Earnings Call Transcript - FLNC Q1 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Fluence Energy First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lexington May, Vice President of Finance and Investor Relations. Please go ahead.

Lexington May, Vice President of Finance and Investor Relations

Thank you. Good morning and welcome to Fluence Energy's first 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 on our 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 related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the 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, President and 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. I will review our Q1 results briefly and then provide an update on our business and financial outlook. Ahmed will then go into more detail on our financial results. Beginning on Slide 4, we continue to see a very strong battery storage market with the U.S. as a cornerstone. We have carved out a solid competitive advantage with our domestic content offering, where we continue to see strong interest from customers. This has been a key driver of the growth of our backlog, which is now at a record $5.1 billion. Our diversified supply chains, particularly our U.S. Domestic content strategy allows us to mitigate the potential impacts of current geopolitical uncertainty that we expect will continue for the foreseeable future. Looking at our first quarter performance. First, we generated $187 million of revenue with a 12.5% adjusted gross margins. Revenue was significantly lower than fiscal Q1 2024 and resulted from our fiscal 2025 backend weighted plan as discussed in our prior earnings call. Second, we continue to add to our backlog with another strong quarter of more than $770 million in order intake. This propelled our backlog to a record $5.1 billion providing a high degree of visibility to future revenue growth. Third, our annual recurring revenue or ARR was $106 million, which is an increase of $6 million from the previous quarter. We're on track to achieve our $145 million ARR target by the end of the fiscal year. Finally, we ended the quarter with more than $650 million of total cash, which puts us in a strong position to continue investing in our products and delivering value to our customers. Turning to Slide 5, we're providing an update to our fiscal year 2025 guidance. We now expect revenue between $3.1 billion and $3.7 billion with a midpoint of $3.4 billion. This is a $600 million reduction from the midpoint of our prior guidance, which is due mostly to delays in the expected signing of contracts for three projects in Australia. The delays were project specific. One was delayed from permitting issues related to traffic control, another due to recent delays in the corresponding customer offtake agreement, and the third project is located at a brownfield site where it took longer to prepare the site than expected. All these contract delays were unique, rather than systemic and do not represent a cool down of the Australian energy storage market. The issues affecting these three projects are now resolved or are close to resolution. We expect to sign all three contracts later this year with revenue to be recognized in fiscal 2026. The midpoint of our revised revenue guidance is approximately 85% covered by contracts in our backlog and revenue recognized to date. This coverage ratio exceeds the coverage ratio we had at this point in fiscal 2024 and fiscal 2023. The new guidance midpoint, albeit disappointing, still represents approximately 26% growth from fiscal 2024. Turning to Slide 6. The strong demand for battery energy storage in our markets continue to attract competition, especially from Chinese players trying to preempt trade restrictions and compensate for underperformance in the Chinese market. Recently, we have seen Chinese players intensify their competitive position in international markets, exerting significant pressure on pricing to win contracts. We believe this competitive environment will continue. And as I will discuss later, we're making the required investments in product development to compete successfully. However, as Ahmed will address shortly, this competitive environment is putting pressure on our fiscal 2025 margins. We recognize that the key to our success in the face of this increased competition is our ability to continuously innovate our technology, which should lead to superior performance, competitive pricing, a more reliable supply chain and better security of our products. Putting the customers at the center of our efforts and ensuring we are the best technology partner to support their project objectives has been the foundation of our success to date and supports our continued leadership position in the market. In response to the increased competition from Chinese players, we have accelerated our product development program. To that end, I would like to highlight a new product platform that we will be launching as part of our customer roadshow this Thursday, February 13. We expect to see the benefit of this new platform beginning in fiscal 2026. This platform will put us in an industry leading position in terms of density, something our customers are increasingly requesting to reduce their footprint and costs. The design will be an AC block incorporating the inverter and other balance of plant equipment within the enclosure. The new platform also offers a lower cost point arising from its higher density, modular design, faster installation and reduced operating costs. This will provide our customers with a significant reduction in their required investments and their total cost of ownership over the life of the project. The new design in conjunction with our digital capabilities and services offering will allow us to offer our customers 99% availability, which represents industry leading performance. We can achieve this performance with a seamless integration of our hardware, proprietary controls, digital tools and service offering. The platform will also offer industry leading safety features, similar to the elements found in our proprietary Cube and Gridstack Pro lines, which includes our Beyond Burn certification, but now at a much higher density. This new platform will integrate our most recent developments in cybersecurity, which will provide the confidence that our customers, regulators and communities require to ensure the security of their power grids. This new platform will also enable faster realization of project investments as we continue to reduce our integration cycle times, which we aim to reduce to 12 months from 18 months historically. All these factors are critical to enable our customers to achieve the lower total cost of ownership across the project