Q1 2024 Fluence Energy Inc Earnings Call

Participants

Lex May; Head of IR; Fluence Energy Inc

Julian Nebreda; President, Chief Executive Officer; Fluence Energy Inc

Ahmed Pasha; Chief Financial Officer; Fluence Energy Inc

George Gianarikas; Analyst; Canaccord Genuity

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Fluence Energy first-quarter 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, Finance and Investor Relations. Please go ahead.

Lex 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, 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.

Julian Nebreda

Thank you, Lex. I would like to assume Well, 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 24 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 margins. Our adjusted EBITDA for the first quarter was approximately negative 80 million, in line with our expectations is an improving from negative EUR26 million in the first Q of 20. 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 Furthermore, our signed contract backlog as of December 31st increased 800 million to $3.7 billion, the highest level in ours. 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 share. We ended the quarter with 3.3 gigawatts of service assets under management. Importantly, our deployed service attachment rate, which is based on our community value-added services contracts relative to our deployed storage remains above 90%. We had a strong quarter in our digital basis, 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.
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 20.
Turning to slide 5, I'd like to discuss our progress on the five strategic objectives that guide our decisions and actions. There are also important marker for investors to monitor and measure our performance. First on delivering profitable growth. This quarter, we continued to grow our backlog as we added EUR1.1 billion of projects that we expect to yield double digit gross margin. Our disciplined approach to offer competitive solutions to customers keeps us on track to deliver on our financial outlook. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we are on track for our bathroom module manufacturing to begin production in the summer of 24, gradually ramping up over the subsequent quarters. This battery module manufacturing will enable us to provide a product that meets the US domestic content requirements for battery energy storage, which I will touch on morning them.
Third to our scale and global outreach we have established a supply chain 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 prices, which I will discuss in more detail.
Fourth, we will use growing digital as a competitive differentiator and a margin driver. I'm pleased to report that we have strong digital customer retention with 21 digital contracts renewal during the quarter and zero customer attrition, and our fifth objective is to work better. I'm proud to state that in November fluids became an official signatory member of the UN Global Compact ahead of the expected time line outlined in our 2020 sustainability report.
Turning to Slide 6. We continue to see strong growth in demand for utility-scale energy storage systems. Over the past 12 months, we've seen lithium carbonate prices decline over 80%. You have in turn led to a decrease in battery prices, which have improved customer economics and allowed for more projects to be painfully has been reflected in the growth of our backlog, which now sits at a record level of EUR3.7 billion, which is an increase of approximately EUR800 million from the fourth quarter. This is also the ninth consecutive quarter in which we added more order intake to backlog that revenue that was recognized out of that further illustrating the growth in demand. Additionally, 3.7 billion does not include some awards signed since the end of the quarter, such as our 650 megawatt hour more Lake project?
Yes, 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 this product addition and approximately 80% of our fiscal 24 revenue guidance midpoint is already covered by our current backlog attributable attributable to fiscal 24 plus revenue already recognized in 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 EBIT for fiscal 20. Based on the conversations we're having with our customers and potential customers, we're expecting to see continued strong revenue growth in fiscal 25 of approximately 35 to 40 for fiscal 20.
Our 2025 outlook is supported by our pipeline, which sits at approximately EUR13.4 billion and grew EUR400 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.
Turning to Slide 7. Over the past couple of years, we have taken major steps to diversify and improve the resilience of our supply chain. Our supply chain strategy is centered around four key elements. The first is the diversity of battery supply. Göran will 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 will also note that build and a stable and reliable U.S. supply chain is critical for the and as I will discuss, we are taking significant steps to establish our US-based supply chain here. Second, to capitalize on growing demand for apparel. We have secure multiyear guarantee battery capacity from the suppliers. We've covered our need for fiscal 24 and fiscal 25 and provide flexibility for upside in them. These capacity agreements are subject to market price adjust. In addition we also use a price discovery mechanism involving multiple battery suppliers to ensure we are constantly delivering the most competitive prices store. And finally, these capacity agreements with minimum take-or-pay obligations.
Sir, to capture the incentive laid out by the IRA. We will be manufacturing our own battery malls in the U.S., which represents two thirds of our grower base. 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. Additionally, it enables us to further commoditize our supply chains by facilitating the integration of multiple live events. We are 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 under Section 45.
The fourth element of our strategy is an asset-light regional supply chains. This involves using two major contract manufacturers for system integration, one in Vietnam and one in Europe. 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 scale and position flowing for a high return on invested capital as we do not incur the capital cost associated with building or maintaining our own production capacity when we look around the world where using various chip and route for our products.
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 segments were expected to use the Red Sea route. The rerouting of the achievements at Surmont two weeks to our chip and scale that we have been able to accommodate without affecting customer delivery comments.
Finally, the incremental costs were experienced in GBM were able to transfer to our customers in their entirety in accordance with our in any event, our logistic team is working very diligently to reduce as much as possible. This increases in cost. Overall, the four elements are the cornerstone of our supply chain strategy, which provides flexibility, competitiveness and high certainty for our costs. We will look to build on this as we continue to strengthen our global supply chain.
Turning to slide 8, we are well positioned to recognize multiple benefits from the IRA, which is already boosting demand for energy storage. This benefit fall into categories. The first category our customers have the potential to receive up to a 50% tax credit for their project capital costs. We significantly improved project economics and attractive this incentive incentives to our customers include a base ITC or investment tax rate as well as bonus incentive for deploying in an energy community and using domestic context, the second category of incentives under the ARRA includes all provisions that directly benefit from by producing battery motors in the US. As I just discussed, we expect to qualify for production tax credit of $10 per kilowatt hour of battery modules produced under Section 45. 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 Turning to slide 9, I'm proud to report that in November, fluids became an official signatory member of the United Nations. Global Compact been affected as a signatory member is an important step on our sustainability journey of building a strong ESG program based on a structural framework, data and active engagement from has joined more than 20,000 companies and organizations around the world that have signed the UN Global Goals and are committed to responsible corporate saliency, citizenship and sustainability. We are excited to collaborate with like-minded companies, nongovernmental organizations and other stakeholders to the lower company network with exchange best practices and drive positive change.
Now I'd like to make a few remarks regarding the article published in late December regarding the Avalon project in California that highlighted a contract claim filed against us by the project owner, alleging that we did not have a valid construction licenses in Canada. This contract claims were filed, file respond to our claim for $37 million in unpaid amounts and related damage. As we have said already, we believe this counter claims are without merit. We intend to get paid for our work on the project, the legal proceedings are ongoing. In the meantime, I wanted to highlight that the Avalon project is performing very well and has the leverage availability or uptime above its contractor requirement during 2020.
In conclusion, I'm pleased with the achievements of the first quarter. Although we are mindful there is still work to be done. We will look to continue this momentum as we progress through 2020.
I will now turn the call over to Ahmed.

