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Array Technologies, Inc. (NASDAQ:ARRY) Q1 2024 Earnings Call Transcript

Array Technologies, Inc. (NASDAQ:ARRY) Q1 2024 Earnings Call Transcript May 10, 2024

Array Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Array Technologies' First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only. 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 Sheppard, Investor Relations at Array. Please go ahead.

Sarah Sheppard: 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.

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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 the statements made today. We refer you to the documents we file with the SEC, including our most recent Form 10-K for a recent 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 forward-looking statements to conform these statements to actual results.

I'll now turn the call over to Kevin.

Kevin Hostetler: 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 3, I'll start with key highlights from our first quarter and some company-specific updates around our operational capabilities and product portfolio. We generated $153 million of revenue, slightly above the high end of the range we provided on our February earnings call. Adjusted gross margins came in at 38.3%, inclusive of a one-time $4 million benefit stemming from the 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 torque tube. 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 4, 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 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 time frames 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 total 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, and 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 trends 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 issue 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 AD/CVD 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 US back in meeting our clean energy deployment and manufacturing goals.

One advantage of Array's offerings in this uncertain regulatory environment is the flexibility of our passive planting solutions, which can be adapted to fit virtually any module type for 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 AV CDD 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 form was overwhelmingly positive in the event with the success across the board. Finally, I'd be remiss if I did 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, utilized Array-tracking technology.

The report side of 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 investments. We are 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 H250 product, which incorporates valuable elements from our flagship DuraTrack offering, including our taped articulated driveline. Our $2.1 billion order book already includes several bookings for this latest version of the H250 in both Brazil and Europe, and we look forward to driving further value to our customers through our enhanced product features and capabilities.

An aerial view of a solar panel farm, its panel incremented tracking the sun's path.
An aerial view of a solar panel farm, its panel incremented tracking the sun's path.

Turning to Slide 5. We recently hosted US Secretary of Energy, Jennifer Granholm, Senators Heinrich and Ray Luján, Senior 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 time frame. 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 6. We've introduced a few exciting hardware and software offerings this quarter.

First, we officially launched our patented Haile Alert Response, which is a groundbreaking set of software features designed to autonomously protect solar assets for haile damage and is currently available and backward comparable for use on our DuraTrack and OmniTrack systems. The Hail Alert Response system leverages fast weather prediction algorithms to pre-emotively stop Solar Trackers before an anticipated Hail events. 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 in Fort Bend County in Texas, which resulted in some sites being subject to three to four-inch size 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 confirm that operators of those four sites successfully utilized our Hail Response capabilities to Storm commission solar panels at the optimal 52 degree angle in advance of the storm reaching the sites. We are happy to report our Storm 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 Array 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 hailstorm angle and is another example of how we provide an attractive ROI for the asset owner and help mitigate risk.

Turning to Slide 7. We wanted to highlight the recent work we've completed to educate and promote market participants around the benefits of our Patented Passive Wind Stow technology. This work extends out the 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 in Array Tracker with our Patented Passive Wind Stow capabilities and the other site utilized a competing tracker technology with Active Stow Technology. Overtime, the customer noted that the Array project consistently experienced better energy production and the customer asked for our help and articulating why. Our engineering team developed an innovative solution to low and simulate Patented Passive Wind Stow algorithms to determine the resulting energy losses from Stow events using High-Resolution Actual Wind Data.

With this model, which was verified by an independent report by DNB, we proved the Passive Stow can have more energy generation compared to Active Stow in medium-to-high wind regions. Specifically, the study shows 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 Wind Stow facility operating in a high wind zone would create a net present value as high as $10 million over a three-year period. That's about half the entire cost of the tracker or $0.05 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 safe by design. Active Stow systems on the contrary, rely on Software Algorithms and External Wind Senses. This technology can easily trigger unnecessary stowing or potentially fail to show 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 stow technology. We have made a summary of this report publicly available and encourage you to go to the product features page within the Products & Services section of our website at arraytechinc.com to access it.

Kurt will now provide additional color on the Q1 '24 results and our 2024 outlook. I'll then get some concluding remarks before opening the line for questions.

Kurt Wood: 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 Q1 '23, 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 torque tube. 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. GAAP net loss attributable to common shareholders was $11.3 million, compared to a GAAP net income of $17.2 million during the same period in the prior year. And basic and diluted loss per share was $0.07, compared to basic and diluted income per share of $0.11 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 $0.06, compared to adjusted and diluted net income per share of $0.26 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 regards 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 tariff. Part of those mitigation plans may include prioritizing projects designed with models sourced from manufacturers that would potentially 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 ADCVD 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 for 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 for our full-year expectations. Now, I'll turn the call back over to Kevin for some closing remarks.

Kevin Hostetler: 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, with a very healthy order book of $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. We'll now open the call up for questions. Operator?

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