Array Technologies, Inc. ($ARRY)

Welcome to the JPMorgan TMC conference. My name is Michael Fairbanks, I cover clean energy and power infrastructure at JP Morgan. Glad to have Array Technologies here Neil Manning, President and Chief Operating Officer. Neil, maybe if you could just get us started and give a one-on-one overview of Array and what you're all about.

Sure. Thanks for having us here this morning. I'm here joined by Nick Strevel, our Chief Product Officer; and Sarah Sheppard Director of Investor Relations and Array Technologies is a leading provider of utility-scale solar tracking technology. So that's a bit of a mouthful. So maybe let me break it down little bit. So solar trackers do a number of important things for utility solar plants. The tracker technologies, first and foremost, hold the solar module structurally in position. But then solar trackers then move the modules and orient it to the optimal sun angle throughout the course of the day to optimize energy performance and energy yield overall. And this is really important as for developers and utilities are developing their business plans. It's important that they maximize the performance of the modules that they're putting forth as part of the power purchase agreements or PPAs. And so trackers are a really important part of that, and Array Technologies has been in the industry now for several decades and ultimately as a leading provider in the space. Now solar trackers do another couple of things beyond optimizing the performance of solar plants. So the tracker technologies can increase energy yield of our solar module by upwards to 25% over a fixed [ sold ] solution that you may see in much smaller installations. So it's important to know that tracker technology is the predominant utility scale chosen source of -- for mounting in the United States in many places around the world. Now in addition to optimizing the energy yield, it's also -- trackers also do a number of important things as part of protecting the modules. So the solar modules, obviously, are made from glass and are inherently fragile. So solar trackers also will protect modules during inclement and extreme weather events, including hail, wind, snow and also during the suboptimal conditions when it comes to cloudiness or shading. So trackers do a number of important things around protecting the modules and optimizing the modules overall. Now what Array does via our DuraTrack platform is a number of important things that are very differentiated from a market perspective. We have a patented technology called Passive Wind Stow that ultimately protects the modules in a way that's very different. It's patent protected and very different than what other providers do in the market. Now when the wind reaches a certain wind speed, it's important that the trackers protect the tracker technology itself and also the modules and go into a defensive position called stow. Now the array solution, which was invented by our founder, ultimately uses a patented clutch technology that puts the stow position in a manual kind of passive case where it doesn't require any active equipment or any technology to do so. It does so without regard for anything other than the wind speed. Alternative position or solutions using kind of more active algorithms and technology that may be coming from off-premise, rely on sensors and other positioning to do so. Now the difference with the array solution that's really important for people to understand is that because we don't require outside source, we actively only put the row into stow that requires it and sees the full effects of the extreme weather and wind and the rest of the solar array will stay in optimal tracking position and optimal performance and energy yield. Separate to that, the rest of the -- only the panels will stay offline and the rest of them are online energy producing. Now alternative solutions ultimately will take more modules offline than necessary because they can't predict the direction of the wind coming in specifically because they're relying on third-party information technology. So they won't have the same level of energy yield that will be coming offline for a much longer period of time. Now with that, they'll lose performance and yield. So we worked with a third-party company called DNV several years ago to do a study, and they determined over the course of a 30-year lifespan of a utility solar tracking plants, we'll see from an array solution up to 4% increased energy yield, which really means a lot for the utility and the developer over the long-term course of the solution. so there's a number of things that Array has done innovatively and technologically to maximize performance in energy generation from a utility solar plant. And our technology, as I mentioned before, is built on the DuraTrack product line. DuraTrack has now been in the market for a number of years. And ultimately, we've been able to extend that product line as customer requirements have changed and morphed and evolved over periods of time. Early on, the original solar plants that are being deployed, often were fairly flat, but there are certain leveling that would take place called cut and fill. But that ultimately, those flatter parcels eventually became all used up and ultimately, developers, utilities have to find alternative locations to deploy tracking technology in solar plants. And so terrain following and working with rocky soil conditions became really important. We brought OmniTrack to market to support those needs. Since then, we've also brought solutions such as SkyLink over the last couple of years, which eliminates the need for trenching, has wireless capability and a smaller footprint that makes it ultimately more adaptable to smaller parcels along with things like Hail XP. Hail can be particularly damaging for solar utility-grade solar plants particularly, where you see in areas of Texas and Oklahoma and elsewhere, we may see Extreme hail, hail that could be 2 to 3 inches in diameter. And so working with our customers and insurance providers, we developed Hail XP, which has a more acute angle of stow to help protect and minimize impact from extreme hail events. The DuraTrack platform does very well in hail events more broadly. But when you have extreme events of 2 to 3 inches requires a more tailored solution at times. And all of this is then controlled by our SmartTrack software that optimizes using AI algorithms, the overall performance of the solar plants on a day-to-day basis, but also then in times of inclement or extreme weather certainly protects the solar array as well as it optimizes it. So it's great to be here. It's great to talk about Array. And hopefully, this gives you a little bit of idea of what we do from a solar tracking and how it comes into play for an overall solar plant standpoint.

