Array Technologies, Inc.

Hello, and welcome to Array Technologies' second quarter 2021 earnings call and webcast. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Cody Mueller, Investor Relations.

Please go ahead. Good evening. And thank you for joining us on today's conference call to discuss Array Technologies' second quarter 2021 results. Slides for today's presentation are available on the investor relations section of our website, arraytechinc.com. During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements. if any of our key assumptions are incorrect because of other factors discussed in today's earnings press release and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, arraytechinc.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's second quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Jim Fusaro, Array Technologies CEO.

Thanks, Cody, and good evening, everyone. Thank you for joining our second quarter earnings call. In addition to Cody, I'm joined by Nipal Patel, our Chief Financial Officer, Brad Forth, our Board Chairman, and Jeff Kranz, our Chief Commercial Officer. I want to open my remarks today by thanking our employees. Solar is a very dynamic industry that demands hard work, execution, and tremendous dedication to be successful. Our employees have met every challenge that has been thrown at them over the past several months, and they continue to deliver. We have a fantastic team, and I'm incredibly proud to be a part of it. But with that said, we have a full agenda for today's call. I will provide an update on our business, then turn it over to NIPL to provide a detailed walkthrough of our second quarter results, and then our chairman, Brad Forth, will provide an overview of the transaction with Blackstone that we announced earlier today. Turning to slide four, there are really three key themes at work in our business right now. The first is that demand for our products continues to grow. Our order book at the end of the second quarter was the highest it has ever been in our history, and that momentum has continued going into the third quarter. In July alone, we won 18 new projects totaling more than $135 million. The commodity price increases and the logistics cost challenges that have been plaguing the industry over the past several months are not cutting into demand. The world wants more solar. The strength of that demand is reflected in our second quarter results. We saw a 76% increase in revenues year over year. But despite that top line growth, we only grew EBITDA by 23% year over year. which brings us to the second theme that's at work in our business, cost inflation. Like most manufacturers, we have seen tremendous increases in input and freight costs over the past several months, driven by the reopening of the global economy following the pandemic lockdowns. The magnitude of the increases and particularly the unprecedented speed with which they have occurred have put significant pressure on our margins. Our gross margin in the second quarter was down 610 basis points. Our response to that inflation is part of the third theme in our business, which is the actions we have taken to strengthen our business and accelerate our growth. First, we have changed our business processes to reduce our exposure to future increases in commodity input costs. We have locked 85 percent of our input costs for the remainder of the year, including nearly all of our steel requirements. And the orders we have booked since changing our business processes are that gross margins are in line with, and in some cases, even above our historical average. The second action we have taken is to strengthen our board and management team. In the last two months, we have added three new independent directors, Gerard Schmidt, Paolo Amarante, and Bilal Khan, and three new executives, including Erica Brinker as our new chief marketing officer, who will also lead our ESG and commercial excellence groups, Ken Stokarski as our new senior vice president of operations, who will lead procurement, supply agreements, and manufacturing operations, and Tyson Hottinger as our new chief legal officer who will oversee our legal, compliance, and governance functions. Their combined expertise and experience will help us as we continue to grow the company. It's important to keep in mind that we have more than tripled the size of Array by nearly every measure over the past two years, such as revenues, customers, and country we sell in. We are adding additional talent to an already great team to help us manage the much larger, increasingly global company that we are becoming. The third action we have taken is to partner with Blackstone to give us the capital to accelerate both our internal and external growth plans. Brad will speak more about the specifics of the transaction, but we believe this is significant for us as it further positions Array as a leader in our space. And finally, policy tailwinds at work within our business. We have talked a lot in the past about how solar has become the most common competitive source of generation here in the U.S., with or without incentives. Solar really isn't alternative energy anymore. It has become a primary source of new generation capacity. The government recognizes this. However, they want it to grow even faster, which is why we are seeing additional policy support being added. The extension of the ITC by two years that occurred in December, coupled with the expansion of the safe harbor, to 2025 that occurred in June are all major accelerants for the industry and their impact really hasn't been fully felt yet. If we flip now to slide five, I'll provide some more detail on our results for the quarter. Revenues for the second quarter of 2021 were $203 million as we had strong delivery execution to close out the quarter. Adjusted EBITDA was $16.2 million on higher volume coupled with a more favorable mix of projects than we had anticipated. Moving to our order book, I mentioned on last quarter's call that we are seeing record levels of quoting activity. During the second quarter, we saw many of those quotes convert to orders, with the result being a record $882 million at the end of June, which represents 45% year-over-year increase. That number includes project wins of over $300 million in the second quarter alone. As I mentioned earlier, that momentum has continued into the third quarter. In July, we were awarded 18 new projects, totaling approximately 135 million. Most importantly, these new wins have gross margins in line with, and in some cases, above what we have achieved historically. If we go to the next slide, I'll dive a little deeper on the cost environment and how it impacted the quarter. The key takeaway from this slide, which will come to no surprise, is that we are in an unprecedented inflationary cost environment. Compared to the second quarter of last year, hot-rolled coil has tripled. Ocean freight has doubled, and aluminum is up 60%. Against that backdrop, our actual purchase material cost is up 14% year-over-year, and our gross margin is down 610 basis points. Turning to the next slide, I'll spend some time talking about the changes we have made to our business processes to limit our exposure to future increases in input costs. Historically, we would agree to a price with our customers when they would award us a project. Once the project was awarded, we would start the process of final design and engineering, the result of which was a detailed bill of materials. Once we had that bill of materials, we would place orders from suppliers. The process of finalizing the design and generating the bill of materials could take up to 90 days. The result was that if input costs moved down during that period, our expected gross margin on the order would increase, and if they moved up, it would decrease. Historically, prices from our suppliers didn't really move much during the 90-day window, and in most cases, they actually went down. At the same time, by ordering later and only after the full bill of materials was complete, we minimized our working capital investment and the chance that we would order too much or too few of a particular component. That changed in early April when prices for nearly every one of our inputs moved up dramatically in a very short period of time. That 90-day window, which had historically benefited us by reducing our working capital investment and giving us time to negotiate the best price from our suppliers, became a gap that could allow price and cost to become mismatched. During the second quarter, we took action to close that gap by changing our business process. Today, if a customer wants a fixed price, we offer two options. Either we offer a price that is good for 30 days with collars around the movement of commodity pricing. If commodity prices move outside those collars, the price is no longer valid, and we will re-quote the project using updated costs. Or we offer a price that is good for seven days only. Under both options, we now require our customers to sign an LOI and make a deposit, which enables us to procure the materials and components that are not impacted by the final design. Buying those components when the customer signs an LOI helps us to lock in our margin on the order because both price and material costs become largely fixed from the outset of the ordering process. The early results of this new process have been great. We are winning projects and locking margins on them at levels that are at or above what we have historically achieved. I am confident we are on the path to getting margins back in line with our historical performance and targets. However, if you turn to slide eight, it's important to keep in mind that this is a business with long lead times, and we still have a lot of orders to fulfill that have preinflation pricing that was agreed to under the previous process. Those preinflation projects create a hangover effect as they are recognized out of our backlog. This chart shows you the percentage of our revenues that we expect to come from preinflation orders over the next several quarters. The key takeaway is that our margins are going to recover gradually as those old projects burn off and more of our revenue comes from projects booked under the new process. Now I will turn it over to Nibel for review of our second quarter results.