Array Technologies, Inc. Q4 FY2020 Earnings Call

Good evening, and welcome to Array Technologies Fourth Quarter and Full Year 2020 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks in Q&A. At this time, I'd like to turn the call over to Cody Mueller, Investor Relations of Array Technologies. Thank you. You may begin.

Good evening and thank you for joining us on today's conference call to discuss Array Technologies fourth quarter and full year 2020 results. 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 and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission, each of 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 fourth quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Jim Fusaro, Array Technologies' CEO.

Thanks, Cody, and good evening everyone. Thank you for joining our earnings call. In addition to Cody, I'm joined today by Nipul Patel, our Chief Financial Officer; and Jeff Krantz, our Chief Commercial Officer. I'm pleased to report that we generated revenues of $181 million in the fourth quarter and $873 million for the full year 2020, exceeding the high end of our full year guidance that we previously provided. Full year 2020 revenues increased 35% versus last year, reflecting continued strong growth in the US solar market, increasing penetration of trackers versus fixed tilt, and continued market share gains by our products. We anticipate continued strong growth in 2021. Since our last earnings call, there have been several developments that have caused us to set our growth expectations higher. First, the recent two-year extension of the solar ITC has expanded the number of solar projects that are viable, and we believe it will result in a substantial increase in demand for our products. Second, corporate commitments to decarbonize continue to increase, and most companies plan to meet their sustainability goals by buying renewable energy. Meeting that demand requires a lot more generation. We believe the lion's share of that will be met with solar. To put some context around that, since our last earnings call in the beginning of November, 323 global companies, including 59 in North America, have announced commitments to source the energy that they use from renewable sources or established targets for emission reductions that rely on using energy from renewable sources. And that's in addition to the 922 global corporations that already have these types of commitments in place. Third, President Biden's election, in combination with Democratic control of Congress, increases the probability of major climate-change related legislation that is likely to accelerate solar deployments. In just the past 10 days, there have been three new bills introduced in Congress that called for increased incentives for solar, a National Clean Energy Standard, and a Green Bank to fund renewable energy projects among other things. While we cannot predict what new incentives and regulations will be enacted, we are confident that there will be new policy that will further accelerate the growth in solar. And lastly, solar's competitiveness versus other forms of fossil and renewable generation continues to increase. The US Energy Information Administration now projects that utility-scale solar projects entering service in 2023 will have an LCOE under $24 a megawatt-hour. That's 17% lower than what their forecast for 2022 was only one year ago. To put some perspective on how meaningful these developments are for the market, we have noted that many independent consultants’ estimates for US utility-scale solar installations over the next three years have been increased by at least 20% from where they were only a few months ago. That's a huge change in expectations over a relatively short period of time. While the tailwinds behind our business continue to strengthen, our goal remains to grow faster than the market. To achieve that goal, we are focused on three core growth strategies that we outlined on our third quarter conference call. Continued market share gains in the US, international expansion, and acquisition of companies that provide complementary products, services, or technology. We are already making good progress. In the US market, we are continuing to grow our wallet share with existing customers as well as convert new customers to Array, as demonstrated by our strong order book. During 2020, we added 38 new customers, underscoring our ability to convert new accounts to Array products. Outside of the US, we are in the process of building the sales and supply chain and fulfillment infrastructure we need to service international customers. COVID-19 has slowed some of our plans, but we expect to be able to accelerate our international strategy later this year as travel restrictions and other challenges created by the pandemic abate. We believe that by Q4 of 2021, we will be generating approximately 50% of our sales from markets outside of the US. Lastly, I'm happy to report that we completed our first strategic transaction in January. We took a stake in a company with a unique technology that we believe could revolutionize the way utility-scale solar is installed. Unfortunately, I will not be able to elaborate much on our investment on this call, given confidential agreements that we have with the company. Other than to say we are very excited about the prospects for the technology, and we are well positioned to acquire the remainder of the company if we choose to. Cutting across all three of our growth strategies will be product innovation. We are making significant investments this year in new product development, with the goal of addressing common pain points in utility-scale solar installation. Installation constitutes a growing proportion of the total cost of a solar energy project, and the availability of skilled labor can be a constraint on our customers' growth. We have several new products, product features, and installation methods in development this year that we believe could significantly reduce the cost and labor required to install our tracker system and further extend our technology lead over competitors. Our product development efforts are focused on four key areas: Trackers that can be installed on rugged terrain without requiring significant site grading, reducing foundation costs through new installation methods, tool-less module mounting systems that can cut installation times, and improving tracking performance through software. To demonstrate these new technologies for customers, we recently opened the Array Technology Research Center in Phoenix, which will serve as a proving ground for us to showcase the new products and installation methods that we are developing. We plan to update you in the coming quarters as we establish launch dates for the new products we have underway. I'll conclude by saying we're excited about the future. The solar market is getting stronger, our products are winning over more customers, and we are taking market share. We still have some tricks up our sleeve in terms of technology innovation. There is more to come. Now, I will turn it over to Nipul for an update on the quarter and full year 2020.

