Fluence Energy Inc (FLNC) 2022 Q2 法說會逐字稿

Good morning, and welcome to the Fluence Energy, Inc. Second Quarter 2022 Earnings Conference Call. My name is Brandon, and I'll be your operator for today. (Operator Instructions) I will now turn the call over to Lex May, and you may begin.

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 Pérez 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. (Operator Instructions) Thank you very much. I will now turn the call over to Manuel.

Thank you, Lex. I would 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 strong demand for our energy storage products and services. In addition, Fluence is well positioned to capitalize on Europe's growing desire for energy security and independency.

Second, we achieved a record quarter for Fluence digital and acquired Nispera. Later in the call, our Chief Digital Officer, Seyed Madaeni, will provide more color on this acquisition. Third, we successfully raised prices on new contracts and roll out the new raw material index or RMI-based 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 have 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 earlier.

Turning to Slide 5. We had an excellent quarter of order intake across the business. We contracted 582 megawatts of energy storage during the second quarter, illustrating the continued 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 contract that we executed were with utility companies that tend to sign service contracts several months after contracting the 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 '21.

I'm pleased to note that Fluence IQ delivered a record quarter in terms of revenue and new contracts. During the quarter, we added 2.8 gigawatts of new digital contracts. And as of March 31, we have deployed or contracted 7.8 gigawatts 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 ahead of our business plan. I would 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, anti-circumvention 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 regard 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 these assets. We currently have not seen an impact on 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 segments. 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 as the need for energy independency and security becomes paramount. The 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 their 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, enable 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 interruption and storing logistics costs. I am pleased to report that we have signed an agreement for our 8th U.S.-based contract manufacturing facility, and we expect to initiate production there towards 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 from our first quarter call, we announced a strategic joint venture with ReNew Power in India. We expect to have the agreement finalized in the coming weeks, and we'll begin ramping up operations in India accordingly.

Additionally, I'm pleased to report that we successfully deployed a 2.75 megawatt C&I product for Google in April to provide them with emission-free battery backup power for their Belgium data center in St. Ghislain. We are proud to partner with Google for this first-of-its-kind product as they strive to become carbon-free by 2030.

While the C&I segment represents a small portion of our overall mix, we are seeing increased demand for the data center [subsegment]. The backup power requirements of this subsegment are approximately 20 gigawatts worldwide. This commercial development represents a significant opportunity for Fluence as other major organizations increasingly replace 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 port congestions, but we are mitigating some of these impacts by shipping earlier where possible.

The supply of parity sales is another area that has been affected. As you may also recall, we have contractually secured 20 gigawatt hours of batteries from our suppliers, providing us adequate supply for our 2022, 2023 needs. However, the majority of the world's current battery supply come from China, which again underwent significant lockdowns to enforce their zero-COVID policy. These 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 realization 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 will 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-off items that were previously associated with the compounding effects 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 product over the past 6 months.

During this time, we have documented lessons learned and conducted more training for our crews. Faulty or substandard 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 assembled a new supplier quality control team. The team is working with our suppliers to ensure components operate at design, which will reduce the risk of delays at 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 this year with a combined power of about 420 megawatts. This includes several mega site installations such as Diablo and High Desert, both in California.

Furthermore, many of this feature first-of-its-kind element such as the first energy storage co-located with geothermal generation or the first product that guarantees 150 millisecond response time. These are amazing accomplishment 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.

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, 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. Nispera currently has 8 gigawatts under management. Their flagship offering is the Nispera Asset Performance Management Platform, or APM, which is sold to customers on a dollar 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 at a similar dollar per megawatt price. These other applications are in the areas of predictive maintenance, portfolio management, O&M and forecasting. One of the distinguishing characteristics of Nispera is their extensive use of machine learning to drive value for their customers. They have 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 IQ's bidding application, which also uses AI machine learning to drive value for our customers.

