Fluence Energy, Inc. (FLNC) on Q2 2022 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the Fluence Energy, Inc. Second Quarter 2022 Earnings Conference Call. My name is Brendan, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. [Operator Instructions] I will now turn the call over to Lex May. You may begin. Lexington May: Thank you. Good morning and welcome to Fluence Energy’s second quarter 2022 earnings conference call. A copy of our earnings presentation and press release 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 Manuel Perez Dubuc, our Chief Executive Officer; Dennis Fehr, our Chief Financial Officer; and Rebecca Boll, our Chief Product Officer; and Seyed Madaeni, our Chief Digital Officer. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters related 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 Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. During this time to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I will now turn the call over to Manuel. Manuel Perez Dubuc: Thank you, Lex. I’d like to extend a warm welcome to our investors, analysts and employees, who are participating on today’s call. Let’s begin on Slide 4 on the earnings presentation. Today, I will provide an update of our performance and macro environment. In summary, first, we continue to experience a strong demand for our energy storage products and services. In addition, Fluence is well positioned to capitalize on Europe’s growing to strive for energy security and independency. Second, we achieved a record quarter for Fluence Digital and acquire Nispera. Later in the call our Chief Digital Officer, Seyed Madaeni will provide more color on this acquisition. Third, we successfully raise prices on new contracts and rollout the new raw material index or RMI base pricing to protect against raw material price volatility. Fourth, we have been encountering headwinds in battery production that have resulted in force majeure in some customer contracts. At the same time, we are making progress on diversifying our battery suppliers, which is a key strategic objective for us. And fifth, we also had made progress in rolling out our Gen 6 technology, but still need to tackle further cost improvements. Later in this call, Dennis Fehr, our Chief Financial Officer will address our Q2 financial performance. As he will discuss we now expect to be at the low-end of our fiscal year 2022 revenue guidance range as the result of the headwinds, I mentioned it earlier. Turning to Slide 5, we had an excellent quarter of order intake across the business. We’ve contracted 582 megawatts of energy storage during the second quarter illustrated they continue to strong and secular demand we are experiencing. We have been working closely with customers to reflect cost increases for batteries and raw materials in new contracts and demand remain unwavering. In our services business, we contracted 343 megawatts during the second quarter, illustrating an attachment rate of 58% in Q2 below our target of 70%. Many of the energy storage contracts that we executed were with utility companies that tend to sign service contracts several months after contract in this storage equipment. We anticipate follow-on services contracts will be signed with these customers during the second half of this year, similar to our experience in fiscal year 2021. I’m pleased to know that Fluence IQ delivered a record quarter in terms of revenue a new contract. During the quarter, we added 2.8 gigawatts of new digital contract. And as of March 31, we have deployed or contracted 7.8 gigawatt assets under management. Importantly, this does not include the additional 8 gigawatts under management associated with our Nispera acquisition. The significant growth in Fluence IQ is a head of our business plan. I’d also like to point out that this quarter, we added our first pumped hydro contract for 1.2 gigawatts, representing a new asset class for Fluence IQ, which opens up new opportunities for Fluence leading application. I would also like to make a few comments related to the U.S. Commerce Department’s probe into solar and the same [ph] convention and dumping. Although, it is too early for us to speculate what actions could result from this probe. We know that during the first half of this fiscal year, approximately 30% of our overall product order intake was connected to Greenfield U.S. solar plus storage projects. In regards to our backlog, let me clarify that we are not responsible for procuring solar panels. In the event that these are not available, it is still commercially beneficial to our customers to complete the energy store and installation piece to start any revenue on this asset. We currently have not seen an impact on the product pipeline relating to this probe. However, we acknowledge this could change and could impact as much as 10% to 15% of our product pipeline, at least with respect to timing. However, Fluence is a global company with diversified offerings across geographies and sectors. For example, we expect to see increased demand from Europe that is not yet reflected in our product