Array Technologies, Inc. (NASDAQ:ARRY) Q4 2023 Earnings Call Transcript

Array Technologies, Inc. (NASDAQ:ARRY) Q4 2023 Earnings Call Transcript February 28, 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 Array Technologies’ Fourth Quarter and Full Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. 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, Cody Mueller, Investor Relations at Array. Please go ahead.

Cody Mueller: Thank you and welcome to Array Technologies’ fourth quarter 2023 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.co, 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 measures can be found on our website. We encourage you to visit our website at arraytechinc.com throughout the quarter with the most current information on the company including information on financial conferences that we may be attending.

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, Cody. Good afternoon, everyone. First turning to Slide three. I’ll give some highlights from our fourth quarter and our full year results. We delivered a record year across almost every metric we track. We exited the year with an order book in excess of $1.8 billion on strong new bookings momentum in the fourth quarter. On a global basis, our book-to-bill ratio was 1.7 with Q4 bookings coming in at approximately $600 million. The sequential growth in bookings and resulting increase of our order book further highlights the improved pipeline we discussed last quarter and is a testament to our winning product and services portfolio, including energy optimization software and severe weather mitigation solutions that enable an attractive levelized cost of energy for our customers.

I will speak more broadly about our order book and what we are seeing in the market in a few moments. Revenue for the full year came in at $1.58 billion, which was above the high-end of our latest guidance range. Full year adjusted gross margin was 27.3% inclusive of approximately $9.3 million, a 45x benefit recognized to the P&L in the fourth quarter. This represents a year-over-year increase of 1300 basis points and is a record for Array as a public company. Our performance here is largely demonstrating the structural changes we have successfully executed around how we price, how we procure materials, and how we design for value optimization in our new product introductions and existing products alike. With the 2023 proof point in hand coupled with the upside from the 45x manufacturing credits, we are confident in our ability to deliver annual adjusted gross margin percentage in the low 30s in 2024.

Adjusted EBITDA more than doubled to $288 million, which was the highest year on record by over $100 million and marks the second consecutive year where this metric has more than doubled. On a full year basis, we generated $215 million of free cash flow, which was $100 million higher than the outlook we provided at the beginning of 2023. We strengthened the balance sheet throughout the year and ended with $250 million of cash on hand. And we now maintain a historically high level of liquidity at $424 million when factoring in our undrawn revolving credit capacity. This leaves us well-positioned to fund growth, while continuing to deleverage our balance sheets. Now please turn to Slide four, where we will discuss our capacity, domestic content and 45x.

From an operational standpoint, we expanded our domestic and international supplier base, and now have more than 30 gigawatts of deliverable capacity in the U.S., and total capacity nearing 50 gigawatts across the globe. At the same time, with our intense focus on supply chain resiliency, we added additional sources of supply for several critical components throughout the year. We did this while simultaneously achieving both lower inventory levels and record on time delivery performance. Our strong execution and proactive build out of our domestic supply chain and manufacturing capabilities allows us to achieve domestic content levels in the mid 80% level and higher depending upon project configuration in high volume, not only on a one-off basis.

This level of scale will be critical as the domestic content requirements become better understood and more relevant to our customers over time. As many of you are aware, in December, the IRS published additional guidance on the 45x manufacturing benefits that largely confirmed our previous understanding of the eligibility of arc torque tube. In late 2023 and early 2024, we successfully negotiated agreements with key suppliers around domestic content incentives associated with our torque tube. This resulted in us earning $50 million a 45x benefit in our financial statements in the fourth quarter, which included a catchup for certain volumes delivered earlier in 2023. Approximately $9 million was recorded as a benefit to our P&L, and the remainder was recorded on our balance sheet and will be recognized to the P&L throughout 2024.

Unfortunately, the 45x guidance published in December did not further clarify what would be considered a structural fastener. We continue to expect there will be additional benefits we can monetize for a number of our components under the definition of structural fasteners, and we are actively working multiple initiatives to obtain clarity regarding specific eligibility. In parallel, we’re continuing to negotiate the economic split with our supply base for parts we do not manufacture internally. It’s our belief that the inclusion of these structural fastener components was the spirit behind the initial framework and the intent of the legislation. We will provide additional updates on future calls as more information becomes available. I’d like to now transition to our product software and service offerings.

