Array Technologies, Inc. (NASDAQ:ARRY) Q1 2023 Earnings Call Transcript

Array Technologies, Inc. (NASDAQ:ARRY) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings and welcome to Array Technologies’ First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Cody Mueller, Investor Relations at Array. Please go ahead.

Cody Mueller: Good evening and thank you for joining us on today’s conference call to discuss Array Technologies’ first quarter 2023 results. Slides for today’s presentation are available on the Investor Relations section of our website, arraytecinc.com. During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website.

We do not undertake any duty to update any forward-looking statements. Today’s presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company’s first quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Kevin Hostetler, Array Technologies’ Chief Executive Officer.

Kevin Hostetler: Thanks Cody and welcome everyone. In addition to Cody, I’m also joined by Nipul Patel, our Chief Financial Officer. Let’s begin with Slide 3, where I will provide some highlights of our first quarter results. The first quarter was an incredibly strong one for Array. Revenue, profitability, and free cash flow were all better than expected as the maturity in our operating system allowed us to take advantage of the opportunities that arose in the quarter. On the revenue side, we benefited from a minimal number of weather delays during the period, which, coupled with a more dynamic demand and logistics planning process, allowed us to overdrive revenue to $377 million, representing a 25% growth year-over-year. This revenue performance was at a gross margin of 26.9%, which is a striking 1,810 basis points better than the first quarter of 2022.

Nipul will discuss in more detail the breakdown of the margin performance this quarter a little later. But this provides another important proof point of the maturation of Array’s operating system. It’s also important to note that our results this quarter do not include any increased pricing for domestic content, or lower input costs from the 45x manufacturing credit. These remain a potential upside once more fully defined. The improved gross margin and volume increase led to an impressive $67 million and adjusted EBITDA, which is up from $700,000 in the first quarter of 2022. And finally, we delivered $42 million of free cash flow in the first quarter as we saw our cash conversion cycle improve 38 days from the first quarter of 2022. This performance leaves us with $148 million of cash on hand and an undrawn revolving credit facility.

Moving to the next slide, as I normally do, I want to take some time to walk through the current demand environment, as it is constantly evolving, given the dynamics around IRA. This quarter, I will also couple that conversation with how we anticipate these market dynamics to evolve as we move into 2024 and beyond. I believe it is a key to draw this distinction because of much of what we are seeing right now is transitory as we shift from a pre IRA world into the post IRA environment. We have covered much of this for a number of quarters, so it shouldn’t come as a surprise. 2023 is a year where the industry is setting the foundation for the application of the IRA benefits, as the value of the benefits and incentives included in the bill are substantial.

This is going to lead to a boom in solar installations over the next 5 to 10 years. And we are already seeing the beginnings of that pipeline string. We have seen discussions move from individual product awards to portfolio awards, from 12-month discussions of project pipelines to multiyear multi-gigawatt pipeline discussions. To be clear, the overall demand landscape is incredibly strong. However, while the size of the benefits is undoubtedly a good thing, it does create an understandable incentive for our customers to wait for clarity before establishing their supply chains in a manner that would maximize their IRA incentives. This has affected our 2023 in two specific ways. First, we have seen a slowdown in the conversion of pipeline orders, which is the driving factor behind the reduction in the order book of approximately $300 million from the prior quarter.

As a reminder, we do not include an order in our order book until a specific project is awarded to Array and a start date is identified. And second, we have seen some projects get pushed out to the right as customers are giving themselves more time to evaluate the IRA provisions. As a specific example, one of our largest projects slated for 2023 has been delayed by over a quarter so that the financier and developer could better evaluate how to maximize the return with all of the various IRA provisions. This project will get built and will use an Array tracker, but we will now report less revenue in 2023 than previously forecasted. Expectedly, these two dynamics limit the upside potential and our previously communicated revenue range as that would have required an improvement in the project timing cadence here in the United States.

It is important to note, as we look outside of the U.S., we are pleased with the progress of our business. Our international markets are progressing as expected, and we remain excited about both the near and longer term growth potential. So despite these near-term volume headwinds, we will remain disciplined in our product technology and pricing strategy. We will continue to sell our value on projects that are a good fit for our product and service offerings and align well with our desired contracting terms. And we won’t chase projects that don’t meet our profitability criteria just for revenue sake. We believe this is a prudent approach, because we don’t want to be reactive to short-term disruptions when our current path has incredibly well positioned for how we believe the market will develop.

Meaning once there is IRA clarity, we will see the top of the funnel projects accelerate through the order process, and project delivery timing will return to a more normalized cadence. This will lead to increased orders and it will be easier to predict project timing. As we discussed last quarter, this will also mean an expansion of the geographical sites and weather conditions that trackers will be asked to account for. This is why our full launch of the OmniTrack and the STI H250 trackers that complement the DuraTrack coupled with our expanding SmartTrack software offerings will be such key growth enablers for us. Finally, we expect all of this to be met with increased profitability as we finally gain an understanding of the value, timing and P&L location of the various IRA benefits.

