Earnings Call Transcript
Fluence Energy, Inc. (FLNC)
Earnings Call Transcript - FLNC Q2 2025
Operator, Operator
Hello, and welcome to Fluence Energy Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Investor Relations. Sir, you may begin. Thank you. Good morning, and welcome to Fluence Energy's second quarter 2025 earnings conference call. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. Joining me on this morning's call are Julian Nebreda, our President and Chief Executive Officer; and Ahmed Pasha, our Chief Financial Officer. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts. 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 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 Julian.
Julian Nebreda, CEO
Thank you, Lex. I would like to extend a warm welcome to our investors, analysts, and employees, who are participating in today's call. This morning, I will briefly review our Q2 results, but I will concentrate primarily on the current environment, and why we remain confident in the long-term growth prospects for energy storage, the competitiveness of our Smartstack platform, and the strength of our U.S. supply chain strategy. Starting with Slide 4 and our Q2 performance. We delivered approximately $432 million in revenue as our execution helped us to deliver on project milestones earlier than expected. We also earned double-digit adjusted gross profit margin, and our annual recurring revenue increased to $110 million. We ended the quarter with approximately $4.9 billion of backlog, including $200 million of contracts added during the quarter. Looking ahead in the coming quarters, we are expecting a meaningful improvement in order volume from this past quarter, especially internationally. In particular, and consistent with our prior expectations, we currently anticipate a strong ramp-up in order volume in Australia as we enter the second half of our fiscal year. And finally, we ended the quarter with more than $1 billion in liquidity, including $610 million in total cash. This demonstrates our solid low-lever financial condition and provides us with a strong basis to deliver long-term value to our stakeholders. Please turn to Slide 5. Since our last call, the market landscape has shifted meaningfully due to the enactment of significant new tariffs, which with respect to China have increased from roughly 10% to roughly 155% in a matter of a few months. The change in tariff and trade policy has led to considerable economic uncertainty in global markets. This uncertainty from the number and magnitude of changes has led the company and certain of our customers to mutually agree to pause execution of some of our U.S. contracts, and the signing of new U.S. contracts as we wait for clarity on the tariff and policy environment. This pause contributed to our decision to revise our fiscal 2025 outlook, which Ahmed will discuss shortly. Having said that, we believe that the current high tariff levels on Chinese inputs are unlikely to be sustainable. The Trump Administration has publicly stated their intention to pursue a new trade deal with China that may result in lower tariff rates. As trade negotiations between the United States and other countries, including China, progresses. We believe the markets will stabilize and provide a clear path forward for both our customers and the company, supporting a return to more normalized contracting activity in the U.S. market. Thus, we expect the contracting pause we're currently experiencing to be temporary and reaffirm our approach to a diversified supply chain. Although the current tariff environment certainly impacts our customers in the short term, we remain optimistic about the future of energy storage in general and particularly for Fluence. To that end, I will cover the following three topics: first, the future demand outlook for battery storage in our most relevant markets; second, how we view energy storage competitiveness against gas as a provider of capacity, especially in the U.S.; and finally, I will discuss how Fluence intends to create value for its stakeholders through its innovative Smartstack technology and U.S. domestic content strategy. Turning to Slide 6. Demand for energy continues to increase. This is driven by many factors, including economic growth, data center deployments, and the electrification of transportation and other sectors. In the U.S. alone, electricity demand is projected to grow 11% through 2030, signaling that annual energy storage capacity will increase to more than 400 gigawatt hours. Just to put this in context, over the last five years, we have seen only 79 gigawatt hours of additions in the U.S. market. This is a strong indication of the increasing significance of battery storage in the U.S. market. We see similar growth rates in other international markets. For example, in Australia, we expect battery storage to reach 51 gigawatt hours by 2030, up from the 2024 levels of 7 gigawatt hours. And in Germany, where we expect battery storage to reach 120 gigawatt hours by 2030 from its 2024 level of 20 gigawatt hours. Turning to Slide 7. Now I would like to touch on the competitiveness of energy storage. Battery prices are down by approximately 70% since 2022, making energy storage competitive across several markets. For the U.S., the current higher tariff on Chinese imports are expected to essentially bring battery costs back to what we saw three years ago. At the same time, capital costs for competing technologies such as natural gas plants have increased materially over the past few years and are expected to continue to increase. In the United States, we anticipate 278 gigawatt hours of capacity additions through 2030 to meet growing needs. And we believe that energy storage is well positioned to meet these needs as it benefits from several factors. First, battery storage is one of the most cost-effective solutions for meeting system needs. Energy storage capacity prices are currently approximately $9 per kilowatt a month, which is about half the price of a gas fired plant. We believe that this significant price difference makes energy storage the most optimal choice even with low gas