During 2023, we strengthened our product services and software portfolio with the launch of two new tracker platforms, the expansion of our SmarTrack software to provide automated Hail and Snow response and the rollout of our new service offerings. This is all on top of numerous other improvements that have driven down our installed cost and improved our customer experience. Turning to Slide five, as I mentioned earlier, I would like to provide additional color around current market dynamics and our orderbook. After gaining meaningful market share in 2021, and 2022, we chose not to pursue business in the first half of 2023 that would not generate a threshold level of financial return or would require us to assume elevated risk. As we entered the second half of 2023, we were seeing the fruits of our structural cost enhancements, and the implementation of more real-time processes around logistics and commodity costing come online, which allowed us to achieve lower price points, while still sustainably achieving our margin expansion goals.

With our structural cost enhancements firmly in place, and the market moving away from the short-term high-risk pricing environment, we saw our pipeline triple and our win rate increase, which are both important leading indicators of bookings and order book momentum. This was evidenced by the $900 million of new orders cumulatively received in the second half of 2023 and a 1.7x book-to-bill ratio in the fourth quarter. As we look into our order book, we continue to see a consistent quality of customers as we have historically. The percentage of our executed contracts with Tier-1 customers has remained over 80% for the last two years. That being said, we’re also seeing new customers enter our pipeline. Our order book stands at over $1.8 billion as of year-end, excluding any BCAs that don’t have a named project and/or defined start date.

The projects that we willingly walked away from in the first half of last year, coupled with the increase in project delays and push outs are disproportionately impacting the first half of 2024 revenues. As it resulted in our orderbook being more weighted towards the second half of ’24, and into 2025, then historically would be the case at this point of the year. As it relates to project push-offs that we highlighted on our last call, we are still seeing several industry-wide factors that are impacting project start dates, particularly in the first half of 2024. The most common issues, we are hearing around permitting and interconnection, supply chain delays on long lead time, equipment, and timing of financing. It’s also important to point out that while we are seeing these delays fairly well represented across all types of customers, utilities included, there are a handful of our customers who are not seeing an impact and projects are moving forward in a more normalized manner.

Looking ahead, we are guiding full year 2024 revenue between $1.25 billion and $1.4 billion, representing a 16% decline at the midpoint versus 2023, on relatively flat volume. We expect ASPs will be down year-over-year, primarily due to declining commodity input costs. However, we will again see adjusted gross margin expand to the low 30% range and expect to see year-over-year growth in both absolute adjusted EBITDA dollars and as a percentage of revenue. Our revenues will be more backend loaded with just under 30% of our revenues expected to materialize in the first half of the year, reflecting the order book dynamics I spoke about earlier. Q1 will be a trough, with revenue in the range of $135 million to $145 million, followed by continued sequential growth for the remainder of the year, and overall year-over-year growth returning in the second half.

Kurt will now provide additional color on 2023 results and our 2024 outlook. I’ll then give some concluding remarks before opening the line for questions. Kurt?

Kurt Wood: Thanks, Kevin. I would like to start off by providing some additional details around the fourth quarter and full year 2023 results, and ask that you turn your attention to Slide seven. As Kevin mentioned, 2023 was a record year on many fronts, and we were able to deliver a highly profitable year despite the headwinds that came our way via project push-ups. In the fourth quarter, we delivered $342 million in revenue above the top end of the guidance range provided on our Q3 earnings call and now in approximately 15% from the prior year period. We shipped 3.3 gigawatts in the fourth quarter, which was roughly flat versus the prior year. At the heart of the year-over-year decline in revenue with lower ASP driven by a reduction in global commodity cost.

As a reminder, when commodity costs move up or down, we generally pass the movement on to our customers. Putting the revenue by geography, the 342 million was comprised of $278 million and $64 million from the legacy Array and STI units respectively. We saw fourth quarter adjusted gross margins expand by 520 basis points on a year-over-year basis to 25.7%. inclusive of the $9.3 million of 45x benefit to cost of sales realized in the quarter. Our ability to expand margins are relatively flat volume and lower revenue is directly attributable to the structural changes Kevin highlighted earlier. Our Q4 adjusted gross margin was negatively impacted by approximately 250 basis points due to one-time entries in our STI segment related to inventory adjustments.

