FTC Solar, Inc.

Good day and welcome to the FTC Solar second quarter 2022 earnings conference call. All participants will be on the list only mode. For any new assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your questions, please press star then two. Please note this event is being recorded. At this time, I'll now turn the conference over to the Vice President of Investor Relations, Mr. Bill Michalak. Please go ahead.

Thank you and welcome everyone to FTC Solar's second quarter 2022 earnings conference call. Prior to today's call, you've likely had 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 are available on the investor relations section of our website at ftcsolar.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, the company's Chief Commercial Officer. Before we begin, I remind everyone that today's discussion contains 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 risks 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 will be discussing both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a 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 that metric is also included in our press release. With that, I'll now turn the call over to Sean.

Thanks, Bill, and good morning, everyone. I'm going to start again this quarter with an update on the market environment, as there's been a fair amount of activity. As you may recall, at the time of our last update in May, the Anti-Dumping Countervailing Duties Investigation, or ADCVD, with its risk of significant retroactive tariffs, was by far the biggest concern in the industry. That, along with some lingering WRO-related import concerns, had essentially halted U.S. imports of most solar modules and module makers had idled their factories. As a result, U.S. solar project construction timelines and decisions on new projects were pushed to the right. Since then, the president issued an executive order in June that essentially removes the 80 CVD tariff risk for 24 months. The market cheered this news, and we have seen a marked increase in customer activity and discussion around projects since the executive order. At the same time, however, the Uyghur Force Labor Prevention Act, or UFLPA, became effective in June. resulting in new rules for module importers and reviews by Customs and Border Patrol. There is still a bit of uncertainty in the market around achieving full compliance with UFLPA, whether related to sufficient mapping of materials or other factors. Once there is additional clarity around this and customers get line of sight to module deliveries, we believe the market will see a swift and substantial recovery. One other potential change that is on the table is the proposed Inflation Reduction Act, which includes incentives and an extension of the investment tax credit. While there are already many underlying drivers of growth in the solar industry, we believe this bill would serve to further bolster and extend future demand. Based on our recent channel checks and customer discussions, we are hearing that many EPCs and developers are anticipating clarity on module supply within a late August, early September time frame. There is such a significant amount of pent-up demand in the market with both delayed 2022 projects and a strong funnel of new 2023 projects that some customers are worried about the availability of sufficient labor and materials to meet the demand. Our focus at FTC Solar during this regulatory-driven downturn has simply been to best position ourselves to capture that demand, to merge even stronger when modules start flowing again, and to grow faster than the market once again with significant enhanced profitability. To that end, we have focused on a few key things. Gross margin improvement. Through our design to value initiative, we continue to take costs out of our tracker systems, enabling future projects to be at higher margins than historical. Building our DG business, which has higher margins. Improving our operational efficiency and controlling costs. building and strengthening customer relationships, accelerating international growth, and finally, one that cuts across both growth and profitability is strategic R&D. We have an incredible R&D team. We have continued to invest in this area and are excited about our R&D pipeline of new products. We'll talk more about this in future calls. So those are our focus areas, and despite the recent industry environment and slowdown, we've made good progress and have several highlights from the quarter. We added a significant $141 million to customer bookings since our last update, bringing total contracted and awarded now to $774 million. This includes the addition of a new top 10 utility customer and a new strategic EPC customer. It also includes an award for our first project in Thailand, continuing our international expansion and following the additions of Kenya, Malaysia, and South Africa last quarter. As we talked about last quarter, the vast majority of our contracted and awarded moving forward will be at a significantly improved margin profile relative to historical projects as we have taken costs out of our systems. As our old projects roll off in Q3, and new projects begin in Q4, we expect this improvement to become very apparent in Q4 margins, and Phelps will talk more about that shortly. We continue to believe that we're well positioned to make significant progress toward our stated long-term target gross margins in the 20-plus percent range when project activity normalizes. We've grown our pipeline to a new record high at more than 86 gigawatts. The international growth has been exceptional, and now, for the first time, stands at more than half of our total pipeline. We also closed on the HX transaction during the quarter, and we believe it will provide many benefits, including further accelerating our international expansion, providing complementary 1P technology, and strengthening our capabilities. And in DG, we've continued our progress, and just