Ahmed Pasha

Thank you, Julian, and good morning, everyone. Before we dive into the reserves. I am very pleased to be here at Fluence, and I would like to share my perspective on my 1st month at Fluence on a macro level, Fluence is well positioned to capitalize on this once-in-a-lifetime opportunity as energy storage benefits from declining input prices and our 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 line. 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 Yes.
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 the 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 financials.
So turning to Slide 12. I am pleased to report that we ended the first 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 Julio 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 24 guidance range.
From a 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 weighting by quarter than revenue. Consistent with our full year guidance, we expect second half 24 adjusted EBITDA improved 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 Julio.

Julian Nebreda

What is causing that Thank you, Amit. 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.
Second, we have a sustainable and resilient supply chains that as a key component of our competitiveness. So we are on track to begin our module manufacturing the summer together with our customers. We believe we are in a prime position to capitalize on various incentives under the ARRA. Fourth, the falling material price environment serves as a tailwind for us, and it allows more energy storage projects to eventually buyer. All of these factors provide us confidence in our ability to successfully deliver on our fiscal 24 and 25 of this concludes my prepared remarks.
Operator, we are now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) George Gianarikas, Canaccord Genuity.

George Gianarikas

Good morning. I'm doing great, but you got a great. Thanks for that 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 10s over the last?

Julian Nebreda

Yes, the geographic profile is in line with what we have said, you know, two thirds in the US and one-third we know internationally and they are, you know, double digit margins for us. For those who follow that order intake talk in line in line with what we have communicated to us.

George Gianarikas

And then just as a follow-up here, as you look at the M&A landscape talked about of ArteFill in the past, it's still undergoing their strategic review, but do you feel compelled at all to change the profile of Fluence, you know, if you have a nice cash balance and as you look out across the landscape, are you looking to potentially to expand footprint for your software profile by making acquisitions?

Julian Nebreda

You know, yes, we have said we we're very we're very happy with our corporate business position and on terms strong, they're very, very strong sales channel lending. You can see not only in our backlog but also in our pipeline. You know, our technology, we have a very clear roadmap that is going well and we're very happy with. And so generally, I don't see any need for a for acquisitions at this data. We know we're not looking at any. We're clearly in a market. We know ensuring to understand what the what they buy, how the environment looks, but there's no need to do any acquisitions in any of our in auto support any of our business structure at this time.
Yes.