Absent those anomalies, STIs adjusted Q4 ’23 gross margin would have been in the mid-20s as expected. I’d now like to expand further on the 45x benefits. In the fourth quarter we recorded a $50 million benefit to our financials relating to torque tube, with 9.3 million included as a reduction to our cost of goods sold and 40.6 million treated as a gross up to the balance sheet in the form of an increased to both other assets and other current liabilities. The entire benefit relates to certain volumes delivered during 2023 but based on the structure of the contract with each vendor, and the timing when the contract was executed $41 million of the amount we are entitled to will not materialize on the P&L until 2024. As Kevin noted earlier, we expect to see additional benefits in future periods relating to our 2023 volumes, based on how eligibility for structural fasteners is determined.

Operating expenses of $54 million were down approximately 11% from $60.5 million during the same period of the previous year. This decline was driven by an improvement in the amortization expense relating to certain intangible assets from the STI acquisition. The decrease was partially offset by a couple of one-time items that combined for nearly $5 million of expense in the period, including a reserve for value added tax or VAT, due to a ruling received from the European tax authority in the fourth quarter on the refundability of certain VAT items, and a reserve uncertain outstanding overdue receivables. Both of these adjustments were related to items that occurred prior to 2023. Net income attributable to common shareholders was $6 million, compared to a loss of $17.3 million during the same period in the prior year.

And basic and diluted income per share was $0.04, compared to basic and diluted loss per share of $0.11 during the same period in 2022. Adjusted net income increased to $31.4 million, compared to adjusted net income of $15 million during the fourth quarter of 2024. And adjusted basic and diluted net income per share was $0.21, compared to adjusted basic and diluted net income per share of $0.10 during the prior year period. Finally, our free cash flow for the period was $88.6 million versus $93.5 million for the same period in the prior year. Kevin spoke to many of the full year metrics, so I’ll just briefly cover these again on Slide eight. Full year revenue was $1.577 billion, representing a 4% revenue decline versus 2022. This decline was primarily attributable to a reduction in ASP resulting from the lower commodity pricing on relatively flat volume and the change in the Brazilian ICMS benefit treatment.

As a reminder, we discussed on the last call how in prior years, the impact of the Brazil value added tax, or ICMS, was treated as an added to revenue and starting in 2023, it was transacted as a reduction to cost of sales. For 2023, this amounted to $23.2 million less revenue relative to the 2022 comparison. Adjusted gross profit increased to $430.1 million from 234.1 million in the prior year. Again, driven by the expansion of our baseline gross margin from the structural enhancements we made to our business and to a lesser effect, the 9.3 million a 45x benefit that was recorded in the fourth quarter. Operating expenses decreased to $201.4 million from 230.9 million in the prior year. The lower expenses were provided primarily related to $46.9 million decrease in intangible amortization expense related to the STI acquisition, partially offset by higher headcount related costs to drive process improvement, operational execution and product innovation.

Net income attributable to common shareholders was $85.5 million, compared to a loss of $43.6 million in the prior year. And basic and diluted income per share was $0.57 and $0.56, compared to basic and diluted loss per share of $0.29 in the prior year. Adjusted EBITDA more than doubled to 288.1 million compared to 128.7 million in the prior period. Adjusted net income increased by approximately 3x to $171.3 million, compared to $57.3 million during the prior year and adjusted basic and diluted net income per share was $1.13 compared to $0.38 in the prior year. Finally, our free cash flow for the year was $215 million compared to $130.9 million in the prior year, excluding the $42.8 million legal settlement proceeds received in the third quarter of 2022.

We more than doubled our free cash flow year-over-year and ended the year with approximately $250 million of cash on hand, and total liquidity of $424 million factoring in capacity in our undrawn revolver. Throughout the year, we paid down $87 million of our debt, including nearly $75 million of principle on our term loan, and we ended the year with a net leverage ratio of 1.6 excluding our preferred shares. Now I’d like to go to Slide nine where I will discuss our outlook for 2024. I want to begin by noting that we will be providing guidance as one consolidated Array segment going forward, rather than breaking out Array and STI. This change is reflective of how we are managing our business following the successful integration of STI and streamlining of recollective processes were helpful, we will continue to give regional and product commentary for additional color in our business performance throughout the year.

