Greetings, ladies and gentlemen, and welcome to Array Technologies Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . It is now my pleasure to introduce your host, Cody Mueller. Thank you. You may begin.

Good evening. And thank you for joining us on today's conference call to discuss Array Technologies, Third Quarter 2021 results. Slides for today's presentation are available on the Investor Relations section of our website, arraytechinc.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 because of other factors discussed in today's earnings press release, the comments made during this conference call, or in our latest reports and filings with the Securities and Exchange Commission, which can be found on our website, arraytechinc.com. 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 third quarter press release for definitional information and reconciliations of historical non-GAAP measures to comparable GAAP financial measures. With that, let me turn the call over to Jim Fusaro, Array Technologies CEO.

Thanks, Cody. And good evening, everyone. Thank you for joining our third quarter earnings call. In addition to Cody, I'm joined by Nipul Patel our Chief Financial Officer and Brad Forth, our Board Chairman. I'll start off today by providing an update on our business. Then I'll turn it over to Nipul to cover our third quarter financials. And then Brad will discuss our acquisition of STI. Turning to page 5 of the slides, Today, there are a couple of major themes that work in our business. The first, the supply chain issues that have been impacting everyone in the solar business are continuing. Panels are still hard to get in both ocean and overland freight is incredibly constrained. The result this project delays in higher shipping costs for suppliers like us. The good news is that we're seeing both suppliers and customers adapt to this new environment. Prices are starting to stabilize, albeit at higher levels. Our suppliers are charging us more and we're charging our customers more. Everyone is recognizing that longer lead times are required for everything. We're not sure how long it will take for our business to return to what it was like. But we do feel the situation is stabilizing and we are optimistic that we're getting to a place where there will be fewer and fewer supply chain-related surprises. Now importantly, despite the supply chain challenges and higher prices, demand for solar has only grown stronger. We have not had a single customer cancel an order, and all of them are reporting rapidly growing project pipelines in every geography. U.S. demand remains extraordinarily strong and we think there is additional upside if President Biden's plans for renewable pass Congress. We continue to monitor this very closely. Both the direct pay option for the…

Thanks, Jim. Turning to slide 9 revenues for the second quarter increased 38% to $192.1 million compared to $139.5 million for the prior-year period. As Jim mentioned, the increase was driven by continued strong demand for our products, but also reflects a favorable comparison to the third quarter of last year, which had lower shipments as a result of the pull forward of orders into the first half of 2020 related to ITC step-down. It It's also important to note that we had approximately $40 million in shipments scheduled for this quarter, where due to supplier delays or logistics unavailability, we're unable to shift prior to the end of the quarter. Gross profit decreased to $9.3 million from $26.7 million in the prior-year period, driven primarily by the majority of our shipments being legacy lower-priced quarters, coupled with higher input costs for commodities and logistics to fulfill those orders. Gross margin decreased 9 -- from 19.2% to 4.8% driven by this high concentration of contract signed prior to our change in process. Going forward, legacy orders will constitute fewer and fewer of our shipments, which should result in higher gross margins. Operating expenses decreased to $25.4 million compared to $31.8 million during the same period in the prior year. The decrease was driven primarily by a $12.7 million reduction in contingent consideration expense. This expense represented earn-out payments we had to our founder, which have now ceased. Excluding contingent consideration expense, operating expenses increased approximately $6 million, which reflects higher cost associated with being a public company, as well as increased headcount to support our growth. Net loss attributable to common shareholders was $31 million compared to a net loss of $7.2 million during the same period in the prior year, and basic and diluted loss per share for negative…

Thanks, Nipul. Turning to Slide 12, I'd like to provide an overview of STI know-how. STI is a leading European manufacturer of trackers. They were founded in 1996 and began supplying trackers in 2002. They have over 12 gigawatts of trackers shipped They are headquartered in Pamplona, Spain with manufacturing facilities in both Spain and Brazil. STI produces a dual-role tracker system that has 1 motor for every 2 rows. This low-cost architecture is well-suited to irregular terrain and regions with low wind and/or snow load requirements. STI enjoys leading positions in both Liberia and Latin America. It's a top 5 global player. It's a top 3 player in Spain, and it's a number one player in Brazil. It's currently owned by the founder's family and a Spanish private equity firm. And as you can see on the right, this business had last 12 month revenue of U.S. $413 million as of September 30th, with growth gross margins in the 30% range EBITDA of $45 million and EBITDA. Margins of 21%. That has a headcount of approximately 200 people. And as of September 30th, had a backlog in awarded order value of approximately 416 million. Slide 13, we believe that this transaction provides a number of key benefits. It creates the largest solar tracker company in the world with leading positions in the United States, Latin America, and Europe. STI is the leading provider of trackers in Brazil, where it's significantly larger than the next closest competitor. It has a long-standing relationship with many important global developers. STI provides reliable products with a dual role architecture that is ideal for certain international markets. In addition, we have the opportunity to drive incremental sales demand by offering Array DuraTrack products through STI sales channels. Array and STI has very little overlap…

