FTC Solar, Inc.

Good day, and thank you for standing by. Welcome to the FTC Solar Earnings Conference Call. At this time, all participants are in 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would like to turn the conference over now to your speaker for today, Bill Michelek. You may go ahead.

Thank you, and welcome, everyone, to FTC Solar's fourth quarter 2022 earnings conference call. Before 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 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, the company's Chief Commercial Officer. Before we begin, I remind everyone that today's discussion states forward-looking statements based on our assumptions and beliefs in the current environment and speaks 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'll discuss 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 of this metric is also included in our press release. With that, I'll turn it over to Sean.

Thanks, Bill, and good morning, everyone. As I reflect on my first full calendar year as CEO in 2022, I am proud of how the team navigated many external challenges. The year began with historically high logistics and steel costs, followed by a rather challenging regulatory market in the U.S., which, as you know, has historically represented the primary source of our revenues. The team has responded well to the challenges, utilizing the downturn to focus on what we can control, improve our competitive positioning, and emerge as a stronger company. As we close out the year, I believe we're on a significantly improving trajectory. We delivered fourth quarter results that showed significant improvement and exceeded the midpoint of our guidance on all metrics. We also continued our operational improvements, which I'll discuss in more detail. one of which includes improving our international exposure, which will allow us to take advantage of near-term opportunities while we wait to unlock our full backlog when the Uyghur Forced Labor Prevention Act, or UFLPA, constraint fully resolves. Today, I'll briefly walk through the market and operational improvement categories we've been discussing to summarize what we accomplished during the first nine months of the year and how we closed out the year on a solid trajectory in Q4. Starting at the market level and perhaps the one constant during the year, the long-term demand trends look great and continue to improve. They have likely never looked better. According to the IEA, renewables are set to become the primary energy source for electricity generation globally in 2027, accounting for about 40% of total electricity output and overtaking coal. Despite higher module pricing, Utility-scale solar is the lowest-cost source of new electricity generation in most countries worldwide and accounts for more than 60% of all renewable capacity expansion. The low cost to install, coupled with additional long-term demand drivers for solar that include existing government policies, including renewable portfolio standards and the current ITC, corporate awareness, and technological improvements, is only further enhanced by current high fossil fuel pricing, discussions of energy security in many countries, and the recent passage of IRA in the U.S. So, we have an incredibly positive market backdrop and tailwinds for long-term global growth. The one gating item required to unlock the potential within the U.S. market, which represents much of our backlog, remains solar module availability. Looking at the U.S. regulatory landscape during the first nine months of 2022, we saw ADCBD and WRO concerns transition to one remaining issue in UFLPA. In the fourth quarter and more recently, we have seen some early signs and reports of improvement. These include positive trends in trade import data, market reports of small module shipments being released from customs, some module supply agreements being inked, and optimism from some that we are getting closer to a more substantial improvement in the back half of the year. There have also been several announcements about new module capacity outside of China, which is an excellent sign for module availability in 2024 and beyond. Overall, we're hopeful that we'll see more substantial improvement in module flow later this year, but as we'll discuss, we don't need to wait for UFLPA resolution to achieve improving financial performance. From a supply chain and procurement standpoint, We started 2022 at historically high prices for steel and logistics, but have since seen improvement in both. Steel is now well off its highs, and logistics is essentially back to historical norms. Given the improvement in logistics, we have fully transitioned back to containerized shipping from the break bulk solution we had implemented to weather the high and uncertain market conditions. With that market, regulatory, and supply chain backdrop, I'll turn now to our operational improvements. As I have mentioned on recent calls, we have not stood idle through the market uncertainty and have used the time to focus on what we can control to best position ourselves for the coming recovery. One area of significant focus has been on improving our cost and gross margin profile. In the first nine months of the year, we maximized our design to value initiative allowing us to take more than 20% of the steel content out of our tracker systems. This helped us create a product cost structure that will enable double digit gross margins on future projects. We also launched a distributed generation business, which has a high margin profile and would be a positive addition to the business. We have received great interest with initial orders and a robust pipeline. In the fourth quarter, We continued our cost reduction focus and launched our design to manufacturing efforts, which aimed to ensure