life, leading to a higher return on their investments. This new platform will be the most substantial generational change for Fluence since the introduction of the Gen 6 Q. Because of the significant benefits to customers, particularly the lower total cost of ownership and improved performance, we plan to price the product competitively, while securing gross margins within our range of 10% to 15%. This new platform also provides a foundation to continue product development that will allow us to accelerate our innovation roadmap going forward. We believe the speed of our innovation is key to our success. Turning to Slide 7. I'm pleased to report that our backlog as of December 31 was $5.1 billion and includes a volume of 18.5 gigawatt hours. This is the highest level in our history, representing a year-over-year increase of 38% in value and more than double in terms of volume. This growth reflects the strong elasticity of demand for our technology, which supports our continuous growth in terms of both revenue and volume, despite declining prices. Our backlog provides us with strong visibility to future revenue and positions us well to continue growth in our recurring services and digital businesses. Turning to Slide 8. The size of our pipeline continues to reflect the strong growth prospects for energy storage. As a reminder, our pipeline reflects a rolling 24-month view, thus giving us confidence in our ability to continue our growth trajectory. Since the end of the previous quarter, we have increased our pipeline by $500 million to $21.4 billion currently. This is particularly impressive, considering that during the first quarter, we converted more than $700 million into backlog. To provide more perspective, our pipeline has increased 60% from this time last year, which reflects significant growth prospects for energy storage globally. We continue to see a very robust international market, which will further diversify our geographic mix in the coming years. Nearly half of our $21.4 billion pipeline is in the U.S. market and the rest in the international markets, with Germany, Australia, Canada and Chile representing the bulk of it. Turning to Slide 9. I would like to provide an update on the U.S. energy storage market, where growth continues to surpass expectations. First, we expect power demand to increase to more than 5,000 terawatt hours by 2030, which represents a 2.4% CAGR from 2022 to 2030. This anticipated robust growth is driven by data center growth, domestic manufacturing and sector-wide electrification. Second, battery storage is becoming more mainstream in the Americas, with the storage installation increasing 83% year-over-year to more than 45 gigawatt hours in 2024. This robust growth is reflected in the interconnection queues for major U.S. markets. Across the entire U.S. interconnection queue, battery storage is second only to solar in gigawatts of interconnection requests. For example, in ERCOT, battery storage represents 43% of the outstanding grid connection applications. And in CAISO, battery storage represents an even larger contribution at 68%. Turning to Slide 10 and continuing with our discussion of the U.S. market. I’d like to review some of the recent policy analysis and headlines since our last call. Starting with trade-related headlines, our U.S. domestic content strategy and our proactive initiatives, especially with respect to supply chain, puts us in an excellent position to successfully weather the change in U.S. trade policy. We view tariffs in two categories: announced and potential targets. The first category is a universal tariff that has already been announced on China. Because of our business strategy that I just outlined, less than 15% of our backlog is exposed to this tariff. We estimate that for our fiscal 2025, the impact of the recently announced 10% tariff on Chinese imports is approximately $10 million of gross profit, which is reflected in our updated guidance. The second category is potential product-specific tariffs that have not been announced. We view the announced and potential tariffs on China, and specifically on Chinese battery storage systems, as a net positive as they will enhance the competitiveness of our U.S. domestic offering. Next, moving to potential changes to the Inflation Reduction Act or IRA. Regarding the Section 48 ITC that our customers claim, we believe there is sufficient bipartisan consensus in keeping the stand-alone ITC for storage as it supports much needed energy security and reliability. Additionally, looking at Section 45X, we also note that there is sufficient bipartisan consensus for maintaining these tax credits as they support domestic manufacturing, something the Trump administration has been very vocal about. As we noted previously, much of our U.S. supply chain is in red states and currently provides thousands of jobs. Finally, on the advocacy front, we’ve been very proactive with the Trump administration promoting awareness of the importance of cybersecurity for critical grid infrastructure, and thus advocating for a ban on foreign control for battery storage systems. The security of power grids is of paramount importance and regulations should ensure they are not software designs or controls by foreign entities that will be able to disrupt power grids. This is especially important for battery storage systems given their increasing role in U.S. power grids. Fluence is proud to build its own control systems for battery storage in the U.S. Battery storage represents the fastest and most economical way to provide the much-needed capacity and resiliency that the U.S. power grids need to support the AI industry, the U.S. reindustrialization and general economic growth. Turning to Slide 11. Our strategy of developing a U.S. supply chain is something we’ve been working on even before the IRA was passed in 2020. As a result, we can now offer a product that is 100% non-Chinese. This is something the market has taken note of as we have doubled our number of U.S. customers over the past year. Our ability to mix and match various components of the battery storage system to enable our products to meet their required thresholds for domestic content is something unique to Fluence and enables us to stretch our U.S. cell supply beyond its nameplate plant capacity. As a result, we have the ability to meet all our expected U.S. domestic content demand in 2025 and 2026. Regarding our domestic manufacturing efforts, we continue to make good progress with our U.S. cell manufacturing efforts at the AESC Tennessee facility. Line 1 is in the process of ramping up production and Line 2 is to come online sometime during the summer of 2026. This concludes my prepared remarks. I will now turn the call over to Ahmed.