prices. Second, energy storage has the unique ability to take advantage of low off-peak prices. For example, in PJM, current off-peak prices are more than 30% lower than on-peak prices, offering tangible arbitrage benefits to plant owners, particularly when there are several gigawatts of excess capacity available during those off-peak hours. Third, as there have historically been fewer supply chain constraints and shorter lead times associated with energy storage compared to other competing technologies, battery storage systems can typically be deployed within six to nine months versus the typical 36 to 40 months needed for gas combustion facilities. Fourth, battery storage systems can be located in places with advantage interconnection and permitting profiles, avoiding the long queue for development facing many power producers. As the market seeks to rapidly meet growing demand for electricity, battery energy storage is one of the few options to provide firm dispatchable power at large scale over the next few years. Finally, we believe that battery storage's rapid response time and ability to adapt to the power grid topology makes it the ideal technology to support grid stability as higher electricity demand adds more pressure on electric grids, both in the U.S. and globally. In summary, we believe that battery storage technology remains the most optimal choice to meet the increasing demand for electricity. Turning to Slide 8. Our backlog remains robust at approximately $4.9 billion as of quarter end, including more than $1.9 billion that is scheduled for delivery this fiscal year. While U.S. and international order intake was lower this quarter, primarily due to tariff uncertainty. Our pipeline continues to expand, now exceeding $22 billion as of quarter end, with roughly half from markets outside the U.S. We believe this international diversification provides resilience and positions us well for renewed growth as global market dynamics stabilize. Now I would like to discuss how Fluence intends to create value for stakeholders, through its innovative Smartstack technology and domestic content strategy. Turning to Slide 9. As we discussed on our last call, we have recently launched a breakthrough technology called Smartstack. I am pleased to report that we have received positive feedback from our customers, who appreciate the features offered by the state-of-the-art technology. In fact, we have already signed our first contract for Smartstack. We believe Smartstack offers significant value for our customers, including: first, world-class safety. Smartstack distributes batteries into four distinct units, called parts. Each of these parts is designed to prevent fire propagation between parts, which is intended to reduce thermal runaway risk. Second, Smartstack's design facilitates the integration of various battery capacity offerings and form factors, enabling a more adaptable supply chain strategy. Third, Smartstack is one of the densest products on the market, enabling lower total cost of energy, which should result in higher customer returns. And fourth, Smartstack offers a more modern and flexible product. By separating the batteries from other equipment, Smartstack is designed to allow for faster service, better inventory management, higher availability and more efficient augmentation. In summary, Smartstack is expected to be priced much lower than our previous Gridstack Pro product, not only because of a decline in equipment prices, but because of a more efficient product design. This product is designed to deliver efficient and cost-effective solutions to our customers, while at the same time is expected to help us earn our targeted returns. Turning to Slide 10. Our domestic content strategy, which we began to implement over two years ago, offers a flexible approach to meet the domestic content requirements under the IRA. This strategy benefits our customers through tariff and IRA incentives, including the 45x manufacturing credit and the 10% domestic content bonus. We are confident that future policy updates will continue to support local manufacturing. Our discussions with regulators indicate a consensus for continued incentives for local manufacturing, which has created thousands of jobs to date. Our domestic content strategy is resilient to multiple scenarios, involving different tariff outcomes and levels of policy support for domestic production. As an example, at the current tariff levels, our domestic content strategy of blending U.S. cells with imported cells is approximately 10% cheaper than a strategy of using all imported cells from China, even without considering the IRA domestic content bonus. Regarding our progress, all six partner facilities in our U.S. supply chain strategy are now producing or preparing to launch production in the current fiscal quarter, which allows us to offer up to 100% non-Chinese U.S. products. Our Utah module manufacturing site has received its first shipment of U.S.-manufactured batteries from ASC. Now with Line 1 of the Tennessee facility fully operational, we are working with ASC to bring the second battery production line into operations, which is currently expected to occur next calendar year. With our U.S. cell manufacturing facility in operations, we are able to offer our customers, through our domestic content product, a range of domestically produced batteries, modules and closures, communication systems, and inverters. These options are intended to enable our customers to achieve the domestic content bonus while mitigating the impacts of supply stock or tariff. By establishing the capability for up to 100% U.S.-made content, we can also maximize the overall domestic content volume offering in the U.S. Once ASC's second line is in production, we anticipate being able to serve 12 gigawatt hours of annual domestic content volume in the U.S., assuming that U.S. sales represent 50% of those using products. We remain very optimistic about our U.S. domestic content offering, and believe it will provide superior value to our customers in the medium and long term. With that, I'll turn the call over to Ahmed for the financial review.