that our products are not only designed for constructability, efficiency, and effectiveness, but are also cost-effective to manufacture. As it relates to our product portfolio, in the first part of the year, we were quite busy with the development of innovative new products that resulted in new product announcements during the back half of the year. In the third quarter, we announced a differentiated new 1P tracker solution called Pioneer, which significantly expands our ability to serve new markets, both in the US and worldwide. This gives us more opportunities to win projects, whether it's a preference or benefit for 1P. Customer enthusiasm for our new product has been strong, and as you know, we launched Pioneer along with a 500 megawatt agreement from a top EPC. Our pipeline for Pioneer is growing nicely, and we continue to anticipate first deliveries in the second half of the year. In the fourth quarter, we announced the introduction of a new cost-effective first solar module solution for our 2P product, which filled a gap in our offering. We have already received orders for this solution and are recognizing revenue. Combined, these new product introductions expand our addressable market while also serving to bolster the non-UFLPA portion of our backlog as we continue to grow revenue. In terms of geography, we entered 2022 as very much a US-focused company in terms of revenue. However, the investments we've been making to expand our international footprint started to bear fruit early in the year. We have since received awards in four new countries, bringing the total to 10 countries with projects outside of the US. We also recorded our largest project in Australia to date at 128 megawatts. Just today, we announced that we added $240 million in backlog since early November. Of that amount, more than 80% is from international locations, including two more projects in Australia, putting us at more than 25 in that country so far. We believe our new 1P tracker will significantly enhance our ability to further grow internationally. International growth is a key focus for us, particularly with the current regulatory challenges in the U.S. I'm quite pleased to see our continued growth in pipeline and conversion to backlog. We also recently announced a U.S. manufacturing joint venture utilizing domestic steel to strengthen and bolster our domestic supply chain. With the passage of the Inflation Reduction Act, customers are now asking for quotes with U.S. local content, including projects for delivery in the latter half of this year. While we still await additional details from the government on the mechanics of the IRA, we believe this JV will be instrumental in helping us support our customers' needs in the future. For this JV, we partnered with a known existing supplier. The facility, located near Houston, Texas, will initially be focused on torque tubes and is expected to begin operation around mid-year. Turning to pipeline, in 2022, we saw robust growth and several new record levels. including the international portion of the pipeline, which more than doubled in the first nine months of the year. Today, we have again achieved new record levels in total pipeline, with the international portion now up 150% relative to the start of 2022. International now represents an increasing majority of our pipeline, and as you can see from our near-term project awards, it's expected to make up a growing portion of our revenue base going forward. further diversifying our revenue and reducing exposure to projects subject to UFLPA review. And finally, with our continued focus on expanding current customer relationships and forming new ones, our backlog has continued to grow nicely despite the constraints in the module market in the U.S. As I mentioned, since our last earnings call in November, we have added $240 million in backlog. bringing the total above the billion dollar mark for the first time at $1.2 billion. The collective results of these initiatives have led to improved financial performance as we close the year. As we progress through the year working on these initiatives, we completed shipments of our legacy lower margin products in Q3 and reached what we believe was a revenue and margin low point in that quarter, from which we expect to see improvement going forward. In Q4, our performance did improve as expected, and we came in ahead of the midpoint of our guidance on all metrics. This includes revenue that grew 58% sequentially off the low Q3 base and non-GAAP gross margin that improved from close to negative 50% to approaching break-even at negative 3.4%. Non-GAAP operating expenses in the quarter were at the low or better end of our guidance range resulting in adjusted EBITDA also coming in better than the midpoint. We are excited to see the results of our DTV and other initiatives begin to show through in a meaningful way in our results, and we see that continuing. So closing out on 2022, we have utilized the downturn to significantly improve our competitive positioning across nearly all aspects of our business. We now have a strong product cost structure on current and future projects, which puts us on track for double-digit gross margins as our revenue run rate recovers. We have a more comprehensive product line that expands our addressable market in the U.S. and internationally. We are growing and diversifying in new markets and are positioned with a strengthened supply chain. And we have a record backlog and pipeline that shows that customer adoption globally is increasing as we look ahead to a market that is not only poised to recover, but is poised with powerful long-term tailwind. As we look ahead to 2023, our focus is solidly on execution, supporting our customers worldwide, continuing to build on our progress, and