Ahmed Pasha, Chief Financial Officer

Thank you, Julian, and good morning, everyone. Today, I will review our first quarter financial results and then discuss our updated outlook and liquidity for fiscal 2025. Turning to Slide 13. In the first quarter, we generated $187 million of revenue, which was a decrease of 49% from the same quarter last year. The decrease was largely anticipated and reflects the back-end weighted nature of our expected full-year revenue, which we noted on our last call. We generated $23 million of gross profit, representing a gross profit margin of approximately 12.5%. This was our sixth consecutive quarter of double-digit gross profit margins. We reported negative $50 million of adjusted EBITDA, mainly due to the fact that our operating expenses are more evenly distributed across the year than our revenue. Turning to Slide 14 and our guidance for 2025. As Julian discussed, we now expect revenue of between $3.1 billion and $3.7 billion with a midpoint of $3.4 billion. This is a reduction of $600 million from the midpoint of our prior guidance, which is due mostly to the timing of three specific projects in Australia that have been delayed, but not lost. We had been expecting to sign these contracts in January such that we would recognize the associated revenue over the following nine months. However, over the past month, it became clear that the signing would be delayed until later in the year, which does not allow us enough lead time to be able to execute on these contracts and recognize revenue in fiscal 2025. We expect to recognize revenue from these contracts in fiscal 2026. I would like to emphasize that the midpoint of our revised revenue guidance represents backlog coverage of approximately 85%. Although it is disappointing to us to reduce guidance, the revised midpoint of $3.4 billion still reflects 26% year-over-year growth from fiscal 2024. From a revenue timing perspective, we now expect our fiscal 2025 revenue split to be 15% in the first half and 85% in the second half. The shift primarily reflects the timing of signing some of the projects. In terms of annual recurring revenue from our services and digital businesses, we continue to see traction in our recurring revenue platform and still expect to end the fiscal year with $145 million of ARR. Regarding gross margin, we have narrowed our expectations for gross margin to 10% to 12% from 10% to 15% due to the factors I will discuss shortly. When looking at our fiscal 2026 outlook, we expect revenue growth of over 30% in fiscal 2026 starting from our updated fiscal 2025 guidance midpoint. Turning to Slide 15. And looking at fiscal 2025's adjusted EBITDA, we have lowered the midpoint of our guidance by $95 million to $85 million. This change reflects a $125 million reduction in gross margin partially offset by cost-cutting initiatives. More specifically, the $600 million reduction to our revenue guidance at the midpoint attributable to the delay in signing the contracts has an impact on adjusted EBITDA of approximately $75 million based on our previously assumed 12.5% gross margin. In addition, there is an impact of $50 million from competitive pressures and the recently announced tariff on Chinese imports that resulted in a lower gross margin of 11%. To mitigate the impact of EBITDA of lower gross margin we are implementing a targeted action plan to reduce our costs that will better align our resources to deliver long-term sustainable growth. We expect these actions to generate $30 million in offsets, which takes us to the new revised adjusted EBITDA guidance midpoint of $85 million. Turning to Slide 16. I will now discuss our liquidity, which continues to be strong. We ended the quarter with $654 million of total cash, which represents a 37% increase from the same quarter last year. Additionally, we have $458 million available under our revolver and supply chain facilities, which puts our total liquidity at more than $1.1 billion. This reflects the benefits of $400 million of convertible notes issued in December, which results in a fully funded plan for 2025. During the first quarter, we used more than $200 million of cash for our operating activities, which was partially driven by the purchase of inventory to fulfill near-term contracts. This use of working capital represents the substantial majority of the expected working capital needs for this year. In summary, we have strong liquidity that positions us well to capitalize on significant growth in the energy storage market. With that, let me turn the call back to Julian for his closing remarks.