As you may recall, the bidding app is currently Fluence IQ's flagship application. We are in the process of developing a dispatch app, manage app and invest app. And 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 portfolio's 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 of 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 15 gigawatts contracted or under management and are encouraged by the tremendous growth we've experienced with our platform.

With that, I'll turn it over to Dennis.

Thank you, Seyed, and good morning to everyone on the call. Looking at Slide 14. First, I will cover our second quarter financial performance, highlighting our record Q2 revenue, the progress we have made in reducing adverse impacts to margin and the strong cash collection and improved 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, we have contracted more than 1.1 gigawatt of energy storage products, of which greater than 95% are with unrelated third parties.

As 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% are with 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 represents a 96% increase from Q1. As we disclosed on our prior call, about $100 million of this revenue was attributable to Q2 completion of installations previously shipped 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 was 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, we 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 nonrecurring expenses. Our gross margin improved from negative 30% to negative 4%. Adjusted gross profit for Q2 exclude $3 million of nonrecurring expenses primarily related to the 2021 cargo loss incident. We delivered an adjusted gross loss of $11 million as compared to negative $8 million in Q1, while gross margin improved slightly to negative 3% from negative 5%.

Turning to Slide 18. We delivered adjusted EBITDA of negative $53 million as compared to negative $43 million in Q1. Adjusted EBITDA includes nonrecurring 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. We expect that our cash balance will be up to $250 million lower at the end of this fiscal year, in part, due to expected working capital build 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, we source 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, we are not receiving a 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 relieved, but I can confirm,, we have not lost any contracts to date as a result. Based on these developments, we now see our full year revenue trending towards the low 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 on 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 times, 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 in fiscal year '23 and fiscal year '24 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, we've 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 have illustrated the current situation. We are selling our products with 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 overruns.

We are now focused on 2 levers: first, to reduce the adverse impacts on margin during delivery and installation; and second, to increase the as-sold margin. The chart in the middle of the slide shows the trajectory of improvement with respect to the first of these 2 levers. During Q1, we incurred total impact of $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 '23 and fiscal year '24. The most significant driver is through 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 products 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 the here 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.

Thank you, Dennis. In summary, we continue to see very strong demand for energy storage and have positioned 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 increased our engagement in attractive market segments such as transmission and data centers and continue to grow and expand our digital offerings. While we had 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 we'll continue to transform the way we power our role 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 Instructions) And from JPMorgan, we have Mark Strouse.

You mentioned you're adding some new battery suppliers. Can you just talk about where those suppliers might be located? And kind of if you think about it cumulatively, your supply base, how much of your battery supply today and kind of in the near future comes from China versus outside of China?

Yes. Mark, thank you for your question. First, yes, I mean, this is a strategy that we started some time ago. We already disclosed that we have this strategic alliance with Northvolt. So that is a key partner for us in the European market. And we will see and we expect to have probably by the end of this calendar year. So we're very excited about that partnership.

We're also talking to other battery -- large battery manufacturers in Asia and the ones that are building new facilities in the U.S. And the target is not having -- diversify ourselves by not having more than 30% of our overall demand just concentrated in one name. I don't know, Rebecca, if you want to add something?

Yes. I would add that -- so we're on track to, by the end of this year, we'll have about a 30% mix that is not coming out of China, if that's your direct question. And then moving into 2024, we'll move that up probably closer to 50%. So some of the players that we're talking to are establishing manufacturing in North America. So that's our next big move -- is to also acquire batteries in this region.

Okay. And then just as a quick follow-up. I appreciate the color on kind of the U.S. pipeline. So you mentioned 10% to 15% in the product pipeline in the U.S. How should we think about kind of setting the downside to your 2022 guidance in the event that there are disruptions from (inaudible)?

Yes, Mark. I mean, you're referring just to the solar plus storage segment, right? And...

Yes.

Yes, I mean, it's too early. You want to say something?

No, I'm sorry. I was just confirming what you said. Yes.