Additionally, starting in 2024, we will be reporting all metrics on an all end basis inclusive of 45x benefits. 2023 was a transitional year and warranted a specific call out or the benefit given the number of uncertainties around its treatment. In future periods, we will call out any material differences in our assumptions, including those resulting around the inclusion of structural fasteners within the 45x benefit, to the extent they’re all ready. We expect full year 2024 revenue to be within the range of $1.25 billion to $1.4 billion. As Kevin discussed earlier, there are a number of dynamics driving our outlook. Primarily, we are forecasting a reduction in ASP of low double-digit percent year-over-year, driven by lower input costs, our ability to lower price due to our lower cost structure, and the pass through of a portion of the 45x benefit to our customers as we strive to lower the overall cost of solar generation for the industry.

From a linearity perspective, the year will be more weighted towards the second half. Q1 will be the trough with revenues at approximately $135 million to $145 million before we begin to see sequential growth in the second quarter, which then continues in earnest in the second half. To that end, we are expecting year-over-year revenue growth in the second half of the year, when compared to the second half of 2023. Inclusive of 45x benefits from our torque tube, we expect our adjusted gross margins to be in the low 30s for the year. As you would expect a quarterly basis this may fluctuate slightly based on product mix, project mix and fixed cost absorption. For adjusted SG&A, we expect approximately $33 million to $35 million a quarter, which is slightly down from a dollar standpoint compared to 2023.

We expect adjusted EBITDA to be within the range of $285 million to $315 million. This guidance is driven by the improvement in profitability from a structural cost enhancement enhancements that drive efficiency and scale as well as the 45x benefits to our torque tube. At the midpoint, this represents a four percentage point increase in adjusted EBITDA and a 430 basis point improvement in adjusted EBITDA margin year-over-year, marking the third consecutive year on both dollar and percent of revenue expansion. For adjusted diluted earnings per share, we anticipate a range of $1 to $1.15, which represents a 5% year-over-year decline at the midpoint. This decrease is largely due to an effective tax rate increase related to a change in tax treatment of the ICMS benefit in Brazil.

Previously, this benefit was tax exempt, but will now become subject to the federal Brazil taxation beginning in 2024. As such, we expect our effective tax rate for the year to be between 26% and 28%. We expect preferred dividends will be approximately 14 million on a quarterly basis of which approximately 6 million will be the cash or PIK portion and the remaining will be the amortization of the discount. We expect free cash flow to be between $100 million and $150 million in 2024 which is inclusive of our estimate of the cash received during the year from the 45x torque tube benefit. I would point out here that a large portion of the expected cash benefit will occur later than the P&L benefit due to the timing of the payments from the IRS.

Embedded in our free cash flow forecast is a CapEx assumption of $25 million to $30 million. Now I’ll turn the call back over to Kevin for closing remarks.

Kevin Hostetler: Thank you, Kurt. I want to again highlight our record 2023 financial performance. The structural enhancements we made to our cost structure, and the strong top-line momentum we are seeing for the second half of 2024 and into 2025. We made a lot of progress as a business over the last few quarters and are confident that this will lead to sustainable and profitable growth as we continue our journey. I’m very proud of what our team accomplished in 2023. And I want to take a moment to thank our hardworking employees for all of their dedicated efforts. We will now open the call up for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Mark Strouse with JP Morgan.

Mark Strouse: I wanted to start with the 2024 outlook and the revenue decline. I fully appreciate kind of the first half of ’23, the being more selective on higher margin projects that created a bit of a hole that you needed to fill. Just trying to compare what we’re hearing today to what we heard on the 3Q call though, as far as the project delays or there continued delays in those projects that you were seeing back then or there incremental delays, just anything you can do to kind of help me compartmentalize what’s happening here. Thank you.

Kevin Hostetler: Thanks for your question, Mark. This is Kevin. Yes, relative to the project delays, what we’ve seen is the continuing delays and push outs of projects for many of the same issues that we talked about earlier on the call. So I’ll highlight them again, but certainly some related to interest rates and financing, and some confusion around the Tax Equity transfer rules. There’s still lack of clarity around the IRA. And we still as I’m engaging our customers, still hearing of orders sitting on the sidelines waiting for better clarity around the overall domestic content added to the ITC. What we’re hearing more of now than we have previously are really about supply chain issues. And that’s really related to shortages of long lead time items of switches transformers, and the one that keeps coming up as being very acute is on high voltage breakers.

