Q3 2022 Fluence Energy Inc Earnings Call

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Good day and welcome to fluids Energy's third quarter earnings Conference call. At this time, all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session. As a reminder, this call maybe recorded I would now.

I'd like to turn the call over to Lex May director of Investor Relations you may begin.

Thank you operator.

Good morning, and welcome to fluids Energy's third quarter 2022 earnings conference call.

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.

Energy Dot com.

Joining me on this morning's call are Manuel Perez.

Our Chief Executive Officer, Dennis sphere, our Chief Financial Officer.

Backup all our chief product officer, and Julian our incoming Chief Executive Officer.

During the course of this call management may make certain forward looking statements regarding various matters relating to our business and company that are not historical facts.

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.

Are cautioned to not place undue reliance on these forward looking statements, which speak only as of today.

Also please note that the company undertakes no duty to update or revise forward looking statements for new information.

This call will also reference non-GAAP measures that we view as important in assessing the performance of our business.

A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the company's Investor Relations website.

Following our prepared comments, we will conduct a question and answer session with our team.

During this time to give more participants an opportunity to speak on this call. Please limit yourself to one initial question and one follow up.

Thank you very much I'll now turn the call over to man well.

Thank you Alex I would like to extend a warm welcome to our investors analysts and employees who are participating on today's call as we announced last week I was stepping down from my role as CEO effective August 31st. This is a decision that the board and I have been discussing for a while.

Both felt that now was a good time to make this change given the stability and upward momentum of the company.

And I are totally aligned on this decision and what it will be a smooth and since less transition.

It's been a privilege to serve as fluent CEO .

I am incredibly proud of all that we have accomplished during the past few years at this amazing company like so many of our dedicated employees I decided to work for us because of the company mission, which is to transform the way we power our world for a more sustainable future.

I'm forever grateful for the opportunity to lead this company through its initial public offering.

As I pass the torch to Holly.

I am confident that I am handing it to someone I know oil take flowing to the next level I am pleased to introduce you.

To the next Fluence CEO .

Please go ahead.

Thank you Manuel it is an honor and a privilege to be here with you today.

Although I do not become CEO into September 1st I thought I would share with you a bit about my background and my initial thoughts on priorities.

I am not new to affluent families.

I have been involved with the company since its creation and have been on the Suez Board for the past year.

For the past 23 years apps are around the globe and different via chip rolls for Aes.

Most recently, our strengthening of U S and lower business levels.

I have a keen interest and experience in growing renewable businesses and I am proud to have led Aes Europe , when we drill the first battery and storage.

Storage projects units there.

Have a good understanding of the key issues for fluids from my role as a director.

Although I am still getting up to speed on the details of <unk> operations.

At this time I do not foresee any major changes to influence over an old strategy.

I'd like to share with you some high level thoughts on key priorities.

My overall objective is to drive increased shareholder value.

By focusing on achieving profitable growth and ensuring continuous strongly green.

I will do this through three initial areas of focus.

First our supply chains.

Intend to support our efforts to relocate secure and diversify from whom and where we buy Keith.

To transform these from a challenged currently to a competitive advantage in the future.

The recent approval of the inflation reduction Act provides additional incentives on this front.

We will work very hard to get.

Second product roadmap.

To ensure we have a clear strategy that can generate strong margins as it relates to our offerings.

I would like to emphasize boroughs doesn't meet the growing demands of our customers, while also allowing us to capture healthy gross profit.

A key element of this is to ensure that we have well planned and implemented program rollouts.

Third influenced digital.

This is an area with tremendous potential.

And I am committed to ensuring that he has the appropriate resources and structure.

I've been involved in the selection process for the new Chief Digital Officer, and Manuel with this call later in the call.

I am excited with my new responsibilities influence.

Nishu aligns with what motivates my professional life.

The combination of our growing platform, providing innovative solutions and value to shareholders costumer and sell side.

Our unique unique place to work.

I will do my best to contribute to the Great mission of this company.

Fulfilled that drove that influenced bore actually stalled upon me.

I'd like to conclude by saying my good friend Manuel.

We have been friends were more than 30 years and I have worked together in many times over our professional lives Manuel.

Manuel leadership has been fundamental in elevating fueling two are strong and market leading position.

And what you can be confident that I will do my best to continue the company's moment.

Additionally, I would like to thank all our employees across the world.

Continued erosion to flow in these remarkable and inspiring.

Who are the cornerstone of our company and enable our success.

I would also like to emphasize that maintaining a strong corporate culture that is centered around our <unk> and <unk>.

You're kind of expecting it to support that as we continue our journey.

I would now like to turn back the Goldman will discuss the quarter.

Thank you for joining.

Turning to the quarter today, I will provide an update of our business and share our preliminary views of the inflation reduction Act our CFO Dennis.

We will then review our financial performance and guidance.

Beginning with the key highlights of the quarter on slide four and pleased to report our team continued to make strong progress mitigating operational headwinds as a result, we have improved our gross profit quarter over quarter and in line with our guidance. Additionally.

We increased our cash balance for the second consecutive quarter and enhancing our balance sheet and ended the quarter with more than $760 million in cash.