Julian Nebreda, President and CEO

Thank you, Ahmed. Turning to Slide 17. I would like to emphasize the key takeaway from this quarter's results. First, we're adjusting fiscal year 2025 guidance, primarily to reflect delays in signing specific contracts and secondly, due to some competitive pressures. The strong backlog coverage of our revised guidance significantly derisks our year-to-go outlook. Second, the battery storage market remains robust, driven by rising demand, and highlighted by the U.S. market, where we have a competitive advantage with domestic content. Third, our U.S. supply chain puts us in an excellent position to mitigate the geopolitical volatility we are experiencing and foresee for the near future. And fourth, our strategy of rapid innovation, more specifically, our new product platform provides a technology foundation to sustain our leadership position in the competitive environment we are experiencing. In summary, even with the disappointing guidance we set today, we have confidence in the strength of our business model to guide us to success in this market. We remain dedicated to delivering the profit return our shareholders are seeking through: One, our strategy of profitable growth that provides robust top line growth with double-digit margins; Two, a successful operating track record that provides confidence in our ability to realize the margins in our backlog; Three, scalable operating leverage, implying strong growth of adjusted EBIT on top of our top line growth; Four, continued investment in product innovation and sales capabilities to ensure our offering is competitive, and more importantly that customers are well served and enjoy a secure route to value for their investment; And five, finally, a capital-light approach that on top of the agility to adapt to a changing environment allows for robust profitability metrics. With that, I would like to open up the call for questions.

Operator, Operator

Thank you. And our first question comes from the line of George Gianarikas of Canaccord Genuity. Your line is now open.

George Gianarikas, Analyst

Good morning. Thank you for taking my questions. Maybe first, just to focus on the 2026 revenue guidance that you pointed to in your deck. You mentioned that you expect 30% plus growth there, which is the same as last quarter, despite the fact that you had some three pushouts this year in Australia. Does that mean that you've maybe lost some business or do you just decide not to update that for other reasons? Thank you.

Julian Nebreda, President and CEO

Thanks, George. We've taken a conservative view of 2026. And what we have today and the way we present this is kind of a floor or where we see we can grow 30% on top of our guidance. Our idea is that as we move forward during the year, we will be able to give you more clarity on these numbers and firm them up. So today, our best view is a 30-plus – or 30% growth on top of the midpoint for 2025, and I will provide a better view for 2026 as we move along. Today, we have around $1.2 billion in backlog for 2026, and we need to bring in some additional backlog to firm that number up. We hope to get it as we move forward. But we have taken into account what has happened now, and we have taken a more conservative view of 2026 than what we had done previously.

