Fluence Energy Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

There are 11 speakers on the call.

Operator

Hello, and welcome to Fluence Energy's Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You would then hear Audit Investor Relations.

Operator

Sir, you may begin.

Speaker 1

Thank you. Good morning, and welcome to Fluence Energy's second quarter twenty twenty five 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 Navreta, our president and chief executive officer, and Ahmed Pasha, our chief financial 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.

Speaker 1

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.

Speaker 1

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.

Speaker 1

I'll now turn the call over to Julian.

Speaker 2

Thank you, Lex. I would like to send a warm welcome to our investors, analysts, and employees who are participating in today's call. This morning, I will briefly review our q two results, but I will concentrate primarily on the current environment and why we remain confident in the long term growth prospects for energy storage, the competitiveness of our SmartStat platform and the strength of our U. S. Supply chain strategy.

Speaker 2

Starting with Slide four and our Q2 performance. We delivered approximately $432,000,000 in revenue as our execution helped us to deliver on project milestones earlier than expected. We also earned double digit adjusted gross profit margin and our annual recurring revenue increased to $110,000,000 We ended the quarter with approximately 4,900,000,000 of backlog, including $200,000,000 of contracts added during the quarter. Looking ahead, in the coming quarters, we are expecting a meaningful improvement in order volume from this past quarter, especially internationally. In particular, and consistent with our prior expectations, we currently anticipate a strong ramp up in order volume in Australia as we enter the second half of our fiscal year.

Speaker 2

And finally, we ended the quarter with more than $1,000,000,000 in liquidity, including $610,000,000 in total cash. This demonstrates our solid low level financial condition and provides us with a strong basis to deliver long term value to our stakeholders. Please turn to Slide five. Since our last call, the market landscape has shifted meaningfully due to the enactment of significant new tariffs, which, with respect to China, have increased from roughly 10% to roughly 155 in a matter of a few months. The change in tariff and trade policy has led to considerable economic uncertainty in global markets.

Speaker 2

This uncertainty from the number and magnitude of changes has led the company and certain of our customers to mutually agree to pause execution of some of our US contracts and the signing of new U. S. Contracts as we wait for clarity on the tariff and policy environment. This pause contributed to our decision to revise our fiscal twenty twenty five outlook, which Ahmed will discuss shortly. Having said that, we believe that the current high tariff levels on Chinese imports are unlikely to be sustainable.

Speaker 2

The Trump administration has publicly stated their intention to pursue a new trade deal with China that may result in lower tariff rates. As trade negotiations between The United States and other countries, including China, progresses, we believe the markets will stabilize and provide a clear path forward for both our customers and the company, supporting our return to more normalized contracting activity in The U. S. Market. Thus, we expect the contracting pause we're currently experiencing to be temporary and reaffirm our approach to a diversified supply chain.

Speaker 2

Although the current tariff environment certainly impacts our customers in the short term, we remain optimistic about the future of energy storage in general and particularly for fluids. To that end, I will cover the following three topics. First, the future demand outlook for battery storage in our most relevant markets. Second, how we view energy storage competitiveness against gas as a provider of capacity, especially in The US. And finally, I will discuss how Fluence intends to create value for its stakeholders through its innovative smart stack technology and US domestic content strategy.

Speaker 2

Turning to Slide six. Demand for energy continues to increase. This is driven by many factors, including economic growth, data center deployments, and electrification of transportations and other sectors. In The US alone, electricity demand is projected to grow 11% through 02/1930, signaling that annual energy storage capacity will increase to more than 400 gigawatt hours. Just to put this in context, over the last five years, we have seen only 79 gigawatt hours of additions in The US market.

Speaker 2

This is a strong indication of the increasing significance of battery storage in The US market. We see similar growth rates in other international markets. For example, in Australia, we expect battery storage to reach 51 gigawatt hours by February third, up from the 02/2024 levels of seven gigawatt hours. And in Germany, where we expect battery storage to reach a 20 gigawatt hours by 02/1930 from its 2024 level of 20 gigawatt hours. Turning to Slide seven.

Speaker 2

Now I would like to touch on the competitiveness of energy storage. Battery prices are down by approximately 70% since 02/2022, making energy storage competitive across several markets. For The US, the current higher tariff on Chinese imports are expected to essentially bring battery costs back to what we saw three years ago. At the same time, capital costs for competing technologies such as natural gas plants have increased materially over the past few years and are expected to continue to increase. In The United States, we anticipate 278 gigawatt hours of capacity additions through 02/1930 to meet growing needs, and we believe that energy storage is well positioned to meet these needs as it benefit from several factors.

Speaker 2

First, battery storage is one of the most cost effective solutions for meeting system needs. Energy storage capacity price is currently approximately $9 per kilowatt a month, which is about half the price of a gas fired plant. We believe that this significant price difference makes energy storage the most optimal choice even with low gas prices. Second, energy storage has the unique ability to take advantage of low off peak prices. For example, in PJM, current off peak prices are more than 30% lower than on peak prices, offering tangible arbitrage benefits to plan owners, particularly when there are several gigawatts of excess capacity available during those off peak hours.