Yes. Yes. Okay. Good. Yes, it is too early to tell what will be the results of the probe. We have seen a lot of the latest news emerging. Some of our customers, they are in a wait-and-see mode. They delaying a bit just waiting to see what is the final result. The others that -- they just [move in]. But as we mentioned, in many of those cases, even if you go ahead with the energy storage piece of the project, you can start making some money and generating revenue.

So it makes sense in many of the markets to keep going ahead with the projects, at least on the energy storage side. We see that we can offset a lot of this 10% to 15%, which is -- it is important for us, but it's not that big. Is that we see a lot of demand from Asia and Europe, especially in Europe, when we know all the energy independency and self-reliance is becoming one of the main drivers of all the policies around the community. And that the REPowerEU, we just mentioned that it's going to more than double the renewable capacity that's going to be installed every year until 2030. So the market is very strong. And we see a lot of the policy makers really, really working on the energy independency and self-reliance.

And Mark, this is Dennis speaking. Just in regards to guidance. So when we think about the revenue guidance, I just want to clarify that's fully based on backlog. So we're not depending on new bookings there.

From Siebert Williams Shank, we have Chris Ellinghaus.

Dennis, you have this great slide on 22. I was going to ask you about as you've made some pretty significant progress on diversifying your supply chain, I'm a little bit surprised that the regionalization bar in terms of the margin step-up that you're looking for is a little smaller. Can you just sort of talk about that?

And also, given that you've had some installation challenges, you don't seem to have anything in this chart that reflects improvement from installation. Can you just talk about those?

Yes, sure. Happy to do so. So on the regionalization side, we will see a full impact from regionalization if you have really the complete supply chain localized, that means batteries and our energy storage products manufacturing.

So as Manuel just talked before, one of the big next step is to bring also the battery supply chain into the U.S. But that's still a bit further out. So in that regard, we're really factoring in here the benefit from the regionalization of the products manufacturing in North America. And in EMEA, we have the full benefit based on our Northvolt partnership. So that's why this number may be in that range here.

On the second question in regards to the installation cost. The installation cost reduction, we think that to be in the level 1 to reduce the adverse margin impact. And to say that's really the key item which we need to tackle now for the second half of the year and to further reduce there. So that's sitting over there if that makes sense.

Sure. And Manuel, you sort of touched on this a little bit about the energy security issue. Can you give us any color on who in particular is demonstrating interest? And can you kind of give us any sense of the increase in magnitude of interest that you're seeing, especially from Europe?

Yes. Well, we already mentioned the significant amount of forecasted renewable deployments in Europe. We have seen and without going too much in the details, that we have seen very strong demand from the U.K. in Ireland. We have several projects there.

The fact -- and we mentioned this in one of our communication to the market. In Ireland, they broke their own record of 98% renewable, clean energy during one weekend. That was a few months ago, and that was just possible with the energy storage high -- ultra-high speed response product.

It was for around 3 days. It was a great achievement. The previous record was around 60%. And they acknowledged -- I mean, the whole system operator, they acknowledged that it would have been absolutely impossible to reach such a level of consistency of clean energy in a market without the energy storage.

So that is a product they already saw that. And what we've seen is that other markets are looking at that to say, "Well, if we really want to become carbon-free, we have to do the same." So that is -- they're looking at what is happening in that market. They will probably imitate the same, and they will start rolling out the same type of solutions.

We see a great demand for our transmission product. We are the only company that are doing this transmission booster product that we started in Lithuania as a pilot, and now we already mentioned about the 200-megawatt contract that we got.

We see that in, for example, in Germany. There's a large tender for moving energy from the north to the south, from the wind of the north to the south industrial area in the south of Germany. We're participating in that. So -- and we see very, very interesting demand for the transmission.

