Fluence Energy, Inc. (FLNC) Earnings Call Transcript & Summary

Hello, and welcome to Fluence Energy Investor Update Call. [Operator Instructions] I would now like to turn the call over to Chris Shelton, Head of Investor Relations. You may begin.

Good afternoon, and thank you for joining us. Joining me on today's call are Julian Nebreda, our President and Chief Executive Officer; and Ahmed Pasha, our Chief Financial Officer. A copy of our press release is posted to the Investor Relations section of our website at fluenceenergy.com. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters related to our business and the company that are not historical facts. Such statements are based upon 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 future results. You are cautioned not to 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 financial measures that we believe are useful in evaluating the performance of our business. We are unable to reconcile our projected fiscal 2026 adjusted EBITDA to the most directly comparable GAAP measure because certain items that may affect future results are outside our control or cannot be reasonably estimated at this time. Following our prepared remarks, we will conduct a question-and-answer session with our team. During this time, to give more participants an opportunity to speak, please limit yourself to one initial question and follow-up. Thank you very much. I'll now turn the call over to Julian.

Thank you for joining us today on very short notice. Earlier this afternoon, we issued a press release reducing our fiscal year '26 guidance to reflect the impact of supply chain issues affecting our U.S. production, particularly at our new contract manufacturing facility in Houston. These issues have had a significant impact on expected revenue for the fourth quarter of fiscal year '26. Today, I'd like to first provide more color on these issues and the impact on our anticipated '26 financial results. Second, cover the action plan we have put into place; and third, provide an outlook on how we are approaching our fiscal year '27 plan. First, to address the issues affecting our U.S. production. On our last earnings call, we discussed the slower-than-expected ramp-up of our Houston facility and the production levels we projected to achieve during the remainder of the fiscal year. Since then, we have experienced additional delays. Our team underestimated the complexity of the ramp-up of the Houston facility. Specifically, the major issue that has emerged has been the underperformance of the customized automated welding process, which is operating significantly below its targeted level. Another issue has been the speed of final assembly of components into finished product, which lags our expectations due to shortages of skilled labor. In order to address these challenges, our contract manufacturer has taken the following corrective actions: first, they switched to manual welding, which require hiring additional skilled labor. Manual welding is slower than automated and requires more detailed quality inspections. Second, they engaged 3 subcontractors across different locations in Houston to increase the capacity of both the welding and the assembly processes. Implementation of these corrective actions is taking longer than expected. As a result, we don't expect to achieve our previously targeted production levels during this fiscal year. Our previous guidance midpoint assume an average of 11 units per day during ramp-up of August and September. Actual production in August has averaged under 1 unit a day. But with the corrective actions implemented, production levels have increased to an average of 3 units per day during the first 2 weeks of September. We expect to continue improving production to achieve the targeted capacity of the facility. Separate from the Houston facility, we have recently experienced delays in the delivery of balance of plant equipment, such as transformers and inverters at a couple of projects due to supplier logistical constraints that will chip revenue out of this fiscal year. Turning to the impact on our fiscal '26 guidance. We are now expecting to recognize approximately $2.4 billion of revenue. This represents a reduction of approximately $600 million from the guidance we provided in August. More than 80% of the expected revenue decrease is attributable to U.S. production issues. This includes approximately $450 million of production delays, primarily from the Houston facility and approximately $65 million of penalties, largely associated with late delivery. The remaining approximately $85 million reflects logistics, primarily due to bottlenecks and customer credit. We now expect to record an adjusted EBITDA loss of approximately $200 million as compared to a loss of $10 million in our prior guidance. Approximately 2/3 of the increased loss is attributable to missed project milestones, including approximately $65 million of associated penalties and approximately $65 million from gross margin tied to revenue shifted into fiscal '27. The remaining $60 million impact includes $35 million costs associated with the initial rollout of new products and an estimated $25 million of additional cost to achieve volumes and quality standards on initial production from the Houston facility. In response to these developments and to better position us to execute on our backlog in fiscal '27, we are implementing a plan to strengthen our supply chain, production systems and processes and execution discipline. To that end, we have made structural changes to our management, including appointing Bernerd Da Santos as our new Chief Operating Officer. Some of you may know Bernerd from his many years at AES, including as COO and most recently as Head of AES Clean Energy. He has extensive experience managing operational turnarounds, including an end-to-end transformation of AES supply chain organization. Bernerd and his team will be developing a plan to address the process weaknesses that contributed to the production shortfall, define corrective actions and track execution against clear milestones. Additionally, they will be developing a framework to effectively evaluate our contract manufacturers and future production schedules. We are approaching this with urgency to incorporate findings and recommendations from this process into our fiscal '27 operating plan. We have identified several critical areas to be addressed, including strengthening our integrated planning process across all aspects of materials, production and delivery and upgrading the resiliency of our supply chain. We plan to provide an update on our action plan in November when we report fiscal '26 results and provide guidance for fiscal '27. Beginning in November, we plan to report U.S. production levels each quarter, both actual and forecast, so that our stakeholders may track our progress on production and delivery performance. At this time, we wanted to provide you the framework from which we are developing our fiscal '27 operating and financial plan. First, our plan is to deliver on our '27 backlog estimated at $2.9 billion as of today, which provides a strong foundation for revenue. Second, we intend to rightsize our revenue growth and corresponding investment so that we do not have need for additional capital in fiscal '27. Third, we are targeting neutral to positive operating cash flow in fiscal '27. And finally, we will address the seasonality aspect of our business, reducing execution concentration and supporting a more balanced delivery profile. In closing, while today's guidance revision is disappointing, the underlying issues have been identified, concentrated in our domestic supply manufacturing ramp-up and addressing. Our international operations are on track and demand for energy storage remains robust. Importantly, recent progress at Houston reinforces our belief that these challenges are operational in nature and can be resolved through targeted execution. Operator, we are now ready for questions.