Speaker 2

Sir, as there has historically been fewer supply chain constraints and shorter lead times associated with energy storage compared to other competing technologies. Battery storage systems can typically be deployed within six to nine months versus the typical thirty six to forty months needed for gas combustion facilities. Fourth, battery storage systems can be located in places with advantage interconnection and permitting profiles, avoiding the long queue for development facing many power producers. As the market seeks to rapidly meet growing demand for electricity, battery energy storage is one of the few options to provide firm dispatchable power at large scale over the next few years. Finally, we believe that battery storage rapid response time and ability to adapt to the power grid's topology makes it the ideal technology to support grid stability as higher electricity demand adds more pressure on electric grids both in The US and globally.

Speaker 2

In summary, we believe that battery storage technology remains the most optimal choice to meet the increasing demand for electricity. Turning to Slide eight. Our backlog remains robust at approximately 4,900,000,000 as of quarter end, including more than $1,900,000,000 that is scheduled for delivery this fiscal year. While U. S.

Speaker 2

And international order intake was lower this quarter, primarily due to tariff uncertainty. Our pipeline continues to expand, now exceeding $22,000,000,000 as of quarter end, with roughly half from markets outside The U. S. We believe this international diversification provides resilience and positions us well for renewed growth as global market dynamics stabilize. Now I would like to discuss how Fluence intends to create value for stakeholders through its innovative smart stack technology and domestic content strategy.

Speaker 2

Turning to Slide nine. As we discussed on our last call, we have recently launched a breakthrough technology called SmartStart. I am pleased to report that we have received positive feedback from our customers who appreciate the features offered by the state of the art technology. In fact, we have already signed our first contract for SmartStack. We believe SmartStack offers a significant value for our customers, including, first, world class safety.

Speaker 2

SmartStack distributes batteries into four distinct units called pods. Each of these pods is designed to prevent fire propagation between pods, which is intended to reduce thermal runaway risk. Second, smart stack design facilitates the integration of various battery capacity offerings and form factors, enabling a more adaptable supply chain strategy. Third, SmartTag is one of the densest products on the market, enabling lower total cost of of energy, which should result in higher customer returns. And fourth, SmartTag offers a more modular and flexible product.

Speaker 2

By separating the batteries from other equipment, SmartTac is designed to allow for faster service, better inventory management, higher availability, and more efficient augmentation. In summary, SmartTac is expected to be priced much lower than our previous GRISTAG Pro product, not only because of declining equipment prices, but because of a more efficient product design. This product is designed to deliver efficient and cost effective solutions to our customers, while at the same time, is expected to help us earn our targeted returns. Turning to Slide 10. Our domestic content strategy, which we began to implement over two years ago, offers a flexible approach to meet the domestic content requirements under the IRA.

Speaker 2

This strategy benefits our customers through tariff and IRA incentives, including the 45 x manufacturing credit and the 10% domestic content bonus. We are confident that future policy updates will continue to support local manufacturing. Our discussions with regulators indicate a consensus for continued incentive for local manufacturing, which has created thousands of jobs to date. Our domestic content strategy is resilient to multiple scenarios involving different tariff outcomes and levels of policy support for domestic production. As an example, at the current tariff levels, our domestic content strategy of blending US sales with imported sales is approximately 10% cheaper than a strategy of using all imported sales from China, even without considering the IRA domestic content bonus.

Speaker 2

Regarding our progress, all six partner facilities in our US supply chain strategy are now producing or preparing to launch production in the current fiscal quarter, which allows us to offer up to a % non Chinese US product. Our Utah module manufacturing site has received its first shipment of US manufactured batteries from ASC. Now with line one of their Tennessee facility fully operational, we are working with ASC to bring the second battery production line into operation, which is currently expected to occur next calendar year. With our US cell manufacturing facility in operations, we are able to offer our customers for our domestic content product a range of domestically produced batteries, modules, enclosures, communication systems, and inverters. These options are intended to enable our customers to achieve the domestic content bonus while mitigating the impacts of supply shocks and tariffs.

Speaker 2

By establishing the capability for up to 100 U. S.-made content, we can also maximize the overall domestic content volume offering in The U. S. Once ASC second line is in production, we anticipate being able to serve 12 gigawatt hours of annual domestic content volume in The US, assuming that US sales represent 50% of those using products. We remain very optimistic about our US domestic content offering and believe it will provide superior value to our customers in the medium and long term.

Speaker 2

With that, I'll turn the call over to Ahmed for the financial review.

Speaker 3

Thank you, Julian, and good morning, everyone. Today, I will review our second quarter financial results and then discuss our liquidity and updated outlook for fiscal twenty twenty five. Turning to Slide 12, in the second quarter, we generated $432,000,000 of revenue, which was better than we expected as we were able to achieve project milestones faster than expected across Americas and APAC regions as we benefited from efficiencies from our supply chain initiatives. This brings our year to date revenue to approximately $618,000,000 versus roughly $500,000,000 of first half revenue expectations discussed on our last call. In terms of gross margin, we generated $45,000,000 of adjusted gross profit, representing an adjusted gross profit margin of approximately 10.4%.

Speaker 3

This quarter makes our seventh consecutive quarter of double digit adjusted gross profit margins. Year over year, operating expenses increased by $10,000,000 to $84,000,000 due to higher r and d spend and sales and marketing costs. A good portion of this increased spending is focused on delivery of our new SmartStack product line to market. Turning to adjusted EBITDA, we reported negative $30,000,000 for the quarter, mainly due to the more level fixed cost nature of our operating expenses compared to back end nature of our revenue as we discussed on our last quarter call. Turning to slide 13, I will now discuss our strong liquidity, which allows us to invest in innovative technologies and support our plan.

