Array Technologies, Inc.

Greetings, and welcome to Array Technologies' first quarter 2024 earnings call. At this time, all participants are in 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 introduce your host, Sarah Shepard, Investor Relations at Array. Please go ahead.

Thank you, and welcome to Array Technologies' first quarter 2024 financial conference call. On the call with me today are Kevin Hostetler, our CEO, and Kurt Wood, our CFO. Today's call is being webcast from our investor relations site at ir.arraytechinc.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website. Today's discussion of financial results is presented on a non-GAAP financial basis, unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website. We encourage you to visit our website at arraytechinc.com throughout the quarter for the most current information on the company, including information on financial conferences that we may be attending. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, our expected results, and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to the documents we filed with the SEC, including our most recent Form 10-K, for a discussion of risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the for this and statements to conform these statements to actual results. And I'll turn the call over to Kevin.

Thank you, Sarah. Good afternoon, everyone. We started 2024 off with the momentum we experienced in the fourth quarter of 2023 continuing into the new year. Beginning on slide three, I'll start with key highlights from our first quarter and some company-specific updates around our operational capabilities and product portfolios. We generated $153 million of revenue, slightly above the high end of the range we provided on our February earnings call. Adjusted gross margin came in at 38.3%, inclusive of a one-time $4 million benefit stemming from a successful resolution of a supplier quality issue. Excluding this one-time item, our adjusted gross margin was 35.7%, which was up 10 percentage points sequentially from the prior quarter and up nearly 9 percentage points from the first quarter of 2023. As a reminder, starting this quarter, we are reporting gross margins inclusive of the benefits derived from 45X, which to date only reflects the contribution from domestic content related to our tortures. Having said that, our core adjusted gross margin, excluding 45X benefits, would have been in the mid-20s range for the quarter, which is consistent with our underlying long-term target. We delivered $26.2 million of adjusted EBITDA, representing 17.1% of revenue, inclusive of the $4 million benefit mentioned earlier. And we generated $45.1 million of free cash flow to end the quarter with a cash balance of $288 million. Total available liquidity was approximately $465 million when including the capacity on our undrawn revolving credit facility. Moving to slide four, we continue to see broad demand across all market segments and customer types. This includes EPCs, developers, independent power producers, and utilities across utility scale and distributed generation projects. both domestically and internationally. In Q1, we booked approximately $400 million of new business and experienced a book-to-bill ratio greater than 2.5 times to end the quarter with an order book of $2.1 billion. With this print, we have won $1.8 billion of new bookings cumulatively over the last four quarters. The quality of our new bookings remains consistent with our historical profile, and approximately 80% of our Q1 activity came from what we classify as Tier 1 customers. We have also seen success in gaining share of wallet from certain accounts that we strategically targeted over the last year. New orders received in the quarter were strong in both North America and the rest of the world, which highlights continued strong global demand for array products and services including our energy optimization software and severe weather mitigating solutions. As was the case in the second half of last year and discussed on our year-end call, customers continue to place orders for projects with more elongated timeframes for first deliveries than has historically been the case. As a result, our 12-month conversion rate of order book to revenue will be lower in 2024 than what we have experienced in prior years. This dynamic remains unchanged and is consistent with the commentary and guidance we provided on our year-end call. From an overall funnel perspective, our pipeline of high-quality, high-probability opportunities has continued to grow. This highlights the demand for our portfolio of products and aligns with our expectation of robust industry-wide growth for utility-scale solar as solar continues to be one of the lowest cost options for satisfying the growing need for new energy generation capacity and replacement of aging energy generating assets. This growth is also, in part, attributable to the trend I mentioned earlier where customers are developing and contracting projects further out in time than they may have in the past. During the quarter, we continue to have focused dialogue with our customers and, in many cases, the asset owners to ensure we have the appropriate voice of customer represented across all aspects of our business. Throughout these conversations, customers reiterated that they are positive on both the trajectory of the industry and their individual business outlooks. By and large, customers continue to communicate they are seeing a softer first half of 2024 before seeing growth in the second half of the year. This is consistent with their prior communication and what we messaged and guided on our last call. The most common issues cited remain around permitting and interconnection, supply chain delays on long lead time equipment, and the timing of financing. These issues continue to be broad-based across all segments and customer profiles, as we have discussed in the past. But there are a handful of customers who are not seeing as much of an impact, and projects are moving ahead in a normalized manner. We are also closely monitoring recent developments related to the ADCDE petitions filed a few weeks ago. As you may have read in numerous media outlets, it is our stance that more duties will cause uncertainty and unnecessary project delays, holding the U.S. back in meeting our clean energy deployment and manufacturing goals. One advantage of our raised offerings in this uncertain regulatory environment is the flexibility of our patented clamping solutions which can be adapted to fit virtually any