Fluence Energy, Inc. Class A Common Stock Investor update

You may begin. Good afternoon, and thank you for joining us.

Joining me on today's call are Julian Nebreda, our President and Chief Executive Officer, and Ahmed Pasha, our Chief Financial Officer. A copy of our press release is posted to the investor relations section of our website at fluenceenergy.com. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters related to our business and the company that are not historical facts. Such statements are based upon current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact future results. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today.

Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP financial measures that we believe are useful in evaluating the performance of our business. We are unable to reconcile our projected fiscal 2026 adjusted EBITDA to the most directly comparable GAAP measure because certain items that may affect future results are outside our control or cannot be reasonably estimated at this time. Following our prepared remarks, we will conduct a question and answer session with our team. During this time, to give more participants an opportunity to speak 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.

Thank you for joining us today on very short notice. Earlier this afternoon, we issued a press release reducing our fiscal year 2026 guidance to reflect the impact of supply chain issues affecting our U.S. production, particularly at our new contract manufacturing facility in Houston. These issues had a significant impact on expected revenue for the fourth quarter of fiscal year 2026. Today, I'd like to first provide more color on these issues and the impact on our anticipated 2026 financial results. Second, cover the action plan we have put into place, and third, provide an outlook on how we are approaching our fiscal year 2027 plan. First, to address the issues affecting our U.S. production. On our last earning call, we discussed the slower than expected ramp-up of our Houston facility and the production levels we projected to achieve during the remainder of the fiscal year.

Since then, we have experienced additional delays. Our team underestimated the complexity of the ramp-up of the Houston facility. Specifically, the major issue that has emerged has been the underperformance of the customized automated welding process, which is operating significantly below its targeted level. Another issue has been the speed of final assembly of components into finished product, which lags our expectations due to shortages of skilled labor. In order to address these challenges, our contract manufacturer has taken the following corrective actions. First, they switched to manual welding, which require hiring additional skilled labor. Manual welding is slower than automated and requires more detailed quality inspections. Second, they engaged three subcontractors across different locations in Houston to increase the capacity of both the welding and the assembly processes. Implementation of these corrective actions is taking longer than expected.

As a result, we don't expect to achieve our previously targeted production levels during this fiscal year. Our previous guidance midpoint assumed an average of 11 units per day during ramp-up of August and September. Actual production in August has averaged under one unit a day, but with the corrective actions implemented, production levels have increased to an average of three units per day during the first two weeks of September. We expect to continue improving production to achieve the targeted capacity of the facility. Separate from the Houston facility, we have recently experienced delays in the delivery of balance of plant equipment such as transformers and inverters, and a couple of projects due to supplier logistical constraints that will shift revenue out of this fiscal year. Turning to the impact on our fiscal 2026 guidance, we are now expecting to recognize approximately $2.4 billion of revenue.

This represents a reduction of approximately $600 million from the guidance we provided in August. More than 80% of the expected revenue decrease is attributable to U.S. production issues. This includes approximately $450 million of production delays, primarily from the Houston facility, and approximately $65 million of penalties largely associated with late delivery. The remaining approximately $85 million reflects logistics primarily due to bottlenecks and customer credits. We now expect to record an adjusted EBITDA loss of approximately $200 million as compared to a loss of $10 million in our prior guidance. Approximately two-thirds of the increased loss is attributable to missed project milestones, including approximately $65 million of associated penalties and approximately $65 million from gross margin tied to revenue shifted into fiscal 2027.

The remaining $60 million impact includes $35 million costs associated with the initial rollout of new products and an estimated $25 million of additional costs to achieve volumes and quality standards on initial production from the Houston facility. In response to these developments, and to better position us to execute on our backlog in fiscal 2027, we are implementing a plan to strengthen our supply chains, production systems and processes, and execution discipline. To that end, we have made structural changes to our management, including appointing Bernerd Da Santos as our new Chief Operating Officer. Some of you may know Bernerd from his many years at AES, including as COO, and most recently, as head of AES Clean Energy. He has extensive experience managing operational turnarounds, including an end-to-end transformation of AES supply chains organization.

Bernard and his team will be developing a plan to address the process weaknesses that contributed to the production shortfall, define corrective actions, and track execution against clear milestones. Additionally, they will be developing a framework to effectively evaluate our contract manufacturers and future production schedules. We are approaching this with urgency to incorporate findings and recommendations from this process into our fiscal 2027 operating plan. We have identified several critical areas to be addressed, including strengthening our integrated planning process across all aspects of materials, production, and delivery, and upgrading the resiliency of our supply chains. We plan to provide an update on our action plan in November, when we report fiscal 2026 results and provide guidance for fiscal 2027. Beginning in November, we plan to report U.S. production levels each quarter, both actual and forecast, so that our stakeholders may track our progress on production and delivery performance.

At this time, we wanted to provide you the framework from which we are developing our fiscal 2027 operating and financial plan. First, our plan is to deliver on our 2027 backlog, estimated at $2.9 billion as of today, which provides a strong foundation for revenue. Second, we intend to rightsize our revenue growth and corresponding investment so that we do not have need for additional capital in fiscal 2027. Third, we are targeting neutral to positive operating cash flow in fiscal 2027. Finally, we will address the seasonality aspect of our business, reducing execution concentration and supporting a more balanced delivery profile. In closing, while today's guidance revision is disappointing, the underlying issues have been identified, concentrated in our domestic supply manufacturing ramp-up, and addressed. Our international operations are on track, and demand for energy storage remains robust.

Importantly, recent progress at Houston reinforces our belief that these challenges are operational in nature and can be resolved through targeted execution. Operator, we are now ready for questions.