Ahmed Pasha, CFO
Thank you, Julian, and good morning, everyone. Today, I will review our second quarter financial results and then discuss our liquidity and updated outlook for fiscal 2025. Turning to Slide 12. In the second quarter, we generated $432 million of revenue, which was better than we expected as we were able to achieve project milestones faster than expected across Americas and APAC regions, as we benefited from efficiencies from our supply chain initiatives. This brings our year-to-date revenue to approximately $618 million versus roughly $500 million of first half revenue expectations discussed on our last call. In terms of gross margin, we generated $45 million of adjusted gross profit, representing an adjusted gross profit margin of approximately 10.4%. This quarter marks our seventh consecutive quarter of double-digit adjusted gross profit margins. Year-over-year, operating expenses increased by $10 million to $84 million due to higher R&D spending and sales and marketing costs. A good portion of this increased spending is focused on delivery of our new Smartstack product line to market. Turning to adjusted EBITDA. We reported negative $30 million for the quarter, mainly due to the more level fixed cost nature of our operating expenses compared to back-end nature of our revenue, as we discussed on our last quarter call. Turning to Slide 13. I will now discuss our strong liquidity, which allows us to invest in innovative technologies and support our plan. We ended the second quarter with more than $610 million of cash consistent with the strong cash position we had at the end of last quarter. Additionally, we have $532 million available under our revolver and supply chain facilities, which puts our total liquidity at more than $1.1 billion. Looking ahead, we will be allocating a couple hundred million dollars of our available liquidity to fund working capital needs to deliver our revenue and execute on our domestic content strategy. Bottom line, we continue to see robust liquidity for the remainder of the year and beyond. Turning to Slide 14. I will review our revised guidance for 2025, which we have lowered to reflect current market conditions in the U.S., which have impacted our full year revenue and EBITDA expectations. Aside from these tariff headwinds, we are pleased with our performance as we are on track to deliver double-digit adjusted gross margins. We continue to see opportunities in our recurring digital and services revenue platform. Accordingly, we are reaffirming our guidance for ARR of $145 million. Turning to Slide 15. Let me explain our revised revenue expectations further. Recent tariff announcements made it clear that bringing products from China at these rates is uneconomical for our customers and for Fluence. This led us to mutually agree with some of our customers to pause certain shipments and entry into pending contracts until we have better visibility. Here, I want to mention two things. First, we do not expect any material cancellations; and second, we remain engaged with our customers. We look forward to improved visibility that allows us to price these pending contracts with adequate returns for both Fluence and our customers. Accordingly, the deferral of these contracts translates to $700 million of revenue previously expected for this year that has been pushed to the right. As such, the midpoint of our revised guidance is now $2.7 billion. This guidance is largely derisked as we have 100% of the required cells in the U.S. Furthermore, 95% of the midpoint of our guidance is supported by our backlog plus revenue recognized to date. Turning to Slide 16, covering adjusted EBITDA. We are lowering our guidance to a midpoint of $10 million, which is $75 million less than our prior midpoint guidance. Our revised guidance includes a combined $100 million of anticipated tariff-related headwinds, which we believe will be partly offset through our proactive actions. To go into this in a bit more detail. First, the $700 million lower revenue I just discussed will have an impact of approximately $80 million. Second, we are incorporating a $20 million incremental impact for tariffs that we were not able to avoid or pass on to our customers. These impacts were partially offset by the benefit of approximately $25 million from currently in progress and planned operational efficiency improvements. These include some renegotiations of equipment costs with our suppliers as well as cuts to our budgeted operating expenses. In summary, although current tariff policy has created some near-term challenges, we are pleased with the underlying performance of the business. We remain confident in the long-term prospects of energy storage in general and particularly in Fluence's ability to deliver maximum value to its customers and shareholders. With that, I would like to turn the call back to Julian for his closing remarks.
Julian Nebreda, CEO
Thank you, Ahmed. Turning to Slide 17. In closing, I will highlight the key takeaways from this quarter's performance and our outlook moving forward. First, the recently imposed U.S. tariff has introduced substantial economic uncertainty, which is impacting near-term customer decision making and project execution. Although this presents some immediate challenges, we are optimistic that they are temporary and manageable. Second, we remain confident in our long-term positioning. We strongly believe that our product innovation strategy in our new platform, Smartstack, and our U.S. domestic content capabilities position us to benefit materially over time as the market overcomes the current economic uncertainty and regains its growth trajectory. Third, we are operating from a position of strength. Our backlog now is approximately $4.9 billion, providing a solid foundation for future growth. We believe our track record of capturing double-digit adjusted gross profit margins provides us with additional visibility on our future financial performance and profitability. And fourth, our liquidity remains robust with more than $1 billion in total cash and committed working capital facilities. We believe that our solid financial condition will give us the flexibility to continue investing through a period of volatility while executing on our long-term strategic priorities. Together, these factors reinforce our confidence in Fluence's ability to navigate the current environment and emerge even stronger. With that, I would like to open up the call for questions.