George Gianarikas

Thank you.

Operator

Thank you. And one moment as we move on to our next question and our next question is going to come from the line of Brian Lee with Goldman Sachs. Your line is open.

Please go ahead and good morning, Brian, Hurley and good morning and good morning, everyone, and thanks for taking the questions. I had to, um, sort of numbers-related first on our legacy backlog. I think entering the year, you guys had talked about something like $150 million is still a low margin, no margin legacy backlog. You need to work off this year and I believe most of it was going to get deployed in Q1. So if that's right, and this implies the gross margins on the non-legacy business was the mid to high 10s or something in that range since you reported 10.5% for the quarter. So wondering if that's right, if the backlog legacies are gone? And then how do you how should we be thinking about gross margin for the rest of the year, given the implicit a higher level for the legacy stuff, it seems like the 10% to 12% annual guide for gross margin seems a bit conservative we're going to have for us.

Yes. All the legacy has, you know, has now gone, you know, a for the actual number for for the first quarter of the legacy contracts that we had in the order. We recognized revenue in the first quarter closer to 50 EUR50 million, 150. So I gave you I think that we are in line with our 1010 to 12 a margin that we that we communicated for the year and this quarter proves that if you take into account the 50 million of new overlay of legacy contract, which are essentially a roughly breakeven and so forth. But there are no more legacy going forward. And the actual number for this quarter was $50 million.

Okay.

Okay.

That's fair. And if I take the 50, it seems like you're sort of closer to the mid 10s, but still within that range.
Understood. And then I know there's been a lot of questions in about some lower battery prices. We see what's happening with lithium carbonate. I think you made a comment on slide 12 or 13 that your fiscal 20 for battery supply and prices are locked in. So does that mean I know there's the index-based adjustments for your customers. Is there anything in your I guess, fiscal 24 backlog to be deployed that can still get adjusted on price? Or is that all for future beyond outside of fiscal 20 for backlogs that maybe still have some of those indexed 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, battery prices keep going lower.

Got it. So let me walk you through where we are. So we use RMI, as you know, as far as that's an important part of how we manage our risk. The RMI supports our project from the time we start negotiating with our customers to the point when we issue the purchase order and when we buy them at that is when we make a downpayment or battery suppliers and get an actual commitment from the battery suppliers.
So why do we have in our backlog today? So what we have said, what we have, we know what we have in our backlog, that we have all our battery prices in all our backlog, all of it in all the EUR3.8 billion are we already fixed that with our suppliers and with our customers so that our currently backlog does not have any commodity risk on either direction and exposure to a supplier moving up or down or the customer moving up. That means that for 24, as we have said, also 80% of our revenue for 24 is already in our backlog. So though that 80% is very much already effect and the battery prices will not move that 80%. However, we have 20% oil 20%. That 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 and price. So we feel very, very comfortable that in and secure that we will meet our guide in our guidance for the year. And then the case of 25 now and I gave you was 25 in front of us and we have roughly a billion and a half of revenue of 25 already in our backlog, that billions of roughly 40% of next year's in our implied guidance, we have given you that is already in our backlog and is already also fixed. So when you looked at, you know, if you looked at it from a from a, you know, from the outset, 80% already in the backlog fix 20%, up from 24% to 80%, subject to no contracts, which are already very late-stage negotiations. We feel very confident which reflect current battery price and we feel very confident and we have assets that we feel very, very confident that we'll meet our numbers in Norway and negotiating the number we're talking to our customers who know where we are those will support our 24 revenue that highlighted for 25 are still clearly working on this 40% is already in our in the books that 60% of all we've not we've looked at. And then you can say, well, why do you feel confident about our looked at our pipeline if you looked at our pipeline and sorry, for Reliance. And maybe if you look at our pilot, we grew our pipeline by 400 million. Well, that means that the EUR1.1 billion We converted from our pipeline to a backlog, we also cover. So in reality, our pipe, we brought in into our pipeline, our current price, 1.5 billion of new accounts, so gave us a very, very clear in one quarter that, you know, the demand we're seeing in the market. The interest that is coming to this day, how much in our investor customers regulator feel comfortable with our technology mix, and we were very confident that we will meet our commitments for 24 and 25. And I do understand that it sometimes, as you know, the financial markets are concerned about the potential downward pressure on revenue of battery price. But maybe I may be very clear. This is a tremendous headwind for the centers. The elasticity of demand is tremendous and that provides for a significant uptick in demand that significantly covers the potential downside of our that in our revenue prices. So you know, very, very confident on 24, 80% on it already fixed. We have clear line of sight within, you know, Jordan range that we use are our a concept. And for 24 for the other 20% and 25 40 in the book 62 will. And with the amount of pipeline coming that we feel that will more than cover all the problems you can attack that.