Thanks, Brad. Turning to slide 19, I'll provide a brief summary of the terms of the transaction. We are acquiring STI for EUR570 million subject to certain adjustments based on the amount of cash, debt, and certain other items that STI has. A consideration is a combination of cash and stock. The final purchase price will be determined at closing, but we currently expect the cash component will be approximately EUR 351 million, which is $407 million at current FX rates and we will issue 13.9 million shares of Array common stock for the seller. The shareholders of STI will also be eligible for an earn-out of up to EUR 55 million in cash depending on the amount of EBITDA that STI generates in 2021. The amount of earn-out is determined by taking the difference between the actual EBITDA that STI generate and EUR 47 million and multiplying by 4 with a maximum payout cap that EUR 55 million. The earn-out payment, if any is made, will not be paid until sometime in Q2 2022 after the 2021 audit is completed. We are locking up the Array stock that sellers will be receiving in the transaction for a period of 6 months with 1 exception. If at any time after 3 months from the closing date, our stock is up more than 20% and stays there for 10 business days, we are obligated to file a registration statement covering 20% of the shares to sellers received in the deal. The other 80% stays locked up for the remainder of the 6-month period. Importantly, it's a very small amount of stock that the sellers are getting. There are 3 of them, and the largest of the 3 will be less than a 5% shareholder in Array. The closing of the transaction…

Thanks, Nipul. I'll wrap up by saying I'm incredibly excited about the road ahead for Array. We have successfully adapted our business model to the current environment and demonstrated that we can generate bookings in line with our historical gross margins. But the domestic supply chain we have built is helping us to take market share and positions us to be an even bigger winner as U.S. content evolves into a competitive differentiator. And with our acquisition of STI Norland, we are now equally well-positioned to accelerate our international growth. We continue to build a great company, and I am more confident than ever that we will emerge from the current environment even stronger than we were before. And with that, Operator, please open the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. One moment please while we poll for questions. Our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, guys, good afternoon. Thanks for taking the questions and congrats on this STI announcement. My first question was on the STI Norland business, the margins, 30% growth, pretty impressive. Can you speak to what's been able to drive them to those margin levels which seem far superior than yours and also your peers? How sustainable is that? What's driving it? And then what sort of synergies could you maybe see overtime and could those drive the core Array business to get to those margin levels as well?

Hey Brian, it's Nipul, how are you? Yes, we're really excited about the STI deal and I think the reason that we're excited is their margin profile and they have a very good local supply chain in the regions that they operate. And as you know, with our business, it's really important to have a built up supply chain locally because there's logistics costs and just better pricing power when you have a local supply chain. So that's the reason we have that. And Brazil is a good market where they have a very good local content. We think that that's going to be help -- that's going to help us as we increase our business over-time.

Okay, and any thoughts, just high-level, around potential synergies?

Right now, from a synergy perspective, we know the 2 businesses together will have great purchasing power as mentioned. So we think those are the key synergies we're looking at initially.

Okay. Fair enough. And then just a second question, and I'll pass it on. You mentioned the Build Back Better budget bill. I think there's differing interpretations around the steel content requirements to qualify for the domestic content added bonus on the tax credit. Could you guys articulate what your current understanding is of the requirements needed to qualify for the bonus ITC. Do you need to have U.S. steel and attractor in order to qualify for domestic content or are you able to do that with panels and other hardware that don't necessarily represent the U.S. steel content? And then assuming you do need U.S. steel and trackers using U.S. steel, and this deal moves forward as written, would you anticipate that helps you on the on the volume demand side, would you potentially see better margins and pricing for your products here domestically, just wondering what the implications might be if that does go through. Thanks, guys.