module type or manufacturer at any point in the design and or construction phase with minimal design changes. This removes the need to complete expensive and time-consuming drilling or modification of the torque tube, providing the EPC and asset owners an immense amount of optionality. This becomes even more beneficial during times of uncertainty around module selection or module availability. We will continue to support and work with our customers like we have for many years as they assess and work to minimize any potential impact to their business from the recently filed ADCVD petitions. In addition to our typical ongoing customer dialogue, we held a very productive customer summit at our office in Arizona earlier this year. This was part of a periodic program where we host diverse groups of industry participants at our offices around the globe. The summits cover a variety of topics, including a showcase of our technology, software, and LCOE benefits, discussions on current market dynamics, and candid feedback sessions on our products and service levels. The feedback received from our Q1 forum was overwhelmingly positive in the event with a success across the board. Finally, I'd be remiss if I didn't take a few minutes to highlight some of the success we are seeing in Brazil. According to independent third-party data from ePowerBay, seven of the top 10 and 13 of the top 20 most efficient solar power plants for 2023 in Brazil utilize array tracking technology. The report cited the efficiency of projects using array trackers was as much as 2% higher than other projects using different tracker offerings. And of course, the greater the energy production, the lower the levelized cost of energy, and the better the return on investment. We're very proud of this accomplishment, as it is truly a testament to the value of our technology, the breadth of our product and services portfolio, and of course, our highly talented team in the region. We're excited to continue our part in Brazil's clean energy movement, and we feel well-positioned with the latest version of our H-250 product, which incorporates valuable elements from our flagship Duratrac offering, including our patented articulating driveline. Our $2.1 billion order book already includes several bookings for this latest version of the H-250 in both Brazil and Europe, and we look forward to driving further value to our customers through our enhanced product features and capabilities. Turning to slide five, we recently hosted U.S. Secretary of Energy Jennifer Granholm, Senators Heinrich and Lujan, SEER President Abby Hopper, and many of our customers' employees at the groundbreaking of our new state-of-the-art manufacturing facility in Albuquerque. This facility will create good-paying New Mexico jobs, strengthen our low-carbon domestic supply chain, and boost American energy independence. We expect this facility to come online in the early 2026 timeframe. While this facility is not required as part of our 45X strategy, it is part of our broader supply chain approach to reduce costs and lower enterprise risk around continuity of supply for certain key components. Moving on to slide six, we've introduced a few exciting hardware and software offerings this quarter. we officially launched our patented hail alert response, which is a groundbreaking set of software features designed to autonomously protect solar assets from hail damage, and is currently available and backward compatible for use on our Duratrack and Omnitrack systems. The hail alert response system leverages advanced weather prediction algorithms to preemptively stow solar trackers before an anticipated hail event. This approach ensures that solar assets are safeguarded against potential damage, enhancing the longevity and durability of the investments. Some of these capabilities were unfortunately put to the test in a recent hailstorm that hit Fort Bend County in Texas, which resulted in some sites being subject to three- to four-inch-sized hail. There were eight sites with array trackers in the Fort Bend area. with four of these sites located within a 10-mile radius of the worst impact of the storm. We confirmed that operators of those four sites successfully utilized our hail response capabilities to stow commissioned solar panels at the optimal 52-degree angle in advance of the storm reaching the sites. We are happy to report our stowing solution worked as designed and was very effective across the board. According to our customers and evaluations performed by our customer support teams, the solar facilities with the rain trackers experienced insignificant damage. This is obviously a strong proof point of the robustness of our severe weather mitigation capabilities, including the effectiveness of our hail stove angle, and it's another example of how we provide an attractive ROI for the asset owner and help mitigate risk. Turning to slide seven, we wanted to highlight the recent work we've completed to educate and promote market participants around the benefits of our patented passive wind stove technology. This work stemmed out of a dialogue we had with a customer. During that discussion, the customer noted they had two similar sites in close proximity of one another. One site utilized an array tracker with our patented passive stove capabilities. and the other site utilized a competing tracker technology with active stove technology. Over time, the customer noted that the array project consistently experienced better energy production, and the customer asked for our help in articulating why. Our engineering team developed an innovative solution to model and simulate passive and active wind stove algorithms to determine the resulting energy losses from stove events using high-resolution actual wind data. With this model, which was verified by an independent report by DNV, we proved that passive stove can have more energy generation compared to active stove in medium to high-wind regions. Specifically, the study showed that the energy enhancement can be as much as 4.3% annually, depending upon location and wind behavior. This is a very significant data point. Let me articulate what this means to the overall economics using a hypothetical 200 megawatt site. The incremental energy production from our patented passive stove facility operating in a high wind zone would create a net present value as high as $10 million over a 30-year period. That is about half the entire cost of the tracker, or 5 cents per watt, and is a tremendous ROI benefit to the asset owner. On top of the enhanced energy