Speaker 3

We ended second quarter with more than $610,000,000 of cash, consistent with the strong cash position we had at the end of last quarter. Additionally, we have $532,000,000 available under our revolver and supply chain facilities, which puts our total liquidity at more than $1,100,000,000 Looking ahead, we will be allocating a couple hundred million dollars of our available liquidity to fund working capital needs to deliver our revenue and execute on our domestic content strategy. Bottom line, we continue to see robust liquidity for the remainder of the year and beyond. Turning to Slide 14, I will review our revised guidance for 2025, which we have lowered to reflect current market conditions in The US, which have impacted our full year revenue and EBITDA expectations. Aside from these tariff headwinds, we are pleased with our performance as we are on track to deliver double digit adjusted gross margins.

Speaker 3

We continue to see opportunities in our recurring digital and services revenue platform. Accordingly, we are reaffirming our guidance for ARR of 145,000,000 Turning to slide 15, let me explain our revised revenue expectations further. Recent tariff announcements made it clear that bringing products from China at these rates is uneconomical for our customers and for Fluence. This led us to mutually agree with some of our customers to pause certain shipments and entry into pending contracts until we have better visibility. Here, I want to mention two things.

Speaker 3

First, we do not expect any material cancellations. And second, we remain engaged with our customers. We look forward to improved visibility that allows us to price these pending contracts with adequate returns for both Fluence and our customers. Accordingly, the deferral of these contracts translates to 700,000,000 of revenue previously expected for this year that has been pushed to the right. As such, the midpoint of our revised guidance is now 2,700,000,000.0.

Speaker 3

This guidance is largely de risked as we have 100% of the required sales in The U. S. Furthermore, 95% of the midpoint of our guidance is supported by our backlog plus revenue recognized to date. Turning to Slide 16, covering adjusted EBITDA. We are lowering our guidance to a midpoint of $10,000,000 which is $75,000,000 less than our prior midpoint guidance.

Speaker 3

Our revised guidance includes a combined $100,000,000 of anticipated tariff related headwinds, which we believe will be partially offset through our proactive actions. To go into this a bit more detail, first, the $700,000,000 lower revenue I just discussed will have an impact of approximately $80,000,000 Second, we are incorporating a $20,000,000 incremental impact for tariffs that we were not able to avoid or pass through to our customers. These impacts were partially offset by the benefit of approximately 25,000,000 from currently in progress and planned operational efficiency improvements. These include some renegotiations of equipment costs with our suppliers as well as cuts to our budgeted operating expenses. In summary, although current tariff policy has created some near term challenge, we are pleased with the underlying performance of the business.

Speaker 3

We remain confident in the long term prospects of energy storage in general and particularly in Fluence's ability to deliver maximum value to its customers and shareholders. With that, I would like to turn the call back to Julian for his closing remarks.

Speaker 2

Thank you, Ahmed. Turning to Slide 17. In closing, I will highlight the key takeaways from this quarter's performance and our outlook moving forward. First, the recently imposed U. S.

Speaker 2

Tariff has introduced substantial economic uncertainty, which is impacting near term customer decision making and project execution. Although this presents some immediate challenges, we are optimistic that they are temporary and manageable. Second, we remain confident in our long term positioning. We strongly believe that our product innovation strategy, anchored in our new platform, SmartStack, and our US domestic content capabilities position us to benefit materially over time as the market overcomes the current economic uncertainty and regains its growth trajectory. Third, we are operating from a position of strength.

Speaker 2

Our backlog now is approximately $4,900,000,000 providing a solid foundation for future growth. We believe our track record of capturing double digit adjusted gross profit margins provides us with additional visibility on our future financial performance and profitability. And fourth, our liquidity remains robust with more than $1,000,000,000 in total cash and committed working capital facility. We believe that our solid financial condition will give us the flexibility to continue investing through a period of volatility while executing on our long term strategic priorities. Together, these factors reinforce our confidence in Fluent's ability to navigate the current environment and emerge even stronger.

Speaker 2

With that, I would like to open up the call for questions.

Operator

Thank you. Ladies and gentlemen, as a reminder to ask a question, please press 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Bryant Lee with Goldman Sachs and Company. Your line is open.

Speaker 4

Hey, guys. Good morning. Thanks for taking the questions.

Speaker 5

Good morning, Brian.

Speaker 4

Good morning, Lillian. I guess the first question just on the AESC ramp. Appreciate some of the additional disclosure here, but I just wanted to make sure I have the numbers right. I think in the past you had talked about like three to four gigawatt hours on line one and then line two would double that. I think I just heard you say by the summer of next year, you'd be at an annualized run rate of 12 gigawatt hours of capacity out of ASC in the in the Tennessee facility.

Speaker 4

Is there another line being contemplated there, or or were there some efficiency gains that are getting you additional capacity? The 12 gigawatt hour seems a little bit more than than we had been anticipating.

Speaker 2

Yeah. No. The the let me thanks. Good question. Each of these lines have capacity between three and three and a half gigawatt hours.

Speaker 2

Our contracts are at a minimum of three, but we can ramp them up to three and a half. What we do with domestic content is that we mix domestically produced manufactured batteries with imported batteries, and that's how we convert the six gigawatt hours that we have available with the two lines into 12 by mixing the two. So that's where the 12 come from. And this assumes a combination of half and half. Half domestic, half half locally manufactured, half internationally manufactured.