[Operator Instructions] Our first question comes from the line of Dylan Nassano with Wolfe Research.

When you talked in your last quarter earnings call, you spoke about access to power being a headwind. Is that still an issue here? Or have we moved past that and these are kind of unrelated issues?

The facility is still not connected to the grid. However, we have provided additional generators that essentially addresses the issue. Today, where we stand, the automated welding is the main critical path and we know that we haven't had -- the power hasn't been a limiting factor. We expected connection to the grid -- sorry, we reconnected connection to the grid first quarter of '27, so sometime between October and November.

Okay. Got it. And then secondly, just on the financial outlook here, you're speaking to neutral or positive operating cash flow. But does this kind of change kind of how you're thinking about the need for capital next year at all?

Yes. I mean our view is to -- we are rightsizing the plan to ensure there will be no need for additional capital in '27. So we are evaluating -- we started evaluating the new order intake in terms of the need for additional capital, and we will ensure that we will have no additional -- we will not need any capital. And second, we will look at our costs, something that we do to ensure that it will be a combination of -- so the plan for next year is no need for cash, a balanced plan based on our backlog and with a cost structure that allows us to have neutral to positive cash flow in '27.

Our next question comes from the line of Justin Clare with ROTH Capital Partners.

First one here, just wondering if you could quantify what the targeted production level is at the Houston facility at this point, When you expect you might reach that run rate? And kind of what is necessary in order to support the fiscal '27 delivery plan? And then just curious on the shift to manual welding, does that solve the near-term bottleneck at the expense of potentially higher unit costs? Like is there any trade-off in making that shift?

Yes. I'll start with '27 first, I think with that -- so we have $2.9 billion of backlog for '27, of which $1.2 billion needs to be produced out of the U.S. and primarily or the majority, potentially majority of it, will come out of the U.S. facility. We have built a plan, and we have looked at the ability to monetize that backlog against a purely manual welding operating scheme, not what we expect to happen. But to ensure that we could today communicate firmly that we believe we're going to deliver on the $2.9 billion, we built a plan based on that. It clearly carries more cost, and it will take a little longer, but that's the plan we're doing today. In order to reach the targeted levels of the facility of Houston, we need to resolve the automated welding. The automated welding is in the learning process. So it's going through a process of learning how to weld our GSP 5000. It is progressing well, but it is taking much longer than expected. We believe this is a time issue that it will be resolved and it will become operational. But in order to be able to confirm the numbers, we wanted to ensure that we will -- that we could offer you a plan that was based on manual welding. As you have said -- as we said in our numbers for '26, now going to '26 and the additional cost, we identified additional $25 million of costs connected to meeting all the volumes and quality numbers. This is an estimate at this time, and it could become -- it could be potentially a lower number or there was some uncertainty around it, but clearly represent the additional cost of putting manual welding and bringing some of these additional subcontractors to support the process. As I said, even though we are presenting a plan based on minor welding for '27, we're working actively to resolve the constraints we have today connected to automated welding and final assembly to be sure that we can make -- confirm the guidance, the margin metrics that we have in those contracts.

Got it. Okay. I appreciate that. And then just one more. You had talked about rightsizing the business to support growth here so that you don't require additional capital. Wondering with the $2.9 billion of backlog already scheduled for fiscal '27, what does the rightsizing mean at this stage? Do you have to limit the incremental orders that you take for 2027? Is there any sort of revenue level that could be supported while still maintaining a neutral to positive cash flow?

Good question. No, the rightsizing means limiting additional backlog that will convert to '27, especially in the U.S. and ensuring that any additional backlog provides positive cash flow to the plan. As you know, our main use of capital as a company is working capital and sometimes these programs, even though they're generally positive in cash flow during most of the execution of the plan, it changes case by case. So we're being very, very careful on what comes into '27 in terms of supporting '27 revenue. So there is spare capacity in the international business to bring additional production, and we are -- our sales teams are looking and working on that. But on the domestic production level, we are being very, very selective on what we can commit in '27.

Our next question comes from the line of George Gianarikas with Canaccord Genuity.

So maybe -- and maybe it's early, but I'd love to understand any impact that you're seeing to your market share so far? And you sort of mentioned, I think, in some of your answers that you're limiting what you're going to put into backlog. So does that -- are you sort of competing less for certain projects? Or are you seeing any negative impact to the market share dynamics that you had?

I would say that in the following, in the international side or anything that doesn't need production out of the U.S., we continue actively and working in terms of anything that goes beyond '27, we are actively working on. Where we're limiting is U.S. -- any products that require U.S. productions and the U.S. delivery on '27. That's what we're working on. So I think that this will have -- it could have an effect, as I said, as we're talking to customers in delaying some projects or saying no to some projects, but it should not have a meaningful impact in our ability to meet customers.

And the only thing I would add, George, this is Ahmed, is that there are many customers in the U.S. who want not necessarily domestic content. So I think we will continue to look at those opportunities in the U.S., particularly the data centers in the U.S.

Maybe as a follow-up, you did mention some issues in securing some supply of components, particularly transformers, I think, inverters you mentioned. Do you know if that has anything to do with the recent announcement from the Trump administration around the U.S. bulk power system?

These are usually small delays of days or weeks that would have been within our guidance range that we are presenting the number and presenting only a final approximate result and not providing a range, these things move. But we're talking at a few weeks or a few days of movement that means that projects that we're expecting late in September are now looking to be more in '28, with none of that has connected to the new restrictions both in the U.S. and Europe on imported inverters or transformers -- inverters from certain countries ahead.

Any impact from that announcement?