Operator, Operator
Thank you. Our first question comes from the line of Brian Lee with Goldman Sachs & Company. Your line is open.
Brian Lee, Analyst
Hi, guys. Good morning. Thanks for taking the question.
Julian Nebreda, CEO
Good morning, Brian.
Brian Lee, Analyst
Good morning, Julian. I guess the first question, just on the ASC ramp. I appreciate some of the additional disclosure here, but I just wanted to make sure I have the numbers right. I think in the past, you had talked about like 3 to 4 gigawatt hours on Line 1 and then Line 2 would double that. I think I just heard you say by the summer of next year, you'd be at an annualized run rate of 12 gigawatt hours of capacity out of ASC and the Tennessee facility. Is there another line being contemplated there? Or were there some efficiency gains that are getting new additional capacity, the 12 gigawatt hours seems a little bit more than we had been anticipating?
Julian Nebreda, CEO
Yes, thank you for the question. Each of the lines has a capacity between 3 and 3.5 gigawatt hours. Our contracts start at a minimum of 3 gigawatt hours, but we can increase them to 3.5 gigawatt hours. We combine domestically produced batteries with imported batteries, which allows us to convert the 6 gigawatt hours available from the two lines into 12 gigawatt hours. This is based on a mix of half domestically manufactured and half internationally manufactured batteries. The exact ratio will depend on the final tariff levels from China and how the process unfolds. However, this is a reasonable assumption moving forward.
Ahmed Pasha, CFO
Brian, I would like to add that we achieve a mix that allows us to benefit from at least 40% domestic content. This capability enables us to sell more volume while satisfying our customers' demand for domestic content. As a result, we can meet our increasing needs at 6 gigawatt hours by converting it into an equivalent volume of 12 gigawatt hours for domestic content.
Brian Lee, Analyst
Okay. No, that's helpful clarification. But presumably, if the 150-plus percent tariffs on China remain, the economics on blending and mixing at any ratio would not make sense? So really, it's 6 to 7 gigawatt hours of domestic capacity run rate next year. If I kind of do the math that current ASP levels, I guess it implies like a $2 billion or $3 billion revenue capacity that can be supported on pure U.S. domestic cells.
Julian Nebreda, CEO
Yes.
Brian Lee, Analyst
One, is that the right range to think about?
Julian Nebreda, CEO
No.
Brian Lee, Analyst
And two, would that cover all your needs for fiscal 2026 given the $700 million that's pushing out from this year's revenue to next year and then what you're projecting for next year on the backlog?
Julian Nebreda, CEO
Yes. As mentioned in the call, even with the current tariff levels, by mixing imported and locally manufactured products, we can offer a price that is 10% lower than fully imported batteries, even without considering the additional 10% incentive from the 45x program. Therefore, we believe that if the situation remains unchanged, we can still maintain a competitive edge with our mix of imported and non-imported tariffs. In the most likely scenarios looking ahead, we will provide a combination of both imported and non-imported tariffs in our product offerings.
Brian Lee, Analyst
My final question is about the economics you've analyzed while talking to customers. The tariff environment is unpredictable. It seems that contracts will not be canceled, but rather renegotiated or approached with a different sourcing strategy. In your discussions with customers regarding mixing, have you explored what pricing and margins could look like? It's important to consider how the revenue impact from tariffs will be handled, whether that revenue comes back later this year or is included in the fiscal 2026 guidance. What do you anticipate the margin implications will be for bringing back that revenue, which will still be affected by tariffs if you are blending and adjusting your pricing with customers?
Julian Nebreda, CEO
That's right. Let me explain our approach, which addresses your question. The current issue we face is uncertainty regarding tariff levels that may be subject to negotiation with the Chinese government, and there is a possibility that they could decrease. This uncertainty makes it challenging for me to establish a price for my customers, as tariffs can impact prices in various ways. It complicates the situation for my customers who need to communicate pricing to their own customers based on a fluctuating cost structure. Assuming the issue is resolved, either at the current tariff level or a lower one, we have enough flexibility to offer competitive pricing compared to alternative options, which helps us achieve our margin goals. Regarding your point about whether this will still work for the customers, generally speaking, there are limited alternatives to battery storage for meeting the needs of the U.S. grid. While I’m not suggesting that battery storage is price-insensitive, the number of viable alternatives is restricted. Therefore, we believe that most countries, if not all, will proceed with battery storage at a potentially higher cost than previously anticipated if tariffs remain where they are. This is crucial for us. We have structured our contracts to ensure alignment of interests between our customers and ourselves, sharing some risks together. We are confident that as we consider all these factors—including our supply chain options, the opportunities for our customers, and the value of battery storage for the U.S. grid—we will be able to achieve growth once the uncertainty is resolved, regardless of the outcome.
