Array Technologies, Inc.

hello and welcome to the array technologies second quarter 2022 earnings call at this time all participants are in a listen only mode a question and answer session will follow the formal presentation as a reminder this conference is being recorded it is now my pleasure to turn the call over to Cody Mueller investor relations array please go ahead

Good evening, and thank you for joining us on today's conference call to discuss Array Technology's second quarter 2022 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. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our investor relations website. 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 Kevin Hostetler, Array Technologies' Chief Executive Officer.

Thanks, Cody, and good evening, everyone. Thank you for joining us on today's call. In addition to Cody, I'm also joined by Nipal Patel, our Chief Financial Officer. Let's begin with slide four, where I'll provide some highlights of our second quarter. This was a strong quarter for Array. We delivered on our revenue adjusted EBITDA, and adjusted EPS expectations while having a strong quarter of bookings despite the impacts of the ADCBD investigation, and we tightly managed working capital to ensure that we did not require additional financing or covenant relief. Revenue for the quarter of $425 million represents a 116% improvement year over year. Included in this number is legacy array revenue of $352 million, representing organic year-over-year growth of 79%. More impressive, this growth was achieved against a challenging set of industry circumstances with numerous project starts and stops, module changes, and delays. Our ability to achieve this operating performance is a strong reminder of three key elements of our business model. One, we offer a differentiated, patent-protected product that provides our customers with the lowest levelized cost of energy. Two, with continued redesigns due to issues with module availability, our flexible mounting structure and civil engineering expertise are key competitive advantages. And three, our large and well-established U.S. supply base, coupled with our asset light operating model, allows for the shortest and most reliable lead times in our industry. This provides our customers the confidence in our ability to deliver the right products and services for their projects on time. Despite the strong delivery volume for the quarter and the slowdown in orders due to the ADCVD investigation in April and May, we added over $200 million in new orders, ending the quarter with a $1.9 billion order book. It is important to note that in July, after the announcement of the tariff moratorium, inbound opportunities increased by 25 percent compared to April and May, and we fully expect this momentum to continue. Gross margin for the quarter was 11.1 percent, which is an improvement of 70 basis points from prior year period, and the third consecutive quarter of improvement, up 230 basis points from the first quarter. The 11.1 percent, while certainly on the right trajectory, is slightly down from where we would like to be as the STI business continued to have some cost challenges both in the U.S. construction business and in Spain. Adjusted EBITDA in the second quarter of $26 million represents a year-over-year improvement of 162 percent and a sequential improvement of approximately $25 million from the first quarter. Although we still have room for improvement in our working capital efficiency, overall, I was pleased with our execution this quarter. You'll recall coming into our second quarter, we had some constraints on our liquidity due to our debt covenants. Delivering $425 million of revenue and managing our working capital to not require either covenant relief or additional funding was a testament to this team's execution. NEPA will discuss this in more detail later, but as we look at liquidity moving forward, there are a few key aspects to keep in mind. In Q2, we were limited to only being able to pull $70 million from our revolving facility because of our existing debt covenant. Given our Q2 results and expected second half performance, we now anticipate unlocking the full $200 million value of that facility. As we've discussed previously, the combination of margin improvement, our business cyclicality, and improved working capital efficiency will provide positive free cash flow in both the third and fourth quarters. And finally, as identified in a recent current report, we reached a $42.75 million legal settlement, and these funds were received in full after our quarter end. We had not planned for this in our cash forecast. With these factors in mind, we feel confident in our liquidity position as we move forward and execute on our $1.9 billion order book. Turning to our next slide. Mindful of recent developments, I want to take some time to discuss the industry landscape here in the U.S. and what that means for Array as we progress through this year and into 2023. There are three key dynamics that are important when looking at our business moving forward. The regulatory environment, customer demand and project timing, and the health of our supply chain. First, on the regulatory side, the Biden administration's executive order providing a two-year moratorium on tariffs offered welcome relief and a window of certainty for our customers. We now expect the $240 million of projects that we previously identified as at risk during our first quarter call to move forward, and we have already secured defined start dates on several