Great. Yes. So obviously, a lot of innovation in the space. Can you maybe talk about some of the things on the horizon maybe this year or these things that you guys are working on?

Yes. So we -- just in our last earnings a couple of weeks ago as part of our Q1 results, we talked about one of the new platforms we're bringing to market called DuraTrack D2S. So now I mentioned a few minutes ago about some of the differentiating aspects and characteristics of the DuraTrack platform. Internationally, markets are a little bit different. And we acquired a company a few years ago called STI Norland. And they had a 2-row tracker technology that they are deploying primarily in the Spain and Brazil markets. We have worked, obviously, in those markets now and as we're working to grow more and more in EMEA and Latin America, we spent time with customers doing [ voice of ] customer events and spend a lot of time looking at what could be best used to meet their needs. And we determined that a 2-row architecture could be optimal for customer needs in international markets. So we developed the D2S platform, which is a derivative of DuraTrack and it takes the best of the DuraTrack technologies and then puts it into a 2-row format and has all the same advantages for extreme weather events, passive wind stow, backtracking diffuse and snow alert response. So it's really important that, again, we're differentiating on our passive wind stow technology that's patented. We're the only solar tracker company in the world that has this capability. And so D2S builds upon this and it's really custom tailored for international markets overall. So we're really excited about that.

Maybe on M&A, can you characterize the M&A landscape today? And then maybe talk about the integration of APA. I think it's 9 months in now.

Yes. So M&A certainly remains a key area of interest for Array. We've talked very openly about our balance of system strategy, our under the module strategy, and we certainly are looking to bring integrated solutions that make things easier for customers on the design and deployment side and ultimately drive cost effectiveness and efficiencies along the way. So ultimately, we do believe that the industry is consolidating over time, and we certainly are always as part of that, looking to expand how we can support customers in making things easier for them on the upfront part of planning and also during the deployment process. So now just touching on the APA acquisition. We closed on acquiring a company called APA last August. And I could just say that, hey, we're happier today about that acquisition than we were at the time we even closed. The integration is really, really well. We talked about it a little bit during our Q1 earnings call. And ultimately, what APA does is they make foundation solutions, along with they have portfolio of fixed tilt solutions as well that broadens the portfolio for where we can apply our expertise solar domain. And now one of the things we talked about that we're really excited about is that APA's first quarter order book grew by over 50% sequentially quarter-over-quarter. And that was also with a sharp increase of 100 megawatt-plus opportunities. So across both the legacy fixed-tilt solutions and also with A-frame. Now what's really interesting for the audience to hear today is that the fixed-tilt business, which is historically the bigger part of the portfolio for APA is showing great momentum in 2026. And a lot of this is driven by data center deployments. Data centers, in particular, have a preference for fixed-tilt solutions because they basically want to have zero management and maintenance. They just want to set it and forget it from an operational perspective. So ultimately, APA is a great indicator of what we're seeing on the AI and data center front.

Great. Maybe just on continue with technology and innovation. What is -- can you talk about your AI strategy internally at Array and how the company is leveraging AI?