Brian Lee, Analyst
All right, thanks guys. I appreciate it. I will pass it on.
Julian Nebreda, CEO
Thank you, Brian.
Operator, Operator
Please standby for our next question. Our next question comes from the line of George Gianarikas with Canaccord. Your line is open.
George Gianarikas, Analyst
Hi, good morning everyone. Thank you for taking our question.
Julian Nebreda, CEO
Good morning, George.
George Gianarikas, Analyst
Along the same lines around AESC, can you maybe discuss the ownership structure there and any solutions if that has to change due to any political concerns? Thank you.
Julian Nebreda, CEO
Yes, thank you. You are referring to the potential FEOC restrictions that may be implemented. Currently, there are no FEOC restrictions on the IRA benefit for battery storage; those apply to the EV industry, not to our segment. However, we recognize this as a potential risk and have coordinated with AESC to address it. We have a plan in place to ensure we comply with any future ownership restrictions that may arise. Unfortunately, I can't provide more specific details at this moment, but this is an issue we have identified and are actively addressing with AESC. Our interests are closely aligned in this regard, and we have been working on it for some time. We are not just waiting for a problem to arise; instead, we are proactive in our approach. As time progresses, we will share more information, but this is what I can communicate at this stage.
George Gianarikas, Analyst
Thanks. And maybe around competitive concerns, last quarter, you had mentioned that you have seen incremental competition from Chinese and the U.S. And I'm curious as to what's happened from a competitive landscape. I know that a lot of deals are paused, but are you seeing incremental steps from Chinese vendors in the U.S.? Or is that sort of abated over the last several months?
Julian Nebreda, CEO
The uncertainty in the U.S. market makes it challenging to price solutions, especially with conditions changing rapidly. It's tough to accurately gauge the current competitive landscape since many are in a wait-and-see mode. The upcoming restrictions will pose significant challenges for competitors who have primarily relied on Chinese production, making it difficult for them to compete in the U.S. market. While we may not have been fully prepared for this level of certainty, we anticipated that the U.S. market would shift toward domestic production. We've been diligently developing a strategy to produce solutions in the U.S., working with U.S. Steel to create enclosures that we can promote and sell to our customers at competitive prices. Many are now attempting to replicate our efforts, but our earlier planning gives us a two-year advantage. Internationally, the competitive environment remains intense, similar to last quarter, which prompted us to accelerate our product launches with Smartstack. We are confident that Smartstack is the right approach. The attempts by others to imitate our work, albeit poorly, show that we've succeeded in our strategy. We believe we can effectively compete in international markets and outperform Chinese competitors and others in the industry.
George Gianarikas, Analyst
Thank you.
Operator, Operator
Thank you. Please standby for our next question. Our next question comes from the line of Dylan Nassano with Wolfe Research. Your line is open.
Dylan Nassano, Analyst
Hi, good morning.
Julian Nebreda, CEO
Good morning, Dylan.
Dylan Nassano, Analyst
Doing well. Thanks for taking my question. Can you just talk a little bit about kind of the global alternative cell supply situation that's not China and that's not, I guess, U.S. and AESC?
Julian Nebreda, CEO
There is limited production coming from Korea, Southeast Asia, and Japan, but the majority of cell production currently originates from China. We are actively working to diversify and explore additional sources, but the volumes we can obtain from China are restricted. We are also focused on developing our U.S. supply chains as much as possible, and we hope that more players will contribute to strengthening the local supply chain in the U.S. in the coming years. However, at this time, we remain heavily reliant on China, and the industry is dependent on Chinese equipment.
Dylan Nassano, Analyst
Thank you. As a follow-up, Ahmed, you mentioned Australia in your opening remarks. Could you discuss whether any of the projects you signed this quarter are related to those that were delayed previously and provide an update on their status?
Julian Nebreda, CEO
Yes. Those three core projects that we delayed last quarter, we expect to sign two in this quarter, the third quarter and one in the fourth. So they are going well. We're very happy and going well. So none of them were part of this $200 million order intake we took this quarter.
Dylan Nassano, Analyst
Great, thank you.
Operator, Operator
Please standby for our next question. Our next question comes from the line of Christine Cho with Barclays. Your line is open.