of these projects. While we are pleased to see this demand solidified, I note we do not currently expect to see a significant impact from these projects in 2022 due to lead times and the time required for our customers to get these projects into their near-term build schedule. We are also seeing some project delays due to the Uyghur Force Labor Prevention Act, or UFLPA. This is resulting in projects still requiring multiple module designs while customers navigate the potential for delays. As of today, these delays are within the range of the slower progression of projects that we have been forecasting all year. On the horizon, the Inflation Reduction Act of 2022, now passed on the U.S. Senate side, represents the biggest piece of climate related legislation in the history of the United States. While details of many of the provisions still need to be clarified, what is clear is this legislation will provide long-term certainty on incentives for both deployment and manufacturing related to solar energy. This certainty allows participants to invest in new facilities and bring jobs to the U.S. while accelerating the transition to clean energy. We strongly encourage the House to pass this bill and President Biden to sign it into law. Our initial analysis of this bill and its specific impact on array can be broken down into two areas. First, it provides a meaningful tailwind to the solar industry in total. Initial industry estimates are that the extension of the investment tax credit would add over 40% of additional installations between 2023 and 2027. This would equal approximately 46 additional gigawatts of solar energy installations over five years. Second, between the domestic content adder of 10% and the advanced manufacturing credit for torque tube and fasteners, there are additional benefits for companies who manufacture and source within the United States. On the domestic content adder, As we have stated before, we have a longstanding and mature domestic supply chain. Since this draft bill was released, we have already been in conversations with our customers to begin mapping out how we can support this provision. Our longstanding domestic capacity serves as an important strategic asset for us should this bill pass. On the manufacturing credits, clarification of how these will be calculated and who will be the direct beneficiary will be important since we do not directly manufacture torque tubes or fasteners. Regardless of the direct beneficiary, these credits provide a meaningful incentive for our industry. We estimate the current credits of 87 cents per kilogram of torque tube and $2.28 per kilogram of fasteners would amount to approximately 1.5 to 1.7 cents per megawatt. Moving on to the demand side, as evidence fires substantial year-over-year growth and our $1.9 billion order book, we have consistently seen strong demand for our products and services. If we look at the current distribution of the demand within our order book, we expect between $600 million and $800 million to be delivered for the remainder of this year based on our current guidance. This means we have already secured between $1 and $1.2 billion in revenue for 2023. And at the point in time when this was measured, we still had six months to go before 2023 begins. Any impact from the passage of the Inflation Reduction Act would only represent an upside to this already strong start. With the potential for additional demand, and the intricacies of where material is manufactured and sourced from becoming increasingly important. What becomes even clearer is that a robust and flexible supply chain, coupled with strong execution, will be more important than ever. Given this as a backdrop, it's important to provide some additional information about a raised supply chain. This year, we have increased our global capacity to serve the market by more than 25%, and are now able to deliver over 30 gigawatts per year. By the end of Q1 2023, given the commitment of our existing partners and the addition of new suppliers already in queue, we expect this number to be near 40 gigawatts. Importantly, given our asset-light operating model, this scaling does not require meaningful capital expenditures and does not represent additional fixed costs to Array. Our operating model and execution provide meaningful cyclical resiliency should volumes ebb and flow. Relative to our domestic content, we currently have over 20 suppliers here in the U.S. for our major components, with five additional suppliers in various stages of our vendor qualification process. It is important to note we not only utilize steel mills located in the U.S., we also have suppliers that source the steel from the U.S. This underlying source of steel becomes a crucial factor for our customers as they look to meet domestic content requirements. So as I take a step back and look at the industry landscape, the term that I like to focus on is flexibility. We want to position ourselves to meet the additional demand as it comes, while ensuring that our operational structure does not depend upon that volume. With our recent and continuing supply chain and logistics improvements, we're in an outstanding position to do just that. As we move to slide six, I want to close out today by talking a little bit about my early observations about the company and some of the key focus areas we'll be driving as we move forward. First, let me reiterate my initial impression that Array has an incredibly solid foundation to build from. Within the legacy array segment, we continue to round out a