And these are placing interconnection queues at risk and we’re hearing about that throughout now. That is not ubiquitous, there are certain customers and utilities that were able to safe harbor, lots of electrical equipment. And we’re finding that those are the ones that seemingly are moving forward with projects now unabated, those that have a huge supply of those electrical components in particular, that fit their design criteria. And last, permitting delays, long queues accentuated by the dramatic increase in solar and solar plus battery. So in many municipalities, we’re getting used to doing solar projects, the addition of the battery storage to sites, and we’re seeing that increasing as a percentage is creating again, confusion and permitting delays.

Really the same set they’re continuing on. And what we’re seeing in the order book and how it translates to the order book is that customers are beginning to bake those delays into their order book. And that’s when we talked about in our prepared remarks, of a higher proportion of orders that are coming now where they’re getting themselves a couple of extra quarters for that work to begin as they solve some of these issues.

Mark Strouse: Okay. And then, Kurt, a couple of quick questions on the 45x here. Are you able to today, are you planning in 2024 to provide kind of what the gross margin is excluding 45x just so we can get a sense of kind of what your structural margin improvements that you’ve been talking about or and then second, the low 30 is outlook for 24. Does that include the 41 million of catch up from 2023?

Kurt Wood: Great questions. We’re still sticking to our structural margin in the mid 20s percent range. We think that we saw that in the fourth quarter as well, if you take out the one-time items there that we were saddled with. And then, yes, the low 30s does take into account the 40%. And you got to remember where, it takes into a couple of things, our margin takes into our cost enhancements that we’ve done that allow us to lower the price and still maintain our margin profile that we want. It takes into account the 45x credits that we’re talking about here. And it takes into account certain passthrough of the 45x, that will pass along to the customers, a new deal that we signed going forward. So it’s got all that in. What it doesn’t have in there, is any additional contracts that we may sign.

And in our prepared remarks, we talked about structural fasteners and what might be included in there. So that would be upside of those materialize, as well as any other deals that we negotiate with our vendors going forward. And we don’t want to give specific because obviously, that puts us at a disadvantage when we’re negotiating some of these things.

Mark Strouse: Okay, I’ll take the rest offline. Thank you.

Operator: Our next question comes from the line of Christine Cho with Barclays.

Juan Gutierrez: Yes. Hey, guys, this is Juan for Christine. Just one quick one from me. What sort of bookings are waiting on the sidelines? You showed this chart where your high probability pipeline tripled since 4Q ’22. So I’m wondering what actually needs to happen for this to be converted?

Kevin Hostetler: Yes. It’s a great question. So what we typically see momentum in our business is, you go from overall pipeline meeting pipeline that’s down in that 25% range to when it becomes over 50%, it becomes the high probability pipeline, that so we’re waiting on, in some cases, an EPC to be named. In other cases, it’s still competitive, even at 50%, there may be a portion of that, that we’re still competing with one of our peer companies to get that business. But what we measure is that trend of high probability pipeline, then once it goes from 50 to 75, that’s when it begins to convert to verbal orders. So that’s really the trend. So what we look at that trend is the overall what’s coming into the funnel, what’s getting through the stage gates in the funnel, in terms of quality of that order, and our position to win that order.

That’s where it gets into the high probability. So that’s really an indication of the momentum we’re seeing in the business of a tripling of that high probability pipeline is very significant to us.

Operator: Our next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Unidentified Analyst: [Cameron Walker John] [ph] from BofA for Julien. Quick one for me. And so they kind of tie together just asking about the tandem. First, on the backlog, can you speak a little bit, I appreciate the commentary around some of the customer delays and things of that nature, interconnection permitting things like that. Are you seeing any project churn in the backlog, any projects coming out of backlog as a result of some of these delays? Whether those projects are, perhaps being sold to others? Or what have you, at the customer level? And then at the same time, just U.S. International dynamics in 4Q, and how those kind of play out in 2024?