Thanks, Jim. Before I talk about our fourth quarter results, it is important to keep in mind that our 2020 results were heavily first-half weighted as a result of our customers' attempt to capture incentives by the federal government related to the 2020 step down in the ITC. This caused our customers to place the bulk of their orders in the back half of 2019 and then take delivery in the fourth quarter of 2019 and the first two quarters in 2020. As a result, comparing a single quarter in 2020 to the same quarter in 2019 is not necessarily indicative of the trajectory of our business, since the ITC step down skewed revenues in 2020 to Q1 and Q2, while revenues in 2019 were more evenly distributed. For the fourth quarter, we generated revenues of $180.6 million, which was a decrease over the prior year period as a result of these changes in seasonal order pattern. However, our revenues exceeded the high end of our guidance as we had better than anticipated project delivery conversion at the end of the year. ASPs in the quarter were up approximately 2% year-over-year. Gross margins in the fourth quarter were 19.6%, lower than the prior year period as a result of having less revenue to absorb fixed costs and project mix, but were in line with our expectations for the quarter. Operating expenses increased compared to the year-ago period, primarily due to a $10.4 million expense related to the revaluation of contingent consideration, mainly related to the earn-out obligation we have with our founder, along with higher costs associated with being a public company and increased headcount. We recorded a net loss in the quarter of $2.2 million, primarily as a result of the $10.4 million contingent consideration charge. This is important to note that we have now paid out the full amount owed under the earn-out obligation and will not have any further expenses or payments under that agreement. Going forward, any expenses recorded to contingent consideration will only be related to the revaluation of the tax receivable agreement. Adjusted EBITDA was $20 million for the fourth quarter, which was down from $49.9 million in the prior year, but also exceeded the high end of our guidance. Now turning to our full-year 2020 results. Revenues for the full year ended December 31, 2020, increased 35% to $872.7 million compared to $647.9 million in 2019, driven by the increases in the volume of trackers delivered anchored by the strength in the US solar industry. ASPs for the year were approximately 2% higher than the prior year period. Gross profit increased 35% to $202.8 million compared to $150.8 million in 2019, driven primarily by higher volume. Gross margin remained flat at 23.2% as we had lower costs on purchase materials, which offset higher logistics costs. Operating expenses increased to $107.6 million compared to $67.4 million last year, primarily as a result of the $26.4 million expense for the contingent consideration discussed earlier, as well as a $4 million benefit we recorded in 2019 for a bad debt recovery for which we had no comparable benefit in 2020, as well as an increase in equity-based compensation and higher payroll costs as we invest in critical resources to enable our future growth. Net income increased 49% to $59.1 million compared to $39.7 million in 2019, and basic and diluted income per share was $0.49 compared to $0.33 during the same period in the prior year. And finally, adjusted EBITDA increased 32% to $160.5 million compared to $121.8 million in 2019. Taken as a whole, we are very pleased with our financial performance in 2020, having delivered record revenues and adjusted EBITDA despite the unique operational challenges created by the pandemic. Turning now to our guidance; for the year ending December 31, 2021, we expect revenues to be in the range of $1.025 billion to $1.125 billion. Adjusted EBITDA to be in the range of $164 million to $180 million. Adjusted net income per share to be in the range of $0.82 to $0.92. The midpoint of our revenue guidance represents a 23% year-over-year increase and reflects the strong demand we are seeing for our products. At December 31, 2020, we had $654 million in executed contracts and awarded orders that are expected to ship in 2021. In years where there was no step down in ITC, our backlog entering the year typically represented the next six months of shipment. That's part of the reason we feel very confident about our revenue growth this year. We entered the year with backlog equivalent to 60% of the midpoint of our revenue guidance, and our order book has grown since then. Our adjusted EBITDA guidance reflects lower margins than we achieved last year. There are several reasons for that. First, as Jim discussed earlier, we have made product innovation a priority, and we are investing in it. In addition to the research center he discussed, we will be adding additional engineering resources and investing more in R&D. These investments have a near-term cost as we will be making the investments ahead of the incremental revenues that we expect to generate from new products. But the long-term results should be higher revenues, greater market share, and increased margins. Second, we are investing in the sales, supply chain, and fulfillment infrastructure we need to service our international customers. The more to our investments in new product development, we have a short-term mismatch between the cost of our investment and the revenues that they will yield. Third, our 2021 SG&A reflects additional public company costs, which will represent a year-over-year headwind for us. And finally, commodity prices and freight costs have increased significantly over the past several months as a result of the re-acceleration of the global economy while certain transportation and raw material capacity remains offline as a result of the pandemic. While we expect prices to normalize and our contracts allow us to pass on these costs to our customers, we have taken a conservative approach to our guidance by incorporating these costs into the low end of our guidance, assuming a delayed return to more normalized pricing. I'd like to close by providing some key modeling assumptions for the full year 2021. As I mentioned earlier, the two-year push out of the ITC step down has impacted how customers time their orders. As a result, we will see a different quarterly distribution of revenues and earnings in 2021 than we did in 2020. We currently expect to generate 20% to 25% of our annual revenues in Q1, 25% to 30% in Q2, 25% to 30% in Q3, and 20% to 25% in Q4. We expect interest expense to be between $26 million to $28 million. Diluted weighted average share count for 2021 to be 127.5 million shares and our effective tax rate to be 25%. Now, I will turn it back over to Jim for some closing remarks.