high-quality, experienced management team who know how to scale and run a large multinational publicly traded corporation. Further, we have set in place key building blocks for continued growth and expanding profitability. In addition to the supply chain elements I discussed earlier, this also includes the change in our business process that was made this time last year reducing the company's exposure to commodity cost fluctuations and therein producing more predictable results. Our digital transformation initiatives deliver streamlined back-end processes, driving better operational efficiencies as we scale, as well as improving our interactions with our customers. And the expansion of the workforce in strategic areas like commercial excellence, commodity management, and logistics to ensure we are driving margin expansion as well as growth. On the STI side, STI is a company with a great customer reputation and product operating in high growth regions. I've recently spent a week in Brazil with our STI team. I was fortunate to meet many of our team members and our customers and to spend time in the field on utility scale solar sites, learning and understanding the STI product and service offerings and the positioning opportunities between our array and STI product lines. I've been incredibly impressed with the team at STI. They are dedicated to the company and to the industry and they continue to rally to every challenge we present them. However, as you can imagine, there are still areas where we need to get better and we will focus on going forward. First, We need to quickly mature the processes and execution within the STI business to meet its current growth trajectory and its operations under a U.S. public company. To that end, we have recently appointed Ken Staherski, our chief operations officer, as our integration leader, and we have brought in a renowned third-party operations and supply chain consulting company to further accelerate our integration efforts. Second, we need to rationalize the construction business at STI. This area of the business continues to be a drag on margins, so we need to ensure we are only offering this service where we have clarity and experience in the scope of work, a strong value proposition, and when we could deliver our required profitability. Since our last quarter call, we have made progress on this front. We discontinued quoting any construction projects in the U.S., and have significantly reduced our construction quotes in Brazil, where we have reduced our associated construction headcount by more than half since the beginning of this year. We are still evaluating the strategic alternatives in Spain, as that region has a more entrenched customer expectation that the tracker provider also performs construction. While this may take a bit more time than Brazil, we will be thoughtful and deliberate in our approach. We need to become a world-class logistics company. You'll remember we manufacture little ourselves. This means we are moving a lot of materials from multiple suppliers direct to multiple customer sites at any given time. We recognize our need to execute this in the most efficient, flexible, and predictable way possible. We've recently hired a new vice president of logistics who has extensive international experience and a proven track record of delivering operational excellence in this area. Our second half ERP system enhancements will also greatly aid our efforts here. Fourth, we need to have an intense focus on improving working capital efficiency. We fell a bit behind here as our team rightly pivoted to focus on margin restoration and improving delivery execution. Our business model inherently produces great free cash flow, and we need to ensure we are maximizing incoming cash to fund organic growth, pay down debt, and provide funding for strategic acquisitions. We have already restructured our collections process to better align with our customer-facing teams, and we have significantly improved the linearity of our shipments, allowing us to get more receivables into the billing cycle earlier in the period. This dramatically improved linearity throughout Q2 and into Q3 was critical to and evidenced by our cash management in our second quarter. While improving, there is still work to do in optimizing inventory levels and bringing our DSO levels nearer our historic levels. Finally, we will focus on becoming easier to do business with while creating a streamlined experience for our customers. We have always had a strong focus on our customers, but often this is done through extraordinary efforts and manual processes, which at times can be slow, frustrating, and exceedingly difficult to scale. This is a key area where we are focusing our near-term digital transformation efforts on. As designed, our digital transformation will improve turnaround times on customer quotes, project design, shipment scheduling, and service appointments, to name a few. All this while simultaneously providing enhanced visibility on project status and delivery directly to our customers. As a company with multiple products servicing numerous regions, we need to ensure our customers know who to go to to get the right answers in a timely manner. There is already a great deal of momentum behind these focus areas, and I'm confident that we could execute on improving them quickly. I look forward to updating you on our progress in these areas as we execute and move forward. With this, I'll turn the call over to NIPL for a deeper review of our second quarter financial performance.