Looking now at our business performance with the lever.

This quarter in line with our expectations, we generated 239 million with total revenue and our gross profit improved from negative 4% in Q2 to negative 2% in Q3.

Despite the expected challenges, resulting from the Covid driven lockdowns in China, we continue to make progress in reducing carbon and shipping related impacts on our margin.

Our backlog now stands at $2 1 billion, providing us strong visibility to future revenue during the third quarter, we achieved solid order intake despite prices increases.

Which highlights the unwavering demand for energy storage overall, we have now contracted more product megawatts through the first nine months of fiscal year 2022.

Then.

We did during the entire fiscal year 2021.

As evidence of the strong growth we are experiencing globally.

In terms of new data contracts Florence IQ delivered another robust quarter approximately 60% of the Q3 order intake was attributable to Nitzberg. We are pleased to have grown our market share with our recent acquisitions.

On the regulatory front, we expect the U S inflation reduction act should provide significant upside to <unk> in the coming years.

One of the key provisions of the Bill is up 30% as Standalone storage investment tax credit we.

We also see other benefits, resulting from the bill, which I will discuss shortly.

As a reminder, our financial plans has not assume these tax credits or other incentives.

As we announced early this month, we have established a contract manufacturing location in Utah.

Which is expected to start production in late September .

This will enable us to finalize our assembly of our products here in the United States closer to our customer sites. This will also allow us to avoid some of the supply chain issues. We have encountered in other locations more importantly, we expect to be able to capitalize on some of the incentives provided under the inflation.

Reduction act for our <unk>.

<unk>.

I'm excited to share that we have officially signed our joint venture with renewable power our world class IP located in India. This partnership is an historic more pore fluids as it provides us with a strategic first mover advantage in this important and growing market.

Additionally, we recently opened our India Technology Center, which will allow us to drive research innovation and development of stored energy storage in India. This launch underscores our commitment to the region as we execute our global prouder strategy and complements our joint venture.

Would renew.

Shifting to our digital business I'm excited to announce we have hired Chris <unk> banka.

Our new Chief Digital Officer, Krishna brings a high level of energy and experience the team and it has demonstrated history of successfully building software businesses Krishna. Most recently served as the Chief product Officer of Inc. Charge energy, we're thrilled to have someone of his caliber leader.

Our fluids digital team, Chris and that will join us in a few weeks and we'll hit the ground running.

Staying with our digital business I am pleased to announce we have rebranded our beating application at Florida most sake.

This wholesale energy in our CLEC services beat in engine provides our customers with higher revenue.

So if optimization powered by artificial intelligence.

Currently most sake is available in the queso and Australian markets.

Turning now to slide five.

Climate change is a reality and we are encouraged by governments, including the United States, taking serious steps to address it the inflation reduction act represents one of the most significant and consequential pieces of economic policy in recent U S history.

There are several elements of the bill that will directly and indirectly benefit fluids, including our 30% investment tax credits for stand alone storage at 30% tax credit will help spur investment decisions by customers and green light more projects.

Creating significantly more domestic demand for energy storage, we believe.

The industry will see at least 20% growth in annual installations, thanks to the tax credits.

This represents a significant opportunity pore fluids, both from a demand and profitability standpoint, as a result of the boost to customer business cases.

While we are pleased to see the tax credits for storage. There are other elements of the of the bill that provides significant upside for fluids.

Fourth had already position itself to capitalize on the build by expanding its supply chain to include domestic contract manufacturing, let me elaborate.

<unk> 48 C of the Bill discuss the expansion of advanced energy projects credits.

This section now provides investment tax credits for projects are equipped or expand manufacturing facilities that produce a specified renewable energy equipment.

This includes facilities that manufacture energy storage systems electric grid modernization equipment and their components. The provision carries a bass base created of 6% with an increased created rate of up to 30%.

If prevailing wage and our premise. This is chip requirements are met.

By opening a contract manufacturing facility in Utah.

We'll be able to benefit from provisions of section 40 AC.

We are encouraged by the support for domestic contract manufacturing at a time when data is a key aspect of our supply chain strategy.

It is too early for us to quantify this potential benefit as we will need to see the IRS interpretation and guidelines first.

As we have said before our financial plan did not assume benefit from any tax provisions or incentives. Therefore.

The I R.

<unk>.

Is pure upside.

Now turning to slide six.

We have made solid progress on mitigating many of the operational headwinds I would like to provide you with an update of our improvement actions first looking at supply chain disruptions.

I'm pleased to report we are seeing shipping rates split too.

In some cases regress. Furthermore, we are starting to see the benefits of the relationships. We have developed with multiple shipping companies. As a result, we are now seeing better terms and more optionality for our shipping partners.

This is a welcome reprieve from the challenges we faced six months ago.

Turning to the battery side I'm pleased to say that we have seen increased battery production volumes for our partners.

Assuming this continuous we believe the force majeure issue by our suppliers and which way in churn issued to certain customers that youll be resolved by first quarter fiscal 'twenty three.

If we as we have mentioned previously we have already lock up our battery supply needs for calendar 'twenty three.