Yes. So AI is really a key part of how we're looking at managing the business internally and also externally moving forward. So I joined Array about 3.5 years ago. Kevin Hostetler, our CEO, joined about a year before that. And since that time, we've really been on a journey of driving operational effectiveness and efficiencies across the organization. And now over the last quarters, AI is very much central to that strategy overall. Last year, I onboarded a new leader to drive our AI strategy. And we're really looking at the foundational architecture within our current systems and then looking at prioritizing areas beyond that where we can come over the top or on a day-to-day basis to improve effectiveness and efficiencies. So just one example of that overall is that we have a program that we call AI champions. So we've designated individuals and leaders from every functional part of the company, whether it be finance, supply chain, sales and sales operations. So we have about 12 of these overall and the representatives and [indiscernible] from their respective function about how they can take and drive and leverage AI to drive more efficiency within their overall function whether it be by leveraging agents and driving specific automation tasks or other more sophisticated opportunities to drive efficiencies and costs out of the business So one really interesting program we have now. So we're looking at things from not just a day-to-day perspective, but also the large, more transformative opportunities as well, what we refer to as the larger boulders. And we're working with a top-tier AI partner and an integrator on really reimagining our design and quotation process for customers. At times, it could take 7 to 10 days to respond to a particular customer request given the size and complexity of these projects overall. And what we're looking to now is to drive that down from 7 to 10 days down to sometimes just a matter of hours. But what's more important than that is not just being responsive to customers, but because we can now do this in a much more effective and efficient manner as this program rolls out, we go back to customers and not just respond to what they requested, but then also give them opportunities to optimize your request in other ways and say, "Hey, what are you looking to solve for most effectively? Are you looking to drive to your lowest CapEx solution? Are you looking to maximize your energy yield? Are you looking to maximize utilization of this particular parcel? So not only can we respond specifically to the ask that they came back with or that they made upon us, but we can then come back with options and solutions and scenarios to give them ability to optimize their requests in ways that they hadn't even thought of previously. So it's going to allow us to be far more consultative in nature, and we're really excited by just one -- this is just one program we have in flight right now around AI operationally and then we're certainly also looking at it from a new product development standpoint as well as it relates to our next-generation controller technology to help drive ultimately more insights and actions and abilities for owners and operators to understand real time what's happening with their solar plants and help them drive efficiencies and effectiveness overall. So we're very much looking at AI as a true transformative capability, both operationally and internally, but also then the best helps our customers, both the product and from a server standpoint.

Great. And you touched on this a bit earlier, but could you talk some more about the impact of AI data center power demand on the business and then maybe differentiating between behind-the-meter front-of-the-meter, what you're seeing in the marketplace?

Yes. So ultimately, we are seeing, obviously, demand as it relates to AI and data centers, but also as part of the broader insatiable demand for increased energy across U.S., not only driven by AI and data centers, but also by the electrification of industry. So we're certainly seeing -- we all see ultimately the challenges from an energy supply and what's happening now with the impacts from the Middle East. And ultimately, we do believe that solar is very well positioned and Array as part of that dynamic to be very well suited to be key supporter and solution provider as it relates to solving the energy shortages that we see, not just in the United States, but now around the world. And that's specifically for a couple of reasons. Solar is the lowest cost to deploy technology and also is the lowest cost and quickest to deploy overall. So whether it be the continuing evolution of data center demand growth, electrification of industry, electrification more broadly via autonomous vehicles, it's going to be -- Solar is uniquely positioned at the center of that solution set overall. Now for Array, we really believe that this provides long-term structural support and demand for our solution suite. Now the timing of this demand, obviously, can ebb and flow based on other factors as well, including interconnection queues and permitting and those types of things. But ultimately, we're really bullish over the long term demand for solar just based on the structural demand for energy and then how well positioned solar is to meet those energy needs.

Great. Order activity has been really strong in the last two quarters. I think 2x book-to-bill order book of $2.4 billion. Can you talk about that momentum in the business? And then maybe just about order quality and customer quality in the book?

