FTC Solar, Inc.

Good day, and thank you for standing by. Welcome to the FTC Solar First Quarter 2022 Earnings Conference Call. At this time, our participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised this call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host today. Bill Michalik, Vice President, Investor Relations. You may begin.

Thank you, and welcome, everyone, to FTC Solar's first quarter 2022 earnings conference call. Prior to today's call, you've likely had an opportunity to review our earnings release, supplemental financial information, and slide presentation, which were posted earlier today. If you've not yet reviewed these documents, they're available on the Investor Relations section of our website at fdcsolar.com. I'm joined today by Sean Hunkler, FTC Solar's president and chief executive officer, Phelps Morris, the company's chief financial officer, and Patrick Cook, chief commercial officer. Before we begin, I remind everyone that today's discussion includes forward-looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date. As such, these forward-looking statements include risk and uncertainties and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information except as required by law. As you'd expect, we'll discuss both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our executed contracts and awarded orders, and our definition for this metric is also included in our press release. With that, I'll turn it over to Sean.

Thanks, Bill, and good morning, everyone. Before I go into our highlights, I thought I'd address the topic on everyone's mind in our industry, and that's the current market environment with ADCVD. Since our last update in mid-March, steel and freight are both off their highs, although still elevated. But those aren't the main drivers in the industry. Module availability is the key limiting factor to solar industry growth in the U.S. in the near term. customers were already facing supply limitations due to WRO, which had the effect of significantly limiting imports as producers either limited or stopped shipments and idled production as they worked to provide sufficient documentation to avoid detention at the ports. As WRO was appearing to show signs of improvement, the new ADCVD investigation, launched on March 25th, with its risk of significant retroactive tariffs, has now compounded customers' difficulties in procuring modules. Module makers would appear even less likely to restart production and unlikely to ship modules at all without buyers agreeing to absorb any potential tariff. This issue with module availability has made the near-term environment increasingly uncertain. As customers work to get line of sight on modules, construction timelines and decisions on new projects continue to get pushed out in time. So, while we have a lot of business in contracted and awarded, much of the construction has been delayed. This particularly impacts our second quarter profitability, as most of the revenue that remains for Q2 is based on old contracts and higher steel content product that doesn't benefit from our significant advances with our design-to-value initiatives. So, with that backdrop of the environment, I'd like to note that there are several bright spots from our standpoint. We have made nice progress on our bookings with contracted and awarded now at $664 million with $112 million added in the past two months and no cancellations. The vast majority of our contracted and awarded moving forward will be at an attractive margin profile relative to historical. And I'll touch on that more in a moment. We have been able to grow our international business organically, and almost half our recent bookings have been international. Our pipeline is at record levels. This includes strong growth in international pipeline, which has grown more than 20% this year alone, and now stands at more than 32 gigawatts. And this excludes our pending acquisition of HX trackers. We're excited about the addition of HX and believe it will enhance our growth and profit opportunities moving forward with incremental pipeline, complimentary 1P technology, and other benefits. We expect to close on that transaction in the current quarter and expect to see tangible progress on bookings as we progress through the year. Overall, there continues to be healthy activity in the U.S. with active bidding and developers working to find new sources of module supply. I think this really underscores what an incredible amount of demand is out there and how well the market could do if ADCBD is resolved. In the near term, we'll continue to focus on what we can control. That includes executing incredibly well on the projects we have in flight while continuing to deepen and broaden our customer relationships. Accelerating our international efforts, which includes smoothly integrating HX Tracker with and supporting their growth as we capitalize on our expanded addressable market. Building our DG business, which has higher margins, and for which we have already been awarded 12 projects since our January business update call. Improving our operational efficiency, which includes automating processes and controlling costs to be most efficient, and continuing to drive our gross margin initiatives, including our Design to Value product cost reduction programs, and strategic R&D efforts. Our design to value initiative has already driven significant cost out of our tracker. We've seen steel reductions roughly in the 20% range with additional reductions expected through year end. Along with improved logistics costs and more disciplined pricing, the new projects we've been winning now have significantly higher product margins. As our lower margin legacy projects complete, and the newer projects begin, it will have a meaningful impact on our margins and results. As an illustration, on the left side of this table, we show what an average margin profile of our legacy projects, or those generally ordered prior to Q4, looks like at revenue levels of $100 and $150 million. And in fact, last quarter, When we provided Q4 results, we mentioned that excluding a credit reserve and incremental logistics expense, we would have been in the negative 2.8% range. On the right side of the chart, it shows an illustration of average new projects and what the gross margin would look like. The vast majority, or more than 600 million, of our contracted and awarded takes advantage of our latest DTV advances. And if there is one silver lining in projects being delayed, it's that we can continuously update those projects as we continue to drive progress in our cost reduction. So essentially, projects can become more profitable than originally designed. Overall, we believe we're well-positioned to make significant progress toward our stated long-term gross margins in the 20-plus percent range. when project activity normalizes post ADCBD. So in conclusion, we believe the regulatory issues will be a near-term bump in a long-term