And are in advanced discussion for battery manufacturers regarding 'twenty, four and 'twenty five.

Turning to the compounding effect of COVID-19, which had included site closures and other site related disruptions I am pleased to report that this item has been effectively remediate it.

Turning to raw material price volatility.

<unk> first with our legacy contracts, we are working with our customers to reprice contracts in light of the ongoing higher price environments. We are now and we have made progress. So far we had repricing such contracts and will continue to work with our customers to come to satisfactory solutions for both parties.

For new contracts and place to report that our MRI is now the industry standard and will continue to be for the foreseeable future.

Finally <unk>.

Turning to project cost overruns. This.

Is that continual agenda item four the team while we'll continue to rollout additional projects during the quarter, we experienced unanticipated costs associated with installations and commissioning, including ballot for Glenn and transformer challenges on a few specific projects.

Sub standard components from certain suppliers also continued to be a challenge.

We are dedicating significant time and resources in taken.

Action in both areas, we are confident in our team's ability to implement these actions.

In summary.

I am extremely proud of our accomplishments.

While there is still work to be done.

Im confident in <unk> ability to continue our progress now I will like to turn the call over to Dennis to review our financial performance.

Thank you model before I begin I would like to express my credits you to Manuel for his leadership and commitment to affluent. Additionally.

Additionally, I'd like to extend a warm welcome to <unk>.

Colin and I have known each other from 2018 and I am excited to continue our working relationship on a deeper level as we together drive to increase value for our shareholders.

Now moving to slide eight and our financial performance.

You had a solid quarter in line with our expectations and previous guidance. Despite the challenges we faced as a result of Covid Lockdowns in China in Q2 and early Q3.

We further improved our margins quarter over quarter, increasing to GAAP gross profit margin from negative 4% in Q2 to negative 2% in Q3.

And turning to positive adjusted gross profit in Q3, thus demonstrating the successful execution of our improvement actions.

The margin improvement quarter over quarter was driven by a reduction of the adverse margin impact we have discussed on previous calls.

<unk> been successful in reducing these by about half for each quarter with the Q2 level being 43% of Q1 and.

In Q3, 48% of Q2.

We are focused on ensuring this positive trend continues into the fourth quarter.

During the third quarter, we were once again cash flow positive and added nearly $40 million to our cash balance further bolstering our liquidity to more than $760 million.

Finally, we are reaffirming our fiscal year 2022 revenue guidance of approximately $1 1 billion.

This is predicated on seeing on time arrival of products, which are currently in transit and timing of transfer of products to our customers.

Turning to slide nine.

As Manuel mentioned earlier, we had a decent quantify energy storage order intake following two exceptionally strong quarters in a row, even with our increased prices throughout fiscal year 2022.

The 1493 megawatt of new orders for the first three quarters combined already exceed the 1311 megawatt of new orders for the entire fiscal year 2021.

Demonstrating the growing demand for energy storage worldwide and the resilience of our customers' business cases.

Additionally, we have done an excellent chart of diversifying our customer base in fact of the 1493 megawatts contracted during the first three quarters.

More than 95% is from unrelated third parties.

Services contracting continues to be pushed out and therefore the service attachment rate during Q3 was lower than we had hoped.

As you may recall from last year, we experienced something similar of every close with a very strong Q4 for service contracts.

Spect, a similar catch up even below current I'd like Q4, Q1 fiscal year 'twenty three moving our aggregate attachment rate closer to <unk> 70 per cent part.

Looking at our digital business.

Another solid quarter for new contracts with more than 800 megawatts of order intake.

This includes <unk>, which we acquired in April .

I am pleased to report that including this pillar, we now have a record of nearly 17, gigawatts contracted or under management as compared to about four gigawatt and this time last year.

Additionally, we saw significant growth in our digital pipeline, mostly attributable to the inclusion of <unk> and our metrics this quarter.

Turning to slide 10.

Okay.

We delivered a solid quarter in line with our expectations in terms of revenue considering the recent China Lockdown challenges.

$139 million generating during the quarter represents a 14% decrease year over year.

Which was mostly attributable to revenue we accelerated in Q2 fiscal year 'twenty, two and the aforementioned COVID-19 driven lockdowns in China, which delayed shipments of our products into Q4 fiscal 'twenty, two and fiscal year 'twenty three.

Turning to slide 11.

Okay.

In addition to the solid revenue recognition in Q3, we made progress on our gross profit and gross margins on a GAAP basis, our GAAP gross profit of negative $15 million in Q2 fiscal 'twenty, two improved approximately 67% to negative $5 million in Q3.

On an adjusted basis, our gross profit improved from negative $11 million in Q2 to positive $2 million in Q3.

Adjusted gross margin improved from negative 4% in Q2 to positive <unk>, 7% in Q3.

These gross profit improvements were driven mostly by a reduction of adverse margin impact, which I will discuss shortly.

As Colin noted as a management team, we are keenly focused on profitable growth.

Improving our profit margins, while growing with the market.

I'd 12 lays out the two levers we discussed on our Q2 call to achieve improved margins.

Beginning with the left hand side of the slide the first lever is to reduce adverse margin impact.