Christine Cho, Analyst
Good morning. Thank you for taking my question.
Julian Nebreda, CEO
Good morning, Christine. How are you?
Christine Cho, Analyst
Good. How are you?
Julian Nebreda, CEO
Yes, well, could be better I guess.
Christine Cho, Analyst
So I appreciate your comment that today your mix of domestic content and non-domestic content batteries is 10% cheaper versus 100% imported panels from China. And that could be a fair statement today. But if we are to assume that capacity is going to build outside China, let's call it, next year. And that's going to be much cheaper than what Chinese imports with the current tariffs are. So how should we think about that scenario and how it would impact your future bookings? And how should we think about you diversifying your supply outside China if only for risk mitigation purposes? And if you do decide to do that, how long would that take?
Julian Nebreda, CEO
Yes, we have a clear understanding of potential price movements in China, and we can also lower our local costs in the U.S. We know our current position and the cost structures in China, which allows us to have a perspective on their pricing. Therefore, I am confident that we will remain competitive, even in a scenario where tariffs remain high. Additionally, we utilize a mixture of locally produced and imported materials, which enables us to benefit from local battery production and Chinese pricing. Our strategy provides us with significant flexibility and performs well across various scenarios, including instances where Chinese prices decrease substantially. However, it's important to note that there isn't much room for substantial price reductions. Overall, we are confident in our approach.
Christine Cho, Analyst
Can your customers choose to get batteries made with only domestic cells from you, while sourcing batteries with non-domestic cells from other manufacturers to mix them independently?
Julian Nebreda, CEO
No.
Christine Cho, Analyst
Or are there no reasons why they would do?
Julian Nebreda, CEO
The real value lies in our battery management system and our ability to integrate our services. While batteries are an important cost element, that's not where the value is generated. Batteries are essentially a commodity. The value comes from our logistics, intelligence, systems, and our ability to ensure high availability. That’s where the value is created. Fixing things does not work.
Christine Cho, Analyst
Got it. Thank you.
Operator, Operator
Please standby for our next question. Our next question comes from the line of Ameet Thakkar with BMO Capital Markets. Your line is open.
Ameet Thakkar, Analyst
Good morning guys. Thanks for taking our questions.
Julian Nebreda, CEO
Good morning, Ameet.
Ameet Thakkar, Analyst
Hi. Good morning. Regarding the $700 million in contracts that are currently on hold, could you provide the breakdown between those that were under advanced negotiations and those that had already been executed? Additionally, for the contracts under advanced negotiations, is there anything preventing them from canceling the project? I have one follow-up question.
Julian Nebreda, CEO
They were approximately evenly split. Half of them were contracts already in our backlog that we're pausing execution on, and these were contracts that were in the early stages. We have not been able to bring the equipment into the country for those contracts. The other half were contracts that we have not signed yet. As I mentioned, our approach to the signed contracts involves sharing the tariff risk, which aligns our interests in resolving the issue together. This is quite different from how we managed the situation during COVID. After COVID, we faced a major supply crunch, and although we had numerous contracts, we struggled to fulfill them, which took us 1.5 years to rectify. Currently, we have a much better risk management strategy, ensuring we share risks with our customers so that our interests align for execution once the situation stabilizes. This will help us achieve the margins we need while allowing our customers to gain the profitability they desire. We believe we are in a much stronger position to navigate this situation quickly and profitably compared to the challenges we faced during COVID, which took us over a year to stabilize. I feel optimistic about our current standing.
Ameet Thakkar, Analyst
Thank you for that information. Regarding the cash flow statement, it appears that you have utilized about $260 million to $270 million in cash. Ahmed indicated that there will be an additional couple hundred million dollars needed for working capital in the second half of the year. A significant part of that involves the $500 million in inventory that has been pre-purchased from AESC to assist them in establishing the additional production lines at their Tennessee plant. When can we expect that pre-purchased inventory to start returning cash to you?
Ahmed Pasha, CFO
Hi, Ameet, this is Ahmed. You're correct in noting the $200 million as year-to-date. For the current quarter, our cash flow is approximately $40 million negative in free cash flow. This is mainly because we are building inventory to support our revenue plan for the rest of the year. We have about $2 billion in revenue that we need to deliver, which involves roughly $700 million of inventory on our balance sheet for our Q3 revenue. The remaining cash requirement, a couple of hundred million dollars, is split equally between our domestic content and our Q4 revenue. However, we anticipate collecting receivables at the end of Q4 within 30 to 60 days after year-end. Overall, this relates to working capital, which is the long-winded answer to your question.
Ameet Thakkar, Analyst
Thank you.