Hey, Brian. It's Nipul again. I think that the way that legislation is written, it helps us because of our U.S. supply chain and that we can pull up to 90%. So from a content perspective, we think that attractor (ph) itself will likely not do it, but we will definitely be part of the -- participate and help the developer get to that content level to participate in that -- in the address to the credit. So in that perspective we do feel that our -- we have an advantage there. And as far as longer-term, we think yes, it is a competitive advantage that can help us overall and drive better margins if we are the primary company that can drive with the U.S. supply chain. So we think that helps us overall.

Okay. Fair enough. I guess maybe just a follow-on that -- onto that, Nipul. It's -- I know with the tracker being roughly 10% of the bomb, you couldn't fulfill the entire domestic content requirement threshold with just U.S. trackers, but is it you’re understanding that you need to have the tracker and the panel to aggregate above the domestic content threshold, or could you do it with other components? I guess that's just sort of clarification that we're hoping to get there.

Hey, Brian, it's Jim. It's really -- the honors is upon the developer owner of the asset and how they get there. So certainly, we provide advantage of up to the 10 percentage you're talking today. Where they get the balance is really up to them, so to the extent they source panels, U.S. or elsewhere, inverters, whatever else makes up the balance's system is really going to be up to them. That's outside of our control as we interpret it today.

Okay. Fair enough. Thanks, guys.

Thank you. Our next question comes from the line of Mark Strouse with JPMorgan, please proceed with your question.

Yes. Thank you very much for taking our questions. And thanks for all the detail on STI is very helpful. One thing I didn't see though. Can you just give a bit more color on kind of what their manufacturing footprint looks like? Is there any change to your capex light model going forward?

Hey, Mark, with respect to the capex, no change going forward. They have manufacturing presence in Brazil, as well as in Spain. That's there are two primary locations with 0 overlap with us, so we think that's another excellent opportunity for us to move forward with and going to market.

Okay. And then can you just talk about how this deal came about? What was it shopped or just any color there would be helpful?

Yeah. Great question. I mean, this is something that we management, Brad and the Balance of the Board work all the time. I'll start off with some of the key tenants that we look for with -- within M&A, and that's growth value creation, how to build that portfolio, extending our global reach, advancing technology and then most importantly, a cultural fit. And as we went through our pipeline, which we've told you in the past was fairly robust. When it came to STI Norland, check the box and we saw that as just an excellent fit for us.

Okay. Very helpful. I'll take the rest offline. Thanks.

Thank you. Our next -- in the interest of time that we ask that you please limit yourself to one question and no follow-ups. Our next question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Thanks so much, guys. You mentioned a little bit of the product synergies, but it seems like you're addressing slightly different development sites with the two products -- with the combined entity. Can you talk a little bit about the cross-selling opportunities that you're seeing already with the 2 companies combined?

Yes, Colin. If you were to look what they do extremely well is in region where there's low wind, they have a design architecture that we like in their tandem configuration. So if you look at how they -- some of their technologies surrounding their control algorithms and what we do, it's really nice bookends if you were to look at tandem versus our 32-row connectivity, and how they design for low-wind and how we designed the high-wind. So we see the 2 winds coming to the middle and really capturing significant share going forward, and that's what we talked about some of the technology synergies there.

I'll take the rest of it offline and just scan the comments for single question.

Thank you. Our next question comes from the line of Philip Shen with ROTH. Please proceed with your question.

Hey, guys, thanks for taking my questions. Great job on the strong bookings. Clearly, you're winning share here. I think some of the key drivers or your better priced steel and localized manufacturing, allowing for that more reliable delivery times. Can you talk through how long do you think your advantage on that U.S. deal and the localized manufacturing footprint last? How is your competition responding and how long do you think that lead is?

Hey, Phil, it's Jim. Well, certainly we intend to continue with our lead with domestic supply. We run 90% or up to 90% of our bill of materials through the U.S. That's substantial volume. We've got longstanding relationships. So to the extent it takes our competitor s to build those relationships, to build out volume, to get the necessary tooling, and to design in, I'll leave it to them to answer, but it's our intent to maintain that advantage and continue to build out and strengthen our U.S. supply chain by bringing in additional volumes through this acquisition. So, more to come.

Okay. Great. Thanks, Jim. And then as it relates to the cadence of revenues in '22, given some of this project push-outs due to limited module availability, I was wondering if you might be able to speak to that cadence. I see you've had that slide in the past during the IPO and so forth. But what -- I was wondering if there might be an update on that cadence, and then also as it relates to the margin slide, how much conservatism do you think you've baked into those estimates for how margins trend by period? Thanks.