Kevin Hostetler: I’ll certainly take the first one, I’ll let Kurt talk about the specific Q4 bookings. So look, we have only, when we put a project into our backlog, we’re pretty sure that that product — project rather is going to go forward. It may be delayed. But they we’ve only we modeled this out actually, in the last few months, we’ve only ever had two projects pull out of backlog and get cancelled, certainly, that’s domestically. Internationally as you do some of the smaller projects, and the Brazilian forgiveness stays a little bit different to that. But I’ll broadly speak to our North American backlog, and that’s only two projects ever. We are in fact seeing some projects get sold. Some developers are coming in and taking advantage of the fact that others are having supply issues.

And they’re coming in and refinancing and moving those. And in some cases, we’re benefiting from that in terms of, some of the developers doing that work or for lack of a better word, friends of Array, and we’re picking up some additional orders and they’re converting it from other suppliers to Array as they do that business. So far, we’ve not seen any meaningful cancellations at all. And in fact, we’re benefiting from some of the secondary market, emerging from these projects getting bought and sold prior to completion.

Kurt Wood: And for the second part of your question on the U.S. and international dynamics, you’ll see when we’ve posted our K out in the next day or so that we’ve got about in Q4 75% U.S., 25 percentage of our revenue was domestic or was international. As we look into the first half of the year, as we talked about the first softness in the first half, obviously, that’s hard to overcome. So we do expect overall, a decline in U.S. volumes year-over-year, first half will be down, second half will be up, as we talked about, and then we’ll see a little bit more meaningful growth on our international locations, including Spain and Brazil.

Operator: Our next question comes from the line of Brian Lee with Goldman Sachs.

Brian Lee: Hey, guys, good afternoon. Thanks for taking the questions. I’ve had a couple, I apologize, I jumped on late. So if you did cover these apologize in advance. On the gross margin guidance, last year, you were talking about mid to high 20s, ex-IRA? Are you expecting the same level in 2024 ex-IRA? Are you actually targeting gross margin expansion into the 30s ex-IRA, maybe just give us some of the breakdown of the overall margin guidance and what’s embedded in there for kind of core margin versus what IRAs adding this year?

Kurt Wood: On that one specifically, I say you got to break it up to U.S., we definitely expect to be in the — higher than what we said on the call, which was consolidated 25%. So kind of mid to high 20s for the U.S. And then obviously, mid 20s, for the international units combined, that’s where you get free, any 45x or IRA benefit. And then on a consolidated basis, the low 30% range for gross margin is an all-in number inclusive of the benefits from any new incentive program that’s out there.

Brian Lee: Okay. Fair enough. That’s helpful. And then I know, it sounds like there’s already been a decent number of questions, and you’re providing some thought process around why the revenue guidance on paper looks like it’s softer than what the backlog you ended the year with. What kind of entails. So maybe just taking even a further step by, you talked about a flat volume view for the year, it seems like peers are growing faster. And some of the utility scale forecasts for the U.S. are all up double digits 10%, 15% this year. So maybe just kind of walk through for you specifically, what’s different, is it a customer mix, is it share, just kind of trying to understand and reconcile the build to the flat volume view for you this year. And after last year, where you already had some push outs and just expectations for 2023. So just trying to reconcile a bit here.

Kevin Hostetler: Yes. I think that’s a great question. I’d love to answer that question. We have seen a lot of notes recently about market share changes and shifts. And let me start by reminding everyone that this is fundamentally a large project business, where a few projects can have an outsize impact on either the shorter-term windows of share, which is why really, in a general practice, we don’t overly focus on quarter-over-quarter market share statistics. I’ll remind you in my prepared remarks, I tried to remind you that not too long ago, we were discussing the dramatic market share gains Array secured in both 2021 and 2022. So that being said, let me talk about a few items I think about relative to the market share change.

First, we’ve discussed previously, and in our prepared remarks that there was a period of time in early ’23 where our primary objective, and my role here was to help demonstrate a margin recovery for the business and build a backlog of high-quality for the business. We’ve talked about this before that in doing so, we brought in less projects into our pipeline to actively pursue in the first half of 2023. We temporarily ceded a portion of projects to our competitors, based on what we saw was dramatically lower pricing and terms that we felt were just simply too risky for our business. These projects are now being delivered in the first half of ’24. We see that and in retrospect, we have yielded a bit more on some of these orders and still here are committed mid 20s margin, perhaps we could have.

