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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