Yeah. Hey, Philip. It's Nipul. So as far as the cadence on revenue, it's -- because there's not an ITC step-down, we think of that as more linear in 2022. Of course, as we've talked about in the past, the Q2 and Q3 s tend to be a little bit higher quarters because of just seasonality in the build seasons in North America. As far as that, your question, on the gross margin slide that we showed, we think there's still some things out there as far as headwinds that we're facing. So we think that the ramp that we have shown is probably a good view of the short-term, but of course, we're going to look to overdrive what we've shown here. But this is what we see right now.

Thank you. As a reminder, ladies and gentlemen, we ask that you please limit yourself to one question. Our next question comes from the line of Maheep Mandloi with Credit Suisse. Please proceed with your question.

Hey, thanks for taking these questions. Just looking at the $200 million guidance and backing in north of $68 million EBITDA composition from STI, it seems like the core business and that isn't the $120, $140 million range. Is that the right way to think about it? Just wanted to square that with prior assumptions for EBITDA generation and a raised core business. Thanks.

Yeah, generally speaking, I mean, probably we can give you a better view of the total 2022 outlook in the Q4 call as we've mentioned, but as we look at it today, that's our view of the combined business, the $200 million of EBITDA.

Thanks

Thank you. Our next question comes from the line of Joseph Osha with Guggenheim Partners. Please proceed with your question.

Hello everyone and thanks for taking the question. As you look out in 2022 in that margin guidance that you provided at the gross margin level, to what extent does that depend on passing material price increases through to you and customer, and I guess I'm trying to understand the extent to which those increases are locked in versus not locked in. Thank you.

Hey Joe, it's Nipul. So the material cost increases aren't really an impact to what we've said on here because of what we stated in Q2 with the change in our procurement and contracting process. As you recall, we locked in the commodity costs aspect of the bill of material once we've been awarded the order, which was new to our process, and that locks-in about north of 80% of the costs of what we have for that order. So that's not really what impacts that. There's obviously other costs -- logistics costs that could vary and that's what could potentially change it. But we don't think by a material amount.

Thank you.

Thank you. Our next question comes from the line of Tristan Richardson with Truist Securities. Please proceed with your question.

Hi. Good evening, guys. Appreciate all the comments and clarity on how you see margins trending, especially as legacy procurement projects are delivered. Just thinking about some of the macro dynamics you guys outlined. Does the trajectory margins assumed that some of those macro conditions abate in 2022, or is this a trajectory assuming things stay the way they are today?

Yes. Hey, Tristan it's Nipul. The way we've modeled it and shown it here is really the status quo. So we can only really look to see where we are at today and with their new contracting process, we've really de -risked ourselves for a lot of that volatility that we faced earlier in the year.

That's helpful. Thank you, guys very much.

Thank you. Our next question comes from the line of Kashy Harrison with Piper Sandler. Please proceed with your question.

Good evening, everyone and thanks for taking the question. I was wondering if you guys could dig a little bit deeper into the combined $1.4 billion order book. How much of that order book relates to 2022? And then part and parcel with that, is Q4 typically a seasonally slow or strong quarter from a bookings perspective? Thank you.

Yeah. Hey, Kash, it's an knee-pool. Generally speaking, of the order books that we've shown about 70 to 75% of that is really related to 2022. So that -- we feel really good about the momentum we have going in 2022. And as far as bookings, Q4's typically a lower booking quarter. Obviously, this year, with the strong demand that we're seeing, we may -- that may be higher, but typically if you look historically, it's been a slower booking quarter.

Thank you.

Thank you. Our next question comes from the line of Moses Sutton with Barclays. Please proceed with your question.

Hi, thanks for taking my questions. On the 350 million in new orders, first, just want to confirm that's of course, pre SDI. So that's the rate base business. And then the $350 million, how much of that is for 2022. And then just any thoughts on the cadence there in terms of the pacing. July had about a $135 million which would be maybe 500 on a quarterly run rate. So have you seen any slowdown in that pacing since July to really any thoughts there on the awarded orders? Thanks.

Yes. Sure. Hey, it's Nipul again. The $350 million of it, that's almost all of it, is in 2022 and we continue to book -- our quoting activity is still very high and we continue to have big orders booked throughout the quarter. So we still see that momentum carrying forward.

Got it. Thank you. And just one on the adjusted EBITDA, the $200 million, are you assuming any freight adjustment on that $200 million similar to the adjustment?

No, that would be our adjusted EBITDA that we're showing.

Thank you.

Thank you. Ladies and gentlemen, at this time, there are no further questions. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.