You can see the progress we have made from a level of negative 53 million in Q1, which.

Which were reduced to negative $23 million in Q2, and again further reduced to negative $11 million in Q3.

Effectively reducing each quarter by about half the level of the previous quarter.

The biggest driver of improvement as the reduction of excess shipping costs and the reduction in the compounding effects of COVID-19, which are cost related to site closures and other site related interruptions.

In line with our previous statements. We expect this trend to continue in the fourth quarter, assuming ongoing renegotiations of legacy contracts and related higher.

Supply agreements will have a neutral impact on the fourth quarter.

Our second lever is to increase our solid margins.

The chart on the right hand side indicated several drivers and the expected benefit to margins.

Let me provide you an update on our efforts in these areas.

As I mentioned on our previous call, we are pushing pricing on our products across the globe. This particular margin drivers on track as I am pleased to report that we are seeing success in this endeavor as customers are willing to accept higher pricing given the inflationary environment.

In the past.

<unk> focused more on market share on pricing, but.

But with bottom line profitability and our primary focus we are laser focused on pushing pricing.

In fact, because of the high level of demand we are seeing.

We are able to be more selective about the projects, we bid on and customers we work for.

As Manuel mentioned before.

We have made strong progress on our regional business model and are in the process of launching contract manufacturing here in the United States.

With an expected start of production in late September we had there.

Therefore also on track on this margin driver.

With respect to segment mix on this margin drive up we are heading in the right direction with our focus on growing in higher margin segments, such as data centers and transmission.

We are seeing traction for the transmission segment in various parts of Europe , and chiller that encouraging.

We believe because of the level of complexity and challenges involved with star just transmission and.

In a strong position to be the market leader in this application, which deliver higher margins relative to other segments and looking for these segments to support our margin expansion in the future.

As far as Gen. Seven product again, we are heading in the right direction with executing our product roadmap, which will deliver acute tailored to specific markets such as the U S.

We expect to see this margin driver support our fiscal year 2000 and for financials.

Overall, our order intake margins for Q3 improved relative to the order intake margins for the 12 months from Q3 fiscal 'twenty, one to Q2 fiscal 'twenty two.

Reflecting the progress <unk> made on executing our plan.

We also see additional benefit to margins from the inflation reduction Act.

We expect to see a significant amount of incremental demand and an enhancement of the overall business case for energy storage.

Enabling higher pricing for our products and services.

Additionally, this increase in demand should further compound the supply demand imbalance in the market as it relates to energy storage.

While it is too early to quantify the expected margin upside as we await guidance from the IRS if provided an illustration of the potential upside on this chart.

I would note that we expect the benefits from the legislation to be reflected in our financial results beginning in fiscal year 'twenty four.

This was based on the typical time it takes to convert demand to order intake and order intake to convert to revenue.

Turning to slide 13.

You can see if you had a slight quarter over quarter improvement in our adjusted EBITDA, which was negative $53 million in Q2 and negative 49 million this quarter.

As our cross profit improves we're also turning our eye to overhead efficiency.

Having scaled up our organization rapidly over the last 12 months and now looking to maintain the current organizational sites, while we continue to grow revenue in fiscal year 'twenty three.

We will provide more details on overhead efficiency in our next earnings call.

We have mentioned on previous calls we expect to be breakeven from an adjusted EBITDA perspective in fiscal year 'twenty four.

Now turning to our cash position on slide 14, I am pleased to report our total cash balance increased approximately $39 million to a total of $762 million.

This increase in cash was due to strong collections from our customers coupled with customer prepayments for certain contracts.

Partially offset by the use of approximately $30 million for the <unk> acquisition.

We continue to remain focused on our cash balance when we deploy our capital in line with our strategic framework.

In line with our comments on the Q2 earnings call is didn't expect that our cash balance will close around $500 million at the end of this fiscal year with the majority of the decrease due to the unexpected working calculable than the fourth quarter.

This working calculable, that's being driven by previously announced revenue and collection shift into the first half of fiscal year 2023.

Turning now to slide 15.

Yeah.

We are reaffirming our revenue guidance for fiscal year 2022 of approximately $1 1 billion, which implies fourth quarter revenue of approximately $345 million.

As mentioned earlier on the call. This outlook is predicated on the on time arrival of products, which are currently in transit and the handover to our customer to recognize the related revenue and the remaining 45 days of the quarter.

In line with our normal cadence, we will provide you with our fiscal year 'twenty three guidance on our year end earnings call.

In summary, we see.

See continued progress on our cross profit by improving our product delivery operations and supported by more stability in the supply chain.

We are making progress on our strategic agenda, including finalizing the JV was renewed and opening the U S contract manufacturing facility in Utah, which will enable us to capitalize on incentives and inflation reduction Act.

Overall, we expect this legislation to drive incremental demand and create margin upside relative to what we have assumed in our financial outlook.

Our strong cash balance enables us to position ourselves for the favorable longer term outlook for energy storage.

As a management team we are intensely focused on improving the bottom line and achieving adjusted EBITDA and cash flow breakeven in fiscal year 'twenty four.

We continue to be bullish on the longer term and are excited about the prospects for our business.