But the reality is, our focus was on improving our pricing to our customers without sacrificing margins to do this. And we were so focused on methodically attacking our cost structure. We focus really on increasing our global strategic sourcing. We really did a deep dive review of our internal engineering and design standards. And we invested in the last two years, nearly $11 million in improved IT systems and cybersecurity systems that would inherently improve our visibility to our bill of materials, our cost structure, our logistics operations, for every project that we do. In engaging with our customers, it was really important to our customers that the cost reductions that we were able to provide them were structural in nature. And therefore they could count on these into the future as they realign and do business with Array.

And to be clear, we’re not out there trying to buy business. And that’s evidenced by our committed 2024 expanding gross margins. I’m confident that if you go out and pull the marketplace today, you’ll find the structural cost reductions are becoming very apparent to our customers. And they’re making a difference in our win rates on projects, we’re actually seeing win rates substantially increase from that pipeline and follow we talked about earlier. Since completing the first two planned initiatives for cost reduction, we’ve seen a marked improvement in the high probability of pipeline that we noted in the presentation. And it’s nearly three times larger than at the end of Q2. And that’s what drove the really strong Q4 bookings on the back of this.

Earlier this month, we completed our third structural cost reduction initiative. This one was all about emphasizing automation, and optimization of some of our engineering calculations that were all about reducing our customers’ cost through optimizing the foundations they would be required to, to purchase and put into the ground. So again, that’s not when that reduces our cost. But we’re focusing beyond our cost into our customers’ costs and identify ways that we can reduce their costs. The second thing is, we continue to see project timing be negatively impacted by the factors we talked about. And one of the first questions that we got to ask, the supply chain issues permitting, interconnect delays, IRA clarity, timing of financing all of the above.

And then, last, I would just note that we saw strong bookings in the fourth quarter. But one of the things we are seeing, as I indicated just a minute ago is, we’re seeing projects get rewarded for longer time periods than we have historically. Our customers are now building in a couple of quarters of buffer. And what they’re doing is locking in capacity with us. I think this is really our customers desire to buy more time to clear some of the project timing challenges. But obviously, this limits our ability to fill in more near-term revenue than we would have historically. Like others in our industry, we keep a portfolio of lots of projects. And historically we’ve been able, we would be able to work with our customers to push and pull projects in, when one we push out further.

Simply stated right now that option is less given that the kind of cycles that we’re seeing in our stated backlog. I think that to just put a topping on this. I don’t see any real dislocation, or any indication of a longer trend, there’s not been a killer app or any major new product that diminishes the strength of our products, and services and software portfolio. There is a short-term dislocation based on what we previously discussed. I can tell you in the last three months, I’ve been in front of over 20 of our largest customers. And we continue to receive great feedback from our customers on our current product, software, service offerings, as well as high marks for many of the operational and business improvements we’ve been making over the last two years.

And most recently, I can tell you, I’m receiving very positive feedback on our increasingly competitive pricing position. So that’s where we were driving that early, Q1 results. And that’s why we’re very confident calling it the trough. We’re seeing that that backlog and pipeline momentum. And we’re certainly going to lean into that as we build the back half of our year here.

Brian Lee: Appreciate all that color. And then, maybe just last one, if I could squeeze in taking all that into account. I mean, I don’t want to put words in your mouth, Kevin, but it sounds like first half of the year, maybe you’re because of all the circumstances you just outlined, you’re growing the market but then back half the year back to like being in line with market growth trends, if that’s the way to read it.

Kevin Hostetler: I think it would be maybe even better in the back half and then how you’ve left and if we just simply look at the win rate percentages. I think we feel really good about the direction of our business at this point.

Operator: Our next question comes from the line of Maheep Mandloi with Mizuho.

David Benjamin: Hi. This is David Benjamin on for Maheep. I was just wondering if you guys expect to see the same sort of gross margin breakdown in the first half versus the second half, despite the delta in revenues.

Kevin Hostetler: It’ll be roughly, to say, obviously, slightly lower probably in the first half, given the lower scale, but not on a material basis, we expect it to be fairly constant. However, I would no doubt that as your project mix and everything else, you get moved quarter-to-quarter, you saw that in 2023 and past years, but we should be relatively consistent, slightly better in the second half than the first half.