While we obviously are disappointed in the amount of time it is taking to get clarity, we will continue to execute on the things we can control to ensure we remain incredibly well positioned for the next phase of solar adoption, which is a theme that I will dive a little deeper on as we move to Slide 5. As I mentioned before, the performance this quarter was not by accident. Array has undergone a long path of improving all aspects of the way it does business. Numerous incremental improvements the company has made add up and allow us to not only minimize risk, but also to capitalize on opportunities as they arise. To point out some of the key areas where we’ve made these incremental improvements, and also, now that I’m just past my one year anniversary, provide an update on what some of our new focus areas will be as we look forward.

This quarter marks our sixth consecutive quarter of gross margin expansion. This continued expansion was anchored by the change to our contracting framework, where we minimize the risk of fluctuating commodity prices. Since the initial rollout of this process, we have continued to improve upon it. We have added more strategic suppliers, increased our visibility to longer term cost inputs, and have created opportunities to find additional cost productivity in places like logistics and indirect spending. We will continue to find ways to improve this process. But we believe, as constructed now, it offers us a competitive advantage. This quarter, we also saw the margin of STI improve by over 1,900 basis points from the same quarter last year. If you remember, last year at this time, we outlined the issues that we needed to address to return the margins to historical norms in that business.

They included improving their purchasing and logistics processes, simplifying their product portfolio and rationalizing their offerings related to construction services. A year later, I’m happy to report that we’ve made significant improvements in each of these areas. The purchasing and logistics processes at STI have been aligned with Legacy Array and now allow for better predictability, reduced working capital needs and cost improvement. As previously noted, we have also significantly reduced the amount of construction work that we do in this business. We now are only performing this activity where we have proven experience and a clear ability to do so and where it is strategically critical for our customers. While we were met with some unexpected challenges early in our integration, in mid-year 2022, we brought onboard additional resources and experience in acquisition integration.

And now I couldn’t be more pleased with where we are today. We have also driven functional excellence through people, process and tools. Every functional area has the proof points. But a key example is the 400 basis point improvement we have seen in our past due percentage year-over-year that was driven by improved demand in logistics planning, as well as better operational execution within our own manufacturing facilities. This reduction in past due is important because it affords us the opportunity to accelerate shipments at the end of the quarter to meet customer pulling requests. We have also focused intently on delivering product offerings that meet our customer needs. I spoke to this in more detail last quarter. But it’s worth reemphasizing that the introduction of the OmniTrack and the STI H250 in the U.S., combined with an expanded SmartTrack offering, greatly expands the solutions we can offer our customers.

Finally, as I mentioned, when I first came to Array, it was critical for us to focus on our working capital efficiency to return the company to a position where it is consistently producing free cash flow. In the last 12 months, we’ve driven numerous initiatives that have had meaningful impact. First, we have introduced an inventory optimizer tool, which uses data and analytics to ensure that we have the right amount of inventory on hand, which has greatly minimized the need to carry unnecessary safety stock. But just in case, high levels of safety stock were a key reason for our high cash conversion cycle during much of 2021 and early 2022. Next, we have partnered with our suppliers to introduce more standardized contractual terms. These terms not only include flow downs of key ESG requirements, but also offer more consistent payment term provisions, which provide for better predictability of our cash outflows.

And lastly, we have made some simple but impactful changes to our AR processes. These includes simplifying contractual billing terms to eliminate confusion with our customers over billing milestones. We have also done a better job of integrating our collection processes with our other customer facing organizations, eliminating the collection silos that has led to improve customer engagement and collection timing. Also the focus we’ve placed on these areas has led to a 38 day improvement in our cash conversion cycle and approximately $300 million of immediate liquidity between our cash on hand and revolver availability. With all the work we have done, we certainly know that the job is far from finished. As we move into the next phase of our growth, I have listed some of the new focus areas that we will be driving in the quarters to come.

First, we have invested in digital transformation and process improvements. We recognize that this has led to a temporary increase in the amount of SG&A that we are spending but we very much view these as investments to drive efficiencies and improve scalability in the future. So, as we move forward, we will focus on executing on this operational leverage and reducing our spending as a percentage of revenue. Next, as our profitability and cash flow have improved greatly. We need to evaluate and update the market on our capital allocation strategy. We will provide a more detailed plan in the quarters to come. But for the time being, we will focus on improving our financial metrics, and identifying opportunities for strategically paying down our debt.