yesterday announced that AUI Partners will be our EPC partner. Our DG business is focused on providing rapid design through installation services for sites under 20 megawatts. The offering includes fast quotes and all the benefits of our differentiated tracker system and software with delivery lead times as short as eight weeks. We're excited about the margin profile of this business and are off to a good start in terms of demand. So in summary, volumes are depressed at the moment in this module-constrained environment. but the pent up demand is incredibly large. Our legacy projects roll off after Q3 and we now have a strong cost structure as we move forward. We're building backlog and pipeline, adding new customers, including in new countries. Simply put, we believe our actions during this industry slowdown have positioned us to outpace market growth once again when modules start to flow normally and to do so with significantly improved profitability. With that, I'll turn the call over to Phelps to provide more detail. Thanks, Sean, and good morning, everyone. As a follow-up to Sean's comments, I'd like to provide some additional color on the second quarter performance and our outlook. Beginning with the results in the second quarter, our results were generally in line with expectations with adjusted EBITDA and gross margins coming ahead of our midpoint of our guidance range while revenue was at the lower end. Specifically, second quarter revenue was $30.7 million. which was at the lower end of our guidance range and reflects the lower demand environment in the U.S. and makes the regulatory backdrop of ADCVD, WRO, UFLPA that Sean talked about. This revenue represents a decrease of 38% compared to the prior quarter and a decrease of 39% year-over-year driven by lower volumes and partially offset by higher ASPs. GAAP gross loss was $6.5 million or 21.2% of revenue compared to $9.3 million or 18.7% of revenue in the prior quarter. Non-GAAP gross loss is $5.4 million, or 17.5% of revenue. The margin percentage was better than our guidance range as some of the lower margin logistics revenue shifted between quarters in the Q3. On a sequential basis, the non-GAAP margin percentage was approximately flat as improved product and logistics direct margins were offset by reduced overhead cost absorption on the lower revenue levels. GAAP operating expense was $18.7 million. On a non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expenses were $12.4 million compared to $8.3 million in the year-ago quarter. This was a bit higher than our guidance range due to a $1.1 million allowance for Daltol accounts and a small amount of HX Tractor operating expenses that were not included in our guidance. The year-over-year increase is driven primarily by the same items as well as the necessary growth in staffing and other costs related with becoming a public company last year. The net loss is $25.7 million, or $0.26 per share, compared to a loss of $27.8 million, or $0.28 per share, in the prior quarter, and compared to a net loss of $52.4 million, or $0.61 per share, a year ago quarter. Adjusted EBITDA loss, which excludes approximately $7.9 million of expenses such as stock-based compensation, expense, certain consulting and legal fees, severance, and other non-cash items was $17.7 million. This was better than the midpoint of our guidance range, and the results compared to an adjusted EBITDA loss of $20 million in the prior quarter and $16.7 million in the year-goal quarter. Regarding liquidity, we generated positive cash flow in Q2 of $17 million and ended the quarter with a cash balance of $66 million. In addition, we amended our revolving credit facility during the quarter, which, among other modifications made, reduced the liquidity covenant from $125 million to $50 million through Q1 2023, providing enhanced liquidity for the company. With that, let's turn to our outlooks. We expect the third quarter represent the low watermark in terms of revenue and margin. Third quarter revenue consists primarily of in-flight legacy projects with new products largely being delayed beyond Q3 due to the module supply issues. Our gross margin expectations reflect these low margin legacy products being delivered, a higher percentage of logistics revenue compared to materials revenue, which come with lower margins, as well as the overhead cost absorption being spread across a relatively lower revenue base. Collectively, These factors flow down to adjusted EBITDA, offset to a degree by expense reduction initiatives we have implemented in light of the module uncertainty in the marketplace. Specifically, our targets for the third quarter call for revenue between $16.5 and $19 million, non-GAAP gross loss of $8.3 to $3.8 million, or negative 50% to 20%. And as you may expect, the percentage range vary more greatly at these lower revenue levels. Our non-GAAP operating expenses are expected to be between $10 and $11 million, and the adjusted EBITDA loss between $19 and $14 million. Finally, looking ahead to the fourth quarter, we're starting to see some light at the end of the tunnel. Based upon what we see today, we anticipate new wins to begin production, helping drive strong sequential revenue growth. Importantly, we expect significant gross margin improvements to be delivered in Q4, moving into positive territory, as these new products will incorporate our latest DTV initiatives, coupled with having the lower margin legacy products behind us. Specifically, our expected targets for the fourth quarter call for revenue between $75 and $90 million, again, representing a significant rebound from Q3 as our new product wins begin production. Gross margins are anticipated between 9% and 14%, with our new products delivering enhanced margins relative to our historical norms. And finally, an adjusted EBITDA range of plus or minus $3 million. With that, we'll conclude our prepared remarks, and I'll turn it over to the operator for questions. Operator?