Speaker 2

Clearly, the decision on how much the how that that mix will go will depend on the the final tariff levels that we get from China and how all this process goes. But that's generally a good assumption to go forward.

Speaker 3

And and, Brian, the only thing I would add, mister Donnet, sorry, is that, sorry, is that we mix because we get the benefit of 40 because what we need is to offer our customers at least 40% minimum domestic content. So I think that gives us ability to basically sell more volume at the same time, give our customers what they want, which is the domestic content incentive. So I think that allows us to to meet our growing need at with the six gigawatt hours, we can sell 12 gigawatt hours equivalent volume for domestic content.

Speaker 4

Okay. No. That's helpful clarification. But presumably, if, you know, the 50 plus tariffs percent tariffs on China remain, the economics on blending and fixing at any ratio wouldn't make sense. So really, it's six to seven gigawatt hours of domestic capacity run rate next year.

Speaker 4

If I kind of do the math at current levels, I guess it implies like a 2,000,000,000 or $3,000,000,000 revenue capacity that can be supported on pure U. S. Domestic sales. One, is that the right range to think about? Two No.

Speaker 4

Would that would that cover all your needs for fiscal twenty six given, you know, the 700,000,000 that's pushing out from this year's revenue to next year and then what you're projecting for for next year on the backlog

Speaker 2

for US? Yeah. As we said in the call, even with the the current tariff levels even with the current tariff levels, mixing imported and local manufactured tariff, we can go with a price that beats fully imported batteries. You know, it beats about 10%. Even taking our you know, even not considering the 10% bonus just on the just using the 45 x.

Speaker 2

So we believe this let's say that if the situation were to stay in the current approach, we'll still believe you know, with the current tariff level, we'll still believe a combi a mixing of imported and nonimported tariff. It's a it it will be a waste it it was a way to go. So we we the the the likely scenario most of the likely scenarios we see coming forward, they we will offer a mix of when we offer a product, it will have a combination of important and unimportant tariffs. So

Speaker 4

Okay. Understood. And then maybe last question. Just since since you, you know, have run those economics and and kinda have have that analysis as you talk to customers, obviously, the tariff environment is fluid. But if you it sounds like no contracts are going to get canceled.

Speaker 4

They're just going to get renegotiated or potentially just done from a different sourcing strategy. But if you do mixing, is there have you had customer conversations as to kind of what pricing and then your margins would be? Because obviously, you've taken out the revenue impact from tariffs as that revenue comes back into the picture, whether it's later this year or if it gets embedded in fiscal twenty twenty six guidance at some point, like what do you think the margin implications would be of bringing that revenue, which is now gonna still have some tariff impact if you're blending it and you're having to set a different level of price, I suppose, with with customers?

Speaker 2

That's right. So let let me tell you our approach to this, which I think is I'm I'm answering your question. It's a little bit first point, the the issue we have today is the uncertainty. The fact that we have a tariff level that it is subject to a potential negotiation with the Chinese government, and there is a likelihood likelihood that it will go down. No?

Speaker 2

So that's where we are. So it is unclear. Very difficult for me to form a price to my customers that I can tell them this is a price that will work in any tariff condition because the tariff could could work in different in different ways. And it is very difficult for my customers to go out to their customers and tell them this is the way you should go because the the cost structure is this. So that that's the problem we have today.

Speaker 2

Assuming the problem gets resolved at the current level, at a lower level, whatever it does. I mean, let's not you know? We have sufficient optionality to offer our customers a price that competes with alternative offerings, you know, very, very well and that allows us to meet our margin objectives. In terms of the the the the point you've mentioned, okay, will this still work for the customers? When we go out and looked at it generally, and this is a general statement clearly, there are not many alternatives to battery storage to resolve the needs of The US grid.

Speaker 2

They're not that many. No? They are limited. And and we believe I'm not saying that there's no price electricity. No.

Speaker 2

Please. Or that we at any price, it will happen. I'm just saying they're limited. So when the because they're limited, we believe that most of these countries, if not all of them, will move forward at a at potentially higher cost than what we originally thought if tariffs were to stay at this level. So that's the way we think of it.

Speaker 2

And this is very, very important. We had designed our contracts in a way where our the interest of our customers and ourselves are aligned, and we can we have we're aligned. We shared some of these risks together. So our interest are aligned to resolve this in a way that our customers meet their profitability objectives, and we meet our our mark. So we're very confident when we looked at all these elements, all my optionality in supply chains, the opportunity that our customers that their customers have, and and where would the value that battery storage can provide to The US grid that we will be able to address.

Speaker 2

Once the uncertainty gets clear, whichever way it gets clear, we will be able to regain our growth. No?

Speaker 4

Alright. Thanks, guys. I appreciate it. I'll pass it on.

Speaker 6

Thank you, Ryan.

Operator

Please stand by for our next question. Our next question comes from the line of George Giannakis with Canaccord. Your line is open.

Speaker 7

Hi. Good morning, everyone. Thank you for taking my Good

Speaker 2

morning, George.

Speaker 7

Along the same lines around AESC, can you maybe discuss the ownership structure there and any solutions if that has to change due to any political concerns? Thank you.

Speaker 2

Thank you. So so you are referring in a in a telegraphic mode to the potential FEOC restrictions on on on under the current regular or or if they were to put in place. So today, as we all know, there are no FPLC restrictions on the IRA benefits for battery storage. There are for you know, you all know also know for the EV industry, not for our part. But what we have done as this is a potential risk, we have worked with ASC to ensure, and we have a plan that we will will put it where we'll put in place to ensure that we will meet any restrictions on ownership that might come up.