That's okay. I appreciate all the hires.

Are there very long answer, Ryan, now crystal clear.

I think I got the message crystal clear. Thanks a lot, guys.
Appreciate it.

And thank you, Ryan, and thank you.

Lex May

And one moment is we move on to our next question?
And our next question is going to come from the line of Christine Cho with Barclays. Your line is open. Please go ahead.

Good morning, Christine.

Good morning and thank you for taking the question. I just wanted a clarification question on the backlog as I understood it. You know, if the customer had not issued notice proceed but had bought, that was still subject to move. And it sounded like you locked everything in as for the backlog as it stands today, as you get incremental bookings, should we think that on a go-forward basis, all of that will be locked in when it enters your backlog as well or same thing. You know, it's subject to move until the issued notice to proceed.

Very important for us. The RMA covered from the point we start negotiating with a customer to the point that the purchase order is issued, which is usually at a point of notice. So the new order intake that we will get there will be a point between the moment, we signed a contract to a point where issued a notice to proceed that where that where that even over that potential risk. However, what we are saying that what we can assure you this time is that that timeframe has, you know, collapsed significantly and that we are now issued a notice to proceed, very close market, very close to the point at which we are a we're signing the contract. So, you know, I will say that generally the NRE for IMI in our backlog will continue to be a small number as we move forward, there might be one or two projects that come in where the customer wants to wait a little bit or, you know, maybe that will happen, but in general, I think most of the contracts were signed in the customer wants to secure batteries immediately take advantage of the good price and in on and move forward on.
Okay.

Got it. And then can you give us an idea of how much of your backlog has EPC services tied to it, maybe percentage of contracted volumes and as demand goes up should we think that this number, you know, this percentage number moves up down consistent with incremental bookings and look, sorry, how different are the ASPs and margins today for new orders if you provide the EPC versus not, the EPC are roughly around 30% in a lot of money and it's very much market and project dependent.

And also we give you a sense all our transmission projects, our UltraSPARC projects, our EBIT, very complex projects that require significant, you know, coordination. We're doing all the elements of that. Those are the basics of minerals. Australia is a market for EPC. The US is less or it happens later where where where what, how they work. And as we see it, we clearly are working on improving continue moving forward. And our Ultra Star project in Australia is a market that we're very excited with. You might see that in all of those as we bring more in Australia and UltraSPARC projects, though will be those will be busy. But generally, if you want to model this going forward, I think the 30% is a good is a good proxy for it. As I said, it depends a little bit on the complexity of the projects and the markets we are working on him going for and in terms of returns I mean, I think that within that 10% to 15% does not change. Clearly the more complex projects, where would that more rates are closer to the upper band as we have always had and the ones that are simpler and less of a problem around the low lower side of that band. But generally, you'll say that most of the EPC projects are more complex, but in our own necessarily a you'd often take us out of the range of 10 to 15.
Got it.

Thank you.

Lex May

I think thank you. Then one moment as we move on to our next question.

Yes.

Lex May

Our next question comes from the line of Justin Clare with Roth MK. and your line is open. Please go ahead.

Joel Yes, good morning, a goalie.

Thanks for taking our questions here. So first, I wanted to ask about the demand that you're seeing for batteries that would meet the domestic content requirements and have you signed contracts at this point for those the domestic batteries? And then is it possible to give us a sense for what the uplift in pricing might be and then do you see potential for a margin uplift given that you're going to be one of the first to supply domestically-produced batteries?

Could you get out of that 10% to 15% range and strong demand from buyers say that not only with our current customers were of attracting new customers.
Are you talking to John, our our the Americas CEO or President who's really, you know, we see a lot of people interested and understanding and getting. So that's a first in very strong demand in terms of a margins are we have said that at whatnot, kind of what have you what you implied?
We believe we have a first mover advantage here and that that first mover advantage will allow us to capture some additional margin power. You know, this is early in the game. We're still negotiating with our customers. We have to wait. If I tell you the number, my customers will use it against me. So you know, we are we are on the way to work with our customers to ensure that they can meet the higher returns and then we can capture some additional margin because they're doing much better than anybody else does on those projects. And that's what we're working with them on. And we know what to ask as this thing settles down and we see of probability of those contracts and Reno coming in and our customers of secure about what the returns are getting. I think we will communicate to you what potential upside we might get. But for now I prefer not to talk about it now. And then two of today, we have not signed any domestic content contracts, even though they are, you know, they are very in very late stage. Just to give you a point, which I think is important, the domestic content projects are 2025 revenue. They're not going to be supporting 24 revenue. Our our supply, our module manufacturer will start in the summer and then it will pick up during the quarter and we will start receiving you know, domestic manufacture batteries in the last quarter of this year, but we need to integrate them and then what they mean to deliver to our customer. So we won't see any revenue in this year from domestic.