Operator, Operator
Thank you. Please standby for our next question. Our next question comes from the line of Andrew Percoco with Morgan Stanley & Company. Your line is open.
Andrew Percoco, Analyst
Great, thanks so much. Good morning everyone. Thanks for taking the question. I guess most of my questions have been asked, but I just wanted to follow up on domestic content strategy here. I guess I'm just curious why just given the uncertainty around tariffs on China, 100% domestic cell battery from you guys wouldn't be something that customers would be willing to contract today. Totally get that there's uncertainty around what's going to happen to the China tariffs, but it seems like that's an easy workaround for a customer. Is it because they're waiting to see what happens to China and they'd rather mix? Is it because 100% domestic cells is cost prohibited? Just trying to get a sense for why that wouldn't be an easy solution for customers right now? Thank you.
Julian Nebreda, CEO
Good question. The main issue today is figuring out when this uncertainty will be resolved. If you believe the current tariffs are a long-term solution and that there won't be a reduction in tariffs in the short term, then a fully domestic offering would be very appealing. However, many of our customers think that the government is negotiating with China and that these negotiations will lead to lower tariffs soon. This makes it hard to commit to a long-term contract when a change could happen in a matter of weeks. Many tariffs are in place as a result of retaliation during a lack of communication. Some anticipate that as discussions resume, those retaliatory tariffs will decrease, and we will have a clearer outlook. If we assume the current tariff levels are permanent, then a fully U.S.-based offering could be quite competitive.
Andrew Percoco, Analyst
I appreciate the helpful context. I have one follow-up. I was surprised to see the weakness in bookings in the first quarter since the high tariffs didn’t take effect until April. Could you elaborate on what you observed regarding competition in the international markets? I understand that has been a challenge. I'm interested in understanding why the first quarter experienced such a significant decline, while I would have expected more impact in the second quarter due to the China tariffs. Thank you.
Julian Nebreda, CEO
Good question. We anticipate a substantial number of U.S. contracts this quarter. Once it became evident that changes were forthcoming, particularly around early March or late February, there was a noticeable shift in behavior as people began to weigh the risks. This created a challenging environment. Our approach has been to share the risk, but most customers preferred to hold off until they had a clearer perspective, which took place a few weeks prior to Liberation Day. Internationally, we did not have high expectations, but I believe the current U.S. situation has not significantly impacted this. We did not foresee major contracts internationally, yet we do expect them this quarter. Additionally, we do not observe any substantial spillover from the U.S. situation into international markets at this point.
Andrew Percoco, Analyst
Great, thank you.
Operator, Operator
Please standby for our next question. Our next question comes from the line of Julien Dumoulin-Smith with Jefferies. Your line is open.
Hannah Velasquez, Analyst
Hi, good morning. This is Hannah Velasquez on for Julien. Thank you for taking the question and squeezing me in. So first, I don't think it has been affected at all by the U.S. situation today. We were not expecting major contracts. We do expect major contracts this quarter. So that's what I'll tell you. We don't see any real spillover of the U.S. situation into international markets at this stage. Great, thank you. Please standby for our next question. Our next question comes from Julien Dumoulin-Smith with Jefferies. Your line is open.
Julian Nebreda, CEO
Good morning.
Hannah Velasquez, Analyst
Good morning. On the note about the couple of hundred million dollars of additional working capital needs, can you just confirm that that's specific to 2025? Or do you see that extending into 2026? And then as a related point, when or could you speak directionally to when you expect to inflect back to positive free cash flow generation?
Ahmed Pasha, CFO
Sure. In response to your question, I believe this primarily concerns 2025. As I mentioned in answer to Ameet's question, we anticipate having a few hundred million dollars in receivables at the end of Q4. This is due to our back-end loaded revenue that will be recognized in Q4. Consequently, we expect to collect those receivables in Q1 next year, which should provide us with sufficient cash to feel confident about our cash position moving forward.
Julian Nebreda, CEO
Free cash flow.
Ahmed Pasha, CFO
We expect to see free cash flow continue. We don't have any major capital commitments this year, and our EBITDA is around $10 million. Next year, we will provide guidance during the Q4 call. As Julian mentioned, we feel optimistic about signing new contracts and anticipate being free cash flow positive next year since we don't have significant capital expenditures, which ultimately hinges on our EBITDA. Our goal is to generate free cash flow and maintain profitability next year, which is the primary focus for everyone at Fluence.
Hannah Velasquez, Analyst
Okay, got it. Super clear. Thank you. And then as a follow-up question, the $700 million in paused revenues, is that reflective of the paused projects and delayed signings that you have visibility into as of today? Or have you built in any potential or any extra cushion, I suppose, in case, say, I don't know, the 90-day pause on reciprocal tariffs is not extended. I don't know your level of exposure there, but could that $700 million widen is the premise of the question?