David Benjamin: Thanks very much. And is there also any of that due to work? Can you talk a little bit about like ASP, between international business and U.S., you mentioned cost downs, are you applying those to customers, both domestically or internationally?

Kevin Hostetler: One of the great things about the product base that we have is that applied universally, obviously, there’s some new geographic differences you have to do for compliance. But generally, the cost savings we do will pass on to customers, or will be in our product to help the margin and/or ASP there. And each margin has a slightly different dynamic, we approach it on a portfolio basis, as you can imagine, as receding new markets, you might go in with a little bit more aggressive pricing, and you will have more established products. But as long as you’re looking at portfolio basis, you’re generally covered and that’s how we do it. Try not to give too much color on a region by region specific just for a competitive and customer related info. We don’t want to give that secret sauce out, so to speak.

Kurt Wood: But the one thing I will note is that on the international there’s obviously not a pass through of the 45x benefits, clearly.

Operator: Our next question comes from the line of Donovan Schafer with Northland Capital Markets.

Donovan Schafer: Hey guys. So I want to ask about the H250 tracker. I know I think when you initially — you really focusing on the U.S. actually at the moment. So when you initially launched, you kind of had a push-pull design I think like a lot of the other two-row tracker companies do. I know you switched to I think we saw Replus. You have the kind of more elevated two-row link to rotary because that was kind of required for the U.S. So has that like — if we can get an update on the roll out there and what was the backlog, the large increase in backlog they had in this quarter, if you could give us the mix of H250 versus the DuraTrack or OmniTrack or if you could just give us some, whether it’s more quantitative or cause it has risen to a level of materiality and moving a needle and is that part of what drove that increase? Anything that helps us understand the nexus of that with the conversations about prices, ASPs and such.

Kevin Hostetler: So what’s really been happening, Donovan, that the whole point of us launching the H250 was to have a tracker at a lower price point to be able to compete with those super capex sensitive customers, and there’s a handful of them, right, that are out there. And what we found that’s really building is that as we’ve reduced our price on the core DuraTrack, that is putting a lot of pressure on those competitors to have those price sensitive. And our win rate against those products using DuraTrack has really gone way up. So what we’re seeing is customers are preferring the DuraTrack at the lower price point far better than saying, hey, let’s go and chase the H250 up against this other competitive platform, right?

So that’s what we’re seeing. We still have a large backlog of quotes. On the H250, we’re still pursuing that. And we think that’s really important because as those competitors, and some have publicly even noted that they’re getting pricing pressure to reduce their price, that’s where the H250 will come into play. But what we’ve seen thus far is a big uptick in the sale of DuraTrack versus those competitors that we targeted the H250 at. And while you’re on it, let me address OmniTrack as well. We have began getting orders, real orders for OmniTrack. And as we’ve said all along, we expect that to kind of be at that 10% to 15% of the overall share domestically versus DuraTrack. And I think that’s really beginning to play out in kind of that volume range, if you will.

So the orders in hand, I think we’re already nearly just over half of our anticipated volume for this year already. So that’s beginning to translate pretty good for us at this point. And what’s more important is that’s translating to our customers in that it’s a very small price premium to the customers and that’s really related to the fact that you may need a couple more foundation or posts to utilize that, but it’s far more offset by the amount of grading savings to our customers. So net-net, that OmniTrack is providing the customer several percentage points of improvement in a project even relative to DuraTrack. So we’re seeing that traction and I think that traction is going to accelerate as more of the EPCs work with civil engineering companies and learn how to design in that product as we go forward.

Operator: Our next question comes from the line of Joseph Osha with Guggenheim Partners.

Joseph Osha: When you discussed some of the push-outs and timing issues that you’ve seen, one of the issues that didn’t come up is cost of capital in terms of the things your developers are struggling with. I’m wondering if in the course of your conversations, that is something that has come up as a factor in it. If you don’t mind also, I do want to quickly follow up on the previous question. Is it your intention still to take H250 and drive it into the lower ASP segment of the market or is, am I hearing a more fundamental shift in your strategy vis-à-vis that and to attract? Thank you.