Speaker 2

That's what I can say today. We cannot be more specific than that, unfortunately. But but this is something, at least, that we have identified, that we have worked with ASC to address, and we have a plan that we will put together to ensure that if there are restrictions on ownership that we will adapt to ensure Delta lines and those investments are will be still be able to meet potential restrictions that come up? And the interest of ASC and ours are very much aligned in ensuring this goes forward. So that that's what I can say.

Speaker 2

This is not you know, this is something we clearly have been working on for some time, and we feel confident that, you know, when if that we will be it's not that we are we're working ahead of the problem coming. No? And, you know, as the time goes along, we'll inform more stuff, but that's what I can communicate at this stage.

Speaker 7

Thanks. And maybe around competitive concerns. Last quarter, you had mentioned that you had seen incremental competition from Chinese in in The US, and I'm curious as to what's happened from a competitive landscape. I know that a lot of deals are paused, but are you seeing incremental steps from Chinese vendors in The US, or is that sort of abated over the last several months?

Speaker 2

I think the the the The US essentially to due to the uncertainty, the fact that it's very difficult to price solutions with the with things potentially changing very, very quickly, it's very difficult to see where competition it is, you know, today, to be very, very clear, because everybody's kinda in a wait mode. I, you know, I believe that clearly that as we see some of these restriction happening, it will be very, very difficult for some competitors who have, you know, essentially built everything in China and bring it here to compete in this market. Not that I you know, I say that we were ready for this level of certainty because it's not, but we were ready for this scenario. We always expected that The US market was gonna become a domestically produced market, and that's why we have been working so hard in developing a strategy that allows to build a solution in The US even with US steel that people say you cannot do it. Even with US steel, we're gonna deliver we're gonna receive our first enclosure made with US steel that we can put the flak, you know, and and drain on them and sell to our customers at very competitive price.

Speaker 2

So, you know, they I I'm sure that a lot of people now are trying to do this and put it together. We have a two two year leg up because we we were envisioning this world. Which is a little bit different, you know, we see, I will say, you know, the competitive the competitive landscape is the same as it was last quarter. You know? The the the very, very intense.

Speaker 2

But with SmartStack, you we had to accelerate our product launches to to be competitive, but we are very confident that that the smart stack is gonna is the way to go. You know? And now just to give you an example, you see people trying to copy it, very bad copies if people do, you know, what we are doing. It tells you that that's the best compliment that you have, that we got it right, that people are trying to figure out how to do something that we can do. So, you know, we're very confident that we can win in the international markets with the Smart Start and win over, you know, the Chinese players and other competitors we have.

Speaker 4

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Dylan Nasano with Wolfe Research. Your line is open.

Speaker 2

Morning, Dylan. How are you? Doing

Speaker 6

well. Thanks for taking my question. Can you just talk a little bit about kind of the global alternative cell supply situation that's not China and that's not, I guess, US and ASC?

Speaker 2

I mean, limited. There's some production coming out of Korea, Southeast Asia

Speaker 4

Mhmm.

Speaker 2

And some in Japan, but but, really, I will say, the majority of cell production today comes out of China. So that that area we are working with you know, to diversify, looking at some of it, but but the volumes we can capture out of out of China are limited. No? So that that's what I will say. I think that China you know, we are working to develop a US supply chains very you know, as much as we can, and, hopefully, some more players will work on this, and we'll have a stronger U local supply change here in The US in the coming years.

Speaker 2

But today, we're very much dependent on Chinese. This industry is dependent on Chinese equipment.

Speaker 6

Great. Thank you. And then as my follow-up, so I I Ahmed, I think you mentioned Australia in your opening remarks. Can you just talk about was any of these these projects that you signed this quarter related to, the stuff that was delayed previously? Like, what was the status on on those?

Speaker 2

Yeah. Those three core projects that we delayed last quarter, we expect to sign two in this this quarter, the sec the third quarter, and one in the fourth. So they are going well. We're very happy, and, you know, they're going well. So none of them were part of this 200,000,000 order intake we took this quarter.

Speaker 5

Great. Thank you.

Speaker 4

Please

Operator

stand by for our next question. Our next question comes from the line of Christine Cho with Barclays. Your line is open.

Speaker 8

Good morning. Thank you for choosing Prosper.

Speaker 2

How are you?

Speaker 9

Good. How are you?

Speaker 2

Yeah. Well, could be better, I guess.

Speaker 9

So I appreciate your comment that, you know, today, your mix of domestic content and nondomestic content batteries is 10% cheaper versus a % imported panels from China. And that could be a fair statement today. But, you know, if we are to assume that capacity is gonna build outside China, you know, let's call it next year, and that's gonna be much cheaper than what Chinese imports with the current tariffs are. So how should we think about that scenario and how it would impact your future bookings? And, you know, how should we think about, you know, you diversifying your supply outside China if only for risk mitigation purposes?

Speaker 9

And if you do decide to do that, how long would that take?

Speaker 2

Yeah. I mean, yeah, we clearly have a view of where prices in China could move, and we, you know, we also can reduce our low local cost in The US. So, you know, it is I I wouldn't you know, we know where we are. We know how what the cost structures of of Chinese, and we have a view on pricing for them. So I'm confident we will continue to be let's say, you know, this scenario, which is one scenario.