pipeline. Turning to Slide 6, we are excited to continue growing on our business in Europe, especially the need for energy independency and security becomes paramount. Their recent geopolitical events in Europe have exacerbated the need for many European countries to reduce their dependency on foreign oil and natural gas. And one of the key solutions to address this situation will be an increased use of renewables, which will require more energy storage. In fact, in early March, the European Commission launched the REPowerEU initiative that will accelerate the transition to renewables by calling for nearly a doubling of renewable asset additions from approximately 42 gigawatts to 78 gigawatts annually until 2030. As you can imagine, this increase in renewable asset generation will create more grid reliability and stability issues, thus, necessitating additional energy storage. We have already seen increased interest from our customers in Europe from energy storage. As the market leader in Europe, Fluence is very well positioned to capitalize on this emerging need, enabling Europe to achieve its energy independency and security goals. Now turning to Slide 7, I would like to update you on the progress we have made in advancing our strategy. Through the planned addition of regional contract manufacturing locations in the U.S. and Europe, we will be protecting ourselves against logistic interruptions and soaring logistics costs. I am pleased to report that we have signed an agreement for an 8 U.S. based contract manufacturing facility. And we expect to initiate production there toward the end of this calendar year. We are on track for starting our European-based facility in early calendar year 2023. And look forward to providing you with an update on our next call. As you may recall on our first quarter call, we announced on a strategic joint venture with ReNew Power in India. We expect to have the agreement finalized in the coming weeks and will begin ramping up operations in India, accordingly. Additionally, I’m pleased to report that we successfully deployed a 2.75 megawatt C&I project for Google in April, to provide them with emission free-battery backup power for the Belgium datacenter in St. Ghislain. We are proud to partner with Google for this first-of-its-kind project, as they strive to become carbon-free by 2030. While the C&I segment represents a small portion of our overall mix, we’re seeing increased demand for the datacenter sub-segment, the backup power requirements of this sub-segment at approximately 20 gigawatts worldwide. This commercial development represents a significant opportunity for Fluence as other major organizations increasingly replace current [ph] fossil fuel power backup systems with emission free-battery backup solutions. Turning to Slide 8, I would like to provide a brief update on some of the headwinds that we have been facing and the actions that we are taking to mitigate their impact. First, supply chain disruptions have affected us in a couple of areas. On the shipping and transportation front, we have seen shipping rates stabilize, providing better visibility on how to price new contracts, we still see global shipping capacity challenges and ports congestions. But we are mitigating some of these impacts by shipping earlier where possible. The supply of battery sales is another area that has been affected. As you may also recall, we have contractually secure 20 gigawatt hours of batteries from our suppliers provide enough adequate supply for our 2022, 2023 needs. However, the majority of the world’s current battery supply comes from China, which again on the one significant lockdowns to enforce their zero-COVID policy. This lockdowns are affecting suppliers’ ability to produce and ship battery cells in a timely manner. Therefore, battery suppliers in China have recently declared force majeure to us and others in the industry. Under our contracts, our suppliers’ force majeure declaration allows to declare force majeure to several of our customers for whom we will not be able to meet contractual timelines. We expect this to protect us from possible timing related charges under the affected contracts. While we do not know how long the current situation will last, we are working closely with our battery manufacturers both in China and elsewhere. As part of our regionalization strategy, we have already been working to reduce our exposure to Chinese battery manufacturers by diversifying our supply regionally, as well as by the number of suppliers. I’m pleased to report that non-China made batteries we represent about 30% of our supply in 2023 and we expect this percentage to grow in 2024. We also have reduced our supplier concentration by increasing the overall number of battery suppliers. Second, as Dennis will address shortly, our second quarter results reflect good progress on reducing the one of items that were previously associated with the compounding effect on COVID-19. We expect to continue reducing this impact as we progress through the second half of this year. Third, as I noted earlier, we have been moving to