George Gianarikas, Analyst

Thank you. And maybe as a follow-up, just a different topic. Do you have any comments on Moss Landing and some of the recent events there? Help us kind of work through that.

Julian Nebreda, President and CEO

Yes. Regarding Moss Landing, we have no information except for what we got from the press. We have not been to that site since 2022. We have no contract with that site. We have no service agreement with that site. So we don't think there's any liability coming out of that event. As I said, what we know is the same thing you saw in the media and in the general media. So, no. We cannot comment more than that.

Operator, Operator

Thank you. And our next question comes from the line of Brian Lee of Goldman Sachs.

Brian Lee, Analyst

Good morning, everyone. I'm sure you're going to get a lot of them, but I wanted to focus on the margins for a little bit. So maybe to start off, can you talk about sort of what margins you're seeing on new bookings this quarter as well as these Australia bookings you're expecting later in the year? Like is that all going to be at the lower end of that 10% to 15% range you've targeted overall? Or are you going to be able to start seeing some margin expansion based off the new product and redesign? I'm just trying to understand how structural and how set are these margins at the lower end of the range for a while? And then is it something you recover in 2026 or does it take longer than that?

Julian Nebreda, President and CEO

Very good question. Two points I think are important. First, regarding 2026, we believe that our new product design and our strategy for 2026 will bring us back to our margin range. So, it will hopefully put us in the middle of that range, but that's our view. Today, when we looked at the product and what it can do, we see this margin reduction as a temporary situation. What we have for the year? Two things are driving this margin point. One, a change of mix, which is due to the delays in the Australian projects. And second, our current view of the recent backlog and the backlog that we will need to enter to support 2026 and 2025 revenue is that they will come in at high single digits. If you do the simple math of what we had in our backlog at 12.5% and the high single digits, it comes around this 10% to 12% that we're providing. We think this is temporary and we are addressing the competitive pressure. We're still not that far off but we clearly need to put our efforts in place to get to where we need to be, and that lies in our investments in technology.

Brian Lee, Analyst

Okay. Fair enough. And then just a follow-up from me would be, I mean, presumably, this competitive pressure you called out from Chinese peers is more acute in international markets than the U.S. Because I know, Julian, you spent a lot of time on the call talking about all the advantages that are starting to come your way in terms of the U.S. So, is this a large function of incremental bookings coming from the international part of your pipeline? And on the U.S. side, are you seeing the same type of pressures? Or are you actually seeing any kind of margin upside because of your kind of domestic advantages? Have you started to see any of those benefits accrue to your margins and pricing, but too maybe just dissect the difference between U.S. and international sort of margin outlook?

Julian Nebreda, President and CEO

On the U.S. side, first, we see a very strong position. The problem—if we can call it that—is in the U.S. The issue in the U.S. are tariffs. As we mentioned, we do expect the hit of around $10 million on margins on U.S. contracts, which we expect to be realized in 2025. So that's the lower point. The competition is mostly in international markets, and that has been significantly stronger there, causing margin compression. However, as I said, to reiterate my point, the U.S. has seen the $10 million hit due to tariffs, which affects our margins, but essentially, all of our U.S. domestic content is already contracted for 2025. So generally, we don't foresee any ability to lose much of that.

Operator, Operator

Thank you. Our next question comes from the line of Dylan Nassano of Wolfe Research.

Dylan Nassano, Analyst

Yes. Can you just talk to your confidence level that these Australian contracts do kind of come back and get signed by the end of the year? And then if they do, is there any chance that any of that would be realized in 2025 at the time that you booked them? And then I guess just taking a step back, can you just talk about what kind of gave you the confidence initially to include them in the guidance? And what kind of changed relative to your assumptions?

Julian Nebreda, President and CEO

This is a very, very good point. These delays were caused, as we discussed, by minor issues that my team did not see on time. By the time we recognized the delay, we realized these projects have all the major permits that should be ready. We are very much advanced, as we believed we already had them in our pocket. However, these minor issues delayed the projects. We are very confident that at least two of them are essentially fully resolved and should be signed. We expect to have revenue from these contracts recognized in fiscal 2026. There is a probability that there may be some revenue realized in 2025, but today, we decided to take them out of the forecast to keep things clear.