Got it.

Okay.

And then just following up on that, just wondering how much of your Utah manufacturing capacity could be supplied with domestically produced cells. Given your agreement with AESC., could you fully utilize that facility to produce on domestic content or domestic sales that meet the requirements?

How are you thinking about that that David, earlier that we will have you know, we we could fully utilize our current capacity. And as we I think we have communicated to you that that capacity can be easily doable if we need so.

Got it. Okay. Thank you.

Thank you very much.

Lex May

Thank you. And one moment as we move on to our next question and our next question is going to come from the line of Andrew Coe with Morgan Stanley. Your line is open. Please go ahead.

Andrew, the moment.

Hey, good morning. Thanks so much for taking the question, um, I did just want to go back to some of your commentary on the Red Sea. Sounds like you haven't seen an impact to margins from the freight rates yet, but I'm just curious, do all of your contracts kind of exposed to the Red Sea have freight adjusters?

Or could there be some potential margin risk if freight rates don't come back down and all our of all our contracts, irrespective of going to the Red Sea or any or any other route have freight adjustments, logistic adjustments. So, you know, there are all these costs are passed on. So, you know, we do not see any any effect on our margins coming out of the Red Sea.

Okay. That's super helpful. And then my second question is a little bit more thematic, but there's been a lot of attention paid to a data center power needs. And it's a big theme right now. And I think the view is energy storage is a pretty critical component when thinking about powering that load with reliable, clean electricity. So can you maybe just provide some insights into your conversations that you're having with maybe some of these customers and what the time line might look like for Fluence for this opportunity?

I mean, yes, this is something we have looked at we work with Google on a project, however, to be very sensitive to a solvency with utility-scale project. And you know that we are not aware we haven't really worked a lot on it, you know, but we did had a project we do better with them a one-well a on, but is that something that we have not actually, you know, we are in the recent quarters of in that we have not. So you've got one of those opportunities were going to appoint on battery cost reductions where this lowering of prices will start making this project Marietta?
No, it makes it a lot more attractive than what they were when we looked at it, I think, roughly a year. So a so I think this is kind of the type of thing that that will talk about is the Elestat it's on demand elasticity, sorry, for that A., that would you call that comes in and it becomes is one-off in your viewpoint that priced Vince appointment term, you turn the lights on and all this demand comes in does increase, and that's a kind of my point to all of you on the tremendous head with tremendous, tremendous tailwind of battery prices in our in our in the in our technology know-how, on how business cases start, you know, forgetting the Starpack being penicillin and become very, very attractive.

So.

Got it. That's helpful. And I guess maybe just one more follow-up on that. When you had that pilot project that you did that demonstration was with Google. Was there anything on the software side or battery chemistry side that they were looking for, it would be changed versus your traditional utility customers?

And this is Rebecca.

On the battery side, no, the chemistry is the same, the physical delivery of the product with the same based on the size of what we're delivering for Google there were some changes on the software side for the application space that was working in that field.

Lex May

Thank you. And one moment as we move on to our next question and our next question is going to come from the line of Julien Dumoulin-Smith with Bank of America. Your line is open. Please go ahead.

Good morning, Bill and team. Congrats again, pleasure.
Guys, just Good morning. I just come back to the top of the queue, the Q&A Roster here on the gross margin piece. I just want to come back to this a little bit. I mean, you guys obviously have this 10 to 15 and then 10 to 12 here in the near term, starting off the year. The way that you did with revenues really poised to scale through the year. Again, I get there's not an OpEx operating leverage piece here, but and to what extent we expand the expect those gross margins to scale as revenues and the size of these projects that could conceivably continue to expand into the bulk of the year here? I mean, is there an argument to be trending higher within even that 10 to 12 range?

No, I think our guidance here, Julian, thanks for your comments compliments. I think in terms of the gross margin, I think our guidance was 10% to 12%. I think we feel pretty good about that range going and through rest of the year. So I think it will be north of where we had realized in the first quarter, but I think we feel pretty good there. We will end up in terms of our range for the full year.