Yes. So hey, we're really encouraged and excited by how the order book has progressed over the last quarters. We talked in our most recent earnings at $2.4 billion is a record order book for us. And it's really driven by a couple of factors overall from a quality standpoint in addition to just the overall size. To be clear, we also are driving a higher domestic mix within that order book. And it's important, we note that for a couple of reasons. One is that average price points and selling prices in the United States for solar are higher than you generate or see elsewhere around the world. Ultimately, that then drops through to a higher profit pool here in the United States. So more domestically oriented order book indicates greater profit opportunity overall. Now International is a key part of our business as well, and we'll probably talk about that a little bit. But ultimately, a high domestic order book is a real indicator of a strong order book quality overall. And also a strong Tier 1 representation. So whether it's utilities and really high-performing developers. And the reason why that's important is that there tends to be a little bit less volatility in our project pipelines. So having a high domestic mix along with a strong Tier 1 customer representation is really important coupled with the increasing representation for our new products of the portfolio in our order book as well. So we also talked about in our earnings for Q1 that over 50% of our order book is now made up of our new products that we've launched within the last 8 quarters. That's really, really compelling because it shows that our innovation is making traction with customers, and customers are pulling through and demanding the new technologies and capabilities we're bringing to market. So that's a great ability for us to continue driving innovation on the front end because we're seeing that traction that's pulling through into the order book, and we really are excited by what this means for our customers as well as our prospects moving forward. One other important note is that we also talked about 80% of our order book does convert over the next 6 quarters. So this order book is not generated for deals out in 2028 and 2029 or beyond, these are real projects with names, with project time lines, with purchase agreements that ultimately will convert over primarily in the next 6 quarters. It's not specific that every project hits exactly on schedule given a number of factors that may take place. But generally speaking, we feel really good that 80% of the order book will pull through in that time line. And it just speaks to the momentum and the return on investments you're seeing from a new commercial front end standpoint. We spent a lot of time building up our commercial capabilities in the last 4 to 6 quarters. We brought in industry experts to help drive that, and particularly around technical selling. We talked quite a bit over the last few minutes around the different types of features and capabilities that Array brings to market that can be quite typically oriented and complex from a selling standpoint. And so we brought in industry experts to help define the value of that and quantify it in terms that customers can put into their modeling, into their power purchase agreement calculations, so they can make sure that they understand the yield and improvements that our technologies are bringing. So having that technical sales ability is really, really important as well. So we're just really excited by the momentum in the order book and ultimately, the prospects moving forward.

Great. Could you touch on the international piece, just what the strategy is today?

Yes. So international is really important. So I mentioned a few minutes ago, we acquired a company called STI Norland Back in 2021. STI Norland is headquartered in Spain, operated primarily out of Spain and Brazil. And those are great markets. Historically, they've been among the top 5 in solar markets globally. But for -- in the last couple of years for reasons of energy saturation and curtailment, both of those markets have slowed down. So we've been driving a diversification campaign as we maintain our homes in those markets overall. Now we're being really selective about this as well. It's important, as I mentioned before, because the U.S. is the predominant profit pool from an overall market and industry standpoint. We want to be very selective about where we diversify internationally and not try to be all places for all sake and referring to what our CEO, Kevin Hostetler, will refer to as [indiscernible]. For us, it's not just about deploying everywhere oftentimes in what can be sometimes commoditized markets internationally. The U.S. operates with kind of 3 top tier providers. So it's a fairly protected IP moat for our market. International markets are quite different where you may have 8 to 10 market participants or more in given geographies and that drives oftentimes fierce price competition, particularly from lower-cost Asian competitors. So when we target international markets, we're very disciplined to look at locations that have a full appreciation for the technical differentiation that we bring. So areas with tougher soil conditions, topographies that may not be even that may be well suited for our OmniTrack solution, extreme weather locations, and also areas where our -- we can domesticate supply chain. We've been very effective over the past years in certain countries and certain markets to be able to take what is oftentimes a very diverse international supply chain in custom tailoring it for a particular market. So in our Q1 earnings, we talked quite openly around the progress and excitement we have for Turkey. They have a great appreciation for differentiation that we bring via DuraTrack and also in South America, in Colombia and Peru, we highlighted with the press release right before earnings, a project called Lupi in Peru, that actually is being deployed at 5,000 meters or roughly 15,000 feet. And so when you think about the complexity of that, it's one of the highest solar installations for utility-grade solar in the world. And you think about the complexities not just from a soil condition standpoint, but also from just an installation and supply chain perspective as well. So where Array really differentiates itself from others in the market is around those tough deployments, extreme weather conditions, and we are really target countries customers who have a need and have a desire for our solutions that can meet those requirements because ultimately, there is a differentiating price point and margin opportunity that comes with that as well.

Great. really strong 1Q gross margin in the high 20s. How should we think about margins from here? And what are the -- what would you characterize as kind of the levers for expansion beyond '26?