Dylan Nassano, Analyst

Okay. Thank you. That's very helpful. And then just as a quick follow-up. So, this slide on the tariff exposure is helpful, but I guess the one thing that's kind of missing in that discussion is the Section 301 tariffs that hit in 2026. Can you just kind of readdress your exposure to that 25% tariff that hits next year and kind of how you're negating that?

Julian Nebreda, President and CEO

We have included that in our forecast; it should not affect our numbers. I mean, it affects our cost structure but it will not affect our ability to meet our forecasts; it's already accounted for.

Operator, Operator

Thank you. Our next question comes from the line of Unidentified Analyst.

Unidentified Analyst, Analyst

Hi. This is Tom on for Christine. So, you guys had a very large deferred revenue number of over $300 million run through your cash flow statement. The magnitude was much larger than what we've seen in the past. Could you talk about what drove that this quarter? And if there's anything notable about when we should see that reverse and booked as revenue?

Julian Nebreda, President and CEO

I'll give that to Ahmed.

Ahmed Pasha, Chief Financial Officer

This is Ahmed. We expect that to be reversed within the next quarter or so. This is more just the accounting, but I think we expect that to be rolled over within the next three months.

Unidentified Analyst, Analyst

Okay. Great. That's helpful. And then I guess just one follow-up for me. Could you talk about what measures you're taking on the graphite supply and procurement front given the AD/CVD investigation? How any duties would impact your existing operations in the event that they were retroactive?

Julian Nebreda, President and CEO

I don't think they can be retroactive. In order to prepare for potential duties, we are trying to accelerate some graphite into a contract. Clearly, for retroactive duties that will not apply, but if they were, we should reduce our problem going forward. In total project costs, graphite is roughly 5%. The way we understand the petitioners' claims is that they are asking for an application of the duties on graphite imports and batteries that include graphite. If successful, this will create a level playing field for both domestic and imported batteries. It will not make domestic offerings less competitive. So from our part, what we are doing is accelerating some graphite imports. However, if a retroactive tariff does come, it may create some disruptions that we will notify you about.

Operator, Operator

Thank you. Our next question comes from the line of Andrew Percoco of Morgan Stanley.

Andrew Percoco, Analyst

Good morning. I just wanted to come back to a question on margins. I think loud and clear that margin compression and pricing compression is really originating in some of these international markets, but I just wanted to put a finer point on what you're seeing from domestic customers. You've talked a lot about strong domestic content demand. Can you confirm whether or not that's translating into maybe premium pricing and higher margins on those contracts today?

Julian Nebreda, President and CEO

I mean, our margins are within our range of 10% to 15%. We have not been able to go beyond that up to now. What we have seen in the U.S. is that a lot of these players are trying to sell into the U.S. ahead of these rules coming out. Generally, the customers we're working with are those who are betting on domestic content. It has not significantly affected them, but we have seen Chinese players trying to become more active, especially on projects being delivered during 2025 to try to gain market space in the U.S. However, I don't think that is affecting the margins for our domestic content contracts. Our domestic content margins are in the 10% to 15% range and today, we haven't seen premiums that take us out of that range.

Andrew Percoco, Analyst

Understood. Okay. That makes sense. And maybe shifting gears to the cost side of the equation for a second. As you've ramped your facility in Utah, can you just discuss how has the cost trajectory played out relative to your expectations? Is everything going as planned? Or are you maybe a little bit higher in the cost per kilowatt hour than expected? Just give a general outlook of cost trajectory from that facility?

Julian Nebreda, President and CEO

I’m very pleased with how that facility is progressing. This is a facility with machines made in India operated by Americans, and it performs very well. The U.S. can compete in manufacturing; we are not at a disadvantage. We have set up this facility quickly and efficiently without importing any machines. I feel that we are gaining confidence that America can produce competitively. We believe that this facility will contribute positively to our overall cost structure.