This concludes my prepared remarks.

I will now turn the call back to model.

Thank you Dennis it has been a pleasure working with you and the rest of the team for the past several years.

I want to thank the fluids board for the opportunity to lead such an amazing company.

I also want to thank the entire executive leadership team for their support.

And most of all.

I want to thank our fluids for their dedication passion and energy.

With all of you.

None of this would have been possible.

This concludes my prepared remarks, I will now turn the call over to Les.

Thank you very much.

Thank you Manuel we are about to start the Q&A session before we begin I would like to note that while <unk> is participating on our call. He is not yet a member of the management team and as such he will not answer any questions today, all questions should be directed to Manwell Dennis.

And Rebecca.

Operator, we are now ready to begin Q&A.

As a reminder to ask a question. Please press star one.

Our first question comes from Julien Dumoulin Smith with Bank of America. Your line is open.

Hey, good morning team and congratulations to both of you can you hear me.

Yes, we can hear you good morning Julien.

Excellent. Thank you again for the time, Hey, listen maybe just to start off.

First off here with Utah, and just expanding a little bit on the relative economics pro forma for the IRA here can you elaborate a little bit more I noted in the remarks, you commented about section 48 et cetera, but can you provide a little bit more meat on the bone if you will.

We'll around quantifying some of those benefits and sort of the the NPV. If you will around the IRR. There and then if you can follow that up with some of the commentary about the scope and acceleration.

In 2004, I know you said it was a little bit of a delayed impact on order book, but just.

Quantifying that a little bit more on what you expect in 2004 as a consequence.

Thank you Julien.

Firstly is that obviously, we need to to get.

Enter into more of the details of them of the New Act.

But certainly this is great news I am very happy that we were.

We decided to go regional manufacturing.

While ago. So we much very very ahead of many of our competitors.

We already have the facility in Utah is going to be up and running.

Probably in a month.

Right, we see the benefit there is nothing else in the demand better pricing and the opportunity for cross selling.

The Standalone tax.

Tax paid or Standalone energy storage question on DTC.

Okay.

Okay.

Okay.

We know.

They're going to be some.

Okay.

Yes.

Okay.

Bye bye.

So it's not sufficient.

Okay.

<unk> thought about that.

Okay.

And in that light.

Okay.

Perfect.

And then Mike.

Yes.

Okay.

Okay.

Okay.

And then the better the better.

Thanks.

Our customers all of those elements are very encouraging.

Got it.

The sound quality can't be a little bit odd.

<unk>.

Just if I can just a quick follow up here if I can.

With respect to the commentary on the guidance is predicated on time arrival of products and you commented about.

To improve some of the quality of the items what are you doing to diversify your suppliers et cetera.

Sure.

Well to ensure execution that we've been open.

Sorry Julien.

Your boss.

Got got caught.

Yeah, Julian we had trouble hearing you on that when you were cutting in and out.

Could you try to repeat them.

Yes, I'll try and Super quick here.

Suffocation strategy.

How else you improve your operations in the back half of the year and to ensure full year 2002 execution here if you will.

So Julien Youre question is primarily about supplier diversification correct.

Yes.

So there's a few different angles that you could speak to here just with respect to some of the challenges we face, but it seems like many of them are beating ready whether its shipping or some of the Chinese consideration, but one of the other element that you alluded to was sub standard parts et cetera.

What do you do to mitigate that how much could we see that impact here or how would that manifest more importantly.

How do you mitigate that impact going into 'twenty three here sure.

Sure. Thanks, So I think I'll answer it in three parts.

Is the player diversification of our major components. So as we consider our product roadmap and where we invest some of our R&D resources. It is in fact to ensure that we are.

<unk> capable of expanding that supplier diversity, so thats one way to handle it is to make sure that we have more than one choice.

We would focus there mainly on batteries and Inverters, both both our target area that is.

Maybe it leads me to the second point about batteries the supplier to <unk>, which is a major goal for us that we've talked to you about before and not only overall.

But geographic supplier diversity, when we consider where we get our batteries.

So we havent made a focus on that we have had a major sort of.

Session with eight eight battery Oems most of whom we have not worked with before so we're expanding beyond the Oems that we currently do business with two additional Oems we have down selected based on technical and sort of quality features of those Oems will be pulling additional oems into the mix of.

Our product moving into 2024 and 2025, when we talk about geographic diversity.

The story continues to be the same of course, most batteries are currently from China. When we look at where we're going with our product roadmap by by the end of 2023 years or so.

30% or so of our battery supply will be from outside of China from areas, such as Europe , and Korea, and then the third part of the answer Julien is about specifically quality issues. Okay. So, let's say, we have several suppliers for inverters and batteries and we still want to and we have developed the methods.

Allergy to be able to manage the supplier quality issue is better so I'll point out two things. There. One is we just issued a press release about our system test lab that we're putting in Pennsylvania right outside of Pittsburgh and a big part of the reason for that lab is to be able to do exactly that test our products touch their components and test their designs both for their launch.

And then when they are out in the field. So we can recreate issues and solve them quickly so best practices from product companies.