Got it. Excellent. And then earlier you mentioned this earlier on the domestic content, your ability to potentially I think you said something like double AESC. contributions here potentially, if need be. I mean, just looking at the trade backdrop here. Can you comment a little bit about like what the back, but what's your ability to pivot is, depending on any future, a shift in trade policy landscape here. I'm really curious about your ability to shift even more so back to domestic product, especially if the market.
Yes, as market demands it, what is your ability to bring that to market as you think about providing further disclosure of the year in scaling up, if you will?

Yes. I mean, you did NOK25 more than 24 as annuities line will come but will come on line or these sales will come in oh nine. We are working with our suppliers to ensure that we have access to the additional to the additional demand to add additional production capabilities and have a first right of refusal on the products as we move forward. These are multiyear contracts. So we know that this is what I can tell you. We haven't really disclosed the volumes and stuff that we're working with. But the way we envision this project is a long-term relationship where you know where we are able to take advantage of the increasing production as it continues moving forward.
That's available, yes, flower and Omega and gasoline.
So you gave the I guess your questions indirectly, you know, maybe I'm sorry that I'm implying is that what happens is that the trade issues and then this with a broad auction becomes even more value?
Well, we drill we believe that, you know, we have we are putting into that into consideration the way we live for a period of time to be able to scale up. If this becomes a lot more attractive than what it is today due to potential trade disruptions.
Right.

And your point is that 10 to 15 as it stands today, there's fundamentally sort of upside as you disclose what the domestic content sort of ASPI. is now they don't have foreign radio.

That's why that's our core. And we will talk more as we move forward and we signed these contracts and you know the competitive environment settles. But essentially, just going back, it is our customers need to feel comfortable with their business cases. We have been on and that they can capture more than what they usually capture and that we will capture part of what they use. We know that an off-site, our giving them so that's kind of how this works and we're working with them on that process. And as soon as that settles down in a way, I feel comfortable that the way it's going to work for a period of time. We'll communicate to the financial markets work.

What Excellent.

Thank you, guys.

Good luck.

Speak to you soon.

Thank you.

Lex May

Think you and one more management of on-time question.
And our next question comes from the line Kashy Harrison with JPMorgan. Your line is open. Please go ahead.

But I think the cashiers are measured by because we are not going to argue about that.

Yes.

So first question is for a 2024 guidance. You indicated that you have 80% already locked in and you should be able to get 100% shortly. But I was I was just wondering if you could give us a sense of how of where you were at this point last year where you 80% booked last year as well. Are you 100% booked at this point for the prior year? And then just in general, how should we conceptually think about the amount of revenues that can be booked and captured within a year?

Yes. So last year, if you looked at our order, what we had in the backlog last year at the end of the first quarter compared against where we ended in revenue. Now where we were guiding as remember, we guided up over the year. So I'll give a little bit of our debt. We were roughly at 90% or 90% of our revenue for for 23. What's in our backlog at this stage. So we're a little bit behind compared to last year from that point of view. However, you know, looking at the late stage of development of our contracts and how we're going to, you know, how we're going to our going. We know where these contracts are. We have very, very high confidence that we will be able to secure the contracts we need to meet our guidance. So yes, that's the way it is. And, you know, that said, you know, we feel very, very good. We have is there are several contracts we have with are all very positive in all of them and which will allow us to be at a point that we will meet our guidance already.

Yes, Kashy, this is Ahmed. And I think your second part of your question was on the profile for the rest of the year. I think as I discussed in my comments, I mean 70% of our revenue or annual revenue is in the second half and it's more back-end loaded. But that is frankly, all based on our current contracts that we have, which are when we execute just a timing when we are delivering those contracts. So it is more driven by the timing of the projects that we have in our pipeline are backlog.

Got it. Thanks for the both of those responses.
And my follow-up question is just around the order intakes of EUR1.1 billion, clearly very impressive. If we look at of last year and the prior year, it seems like your order off there were some type of order seasonality where the second quarter orders look about the same as the first quarter than you had like a dip into 3Q and then somewhat of a recovery into 4Q. Is that directionally how we should without giving super explicit order guidance? I'm just wondering if that's directionally how we should think about seasonality for orders in your in your own as moving forward?

I mean, if you look back every year is very different. So I don't think there is a strong seasonality in our order intake, you know, so that doesn't without our B&O, it moves around. So near term, if we move more of how things worked out and you know something that can be sign on, you know, December 15th or January 15 is quite not until we see some more of in world where people want to take vacation to give you a sense of this part. And so I wouldn't give any data on. We are not we cannot give you a view of season and seasonality of product orders.