Data centers in Belgium, I think that what we did with Google is fantastic. We all know that every single data center around the world has a diesel backup engine. And if we can replace that and replace the number of barrels of diesel and oil that is being burned during some of the unexpected events or may -- unexpected suspension of energy, interruption of energy, well, this is a fantastic product. So if we can also take advantage of that C&I customer and then we can expand that to other customers as well.

From Baird, we have George Gianarikas.

First, you have a slide in your deck that talks about gaining market share. I'm curious as to whether you could help us paint a picture of what's happening out there with all the delays and projects and cell supply. What is the competitive dynamic like near term? And how do you see that evolving over the next couple of years?

Yes. Thank you very much, George, for your question. We mentioned in our previous call that -- and some of our presentations that our target is to be around 20% market share. We ended up, I would say, a little bit higher than that.

And I think that it has been a result of 2 things. One is that we have seen other competitors canceling or customers canceling contracts with our competitors. And also the lack -- the second element is the lack of availability of batteries.

In some cases, it's not about the price. In some cases, it's about the supply that if you really can get enough batteries to move ahead with 1 or 2 projects in your pipeline. The fact that we secure extensive capacity, it helped us. So we haven't had any cancellations so far. And we're still delivering. With some delays, we're still delivering.

So it speaks very highly about the quality of our contracts and counterparties. It's a very tight market. We don't know what's going to happen with the COVID situation in China, but we're still getting deliveries.

There are 3 factories in China that are producing for us. So that also diversify a little bit the supply in our case. So we are not just relying on one factory, for example, in the Jiangsu province that it might be affected by the lockdowns.

May ask one follow-up to Dennis with regard to your Slide 22 and your gross margin projections for the next, it looks like, 2 years? Is that about a 1,000 basis point improvement that you're projecting over the next 2 years there? And also, you mentioned on the call that you expect breakeven in '24. I would assume that's with regards to EBITDA.

That is correct. That's in regards to EBITDA. And certainly, if you sum up the numbers here, then you would somewhere be around 1,000 basis points as a total as outlined here. So that's the correct takeaway.

From Goldman Sachs, we have Brian Lee.

Maybe, Dennis, just a follow-up to that. I was looking at the Slide 22 and trying to interpret some of the moving pieces here, 1,000 basis points. Can you kind of level set us? You're doing negative low single-digit gross margins. I think you had been talking about kind of getting to mid-single-digit positive gross margin exiting this year.

Still -- is that still the baseline for exiting fiscal '22 and off of which we should be modeling that 1,000 basis points, i.e., you're talking about kind of mid-teens gross margin come fiscal '24 when you get to Gen 7 ramping?

Yes. No, thanks for the question, Brian. And yes, let me clarify on that. So on the one side, for the remainder of the fiscal year, we're really focused on reducing this adverse margin impact and moving ourselves out of the negative gross profit zone.

So what you then see on the right side on the chart is basically based on the as-sold, which we had already over the last 12 months, 400 to 600 basis points. So that's really the starting point you can think about, which is then excluding adverse margin impact.

So that's the one thing we need to tackle. No more adverse margin impact so that we are having that baseline start of 400 to 600 basis points. And then moving on top of that, these 4 steps with up to 300 basis points pricing and so on. So all that then comes together to a high single digits to low teens in the margin side of the products business.

Okay. That's super helpful. So something more like maybe, call it, 10% in fiscal '24 gross margin for just kind of using a midpoint. That's helpful.

And then I guess on -- I might have missed this, but you mentioned earlier in the call the pricing increases. Can you help quantify that a bit? And then when should we start to see those readout in terms of timing?

And then maybe just lastly, it seems like the margins are going to get helped by pricing a lot and by some of these nonrecurring -- or sorry, yes, nonrecurring charges going away. But can you give us a sense of how much of your costs are kind of fully locked in for this outlook, this margin trajectory outlook? And then what percent is maybe still variable? I'm just trying to get a sense of what potential risk still lies in the margin view here?

Yes. Thank you, Brian. First, we have been able to increase our prices between 15% to 25%. And the good news is that no cancellations after those price changes. That's one element of your question.