yield, passive stow technology is a mechanical solution, meaning it is simple and is fail-safe by design. Active stow systems, on the contrary, rely on software algorithms and external wind sensors. This technology can easily trigger unnecessary stowing or potentially fail to stow at all, thus inserting increased complexity and unnecessary risk for the asset owner. We will continue to educate our customers, banking participants, and solar insurers on the inherent advantages and differentiation of our passive wind stove technology. We have made a summary of this report publicly available and encourage you to go to the product features page within the products and services section of our website at arraytechinc.com to access it. Kirk will now provide additional color on the Q1-24 results and our 2024 outlook. I'll then give some concluding remarks before opening the line for questions. Thank you, Kevin. I would like to start off by providing some additional details around the first quarter results and ask that you turn your attention to slide 9. As Kevin mentioned, revenue came in slightly above the high end of our guidance range at $153 million, which was down 59% from Q123 and down 55% sequentially from the fourth quarter of 2023. Overall, we experienced declining volume in ASPs year over year, in line with what we had communicated on our last call. Sales in North America represented 70% of our revenue for the quarter, with the remainder of our revenue coming from international locations. Before moving to gross margin, I'd like to briefly speak to the deferred revenue on our balance sheet, And note we saw the balance increase by $20 million in the quarter as customers made contractual deposits ahead of project deliveries scheduled for later this year. We expect our deferred revenue to increase again in the second quarter as additional deposits come due in advance of our second half ramp in revenues. We achieved first quarter adjusted gross margins of 38.3%, an expansion of over 11 percentage points year over year, which was inclusive of the $4 million one-time benefit to cost of goods sold Kevin mentioned earlier. Excluding that one-time benefit, we saw first quarter adjusted gross margins expand by 880 basis points on a year-over-year basis to 35.7%, and by 10 percentage points sequentially versus Q4 of last year, inclusive of 45x benefits associated with our core two. Our ability to expand margins on lower volume is a testament to the considerable operational improvements we have made within the business. Operating expenses of $46.7 million were down approximately 7% from $50.1 million during the same period of the previous year and down 14% or $7.3 million from the fourth quarter of 2023. This decline was driven by a year-over-year improvement in amortization expense relating to certain intangible assets from the STI acquisition and the non-recurring nature of several one-time items negatively impacting prior quarters. Adjusted EBITDA was $26.2 million when including the one-time $4 million benefit compared to adjusted EBITDA of $67 million during the first quarter of 2023. Gap net loss attributable to common shareholders was $11.3 million compared to a gap net income of $17.2 million during the same period in the prior year. And basic and diluted loss per share was 7 cents compared to basic and diluted income per share of 11 cents during the same period in the prior year. Adjusted net income was $9 million compared to adjusted net income of $39.6 million during the first quarter of 2023, and adjusted basic and diluted net income per share was 6 cents compared to adjusted and diluted net income per share of 26 cents during the prior year period. Finally, our free cash flow for the period was $45.1 million versus $41.9 million for the same period in the prior year, demonstrating our continued focus on cash generation. Now we'd like to go to slide 10 and conclude by affirming no changes to our prior guidance for the full year 2024 at this time. As a recap, we previously guided full year revenue of $1.25 billion to $1.4 billion, adjusted gross margin in the low 30s percentage range, adjusted EBITDA of $285 billion to $315 billion, and adjusted EPS of $1 to $1.15. As communicated when we issued our 2024 guidance on February call, our revenue profile is back half-loaded. We expect Q2 revenues to grow sequentially from Q1 to the range of $225 million to $235 million and continue to expect sequential growth in both the third and fourth quarters, with the fourth quarter being the peak revenue for 2024. In regard to the recent ADCVD petition that Kevin touched upon earlier, this does inject some uncertainty into the year. While customers are digesting the news and awaiting further details, we are hearing of some starting to plan scenarios that could mitigate, in part or in whole, potential short-term risks to their business imposed by any new tariffs. Part of those mitigation plans may include prioritizing projects designed with modules sourced from manufacturers that be subject to new tariffs ahead of other projects prior to any tariff going into effect. Whether these plans get put into effect remains to be seen and is dependent on how the petitions around ADCBD play out over the next few months. Given how recent this news is and the many unanswered questions around how the petition will ultimately play out, we are not in a position at the time of this call to quantify any impact to our full-year guidance, whether that be a potential risk or a net opportunity. We will provide further updates on a future earnings call when we have clarity and if there is any material impact to our full-year expectations. Now, I'll turn the call back over to Kevin for some closing remarks. Thank you, Kurt. We are very excited about the continued positive momentum in the business. During the quarter, we officially launched new features to our severe weather mitigation offering, including hail alert response, and we successfully rolled out the next generation of our H-250 product. We continue to see our portfolio of products well received by our customers, as evidenced by approximately $400 million of new bookings in the quarter. We have a very healthy order book at $2.1 billion at the end of the quarter, which includes a meaningful amount of orders for 2025. This gives us greater visibility into the next year than historically would be the case at this time of the year. We remain very excited for solar in general and more importantly for Array to capitalize on the industry growth with our diverse product and service portfolio.