RMI-based pricing for new contracts to protect against the volatility we have seen in the cost of raw materials. So far, we have seen a broad acceptance by our partners to engage in finding optimal and creative solutions for all parties. Finally, we have made progress on installing and commissioning our Gen 6 product in the field. As we discussed on our previous call, we have experienced delays and additional costs associated with the rollout of our Gen 6 products over the past 6 months. During this time, we have documented lessons learned and conducted more training for our crews. Faulty or sub-standard components from some of our battery and inverter suppliers were one of the reasons for the delays, particularly at large installations. That is why we have a family and new supplier quality control team. The team is working with our suppliers to ensure components operate as designed, which will reduce the risk of delays and unforeseen costs. As you can see on Slide 9, I’m pleased to report that we are now fully caught up on our Gen 6 installation schedule. We have successfully installed 10 Gen 6 systems since the beginning of the year, with a combined power of about 420 megawatts. This includes several mega site installations such as Diablo [ph] and High Desert both in California. Furthermore, many of these feature first-of-its-kind elements, such as the first energy storage co-located with geothermal generation, or the first product that guarantees 150 millisecond response time. These are amazing accomplishments and showcase our ability to innovate and push the boundaries of what is possible. I will now turn the call over to Seyed to provide a bit more color on the Nispera acquisition and its impact on Fluence IQ. Seyed Madaeni: Thank you, Manuel. I’m pleased to have the opportunity to discuss this acquisition the first since our IPO last fall. I’ll begin on Slide 11. As Manuel mentioned, like Fluence IQ and Nispera is a SaaS company providing many key applications for customers looking to monitor, analyze and optimize the performance and value of their renewable energy assets. This Bureau currently has 8 gigawatts under management. Their flagship offering is the Nispera asset performance management platform or APM, which is sold to customers on $1 per megawatt basis. This platform includes SaaS offerings such as digital twin, and performance analysis and portfolio overviews. In addition to the APM platform, Nispera also offers 4 other applications or modules that can be added on to the APM for an additional cost that is similar dollar per megawatt price. These other applications are in the areas of predictive maintenance, portfolio management, O&M and forecasting. What are the distinguishing characteristics of Nispera is their extensive use of machine learning to drive value for their customers. They’ve embedded machine learning in their forecasting app and predictive maintenance app for both wind and solar, and are actively working on new machine learning enabled apps. This aligns well with Fluence IQs bidding application, which also uses AI machine learning to drive value for our customers. As you may recall, the bidding app is currently Fluence IQs flagship application, we are in the process of developing a dispatch app, manage app and invest app, but we intend to utilize Nispera’s APM as a foundation for our manage app, which we expect will accelerate the time to deploy this application to the market. Not only does Nispera provide us with a solid foundation for our manage app, but it also expands our digital portfolios geographic footprint. As you can see on Slide 12, Nispera is in 25 countries, which provides us with a powerful cross selling opportunity for our products and services. While our bidding app won’t be immediately available in all these countries, bringing on Nispera will help accelerate our entrance into additional markets around the world. From a financial standpoint, this transaction is on the smaller side, and we expect it to be EBITDA accretive by the end of fiscal year 2024. So in summary, we are very excited about adding Nispera into our digital portfolio, which now has a combined 50 gigawatts contracted are under management and are encouraged by the tremendous growth we’ve experienced with our platform. With that I’ll turn it over to Dennis. Dennis Fehr: Thank you, Seyed, and good morning to everyone on the call. Looking at Slide 14. First, I’ll cover our second quarter financial performance, highlighting our record Q2 revenue, the progress we have made and reducing adverse impacts to margin and the strong cash collection and improve liquidity in the quarter. I will then discuss our revised outlook for revenue and gross profit going forward. Turning to Slide 15. As Manuel stated, in Q2, we had very strong new orders across all our business lines. More importantly, this success also shows the ability for the market to absorb price increases. I’d also like to highlight that in the first 6 months of this fiscal year, if contracted more than 1.1 gigawatt of energy storage product, of which greater than 95% of unrelated third