Julian Nebreda, CEO
No. I believe the $700 million reflects our position, and we do not anticipate any additional downside, even if tariffs on Vietnam, Malaysia, or elsewhere were to change. Therefore, we feel confident about where we stand.
Ahmed Pasha, CFO
Yes, I would like to add that we are confident because we have already imported all the necessary equipment into the country. This means we have mitigated the risks associated with the revenue guidance we provided, since there is no need for further imports forecasted.
Hannah Velasquez, Analyst
Thank you.
Operator, Operator
Thank you. Please standby for our next question. Our next question comes from the line of Kashy Harrison with Piper Sandler. Your line is open.
Kashy Harrison, Analyst
Hi.
Julian Nebreda, CEO
Hi, Kashy.
Kashy Harrison, Analyst
Good morning.
Julian Nebreda, CEO
Good morning.
Kashy Harrison, Analyst
How are you? Thank you for including me. Julian, you mentioned that your domestic solution is 10% cheaper than the imported content before considering the bonus. Is there a straightforward way to understand the breakeven tariff level that would align your costs with imports? Is it at 100% or 50%? I'm trying to determine what would bring you in line with imports.
Julian Nebreda, CEO
Let me give it to Ahmed.
Ahmed Pasha, CFO
Yes, we are currently in discussions with many customers, so I can't provide specific details. However, in any likely scenario regarding the tariff, we believe our product will remain competitive. We have run various scenarios, and we are quite confident in our position.
Kashy Harrison, Analyst
Okay. And then maybe just a follow-up on the guidance. You indicated that you're 95% covered. But you've also paused U.S. bookings. So how do we reach the midpoint of guidance? If you've paused bookings, is that just for international, or is there something else?
Julian Nebreda, CEO
Yes. I mean the 5% is essentially the revenue we would recognize are other contracts we expect to sign from now to year-end. As you know, we recognize a small portion of them early on once we deliver the engineering and stuff. So that's what it reflects too. And it's in line with what we are expecting to sign in the coming months.
Ahmed Pasha, CFO
Yes.
Kashy Harrison, Analyst
Okay. Thanks. Actually, if I could just sneak one more in.
Julian Nebreda, CEO
Sorry guys. And it does not include any U.S.
Kashy Harrison, Analyst
If I could just sneak one more in, what proportion of those delayed projects were co-located with solar? If so...
Julian Nebreda, CEO
I don't…
Ahmed Pasha, CFO
It's a combination of both. It's not one single. So, I think, there are multiple projects that we have.
Kashy Harrison, Analyst
Okay, thank you.
Julian Nebreda, CEO
Thank you, Kashy.
Ahmed Pasha, CFO
Thank you.
Operator, Operator
Ladies and gentlemen, due to the interest of time, our final question will come from the line of Jordan Levy. Mr. Levy, your line is open, with Truist Securities.
Unidentified Analyst, Analyst
Thanks. Thanks for squeezing me in. It's Noah on for Jordan. So a quick one here. I understand $700 million reduction is mostly due to U.S. projects. Are you seeing any delays in international projects? And can you maybe walk us through the supply chain for international shipments? And then I have a quick follow-up.
Julian Nebreda, CEO
No, there are no real delays in international projects. Everything is progressing well. We produce enclosures for international markets mainly in Vietnam, source batteries from China, and integrate those batteries at our Vietnam facility for delivery to various sites. For inverters, we typically import them from Europe to better serve our customers, and we are working on developing a new supply chain. Essentially, for Smartstack, we will introduce new suppliers. Overall, we are doing very well.
Unidentified Analyst, Analyst
Great. That's super helpful. I think last quarter you mentioned 15% of backlog was exposed to tariff risk. I'm just wondering what's that number in your current backlog? Thank you.
Julian Nebreda, CEO
Correct. In the case of the U.S., we need to consider our current backlog and tariff risk. We share this risk with our customers to ensure that once the situation stabilizes, we will find a way to meet our margins while helping them achieve their goals. The design of our approach is focused on resolving the issue at hand. The tariff risk indicates that there could be delays in contracts as we negotiate, but we do not anticipate moving forward with contracts that do not have attractive margins. That's how to understand the situation.
Unidentified Analyst, Analyst
I appreciate the color.
Julian Nebreda, CEO
Thank you, Jordan. Thank you.
Operator, Operator
Thank you for participating in today's call. If you have any questions, feel free to reach out to me. We look forward to speaking with you again when we report our third quarter results. Have a good day. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.