demonstrating the capabilities for our improved business. We believe we can continue to show margin improvement even in a depressed volume environment, followed by much more significant improvement as module availability and volumes improve in the U.S. With that, I will turn the call over to Phelps. Thanks, Sean, and good morning, everyone. As a follow-up to Sean's comments, I'd like to provide some additional color on the fourth quarter performance and outlook. So let's begin with the discussion of the fourth quarter. Overall, I'm happy to share that we delivered results that were better than the midpoint of our guidance trends on all metrics for the quarter. First, revenue was $26.2 million. While on a year-over-year basis, revenue was down 74%, it did represent a 58% increase versus the prior quarter as we begin to build some momentum moving up from the lows in Q3. We are starting to see new production tied to both international projects as well as non-UFLPA projects moving forward. We believe this is a sign that the strategy we discussed last quarter of attacking non-UFLPA impacted projects is beginning to benefit the company. While we saw nice sequential growth in revenue, UFLPA has constrained our near-term ability to convert backlog into revenue, with the bulk of our backlog, roughly two-thirds, remaining subject to UFLPA. Now, on the plus side, our non-UFLPA backlog doubled quarter over quarter, now represents a third of our total backlog. Next, our GAAP gross loss for the quarter was $1.9 million, or 7.3% of revenue, compared to $9.5 million, or 57.4% of revenue in the prior quarter. On a non-GAAP basis, the gross loss was $0.9 million, or 3.4% of revenue, coming above the midpoint of the guidance range. Compared to our Q3 2022 non-GAAP loss of $8.2 million, or 49.8% of revenue, we were able to deliver an impressive 46-point improvement quarter-over-quarter. We were able to accomplish this due to the following. First, the legacy low-margin products we discussed in prior quarters were completed during Q3. Second, the new products we now deliver benefit from our team's efforts on the DTV front, coupled with a more normalized supply chain cost in both steel and shipping. The team is excited to see the early fruits of our labor starting to show in our results. On a year-over-year basis, we delivered improvement to non-GAAP gross loss by $6.5 million, even in the face of significantly lower revenue in Q4 2022 versus the prior period in 2021, $26.2 million this year versus $101.7 million last year. The improvements were driven primarily by improved tracker and logistics direct margins. Our GAAP operating expenses were $17.9 million. On a non-GAAP basis, excluding the stock-based compensation charges associated with the FCX legal settlement and certain other expenses, our operating expenses was $10 million compared to $9 million in the year-ago quarter. This was at the lower end of our guidance range. The slight year-to-year increase was driven by an increase in the R&D expenses, as well as the absence of credits that we had in the year-ago quarter. We continue to keep a keen eye on expenses as we manage through this period. To that end, we executed a targeted headcount reduction during the quarter, representing approximately 8% of our labor force. In addition, we continue to keep a close eye on our non-labor spend. Next, GAAP net loss is $20.5 million, or 20 cents per share, compared to the loss of $25.6 million, or 25 cents per share in the prior quarter, and compared to a net loss of 23.9 million in the year-ago quarter. Collectively, results from our improved margins and careful management of operating expense and overhead flowed down to our adjusted EBITDA results. For the quarter, the adjusted EBITDA loss was excluded approximately $9.1 million, including stock-based compensation expense, certain consulting and legal fees, severance, and other non-cash items was $11 million, better than the midpoint of our guidance range of $12.3 million. The results represent an improvement of $6.7 million compared to an adjusted EBITDA loss of $17.7 million in the prior quarter and compares to $16.4 million in the year-goal quarter. Finally, regarding liquidity, we ended the quarter with a modest use of cash and ended with $44.4 million. In addition, we continue to hold no debt on the balance sheet, have an undrawn credit revolver, as well as a $100 million ATM program, which we have not accessed to date. With that, let's turn our focus to the outlook. Based upon our current view, we continue to expect sequential revenue growth in the first quarter. We also expect gross margin to continue to show improvement quarter over quarter and cross into the positive territory. Specifically, our targets for the first quarter call for the following. Revenue between $36 and $40 million, representing 37 to 53% growth off of the Q4 2022 results. non-GAAP gross margin between $0.7 and $3.2 million, or between 2% and 8% of revenue, non-GAAP operating expenses between $10 and $11 million, and finally adjusted EBITDA loss between $10.3 and $6.8 million. And for the second quarter, we expect to see further operational improvements. Overall, we continue to believe that ingredients are in place for a very strong industrial recovery and long-term growth. The rate of recovery in our largest market, the U.S., will largely be determined by the pace of improvement for the importation of modules. Once improvements do occur at scale, we believe FTC solar is increasingly well positioned competitively to capitalize on that growth with a lower cost structure, an innovative product line, a record pipeline, and more than a billion dollars in backlog. With that, we conclude our prepared remarks, and I will turn it over to the operator for any questions. Operator?