parties. That’s Manuel and Seyed mentioned, we are very encouraged by the demand we have seen on the digital side. In the first 6 months of this year, we have contracted more than 3 gigawatts of which about 70% of its unrelated third parties. I’d also like to point out that our digital numbers, including our pipeline, do not include the acquisition of Nispera, which occurred in April. Turning to Slide 16, we delivered a record quarter in terms of revenue, the $343 million represent and 96% increase from Q1. As we disclosed on our prior call, about $100 million of this revenue that’s attributable to Q2 completion of installations previously shifted out from Q1, demonstrating our ability to deliver on our commitments to customers, despite the longer time required to fulfill these contracts. In addition, about $60 million of our Q2 revenue is attributable to a higher percentage of completion of certain planned Q2 installations in Q2, which pulled forward revenue anticipated for Q3. Turning to Slide 17, in addition to the strong revenue recognition in Q2, they also made progress on our gross profit and gross margins on a GAAP basis. Our gross loss of $15 million improved approximately 72% from negative $53 million in Q1, driven mostly by a reduction in non-recurring expenses. Our gross margin improved from negative 30% to negative 4%. Adjusted gross profit for Q2 exclude $3 million of non-recurring expenses primarily related to the 2021 cargo loss incident. It delivered an adjusted gross loss of $11 million as compared to negative $8 million in Q1 by gross margin improved slightly to negative 3% from negative 5%. Turning to Slide 18, it delivered adjusted EBITDA of negative $53 million as compared to negative $43 million in Q1. Adjusted EBITDA includes non-recurring expenses adjustments, mainly related to the 2021 cargo loss incident, as well as $3 million for stock-based compensation adjustments. Now looking at our cash position on Slide 19, I’m pleased to report total cash balance increased approximately $44 million to a total of $723 million. This increase in cash was due to strong collections from our customers, coupled with customer prepayments for certain contracts. We continue to remain focused on our cash balance when we deploy our capital in line with our strategic framework. Expected our cash balance will be up to $250 million lower at the end of this fiscal year, in part due to expected working capital in the second half of this year, driven by revenue shifts towards the end of fiscal year 2022. Turning now to Slide 20. As Manuel mentioned, it was many of our batteries and components from China. Recently, the country has had significant outbreak of COVID-19 that has resulted in lockdowns across the country. We do have dedicated production lines with our battery manufacturing partners. However, these are currently running at reduced capacity as a result in not receiving the number of batteries that we previously expected and contracted for. This in turn has affected our ability to produce some of our energy storage products that were previously scheduled for production in the coming months. As Manuel noted, in some cases, we have declared force majeure to our customers. At this time, we cannot provide a timeline for when force majeure will be released. But I can confirm if not lost any contracts to date as a result. Based on these developments, we now see our full year revenue trending towards the lower end of our guiding range of $1.1 billion to $1.3 billion. With respect to our outlook for the second half specifically, as I noted earlier, we pulled forward some of our Q3 revenue into Q2. As such, we expect our second half revenue to be significantly back-end weighted to Q4. Turning to Slide 21. As you can see on the slide, historically, we would place products into service and slightly more than 12 months following receipt of the signed purchase order from our customers. Consistent with this, we typically would recognize more than 90% of expected revenues under the contract in the first 12 months. However, because of the increase in production and shipping related cycle time, we are in a new operating environment. This new normal has us completing a contract and recognizing the majority of that revenue within 15 to 18 months on average, as compared to 12 months previously. This elongated timing for revenue recognition reduces our expectation for revenue progression and fiscal year 2023 and fiscal year 2024 by 10% to 15% as we expect this new normal will continue for the foreseeable future. The rapid increase in inflation is another element of the new normal environment in which we are operating. As a result, if made changes to our approach to achieving margin expansion. Also, we continue to expect significant margin improvement over the next few years. We have tempered our outlook with respect to timing and the degree of improvement. As we look at Slide 22. On the left hand side of the slide, we’ve illustrated the current situation. We’re selling our products as expected positive gross profit margins. However, this expected margin is being