The second is that, okay, what about those contracts that are already signed, and they're already in our backlog. And we're having a very honest and friendly conversation with customers around the world because this is a long-term relationship. And they want us to stay supplying and providing more and more applications to them. So we're having conversations with them.

In some cases, we are going back and try to come up with an agreement to increase some of those prices. And we have been successful in those -- in some of those conversations.

And I think that the fact that we haven't had any cancellations so far, it speaks that even with the price increases, they still want to keep working with us. And they see us as a long-term partner.

And Brian, for the kind of margin expansion outlook, it's really key to go to the RMI-based pricing for us. So that means that having the same variability in our pricing to the customers as it may be happening to the underlying cost curve. So that's really the risk mitigation measure, which we have put in place there.

From Bank of America, we have Julien Dumoulin-Smith.

So maybe just following on Brian's question here a moment ago, just to keep going here. On the back half of the year, how do you think about these timing-related issues just Chinese logistics improving?

Just you talk about being back half-weighted. It seems that maybe third quarter is still somewhat impacted by, I think, as you termed it, these nonrecurring items, be it logistics from China or otherwise. And it's really looking towards the fourth quarter exit run rate.

Can you try to tie that 10% margin, say, by '24 back to how you see that exit by '22? And also how much of an ongoing impact you see in the third quarter here from some of these transient items?

Right. So let me first talk about on the revenue side, Julien, before I go to the margin side. On the revenue side, keep in mind that we pulled forward some of the revenue from the third quarter into the second quarter. And then of course, now it's also the topics about the China lockdowns and the production topics there. So that means that's pushing revenue from the third quarter into the fourth quarter.

So that's really driving the back-end weighting of the revenue in the second half year. And then on the margin side, really, we are focused here on pushing to reduce the adverse margin impact in the second half of the year. But overall, we expect that the GAAP gross profit will still stay negative in the second half and for the full fiscal year and then pushing towards low and mid-single digits in '23 and from there going into the high singles in the fiscal year '24.

Got it. Yes. So I'm just -- and can you talk a little bit more about how this force majeure is sort of cascading through to your customers and sort of the LDs, right? So just ultimately, how does that impact your margins there on that side again? How does that flow through the income statement in kind of a similar way from your suppliers?

Yes. Julien, yes, first is that on the force majeure, it has been that in some cases, our battery manufacturers, they issue the force majeure, and then what we're doing is just doing the same. We are translating that force majeure event to our customers.

That just had happened so far in 3 -- with 3 customers in 3 contracts. So it's not, I would say, across the board. And the fact that it has been a reduction in the supply from China but not an interruption, which is very good news. And I mentioned about that we -- that they are producing for us in 3 different location storage. It help us to also diversify that the lockdowns are not affecting every single factory, manufacturing facility in China. So that is an important element. I don't know, Dennis, you want to add?

Yes, really like, Julien, to the question of the P&L side. I mean at the end, the force majeure is there to protect and just a contractual basis for not having liquidated damages. So our expectation is to not see that in the P&L for that battery production reason.

Yes. Julien, I would add also that -- and this speaks very highly about our teams and the engineering teams and the commissioning teams around the world that we put in operation 10 projects already, and it's -- and we also -- we closed the gap that we had delays in the last quarter last year. We had delays in the first quarter this year. So we caught up everything.

So now that's -- it's a tremendous effort given all the headwinds. So it's -- I really want to thank the teams are working so hard to make that happen. So that -- it means that our technology is working. We're fixing the issues, and we're moving ahead. So that's a very good news.

From Wolfe Research, we have David Peters.

Just curious on the Nispera acquisition. You said you expect that to be EBITDA-accretive in '24. But I was just curious if you can give us a sense of sort of the revenue contribution, if any, in '22 and then into '23. Any sense on like the revenue per megawatt for that 8 gigawatts that they have under contract?