Got it.

Thank you.

Lex May

Thank you and one moment for our next question.
And our next question comes from the line of Mark Strouse with JPMorgan. Your line is open. Please go ahead.

Great. Good morning, everybody. Thanks for taking my question. And I appreciate the color that you were giving earlier about no margin risk from changes in pricing because your contracts with your suppliers and your customers are locked in. Can you talk about the ability, though of our customers to potentially cancel in order? I mean, especially if pricing goes lower enough? And if so, can you can you give us what your average deposits that you're collecting on those on those contracts? And then on the other side, do you then have the ability to turn around and cancel any orders with suppliers?

Yes.

I mean, day out one, what we're bringing our Bakken, our binding contracts that the costumer cannot get out with making us whole on any on any cancellation delay to this day?
We have never seen a cancellation of a contract in Norway. There's a reason for it. We are very, very strict on what comes in even though we have contracts that we have signed, which aren't are not in our backlog until they meet the conditions to ensure that if there's a cancellation everybody's covered. So you know, we aren't seeing a cancellation or what have turned out. You know, this project is very much our so, you know, Aspen that have never been at risk and the contract will make it difficult for the customer to get out if they can. It will offer significant financial advantages of these penalties to ensure they meet and make a hole about asset that has never happened.
And your second question, sorry, a on on if you don't mind reminding me overall.

I mean, maybe it's not a risk now that the second question was, if your customers canceled on you. Would you have the ability to cancel with your suppliers?

I mean, we'll put purchase orders will have will have penalties if we cancel with our suppliers but as I said, our customers will more than compensate for that.

So the way we should be, I would say the only thing I would add to that is, Mark, I think our comp when we signed the contract counterparties signed the contract at a price that makes sense for them at that time. So they look into take into account the economics of the project. So I think that is what really drives their decision to continue. And then they make advanced payments know because we generally get anywhere from 10% to 30% advance payments. And I think those are the things and that you have to take into account, I think. But overall as a whole, you mentioned, you know, we have never seen any contract getting canceled for the same reasons?

Yes, yes, makes sense.
Okay, thank you, both. One quick follow up. One quick follow-up on the last call. Mike, you gave some color about the timing of downpayments to AEFC. Was there any update there?
I'm sorry if I missed it.

No, nothing changed. I think we basically are on track No, nothing to report.

We are just going to have an excellent. Thank you very much.

Thank you.

Lex May

Thank you. And one moment as we move on to our next question and our next question comes from the line of Tom Curran with Seaport Research Partners. Your line is open.

Please go ahead to more than double of.

Good.

Good.

So under the EU climate law. The European Commission is working on an updated version of its National Energy and Climate Plan that will establish decarbonization targets for 2040 between an early draft that leaked into the media and then a subsequent official communication. The Commission has proposed a target for the power gen mix of 90% renewables, complemented by nuclear and referred to grid-scale energy storage as a key element in their words for achieving that this news following last year's adoption of accelerated permitting for stand-alone storage suggests the EU really is placing increasing emphasis on storage support when it comes to policy, what what are you guys most excited about on that either is gestating and seem to have good odds of becoming part of law or new rule or incentive. What are you most excited about that you have visibility on over either this year or let's say, by the end of fiscal 25?

It I'll tell you one of the things you have seen in the last quarters, clearly demand very strong. Also. I don't know if you saw the announcements a supply change moving into Germany or into Europe and exported in a normal announcing a big factory in Germany or other players announcing factors all around Europe. So our localization of supply chains coming now with a better environment for it.

So good.

That's a good sign. And then our pipeline moving very strongly now, especially Germany, becoming a cost to a market that's very active. The UK has always in market, but then markets that have not been that active now becoming more in Italy came out with a six hour window capacity payment. There are a few things happening around that makes us very, very excited. I will tell you if you ask me what I'm excited about all of the above, you know everything, and they're excited about the fact that we have the supply changes, you know, starting incipient Vadinar good, it filed so that, you know, we believe the reorganization supply chain. So that's great. And now there is a lot more players and regulators are supporting the and or the regulator supporting this upgrade. We see these changes in Italy and in some of the Nordic countries.

That's right.

And then a lot of customers in Germany in the UK that we have been working on contracting of normal-course volume. All of the above. I would say Europe is a fertile ground for full format stores.