eroded during the delivery and installation of our product. This is due to excess shipping costs, the compounding effects of COVID-19 and installation cost. We are now focused on 2 levels: first, to reduce the adverse impacts on margin during delivery and installation; and second, to increase as-sold margin. The chart in the middle of the slide shows the trajectory of improvement with respect to the first of these 2 levels. During Q1, we incurred total impacts are $53 million. In Q2, we reduced this adverse margin impact to $23 million. We are focused on further reducing this margin impact in the second half of this year to approximately $35 million to $40 million, this quarter-over-quarter improvement expected in Q3 and Q4. Even with these improvements, however, we expect that for the full fiscal year, our gross profit on GAAP basis will be negative. The chart on the right illustrates our plan to expand the as-sold margins of our energy storage products during fiscal year 2023 and fiscal year 2024. The most significant driver is pricing. In addition, we are moving to a regional contract manufacturing business model that will reduce our shipping expense, increasing the proportion of our revenue mix associated with higher margin segments, such as transmission and data centers, and launching our Gen 7 product in 2023. Through these actions, we believe we can achieve the required gross margins in the product business to achieve overall breakeven profitability in 2024. In summary, we have faced many unexpected challenges over the past 6 months, ranging from the macro environment to a homegrown issue. While we are focused on reducing adverse margin impact by improving our product delivery operations, and have made significant strides in several key areas. We have had to reset our expectations for financial performance for the next 18 to 24 months. Certainly, we have not lost sight of the bigger picture and favorable longer term outlook for energy storage. However, as a management team, we are intensely focused on improving this year and now. We acknowledge that change will not happen overnight. Yet we are fully committed to providing our shareholders with attractive returns. We continue to be bullish on the longer-term and are excited about the prospects for our business. This concludes my prepared remarks. At this time, I would like to turn the call back to Manuel. Manuel Perez Dubuc: Thank you, Dennis. In summary, we continue to see very strong demand for energy storage and have position Fluence to capitalize on new opportunities as the world continues to transition away from fossil fuels. We are executing our strategy of building the best-in-class ecosystem offering. We increase our engagement in attractive market segments such as transmission and data centers, and continue to grow and expand our digital offerings. While we have made some progress on tackling the challenges we acknowledge a lot still needs to be done. All in all, we are extremely encouraged by our future and will continue to transform the way we power our rural for a more sustainable future. I would like to extend my sincere gratitude to our employees around the world. Without you, none of this would be possible. This concludes my comments. Operator, we are now ready to take questions. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] From JPMorgan, we have Mark Strouse. Please go ahead. Operator: From Siebert Williams Shank, we have Chris Ellinghaus. Please go ahead. Operator: From Baird, we have George Gianarikas. Please go ahead. Operator: From Goldman Sachs, we had Brian Lee. Please go ahead. Operator: From Bank of America, we have Julien Dumoulin-Smith. Please go ahead. Operator: From Wolfe Research, we have David Peters. Please go ahead. Operator: From the Tuohy Brothers, we have Craig Shere. Please go ahead. Operator: From Raymond James, we have Pavel Molchanov. Please go ahead. Operator: Thank you. We will now turn it back to Lex May for closing comments. Lexington May: Thank you, everyone, for your participation on today’s call. If you have further questions, please feel free to contact me. We look forward to talking with you again, when we report our third quarter results. Have a good day. Operator: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for joining. You may now disconnect.FLNC Ratings Summary
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Fluence Energy Price Target Raised to $23 at RBC Capital
Analysts at RBC Capital raised their price target on Fluence Energy, Inc. (NASDAQ:FLNC) to $23 from $18, noting they see the recent management changes as an opportunity to prove that the company can overcome supply chain challenges both near and far.
The analysts anticipate more clarity on long-growth prospects in Q1/23 in a potential Analyst Day. The analysts continue to see margin breakeven as the top driver of the stock. The analysts believe near-term factors that support better margins will come from relaxing COVID policies in China, suppliers adjusting to forced labor laws and favorable results from the Commerce Department's solar tariff circumvention study.