Operator, Operator

Thank you. Our next question comes from the line of Mark Strouse of J.P. Morgan.

Mark Strouse, Analyst

I want to go back to Slide 10. So, regarding government policy and trade, there's nothing on there about the temporary permit increase in Trump's executive order. Is it safe to say that there's no impact to Fluence there or is it maybe just too early to tell?

Julian Nebreda, President and CEO

No, we haven't seen any impact today, no real impact. From what I understand, they were all lifted and that’s what I read earlier this week. I don’t know for sure as I haven’t been directly involved.

Operator, Operator

Thank you. Our next question comes from the line of Chris Dendrinos of RBC Capital Markets.

Chris Dendrinos, Analyst

I wanted to ask about the new product launch. And I guess the question is, is this sort of industry-leading or is this a bit of a catch-up product? And the reason I'm asking is I'm curious if you think you're going to be able to maintain that margin profile if it's an industry-leading product and your competition would play catch up and price down as well?

Julian Nebreda, President and CEO

We see it as an industry-leading product. It will allow us to achieve 7 megawatts of capacity per unit, which represents 30% better performance than our competitors. This will set us apart from the competition. We have separated the batteries from the intelligence of the unit, thus optimizing density and operational efficiency. As such, we believe that we can sustain competitive pricing while achieving our targeted margins over time.

Ahmed Pasha, Chief Financial Officer

I think, as Julian has mentioned, our goal is to create value for our customers in return. It's a win-win proposition that will bring us back to our targeted returns in the range of 10% to 15%.

Chris Dendrinos, Analyst

Okay. And then maybe as just a follow-up here. I hate to hit the margin question again, but if I go back to the prior commentary, the original outlook, and I think you mentioned that you were 65% booked for the year. So, if I just do the bridge on that to the new guidance, it looks like the incremental margin on the unbooked portion here is pretty low to almost negative. Is that...

Ahmed Pasha, Chief Financial Officer

Chris, just to step back, last time when we gave our guidance, we were seeing 10% to 15% margin. We had 65% of our coverage for $4 billion in revenue. Fast forward, the contracts we have signed are now at roughly high single digits. So, that is the impact we are seeing, but our previously signed backlog has not seen any material change except for the tariff which has affected us slightly.

Operator, Operator

Thank you. Our next question comes from the line of Kashy Harrison of Piper Sandler.

Kashy Harrison, Analyst

Good morning, everyone. Just two quick ones for me. So a quick clarification question. Is the margin weakness in the U.S. or is the margin weakness in international markets? I just want to make sure I fully understand that.

Julian Nebreda, President and CEO

Mostly international. I mean, we do have some nondomestic offerings in the U.S. but mostly, international.

Kashy Harrison, Analyst

Okay. And then my follow-up question. So, if I just take a step back and I think about the broader renewable space, a recurring theme is that competition against the Chinese, especially when they have severe excess capacity in markets that don't have strong protectionist policies in place, it just never seems to end well. It's fantastic to hear your enthusiasm on competition, but generally speaking, they're more focused on utilization than profitability, which makes it tough. And, as you look at markets outside the U.S. that you're competing in, are there any places you feel will have strong protectionist policies in place? And is there perhaps a thought on pulling back from some of these more competitive markets where the Chinese can play without worrying about duties and whatnot? Thank you.

Julian Nebreda, President and CEO

Kashy, I would disagree with the premise. When you look at these products, battery cells are becoming less relevant in the value proposition. The value comes from a combination of cooling, software, controls, and delivery. It's true that Chinese companies may sell at low margins or even zero margins. However, through innovative technology, we can compete successfully. We believe domestic content provides us with a certain competitive advantage. Markets like the U.S. and Australia have more restrictions in place for Chinese competition. In contrast, places like Europe and Latin America are more open, but our goal is to compete globally. So that’s how we see things moving forward.

Kashy Harrison, Analyst

No, you answered the question. You answered all points, and I appreciate your thoughts on the market. If I could just sneak one more in since I'm talking right now. So, I think in the past, you had thought of the in-house inverter as being margin accretive to the business. When you look at your current offering, do you think that this in-house inverter gives you a path to go from the 10% to 15%? And how long do you think it will take before 100% of your shipments are using the in-house inverter?