Yes. So margin certainly has been a big -- we're very excited by the Q1. We printed a 30.7% gross margin on an adjusted basis driven by a couple of things. Certainly, one was on timing. We had some pull forwards that we always maintain the ability from a supply chain perspective to meet customer requests. If they need to shift projects from a timing perspective, we can pull them in when appropriate. So that was part of the Q1 kind of overdrive on that front. Also, an additional domestic mix, as I mentioned previously, domestic comes with a higher margin opportunity. So that drove part of the Q1 performance and also great execution by our supply chain and engineering teams on the cost-out programs that we drive on a quarter-over-quarter on an annual basis as well. There's also some one-timers sprinkling in there for Q1. Recognition of 45x tax benefits that were rolled over from 2025 and also a tariff reimbursement from the government that was a onetime effect as well. So that was really what I'd kind of underpin the first quarter. Just a couple of notes that I think are important and helpful for people to understand. As the year progresses, overall, international will be an increasing amount of the mix. So obviously, that will come into play, which is why we reiterated our gross margin guide overall for the year, even with the outperform in Q1. But then to your point around the longer-term kind of structural opportunities for margin expansion, there's a number of things that we're particularly excited about on that front beyond 2026. Ultimately, when we think about product productivity, driving the effectiveness of our new factories with APA and with Array in our Albuquerque facility. It's allowing us the opportunity to in-source more components that can ultimately drive full 45x tax benefit overall. Also looking at the continued progression of new products and the differentiation that those bring into the pipeline and order book as well. So when you look at the overall, not just the landscape for 2026, we're bullish about the long-term opportunities for gross margin expansion based on our factors and our ability to execute and also deliver continued technological differentiation for our customers, which ultimately then does fall through to the bottom line.

Great. And then maybe more near term, logistics and fuel costs, how would you say, how exposed you are there? And how much of that can you pass through to customers?

Yes. So logistics certainly has been quite the topic with obviously the everything going on in the Middle East. So to be clear, we have seen in Q1, higher fuel costs due to a number of things, fuel surcharges, laying congestion, tighter lane availability for carriers. And with that, we responded with a couple of specific targeted actions. We renegotiated carrier agreements. We optimized regional routings for supply chains. We also increased the amount of contracted freight capacity we had versus going with spot rates. And ultimately, we then take -- took all those changes and updates and put them into our new proposals and new contracts along the way. So overall, from an Array standpoint, we're very much looking at this as a controllable work stream. We're reacting real-time and then putting all those new updates into our proposals and contracts. So it doesn't upset our overall framework for the year. But one key thing to note, though, is when there is an impact during a project deployment, oftentimes, it's important to note that pricing is fixed with the customer. So there isn't necessarily an opportunity all the time to -- whether it's on tariffs or in this particular case with logistics to push those costs increase through to the customers. Depending on the contract, sometimes we can. But in many cases, we cannot. So ultimately, we have to kind of work with customers to absorb those in certain instances, but then moving forward for new proposals and new contracts, we always make sure that our systems are updated real time to make sure that we're protecting the future pipeline with those impacts. So one thing that's really important to note, though, is that our guidance for 2026 is not expect or anticipate a normalization throughout the remainder of this year. We expect the volatility will sustain and remain. And so we built our planning around that expectation.

Great. Can you talk about the impact of Section 232 and then how we should think about kind of tariff risk in the business moving forward?

Yes. So tariffs certainly were the key topic from last year and they're still percolating around as we now have our fund with logistics. But ultimately, our main tariff exposure for 232 tariffs remain. So when we look at 232 tariffs versus IEEPA, it was the IEEPA tariffs that the Supreme Court struck down a couple of months back. And to put it in perspective of -- for those here, about 5% of our overall tariff burden last year was on the IEEPA tariffs, about 95% was on the Section 232 tariffs. Now with that, a couple of interesting nuances obviously, with the ruling that came in April, where the derivative tariffs on 232 for steel and aluminum were taken from 50% to 25%, but it was previously 50% on the derivative, only the steel and aluminum content, it's now 25% on the total value of the particular component. So when you net it all out, it's roughly kind of a net neutral for us overall on that front. So tariffs certainly are something that we're managing to very carefully. We work with our customers, and we've had a great deal of success and be able to pass through the majority of those tariff burdens that we experienced last year based on our contracts that we had in place. And now obviously, we're working through the new updates that came through after the April ruling. But the good news on that front is though, with the tariff going from 50% to 25% on the total component value, it is a little bit easier to administer. We're not have to do subcalculations on specific derivative content. So it's quite easier to the calculations operationally. So overall, we're keeping a close eye on tariffs. It's something we'll be mindful of throughout the course of the year, but we've gotten pretty good and experienced over the last 4 quarters or so, reacting to it. So we feel pretty good about our ability to manage it.

Great. I think we'll leave it there. Thanks.