That goes hand in hand, I think with some supplier quality methodologies and processes that we've put in place over the last 12 months. So we have the processes and we have the facility. So we can tackle these things in an ever more efficient way.

Okay.

Thanks, Good morning, guys.

Thank you Julien.

Our next question comes from Mohit <unk> with credit Suisse. Your line is open.

Hey, good morning.

Thanks for taking our questions.

Just a quickie on the IRS aspect doesn't just to dig deeper on that how much capacity do you have planned.

Plant in Utah.

Moving on the seven five to 150 <unk> per week.

I calculate at around 428 Gigawatts.

How should we is that correct and how should we think about on gigawatt.

Sure.

Does that $10 per kilowatt kind of apply to this is there anything else that we should expect from this.

<unk>.

Dennis here. Good morning, So I think we're really upset our self up that first of all.

The initial stage of the facility size, we can basically capture the entire demand of.

<unk>, we have contemplated for calendar year 'twenty three.

We got really 100% coverage all of that capacity and we then have really a flexible setup. There so that we can further.

Increase the capacity to north of 10 gigawatt hours, maybe all the way.

14 gigawatt hours down the road and that's actually not that.

That much of an effort to increase the capacity over time. So in that regard really the major established kind of making the tourist initiation and that really has been a work off.

A while and so we really got a very good timing of being ready to launch that and I'll ask the iia kicks in and.

Really that's incremental increase of capacity. That's really then are much easier to achieve so we're very positive in terms of the capacity customer, which we have.

Got you and I appreciate that color.

Looking more on to slide 12.

The margin upside from the already kind of talked about got coming in FY 'twenty four is that the right way to think about it on.

Im just trying to understand like.

It comes on in September how much.

When can we expect that margin upside or pricing power for.

So from my area for you guys in 'twenty three.

Okay.

Keep in mind, we have two items under the Iia as the 30% ITC Standalone storage and then the section.

48.

In there.

So in that regard I think very clearly.

Very positive that the ICC as Standalone storage will create credit tax credit there will create additional demand and does that also create that margin upside on the pricing side and thats kind of what we illustrated on the chart, which would then take till fiscal year 'twenty four.

The manufacturing side I think they are really looking at more details in terms of on the IRS.

Of guidance on how this will really work will be a question hey is that actually everybody.

Trading pricing Paul is that creating which then may be reflected in the cross profit line of the P&L will we see the benefit some of our more down in the P&L. So in that regard I would say really much too early to right now major quantification around.

The potential positive upside on the manufacturing benefits and.

Waiting for the IRS to come out with some more details on who will update you accordingly.

Got you so definitely it seems like an upside here for 'twenty three.

Alright.

Thats all from me and I'll follow up the rest later on thank you.

Thank you.

Yes.

Okay.

Our next question.

It comes from David Peters with Wolfe Research Your line is open.

Yeah, Hey, good morning.

First question I have is just on the order intake during the quarter down versus what you guys did the previous quarter uneven.

Your year over year for storage and services wondering kind of what drove the softness this quarter.

Particularly on the storage product side, and then just I think you said the services attach rate is kind of a timing issue, but I just wanted to clarify that thank you.

Alright.

So sterno.

So I think general.

We feel that this year is a little bit.

Different than previous years, what we have seen in terms of like the quarterly progression. I mean, you may remember that typically we would have seen very strong Q3, and Q4 is in terms of contracting as well as both from the revenue side, but it was everything what's going on in the year.

The market in macroeconomics and supply chain topics I think this year is really very different in terms of how the different quarters come together in that regard I would say in all.

On the order intake side, two very strong quarters in Q1, and Q2, which would typically we wouldnt have expected them that way and now we are seeing in Q3, which was more like an average quarter, but I wouldn't really put too much to it and would say hey, Jay anything kind of <unk>.

Going going differently, except for like Hey, just in general the whole way how does this yes, playing out in terms of the quarter was just very different. So that's the first part and then to your second part of the question on the services side.

So in general and all we have two different two different set of customers some customers.

A really kind of very keen to sign the contract the LTM sales for service contracts at the same time. They also signed for the product. But then there are other customers that maybe also just from the internal organization point of view and you have a product team product procurement team going out to sign the products and the ethanol operations team once more.

The service contracting and so in that regard, we sometimes see that.

Some of the customers really just signed one or two months ahead of when the assets really coming online and being handed over to the operations team that theyre entering into the service contract.

That's a little bit why we havent seen last year at the same time wherever you're also highlighting.

I know some of this.

Attachment rates in some quarters have been rather low on another quarter as we all thought 90% almost 100% and so on and that's really a bit of this timing aspect. So in general we are not really seeing a signal from our customers. So they are not wanting to sign and service agreements that we see it really just is a timing issue.

And therefore expect to catch up in the fourth quarter and first quarter of 'twenty.

Got it.

And then just separately on the the announcement of the new chief of digital Congrats there.

I'm wondering if you could share any additional details on that process and a fee. The vision for fluids IQ has changed at all versus what was anticipated initially.

Is there going to be a focus in one area or an acceleration of new apps or even more M&A potentially.

Yes. Thank you David first is that we're very happy with.