Julian Nebreda, President and CEO

Yes. The in-house inverter and all the balance of plant equipment we're adding—by doing this, we're also incorporating edge computing into our software systems. This will enhance performance. We believe this product will boost our sales significantly and all our sales will transition to this architecture over time. It's more than just adding an inverter; it creates a far more advanced system.

Operator, Operator

Thank you. Our next question comes from the line of Jordan Levy of Truist Securities.

Jordan Levy, Analyst

Just to get your thoughts on the new guide, 85% covered by current backlog. I think you covered that well. I recognize that's higher than the same time last year, but can you just talk through your thinking process there given what we saw last year in terms of project pushouts? And I know these are kind of one-off occurrences that aren't necessarily interconnection-related or anything, but maybe just talk to your confidence on the ability to deliver on that uncovered portion of the guide?

Julian Nebreda, President and CEO

Yes. We feel very confident. We're setting our guidance today based on that number. We are working diligently to find a substantial part of this number by the next earnings call. We believe we can achieve this, and we want to give you a sense of security that the midpoint of our range is well covered to help restore your trust in our ability to deliver.

Jordan Levy, Analyst

Thanks for that. And then just a quick follow-up on the $30 million in cost reductions and rightsizing. Is there, depending on market conditions, is there still more wood to chop on that front or is that sort of the level you're comfortable with on a go-forward basis?

Julian Nebreda, President and CEO

This cost reduction aligns our cost structure with our growth model, ensuring that our costs do not grow more than half of our top line growth. If our growth is projected at 25%, we won't allow our costs to exceed 12.5%. There may always be minor opportunities to cut costs, but that is our primary objective.

Operator, Operator

Thank you. Our final question comes from the line of Julien Dumoulin-Smith of Jefferies.

Julien Dumoulin-Smith, Analyst

Good morning, guys. Just following up here on a couple of things said. First, briefly on liquidity backdrop. Obviously, you commented about working capital here at the start of the year. I mean given the EBITDA profile, are you basically suggesting that the cash balance should remain relatively intact through the course of the year? Ahmed, I just want to make sure we're on the same page about how to—you're saying yes, right?

Ahmed Pasha, Chief Financial Officer

Yes, Julien. Yes, I think the main reason for working capital uses the buildup in inventory. As you may have seen, we have over $300 million of inventory, and that is primarily to serve our demand contracts we have in place. So, net-net, during the whole year, we are not expecting the working capital use to be more than roughly $225 million that we are forecasting for the full year and $200 million of that is already in Q1. So, we don't expect any material change in the forecast.

Julien Dumoulin-Smith, Analyst

Awesome. And Julian, if I can go back to the competitive pressure. I mean, obviously, 2025, 2026, you've got this running advantage versus your peers in the U.S. but by 2027, we might see some international entrants into the U.S. market at various levels here. How do you think about the competitive landscape in the U.S. over time and how much of what you just described internationally will bear weight here? Again, would you think that 2026 would be a relative peak versus 2027 as you see some of those entrants come in? Again, open question; obviously, you responded in part to Kashy on this, but I would love to hear your thoughts, especially as you think about your product innovation in 2027.

Julian Nebreda, President and CEO

In terms of the competitive landscape, we believe that over time, the U.S. market will primarily consist of domestic content offerings. So, the most players competing will do so with local products, and it's not surprising to me that it has taken them this long to prepare. Our view today is that by 2027, we might see more domestic offerings competing in our market. We will need to focus on technological advancements to maintain our competitive edge. That means our success will hinge on providing products that perform better, operate better, and last longer. So, there will be some margin dynamics at play, but we feel that our current target of 10% to 15% is achievable. We are already building out a roadmap for continual improvements and technology innovations to ensure we remain competitive as others enter the market. Thank you, everyone, for participating on today's call. I appreciate your engagement and insights.

Lexington May, Vice President of Finance and Investor Relations

Thank you for your participation 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 second quarter results. Have a good day.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.