Let me go first on the revenue on the modeling side and then maybe have Seyed say a bit more on the second part of that question. Think about it for us when we -- just taking 1 step back here, not going into specific numbers here.

This acquisition, as Seyed outlined in his part of the remarks, it was really to solidify our path towards the manage app and to secure basically the existing business plan, which we put out as part of the IPO process and modeling. On that regard, this EBITDA-accretive, it's really kind of that contribution of the business, but I really want to also clarify that at the end, this acquisition is there to secure the business plan, which we have already put forward. And that's what we are focused on is to make sure with this acquisition. And then please, Seyed, maybe additional thoughts from your side.

Sure. Thank you. Great question. So Nispera, the reason we're super excited about it, as Dennis mentioned, it really pulls forward our plan to execute on our digital strategy, which is to really pull forward a couple of applications, including the manage application. So Nispera is spot on in that regard, and it really fits our 3 main criteria that we've been talking about throughout these calls, which is technology agnosticism, portfolio optimization and really having an overview of predictive analytics.

What's really also important and exciting about Nispera is the scalability of the product. As you know, with Fluence IQ's bidding application, we're expanding markets one by one. And we're really dealing with the intricacies and complexities of wholesale market, which is totally our kind of a strength that we bring to the table.

But within Nispera, given the scalability of the product, it's one product globally. We have a strong presence now in EMEA, Americas and APAC with this product. And we continue to grow it. In terms of if there's questions around particular ASPs, we've talked about the ASPs for Fluence IQ. We've given the range on Nispera, may fall on the lower end of that range, but the volume and the throughput and the scalability is really a strong factor.

Perfect. And then the other question I just had was just on the elongated revenue recognition timeline. You guys are calling this the new normal. Just curious if you could specifically dive into what's driving this? Is it shipping? Is it battery availability that you've talked to? And then, I mean, do you see a path to potentially get back to that initial timeline that you guys initially pointed to?

Yes, no, thanks for that clarifying question there. In general, it's really the broader topics, what we see in the supply chain. I mean, it's not really related to just one component. But then overall, we are seeing that supply chains having their difficulties from component sides to the shipping side, what you're mentioning.

So that's really -- we are factoring that in to the way how we contract with our customers and is there a way back? Yes, absolutely. But we just wanted to make sure that there's an understanding that this is not a near-term thing. I mean, if you look out what's happening globally around supply chain, it just doesn't look like it's going to swing. So therefore, we wanted to provide this clarification. And could it become better? Yes, again absolutely.

Yes. And David, we mentioned this in our previous earnings call. Remember that the shipping times, they change it from the pre-COVID times of -- from Asia to the West Coast of the U.S. They changed it from 8 days to 3 weeks. So that is something that's still there. The port congestions are still there. So as we -- and this is just 2 factors, and there are others about components availability and a little bit of higher-than-normal faulty rates on some of the equipment that we're receiving. And those are also as a result of everything that we're seeing happening.

And this is not just our industry, it's in every single industry. So yes, I -- personally, I have no doubt that the world will get back to normal, and those challenges will be solved and mitigated. But it's a matter of how much time it will take the different supply chains and the realignment that we're seeing around the world from the globalization into a regionalization.

The other element that might help, it is that if we are going to see a reduction in the demand, well, this current imbalance, it will essentially change, and it can change really fast. I don't know what you're seeing on the overall macroeconomic environment. But if we see as a small slowdown in economic activity, we will see a kind of a reduction in demand that it will certainly help in that regard.

From Tuohy Brothers, we have Craig Shere.

The gross margin improvement sequentially was certainly nice to see. And then, of course, you've got ongoing price increases you're rolling out. But the G&A, excluding stock-based comp, seemed to stairstep pretty hard in the quarter, and that weighed on the total adjusted EBITDA. What should we expect for ongoing trends in that G&A ex stock-based comp? And how volatile can that be quarter-to-quarter?