road of strong growth. We have record pipeline, are winning new business, are accelerating internationally and in DG, and have higher margin business poised to replace legacy projects. With the differentiated product, strong customer adoption, significant cost reduction initiatives and operational improvements, I believe FTC Solar is controlling what it can control and positioning itself incredibly well for the future. We significantly outgrew the overall market in the past few years and plan to be even more efficient and effective as we get increased visibility on the externalities or regulatory factors impacting the industry. With that, I'm pleased to turn the call over to our CFO, Phelps Morris. Thanks, Sean, and good morning, everyone. As a follow-up to Sean's comments, I'd like to provide some additional detail on the first quarter performance and our outlook. Beginning with the first quarter, normalizing the effects for the credit reserve, our results for the quarter were generally in line with our expectations. Adjusted EBITDA would have been a midpoint of our guidance range, and non-GAAP gross margin revenue coming in at the low end. Specifically, first quarter revenue was $49.6 million, which includes a reserve associated with a potential customer credit that resulted in a $5 million reduction to our first quarter revenue and gross margin. Exclusive of this reserve, revenue was just shy of the low end of our target range. The difference relative to the midpoint of the range was slightly lower than the expected production in the quarter, as well as a bit of logistics revenue being pushed to the second quarter. This revenue level represents a decrease of 51% compared to the prior quarter on lower volume and a lower ASP and a decrease 25% year-over-year driven by the inclusion of the reserve and lower volume. GAAP gross loss was $9.3 million or 18.7% of revenue compared to $8.6 million or 8.4% of revenue in the prior quarter. Non-GAAP gross loss was $8.8 million or 17.8% of revenue. Excluding the negative impact of the $5 million credit reserve, the improvement in dollars quarter over quarter was due to a reduction in warranty expense as well as improved product cost and logistics margin. The margin percentage declined on a lower sequential revenue level, which leads to less absorption of overhead costs. The results for this quarter compares to a gross profit of $0.1 million in the prior year period, with the difference driven primarily by the reserve and reduced production volume versus the prior year, and an increase in employee count and other overhead expenses to support the company's growth. GAAP operating expense was $18.5 million. On a non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expense was $11.2 million, which compares to $6.9 million in the year-ago quarter. The year-over-year increase was driven primarily by the necessary growth in staffing and other costs associated with being a public company. GAAP net loss was $27.8 million, or $0.28 per share, compared to a loss of $23.9 million, or $0.25 per share in the prior quarter, and compared to a net loss of $7.4 million, or $0.11 per share in the year-ago quarter. Adjusted EBITDA loss, which excludes $7.8 million of stock-based compensation, certain consulting and legal fees, severance, and other non-cash items was $20 million. Net of the reserve, this was just above the midpoint of our guidance range. This result compares to an adjusted EBITDA loss of $16.4 million in the prior quarter and $6.7 million in the year-ago quarter. As Sean mentioned, the ATX transaction remains on track to close in the current quarter. We anticipate integration costs will be approximately $0.3 million, which is primarily composed of legal administrative activities and limited to 2022. With that, let's turn to our outlooks. In light of the near-term regulatory uncertainties in the U.S. solar market associated with ADCBD and WRO, the company is withdrawing its prior annual guidance for the full year 2022 and instead is moving back to provide quarterly guidance and some qualitative discussion beyond that. Our revenue outlook for the second quarter of 2022 reflects this current U.S. uncertainty as our customers have delayed products until they're unable to secure modules. Our gross margin outlook is expected to step back given the lower revenue base of absorbing our overhead costs and, more importantly, the delay of newer, higher-margin products that Sean spoke about previously. Unfortunately, as these projects have pushed, it has left the quarter largely with lower-margin legacy projects in Q2. These factors slow down to adjusted EBITDA, offset to agree by certain expense reduction initiatives we're implementing as we wait resolution of ADCBD and WRO industry impacts. Specifically, our targets for the second quarter call for revenue between $30 and $35 million, non-GAAP gross margin of negative 29% to negative 19%, non-GAAP operating expense between $10 and $11 million, and finally, adjusted EBITDA loss between $19.7 and $16.7 million. While regulatory factors remain the largest wild card for the remainder of 2022, we do see some light as we move to the back half of the year as the lower-margin projects will largely roll off in Q3 and newer, higher-margin products begin delivery. In addition, we've seen great growth in our international pipeline, which will remain a focus for us given the near-term U.S. uncertainties. Finally, we continue to make good progress in our bookings with contracted and warning now standing at $664 million with $112 million added in the past two months. As Sean mentioned, one of the silver linings of the ADCVD delays is products being pushed will allow us to take advantage of further advances and become more profitable than may have been previously designed. We believe that the vast majority, over $600 million of the $664 million in contract and award, will take advantage of our latest DTV initiatives. This should further aid us down the road towards a previously stated long-term growth margin target of 20-plus percent. Based on these factors and what we see today, we believe that revenue in the second half of the year will grow versus the first half, our gross margins will improve, and our non-GAAP operating expenses will decline in the second half relative to the first. It should be noted that all outlook figures and commentary exclude the pending acquisition of HFs. In addition, should there be favorable resolution to the current regulatory issues impacting the U.S. module of supply, including ADCBD and WRO, In the near term, we believe we'll be well-positioned to quickly respond to the pent-up customer demand we're seeing in the U.S. In closing, while we're experiencing some short-term headwinds in the U.S. industry, we remain incredibly bullish on the long-term growth and outlook for the global solar markets. With that, we'll conclude our prepared remarks, and I'll turn it over to the operator for any questions. Operator?