That's helpful and makes sense. And then, Amit, on the balance sheet, you saw a big sequential increase inventory which more than doubled to 564 million given the steep ramp in shipment and installation activity that you're preparing for as part of recognizing roughly 70% of fiscal 24 revenue over the second half, I suppose that you know, is at least partly self-explanatory, but could you just expand on that inventory surge and then give us an idea of how working capital as a source or use of CFFO should evolve quarter by quarter over fiscal 24.

So sure. I think in terms of, yes, you're right. I think our inventory balance has increased a couple hundred million dollars you know, I mean this year, I think this quarter and that is primarily I think as we are ramping up our growth in revenue because as I discuss, you know, I mean our revenue next quarter second quarter will be not about $500 million. So that inventory balances largely, I think is will be deployed to serve our recognized revenue in Q2 in terms of working capital needs?
You know, I think we discussed on our Q4 call, I think in 2020 for now, there will be, I think, about $100 million or so of additional working capital needs. But that is part of the plan. I think that we will be funding to our existing liquidity. So nothing changed from that perspective, what we discussed in our Q4 call feel pretty good given our liquidity is north of 6 million. So we can manage any short-term working capital needs if we have to Great.

Appreciate the insights.

Lex May

Thank you and one moment.

Yes.

Lex May

Our last question has come from the line of Ben Kallo with Baird. Your line is open. Please go ahead.

Hey, thanks, guys. Just two quick ones. First on maybe this relates to those to proceed, but could you talk about any risk in your project or sales timing based on them interconnection delays or real shortage of electricians or labor shortages? And then my second question is just your appetite for deals offering your software to other battery providers, whether lithium-ion or other types of storage providers.

Thank you.

In terms of what you looked at our in terms of the rest of the of the of the delays is interconnection, essentially it is an acute problem in the U.S., less of a problem, generally not in our market. It's important to make that point.
The second one is that what we have in our backlog already has in the queue has been resolved. Our customer has a clear line of sight of when they're going to connect what they need to do one by one. So you know, there could be delays, weather delays are usually weeks because you know something didn't get to assign on time or we know things are not normal delays. We talked also generally, I will say that our backlog is the risk on, you know, transmission delays in general, you know, except for, you know, more of a stable world. That type of thing that you'll see you know, clearly our pipeline, the our ability to convert our pipeline into backlog. You know it is subject to our customers in the U. S, ensuring that they can get on the queue and get the kinds of problems resolve we, you know, just see what happened this quarter. You know, we are not seeing a significantly when we look when we build a pipeline. We said days when we see the projects are going to, we actually have projects that we believe they're going to be able we're going to be able to sign them and we haven't seen a significant delays of in on that in any way affect our results or our ability to meet our financial metrics, our project, your latter ones that surprise you by how fast they move. And one that surprised me because they're a little late. But I would say when you put them in balance, they're generally they're generally not a problem.

This is the same in terms of digital solutions.

I think that I will have to make to we have a, you know, our operating, our BMS., our operating systems, which are integral to our we know hardware solutions. And those are not that we're not going to sell that to anybody. We're not we don't offer to third parties this is ours. We use it for ourselves and the mix was different and is one of our competitive barriers we know and our competitive capacity higher. We do have our fluids digital offering our Mosaic offering, which is a leading that and R&D spare offer, which is a performance management tool, those two with those we do sell to third party a third party technology. So there are competitors of ours who their owners of their technology prefers to use our bidding and prefer to use our performance management tools greater than whatever they or their competitor is offering. But I'll say that only on those two points on they are OS. and on the operating system and the BMS., it is integral to what we do and we don't offer that to anyone.
Thank you.

Lex May

Thank you. And I would now like to hand the conference back over to Julio for any further remarks as well.

Thank you.
Thank you so much, everybody, for your interest and questions. And you know, we had a great quarter, a great quarter, great order intake revenue. We knew from below that line. What we expected was this is what kind of in line where we were going. I think an important point and something that you all brought to me last year that you know, as our main point is in the double-digit gross margins, you know, this was a main discussion during 23 where we were going to be able to do and now we have two quarters of the bring meeting, you know, double digit gross margins. I think this is a this is the basis of which, you know, as we ramp up on revenue, the basis of which will be able to become, you know, to reach profitability for this quarter. And so we're very confident on our 23 or 24 guidance on our ability to meet our aim to the tune of EUR3 billion, middle of that range in earnings, a revenue a guideline and they are 50 to 80 in terms of adjusted EBITDA. So very happy for what's going on. Thank you so much and talk to you.

Lex May

This concludes today's conference call. Thank you for participating, and you may now disconnect.
So yes, who are you? Who do they do? Yes, we're going to be yes.