We are intensely focused on ensuring a flawless rollout of our new product offerings. In the last year, we’ve created a robust product management organization. And under their guidance, we will ensure that once we fully launch into the market, we are prepared to deliver at scale. And finally, we have all hands on deck to ensure we strengthen our internal controls environment. We’ve already made key changes in third-party partners and have added significant resources and tools throughout the organization to drive improvement. This is very much a company-wide effort, and we are committed to driving excellence in this area. And with that, I will turn the call over to Nipul for a more detailed discussion of our financial results and an update to our 2023 guidance.

Nipul Patel : Thanks, Kevin. Please turn to Slide 7, revenues for the first quarter grew 25% to $376.8 million, compared to $300.6 million for the prior year period, driven by both an increase in the total number of megawatts shipped by 10%, from 3 gigawatts to 3.3 gigawatts and an increase in ASP of 14% from 9.9 cents per watt to 11.4 cents per watt, resulting from improved pass through pricing to our customers. The $377 million in revenue reflects $305 million from the Legacy Array segment and $72 million from the STI segment. Gross profit increased to $101.2 million from $26.6 million in the prior year period, due to a combination of higher volume and improved gross margin. Gross margin increased to 26.9% from 8.8%. Gross margin for the Legacy Array business was 27.4% and the STI business had gross margin of 24.9% in the quarter.

The margin of 26.9% exceeded our expectations, as we benefited from the favorable project mix and from one time benefits from lower than expected logistics costs. On the project mix side, we have discussed previously that we manage a portfolio of projects. Projects can range in margin depending on a number of characteristics. And we are constantly balancing projects on the upper and lower end of the spectrum. In the first quarter, we happen to deliver on a number of projects that were on the higher end of our portfolio from a margin perspective. As you would imagine with any portfolio, we do not necessarily anticipate this favorable mix to continue throughout the year as we will see this mix revert back to the mid. Additionally, we had a gross margin lift from one time logistics benefit as ocean and domestic transport rates dropped faster than expected.

We do expect this dynamic to normalize in future quarters as we have reduced our cost assumptions in our customer quotes to match the new rate environment. Operating expenses decreased to $53.7 million from $64.9 million during the same period in the prior year. Decrease is primarily due to lower STI acquisition related amortization expense in addition to STI integration costs in the first quarter 2022 that do not repeat in the first quarter of 2023. Net income attributable to common shareholders was $13.6 million compared to a net loss of $37.5 million during the same period in the prior year. And basic and diluted income per share was $0.09, compared to basic and diluted loss per share $0.25 during the same period in the prior year. Adjusted EBITDA increased to 67 million, compared to approximately $700,000 for the prior year period.

Adjusted net income increased to $37.3 million compared to adjusted net income of approximately $500,000 during the same period in the prior year, and adjusted basic and diluted net income per share was $0.25, compared to adjusted diluted net income share per share of less than $0.01 during the same period in the prior year. Finally, our free cash flow for the period was $41.9 million versus a use of cash of $52.5 million for the same period in the prior year. The increase was driven by both improved profitability, and the improvement in our cash conversion cycle of 38 days that Kevin previously mentioned. Now, I’d like to go to Slide 8, where I will discuss our updated outlook for 2023. For the full year of 2023, we now expect revenue to be in the range of $1.8 billion to $1.9 billion, a reduction of $50 million from the top end of our original guidance.

Kevin mentioned, this is merely a reflection of the ongoing delays in the IRA guidance, which have caused projects to push out of 2023 and into 2024, and a temporary slowdown in orders. However, despite the reduction to the top end of our revenue guidance, given the first quarter tailwind and the strength of our margins in our order book, we are still holding our original adjusted EBITDA and adjusted EPS guidance. The remainder of the planning assumptions we previously provided remain intact. Although with the reduction in our revenue expectations, we will obviously look to moderate our SG&A spend on the lower end of the range that was previously provided. And finally, looking forward to the second quarter we expect a revenue increase between 15% to 20%, as we hit a seasonally higher delivery quarter.

But we do expect consolidated gross margins to average in the low 20s for the year as we normalize our project mix, and do not have the benefit of the onetime logistics increases. Now I’ll turn it back over to Kevin for some closing remarks.

Kevin Hostetler: Thank you, Nipul. While the delays in the IRA guidance have obviously caused some short-term disruption, we are encouraged by the engagement we have seen from legislators and administrative officials as they work to find the right language. Taken as a whole, we will take 9.5 years of a well written set of regulations as opposed to 10 years poorly written. So we are not losing sight of the bigger picture and continuing to position ourselves in the best possible way to take advantage of the growth to come. We look forward to updating everyone as we all learn more in the coming months. And with that operator, please open the line for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Brian Lee with Goldman Sachs.

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Operator: Our next question comes from the line of Alex Kania with Wolfe Research.

Operator: There’s time for one last question. Our last question comes from the line of Derek Soderberg with Cantor Fitzgerald.

Operator: That concludes our question-and-answer session. This does conclude our teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.