Speaker 2

Tariff, you know, stay very high, but, you know, our domestic our mixing of domestic content will will still be competitive. The other point to take into consideration that is important is we also we also bring you know, as I said, it's a mix of locally produced and internally. So we we also will take advantage of the locally produced batteries to the of the sorry, of the Chinese prices. So, you know, we we when we looked at the scenarios, this strategy we have gives us a lot of optionality and and works well in in many of these scenarios, including an scenario where you Chinese prices come down significantly. Okay.

Speaker 2

They don't have a lot of space to come down, by the way, just so it will be clear. But yeah. So, you know, we're we're we're confident that we have the this is the right.

Speaker 9

And, you know, you you talk about you guys providing the mixing, you know, that that you're mixing it with your domestic, supply and, your imports. But can the is there an option for your customers to just get the batteries with domestic cells from you and get batteries with non domestic content cells elsewhere and do the mixing themselves with different manufacturers? No. No. No reasons why they would do that.

Speaker 2

I mean, no. The the the real value is our you know, the the batteries are like gasoline. We don't care where you know? The real value is our BMS, our ability to integrate the our services. That's where we create value.

Speaker 2

You know? You you I mean, batteries are important are an important cost element, but that's not where the value is created. Batteries are a commodity A commodity, essentially. The what we the value is creating in our ability to our logistics, our intelligence, our systems, the ability, you know, our ability to deliver, you know, you know, high high availability. That's where the value is.

Speaker 2

You know? Mix and stuff, it's you know, this is not it doesn't work.

Speaker 9

Got it. Thank you.

Speaker 2

Yeah.

Operator

Please stand by for our next question. Our next question comes from the line of Amit Akar with BMO Capital Markets. Just

Speaker 6

on the $700,000,000 of contracts that you've, kind of, I guess, are are kind of in a state of pause right now. Can you give us kind of like the mix between contracts that were under advanced negotiations, versus contracts that were already executed out of that $700,000,000 And then the contracts that were under advanced negotiations, is there anything kind of obligating them to, you know, kind of, like, I I guess, stay with you, rather not cancel that project? And I've got one follow-up.

Speaker 2

They were roughly half and half. Half of them were contract already in our backlog that were passing the execution, and these were contracts that were very early in the execution that we had not been able to allure to bring in the the, you know, to bring into the country the the equipment for that. And the other half were contracts that were that were not signed. You know? And as I said, with the way our approach to the contracts that were signed is an approach of sharing the tariff risk so that aligns our interest in resolving the problem together.

Speaker 2

No? I've somehow you know, if I can maybe give you a a two second approach. This is completely different than the approach that how the COVID situation was managed. Remember, after COVID, we had that major supply crunch. And how do we end it?

Speaker 2

We ended up with a lot of contracts where we were underwater that we had to deliver on, and it took us a year and a half to bring those contracts back to neutrality. Today, you know, we we have a completely different risk management. We share the risk with our customers in a way to ensure that we will align in the execution once the situation is clear to ensure that we can get the margins we care about and that they they can do have the profitability they want to. So that that's a completely different approach. We think we're in a much better position to get out of this situation as you know, once they there's clarity that we can get out of it very, very quickly quickly and profitability compared to what we had when we COVID, when it took off, you know, a almost a year or a year more than a year.

Speaker 2

And what we were able to do was just to bring the contracts to to meet to meet neutrality. You know? So so I think we're we're in a good place.

Speaker 6

Alright. Thanks for all that color.

Speaker 10

And just on turning to

Speaker 6

the cash flow statement, it looks like you guys have kinda burned around 260, 2 hundred and 70 million dollars of of cash. I think Ahmed kind of indicated to be another couple hundred million dollars of investment in working capital for the second half of the year. Big portion of that was like the $500,000,000 of kind of inventory that you, I guess, kind of prebought cells from ASC to help them stand up, I guess, the the additional lines at their Tennessee plant. When would those spot like, that that kind of those prebought kind of domestic cells start coming back to you in in terms of of cash?

Speaker 3

So hey, Amit. Amit here. So, yes, you're right. I think when you said 200,000,000, I think that is year to date. I think in the quarter, our cash is roughly $40,000,000 negative, I think, free cash flow.

Speaker 3

And that is primarily, I think, the point the the key is we if you look at, we are building inventory to execute on our revenue plan that we have for the remainder of the year. If keep in mind, we have roughly $2,000,000,000 of revenue that we have to deliver. I think that is what the inventory is, which is roughly $700,000,000 of inventory on our balance sheet to deliver our q three revenue. And then the remaining, I think, is for we will be using cash, as you mentioned, couple of hundred million dollars. Half of that is roughly for our domestic content, and the remaining half is for our q four revenue.

Speaker 3

But I think we will recoup the we will have receivables at the end of q four, which we'll be collecting within next thirty to sixty days after the year end. So net net, I think this is all working capital, long way of answering your question.

Speaker 7

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Andrew Percoco with Morgan Stanley and Company. Your line is open.

Speaker 10

Great. Thanks so much. Good morning, everyone. Thanks for taking the question. I just most of my questions have been asked, I just wanted to follow-up on domestic content strategy here.