Creating that come in and he he wanted to join the affluent family.

It was a process that we.

We analyzed and we.

Went through.

Some internal candidates, we went out to the market.

We had a very very good.

Bob.

Talent that was interested in coming to this is a extremely attractive area. We all know.

The enormous opportunity that is ahead of us and also the value that we created with this flow in Seattle.

And the.

That.

It has been demonstrated in the Australia market, we already have 30% market share.

So overall very happy with that the team is.

Is there I mean, there is no.

That's good that we have we take by the team together. They are very very focused on developing new products and expand into new markets. We are very encouraged by.

Mosaic <unk>.

<unk> expanded to them.

So there are good market that that is that is going forward.

We've been very very active conversations with one big customer there to do a test pilot.

Then.

We see a lot of experience from Kris now developing software and bringing new product to the next level.

The scaling of those products and he.

He is coming from a company named <unk> in charge of that.

It's a joint venture where ABB extremely successful.

Also by ground on.

Having very very talented teams and building strong teams so.

We keep going forward, where our product development and expanding to new markets and the addition of <unk> our team in Europe . It is a great combination so very very much happy with the present that as soon as he joins the company.

<unk> in a few weeks.

He will be to start hitting the ground running and start working with the team and given us all what is that they probably did to even accelerate some of our product development.

Alright, thank you.

Thank you.

Our next question comes from James West with Evercore ISI. Your line is open.

Hey, good morning, everyone.

Good morning.

And.

Well maybe.

Put more of a philosophical question for you as you guys think about and.

And we are leaving going forward, even as you transition out.

With fluids.

<unk>.

Roll off I guess revenue growth versus profitability and profitable growth and given the early stages of the build out of energy storage.

What's what are their priorities, what's most important here for you guys is the combination of both is the plan that expand Howard how are you thinking about it.

Hey, James status speaking, let me take that but forward looking statements yet since <unk>.

Clear this to have a strong focus on profitable growth. So it's really both it's not just one or the other.

At the end like you're also indicating as an industry. We are really in the early innings and we have a very positive about the long term all silicon. Therefore, it's very clearly that it's really about continuing to grow here, but you also said very clearly hay and <unk>.

And opened up.

Yes, a lot has been about a bit of a market share game and positioning the soul of the company is like the leader in the space and I think we have clearly achieved that and therefore, it's not just the growth side. It's also the profitable side and really the focus on the bottom line and in that regard.

Any of that combination and to say, let's continue to grow at attractive rates, which just coming by the market growth itself, but at the same time earlier.

Very clear focus on achieving the breakeven on adjusted EBITDA and cash flow basis from 24.

Okay. Okay makes sense. Thanks, guys for that and then I'm curious about the opportunities that you guys have highlighted several times the India.

<unk> signed there maybe if you could expand a bit on the opportunity.

In that market in.

Berdine opens up.

Other areas in the southeast Asia market.

Thank you yes. This is another.

Very very attractive market, we see around 2007 gigawatts of storage being deployed in India by 2030.

We have this great first mover advantage, we have a technology team.

Established technology team in Bangalore, So that that is also very good for us.

The localization of the product.

In India. It was also help us develop a very competitive product there.

Have a great partner three new power is an excellent developer they are very well known in the market one of the leaders very strong shareholders.

Similar coiled sure also a public company company public listed in NASDAQ, So very very common.

Elements that is.

We feel so comfortable working with them.

And again I mean this is this is that another JV with status of the JV. We are establishing now fluids. The Nevada JV that we can repeat the tremendous success of fluid thing in their in the India JV will.

We're expanding our sales and multiply and then.

And learning from our success and tried to repeat dose.

Okay very good thanks, guys.

Thank you.

Okay.

Our next question comes from George <unk> with Canaccord Genuity. Your line is open.

Hey, good morning, everyone. Thanks for taking my question.

<unk>.

I'd like to ask first about your gross margin targets I mean, a lot has changed since your IPO, but im wondering yes, we think about the 15 to $35 85 margin targets that you laid out several months ago for three segments are there are those still viable and at a steady state.

Or has something changed structurally about the business that those can no longer be relied upon thank you.

Hey, George Good morning, Dennis here.

Absolutely if other targets, which we are going after I would say.

What structurally may have changed now that the IRS. So thats certainly hasnt been baked into any of the previous financial modeling outlook statements on that regard.

Prior to our previous statements around the Iia.

A bit early to quantify that margin upside here, but I think on the especially on the product side.

It's they are very clearly.

Otherwise in terms of kind of the more near term margin progression I think if you stay in line with our statements, especially from the last earnings call, where we said hey expect fiscal year 'twenty three somewhere in that low to mid single digit in fiscal year 2004, and high single digit this year or is that addition to hey, let's all prior tool.

NII upside so that's same.

Same statement there.

Thank you and as a follow up just on the competitive dynamic that youre seeing in the marketplace have there been any material changes over the last several months in terms of who youre seeing and who is more aggressive less aggressive than general market share dynamics. Thanks Scott.

Well in general.

To be honest at one point.

We were.

We are receiving a lot of calls from customers that they are.

They didn't.

They didn't have.