Yes. No, thanks for the question. So on the G&A side, I mean, on the one side, we ramped up the revenue, almost doubled the revenue compared to the previous quarter. And when you think about full year guidance compared to last year, there's almost also a doubling in that number there but less than doubling.

In that regard, we are pulling the G&A in line with the growth increase, and we have been really pushing on the organization expansion in the first quarter as well as in the second quarter. But we feel now that we have kind of also reached a level of organizational strength, which kind of gears up to that level of volume.

So therefore, we are not expecting a similar kind of increase on the G&A side in the third and the fourth quarter. A bit still in the third quarter with additional people added, certainly maybe it's still a little bit higher, but definitely not in that step increase level as you have seen it over the last 2 quarters.

So we're getting close to a relatively steady state rate, say, the third quarter G&A can last you into, say, next fiscal year as a run rate?

I mean, maybe if you take it, if you think about it on a percentage of revenue, I think that's a better comparison because consider that we are still on a growth trajectory also throughout fiscal year '23. But certainly, overall, much more focused at this stage on profitability.

And it's very clear for us that we are focusing on moving towards a breakeven point. But that still means that if we are having top line growth, we still need to scale the organization accordingly, but definitely not in that sense to further increase in terms of a percent of revenue. And that should actually should come down over the next couple of quarters. So maybe in short, absolutely, it may still increase. On a percentage basis, it will decrease.

From Raymond James, we have Pavel Molchanov.

You referenced REPowerEU. In that context, have you noticed any increase in incoming calls, customer activity since the time the war started?

Yes. I mean, first, thank you very much, Pavel. Yes, there's no doubt about it. I mean, there's a very strong interest. We are the market leaders in Europe, and that's good. We are the market leaders, not just in volume. We are the market leaders also in applications. And they see what is happening in Ireland, what we have done in Portugal, what we've achieved in Belgium, the Lithuania case that -- our participation in Germany. So our brand is there, top of mind.

The solutions are there, and the interest is very, very high. I mean, if you just talk to every single country, every single customer is really thinking about how the European community can really assure that they can keep growing and operating as an economic ecosystem in a much better position in terms of energy, independency and self-reliance.

And we are demonstrating every one of them that with energy storage and our software and controls and the quality of our response time, they can make that happen. And we all can make that happen.

Yes. Understood. And are there any additional logistics issues in terms of installing or delivering your product to Europe that have been affected by the war as far as increased costs, anything along those lines?

No, nothing that is really significant. There might be some components, I mean, [I saw] raw materials that used to come from Russia, and they are not available anymore. But nothing material. And in terms of the localization in Europe, Rebecca, you want to mention about our contract manufacturing process in Europe, how that's going and then the relationship with Northvolt, which is very exciting about how we're going to be localizing and codesigning with Northvolt, our offerings in Europe?

Sure, very quickly. So more than a year ago, we announced our partnership with Northvolt. We have engineering teams that work together to design the product.

The product is at a very near state of readiness to launch for a complete sale. And we actually do have our sales teams in Europe talking to customers about our Gen 6 solution with Northvolt as a key part of it. So we're at that stage where we're engaging customers in it.

Part of the plan there is to manufacture it in Europe as well. And that manufacturer has also been selected, and we're working on the specs of how that product will get designed and created in that factory. In early 2023, that manufacturing will come to fruition. So all great progress there to have that footprint in Europe.

Got it.

And Pavel, let me take the opportunity to also to mention we are building a magnificent ecosystem. I mean, we're right now combining all our 3 business lines. We have 20 gigawatts. And this is a platform that is with the acquisition of Nispera, where the new applications that are coming with the services, the data-driven services, the value that we're creating for our customers and the value of the platform is significant.

And we keep expanding the ecosystem. And it's -- overall, I see that the customers are really appreciating how much we are helping them and how much value we're creating for them.

We will now turn it back to Lex May for closing comments.

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.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.