Speaker 10

I guess I'm just curious why, just given the uncertainty around tariffs on China, a 100% domestic cell battery from you guys wouldn't be something that customers would be willing to contract today. Totally get that there's uncertainty around what's gonna happen to to the China tariffs, but seems like that's an easy workaround for a customer. Is it because they're waiting to see what happens to China and they'd rather mix? Is it because, you know, a % domestic sales is not cost, you know, is cost prohibited? Just trying to get a sense for why that wouldn't be an easy solution for for customers right now.

Speaker 10

Thank you.

Speaker 2

Good good question. I think the as I said, the the main issue today is how to ensure your you know, the the do you think things are gonna be when is the uncertainty gonna be resolved? No? If you believe that the current tariffs are the solution long term, No? And that there there will be no there's no there will be no reduction in tariff going forward in the short term.

Speaker 2

Clearly, the the solution of a fully domestic offering will be very attractive. No? However, more a lot some of our customers and I think, generally, the there's a view that the government is engaging with trade negotiations with China and that there will be a change in the negotiations with China into that will convert into lower tariff with in the near future. So it's very difficult to commit to a twenty year contract, you know, and resolving a problem if you believe that, you know, two weeks from now, there will be an announcement saying or a month from now, whatever time frame you think it is, saying, hey. These retaliatory tariffs that we have mentioned are no longer in in in in the because remember, what we had is that a lot of the tariffs we have today are retaliation because they mark they they were not talking with with some people expect that once they've started talking, the retaliation will come down, and we'll have a much better view.

Speaker 2

So that's what it is. I think that if if but you are right. If we had a view that this is a tariff level going forward, they probably a full US offering will be very, very competitive.

Speaker 10

Okay. That's helpful context. Appreciate that. And just one follow-up. I guess a little surprised to see the weakness in bookings in the first quarter being that tariffs the high tariffs really didn't go into effect until April.

Speaker 10

So just curious if you could talk more to what you saw. Was it competition driven in the international markets, which I know has been a headwind? Just curious to get more context around why first quarter such a significant drawdown, whereas maybe we would have expected to see more of that in the second quarter with the China tariffs. Good

Speaker 2

question. I think that we're expecting a significant amount of U. S. Contracts this quarter. And I say once it it was clear that liberation day was coming, that the Trump administration was, I'll say, March, you know, late February, around that time frame, people start saying, hey.

Speaker 2

You should take the risk or we should take the you know, it it started that part, and that that made it very difficult to our approach is, you know, we should let's share the risk, but most of our customers wanted to wait until they have a better view on and that happened, you know, a few weeks before before liberation day. So internationally, we were not expecting that much. Clearly, I don't think it has been affected at all by the The US situation today. We were not expecting major major contract. We do expect major contracts this quarter.

Speaker 2

So, you know, that's what I'll tell you. So we and we don't see any real any real spillover of the of The US situation into international markets at this stage.

Speaker 10

Great. Thank you.

Operator

Please stand by for our next question. Our next question comes from the line of Julien Dumoulin Smith with Jefferies. Your line is open.

Speaker 8

Hey. Good morning. This is Hannah Velasquez on for Julian. Thank you for taking the question and squeezing me in. So first good morning.

Speaker 8

On the note about the couple of a hundred million of additional working capital need, can you just confirm that that's specific to 2025, or do you see that extending into 2026? And then as a related point, when or, you know, could you speak directionally to when you expect to inflect back to positive free cash flow generation?

Speaker 3

Sure. So I think in terms of your question, yes, I think this is mostly for 02/2025. We will be, as I mentioned to Amit's question, you know, I mean, I think we will have couple of hundred million dollars of receivables at the end of q four because we keep in mind, as we discussed, you know, we have back end loaded revenue that we in our backlog that we will be recognizing in q four. So I think that revenue, we will be collecting those receivables in q first next year. So I think that will give us enough cash to so we feel pretty good about our cash position going forward.

Speaker 3

And your second question is on Free cash flow. Free cash flow. Yeah. I think we continue to see. We don't have any significant capital commitments.

Speaker 3

This year, EBITDA is roughly $10,000,000, but at next year, we will give you guidance on q four call. But as Julian mentioned, you know, I mean, I think if we continue in the path of our that we expect in terms of signing new contracts, we feel pretty good that we will be free cash flow positive next year because we don't have any significant CapEx, and it all boils down to the EBITDA. You know, if we our goal is to generate free cash flow next year and maintain our profitability. You know? That is, frankly, the key focus for everybody in Fluence.

Speaker 8

Okay. Got it. Super clear. Thank you. And then as a follow-up question, the 700,000,000 in pause revenues, is that reflective of the pause projects and delayed signings that you have visibility into as of today, or have you built in any potential or any extra cushion, I suppose, in case, say, I don't know, the ninety day pause on reciprocal Paris is is not extended?

Speaker 8

I don't know your level of exposure there, but could that 700,000,000 widen is the premise of the question.

Speaker 2

No. No. I I think the 700,000,000 is what what we see the reason. We don't see any any downside additional downside even if tariffs were to let's say that the tariffs on Vietnamese or Malaysia or somewhere else were to grow were to move. So we're we're confident where we are.

Speaker 3

Yeah. I think the the only thing I would add is given we have a confidence that we have as I mentioned in my comments, you know, we have already brought all required equipment in the country. So we have derisked that the revenue guidance we have given, given there's nothing to be imported in our forecast. Yeah.

Speaker 8

Thank you.

Operator

Thank you. Our next question comes from the line of Kashy Harrison with Piper Sandler. Your line is open.