Any other option because some of our competitors.

He decided to.

To slowdown their participation now they some of them. They are coming back we have been becoming more selective in.

Indeed, both in their customers with strategic customers the markets and the segments. We're participating which also is helping us on the margin side and the fact that we haven't had any cancellation of projects and we have been able to reprice. Some of the contract. It tells us that those customers that we selected a very loyal they want.

To keep working with us they want to keep developing the portfolios without.

And is that.

I'd say its a satisfaction to know that we were in a name in the market and respected and we keep attracting.

In a new market.

Within that.

I can also add is that with.

This.

They renew.

The new the new situation in Europe , the demand in Europe also is becoming.

Extremely strong and we see very good opportunities, there and expanding a lot of repetitive.

Customers in the U S. Now we sold are happy with the ITC in solar now having that the standalone storage ITC and all of this push for re shoring.

Infrastructure and manufacturing in the in the U S. All of that is.

We will see additional demand so in general we feel very comfortable with where the prospects around the world and Asia has still very very strong market for us.

Thank you.

Our last question comes from Craig Shere with Tuohy Brothers. Your line is open.

Good morning, Thanks for taking the questions.

Yeah.

They are all kind of related.

First kind of nearer term.

Sorry, maybe I didn't catch that.

In the opening comments, but im trying to reconcile the guidance that we could end the force majeure, possibly by the first quarter of fiscal 'twenty three.

With the comment that type battery and Burger market conditions may extend into next year.

And then I certainly understand.

But in today's remarkably tight energy markets. Our customers are certainly happy to pay up for lithium battery storage project inflationary pressure, but.

But looking in the mid decade.

But in an eventual easing of macro inflation and ongoing lithium pressure start to change customer behavior.

And then the last part of the question is do you see tight lithium battery market conditions.

Kind of accelerating entrust and alternative technologies.

Let me.

It is it is a very interesting question and I will.

I will answer that my personal view.

I think that you will remember that we entered into a strategic alliance with quantum escape.

I personally think that.

The solid state battery is is it's a very very interesting evolution of the leach and iron is in fact.

Three times more dense in terms of energy and so that will say David significantly reduce their overall costs by nature in this design and architecture is use much less material. So it's not just.

Has a lower cost point, but it's also more efficient and very high density. So that I think that that will be a very interesting evolution in the auction technology. If you look at the manufacturing that has been built in Europe and in the U S that is massive and is massive and is based in lithium ion they might be other thing.

Knowledge is on maybe longer term in storage like hydrogen probably the future will be a combination between both in Assam hybrid models.

The market is.

Is massively investing in researching on lithium ion type of batteries.

Brebach and their team has been looking for other options.

Sodium <unk> and we see some opportunity just also on sodium that obviously has a more abundant.

Components and raw materials on that one, but it's steel they're seeing is still some work to be done we have an extremely nobody'd bye bye testing.

New bodies, but again I mean, it's a mad enough.

Economy of scale and the quantity of production because they are also all their options out there yet, but if you want to ask them for two to three five maybe even 10 gigawatts theyre not capable to do that so it's not just the technology, but is also the manufacturing capacity and the volumes.

Great and nearer term.

Maybe you can help me understand the opportunity to and of course mers or into early next fiscal year, while still expecting place battery and inverter market conditions. How do you see that all playing out for you in the coming two to three quarters.

Yes, let me take that I think in general we see actually that there is.

Supply and demand imbalance and that actually.

The positive driver in our perspective in regards to the year.

Margin upside potentials here at the same time of course, what it also does on behalf of been talking about that on the last earnings call that kind of drives the bit ultimate elongation in the revenue cycle.

And.

But the other.

And of.

Aspect to it but in general.

Feel that they have done the homework that we have secured all the supply fulfilled sorry.

Sorry calendar year 'twenty three already that means for that time period, we are well set up.

<unk> been making earlier statements also that's very.

Very good.

In regards to securing the 'twenty four potentially year and a 25 supply that's big IP overall, you like that.

Things are going into the right direction.

We'll continue to do our homework in this area.

Yes, I just would like to add and again. This is a very personal note because my experience in the field and other technologies evolution is that I don't think that the bottleneck will be but it is in the future.

Bottleneck will be the existing infrastructure.

We have seen just the effect of the ITC on solar and how many years.

<unk> interconnection you need to wait in order to get the capacity. So there is a tremendous opportunity for fluent we are the leaders and the only the only company out there that is offering the transmission booster. We know that the transmission is going to be a bottleneck in this new new grid and we already won.

Very significant contract in Europe , we participating in Germany recently.

The regulator approved that transmission booster in Chile, So is up.

<unk> point that that need it will a significant market for us and if that comes to the U S. In order to really really accommodate the additional demand that we will see so we will see I believe we will have additional opportunity to offer some cross selling opportunities with the transmission distance.

Great. Thank you.

Okay.

There are no further questions I'd like to turn the call back over to <unk> for any closing remarks.

Thank you Michelle and 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 fourth quarter results have a good day.

Yes.

This concludes the program you may now disconnect.

Okay.

Yeah.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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Yes.

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Okay.

Okay.