Speaker 2

Hey, Kashy. Good

Speaker 5

morning. How are you doing? Thanks for sliding me in here. Julian, you said your domestic solution is 10% cheaper than the imported content before taking the bonus into consideration. Is there a simple way we should think about the breakeven tariff level that would make your costs you know, exactly in line with imports?

Speaker 5

Is that, you know, a %? Is it 50%? Just trying to think about what gets you to, you know, being in line with imports.

Speaker 2

Let let me Ahmed.

Speaker 3

So, yeah, I think I mean, obviously, I think it's frankly, we are still we're in discussions with many customers, so I can't be more specific. But I think in any likely scenario where we think the tariff's gonna land, we we feel pretty good that our product will be competitive. Obviously, $1.50 is is is I mean, we already said, but I think we we continue to see in any we ran different scenarios. In any any likely scenario, we feel pretty good. I think that that we can tell you.

Speaker 5

Okay. And and then, you know, maybe maybe just a follow-up on the guidance. You know, you indicated that you're 95% covered, but you've also you know, you're not you're not you've paused US bookings. And so is is how do we get to the midpoint of guidance if you pause bookings? Is that just from international, or is or is there something else?

Speaker 2

Yeah. I mean, the the the the 5% is essentially the revenue we rec we would recognize out of the contracts we expect to sign from now to year end. As you know, we recognize a small portion of them early on once we deliver the engineering stuff, so that that's what it reflects to. And and it's in line with what we are expected to sign in the coming in the coming month.

Speaker 5

Yeah. Okay. Thanks. Actually, if I could just link one more in.

Speaker 2

And and and sorry sorry, Kashy. Andy does not include any in The US.

Speaker 5

Okay. It doesn't include US. Got it. If I could just sneak one more in, you know, how what proportion were any of those projects that you did delayed colocated with solar? If so, you know oh

Speaker 2

I don't know. It's a

Speaker 3

it's a combination of both. It's not one single, so I think there are multiple projects that we have.

Speaker 2

Okay. I don't know that.

Speaker 5

Alright. Thank you.

Speaker 8

Thank you.

Speaker 4

Thank you.

Operator

Ladies and gentlemen, due to the interest of time, our final question will come from the line of Jordan Levy. Mister Levy, your line is open with Truist Securities.

Speaker 7

Oh, thanks. Thanks for squeezing me in. It's Moe on for Jordan. So quick one here. I understand 700,000,000 reduction is mostly due to US projects.

Speaker 7

Are you seeing any delays in international projects? And can you maybe walk us through the supply chain for your international shipments? And then I have a quick follow-up.

Speaker 2

No. Not not real delays in international projects. Things are going well. And, you know, in for we produce for international markets, generally, we produce our enclosures in the in in Vietnam by batteries from from China. Most you know?

Speaker 2

And we bring the those those batteries are integrated into our Vietnam facility and deliver to to to sites. And then in terms of inverters, we generally bring them from from Europe to meet more customers, and we're developing a new supply change. So, for SmartStack, essentially, that will bring a new supply for so so, generally, we are we're doing very, very well. You know?

Speaker 7

Great. That's super helpful. I think last quarter, you mentioned 15% of backlog was exposed to tariff risk. I'm just wondering what's that number in your current backlog. Thank you.

Speaker 2

Correct. But but, you know, in you mean in the case of The US, where do we see the the way we should think about about our backlog today and our tariff rates is that because we share the risk. We are aligned with our customers to ensure that once the situation settles, that we will find a path that will ensure that we meet our margins and their meet and they meet their objectives. So that's the way it's not you know, tariff risk is a is a little bit of a because the way this this is designed is to ensure that we resolve the problem. So, you know, clearly, tariff risk, and the tariff risk will be a guess that the contracts could be delayed or delayed while we negotiate, but but we are not expecting we're we're the way we have designed this, we will not move forward with contracts that have negative or or have margins that we do not find attractive.

Speaker 2

So that's the way to think about it.

Speaker 4

Appreciate the color.

Speaker 2

Great, Jordan. Thank you.

Operator

Thank you. Ladies and gentlemen, at this time, I will not I would now like to turn the call back over to Lexington for closing remarks.

Speaker 1

Thank you for participating on today's call. If you have any questions, 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.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • In Q2 Fluence delivered $432 million in revenue, achieved double‐digit adjusted gross margins, grew ARR to $110 million, and ended with a $4.9 billion backlog and over $1 billion liquidity.
  • Recent U.S. tariffs on Chinese imports rose to ~55%, causing a temporary pause in some U.S. contracts, a $700 million deferral, and a revision of FY ’25 guidance; management expects this pause to lift once trade negotiations advance.
  • Fluence remains confident in long‐term storage demand, expecting U.S. electricity needs to grow ~11% by 2030 and battery storage to reach hundreds of gigawatt‐hours globally, supported by ~70% cost declines since 2022 and six‐to‐nine month deployment versus three years for gas.
  • Launched SmartStack technology with modular safety pods, high energy density, flexible form factors, and lower system costs; the first SmartStack contract has already been signed.
  • The U.S. domestic content strategy—six partner facilities including ASC’s Utah and Tennessee sites—enables up to 40% U.S.-made content, leverages IRA incentives and mitigates tariffs, with capacity to support ~12 GWh annual domestic volume.
AI Generated. May Contain Errors.
Earnings Conference Call
Fluence Energy Q2 2025
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