Thanks, Nipul. I'll close by reiterating how proud I am of the Array team for all that we accomplished in 2020, from our hugely successful IPO to our strong financial performance to the work we have done to lay a foundation for continued growth in 2021. It was truly an incredible year. We appreciate the support of our shareholders as we continue to grow our company. And with that, operator, please open the line for questions.

At this time, we'll be conducting a question-and-answer session. Our first question comes from Brian Lee with Goldman Sachs. Please go ahead with your question.

Hey, guys. Good afternoon. Thanks for taking the questions. Good job on the first quarter out here. I had a couple here I guess, with respect to, you mentioned Nipul, the pricing dynamic for 2020, you were up 2% average ASP, I think. How should we be thinking about pricing in 2021? What's embedded in your outlook here? Just given some of the comments around cost inflation, are you capturing some of that in price? And can you quantify it to any degree? And then are you able to go out to the market with more price increases if we continue to see inflation sort of pressure in some of your input costs moving throughout the year and there is not a normalization?

Yes, Brian, it's Nipul. Thanks for your questions. You're correct that we had a 2% price increase year-on-year. We've kept prices relatively stable and believe they are steady. However, we do have the option to revisit the market as needed. We've incorporated that flexibility into our guidance so we can assess pricing on a case-by-case basis. So yes, that option is available to us.

Okay, that's great. For my second question regarding contracts and awarded orders, I understand you won't provide regular updates, but could you share if there's been noticeable growth since the reported figure on December 31, 2020? What does the current situation look like early in 2021, and how is the geographic mix shaping up? You mentioned that by Q4 2021, non-US sales would account for 15%. Does that 85-15 ratio apply to the contracts awarded order backlog as well, or is it different? Thank you.

Yes, sure. So. Hey, so regarding the backlog and awarded orders, like you mentioned, we decided we're going to provide that once a year, the concrete number as part of our annual guidance process, but yes, what we've seen is it is growing since December 31, and we'll give qualitative measures on that going forward, but we feel pretty good about that. The thing to really mention about this, Brian, too, is with the ordering pattern changes in 2020, with the ITC being extended, we feel really good that we have 60% coverage at year-end of our mid-point guidance. So, we really feel good about that as well as the increase from January.

All right. And then, just Nipul, in terms of the mix, any kind of geographic color you can provide? Is it that 85-15 or are you seeing more skew even toward non-US in that mix?

Yes. So what we've said, Jim mentioned in his script is there is a little bit of a ramp in the international sales, and we feel by the end of the year, the fourth quarter will be at a 15% mix. Right now, I think for the overall blended, I would say it's in the 90%-10% for the full year.

Okay, fair enough. Thanks a lot, guys.

Thanks, Brian.

Our next question comes from the line of Shar Pourreza with Guggenheim Partners. Proceed with your question.

Hey, good evening, guys.

Hi, Shar.

So, just a couple of quick questions here. Obviously, you've touched on what's driving the lower EBITDA margin in '21 and sort of that mid-point of the new guidance implies around 16%, and obviously you guys highlight several items like commodity costs, public company costs sort of that international push as the driver of some of that compression, but as we sort of think about margins, maybe in the medium term say post '21, should we assume some incremental margin compression further from what we're seeing today, as you're guiding as, let's say you expand internationally or should we assume maybe that 16% a pretty good floor for our modeling purposes as we think about post '21?

Yes. Hey, Shar, it's Nipul again.

Hey, Nipul.

We've given that kind of range, and the medium-term being 16% to 18% EBITDA and that's where we feel it still is with the commodity pricing as it is right now, that's what any investments we're making consciously for the revenues that will be coming, we feel that that is kind of near the floor where we feel.

I just wanted to ensure that was reiterated. You recently increased the size of your revolver. Could you explain why there was an increase in capacity? Is it related to organic or inorganic opportunities? Previously, you mentioned that you would use your revolver for potential bolt-on acquisitions. Could you also share your thoughts on M&A in the near term? Are you focusing on existing parts of the business or looking to acquire new innovations, similar to the technology investment made earlier this year?

Sure, Shar, I'll address the first part of that, and I'll let Jim handle the M&A question. Regarding the revolver, we are always seeking flexibility in our capital structure. We aim to invest in high ROI projects while also exploring opportunities for bolt-on or inorganic growth. We believe that maintaining flexibility in our revolver will help us achieve both objectives. Jim, would you like to discuss the M&A?

Yes, so we're going to continue to keep that pipeline robust and our thesis remains the same, to the extent we can tap into additional wallet share whether it's mechanical balance of system or electrical balance of system, and most importantly technology. That remains really foundational to our strategy on M&A, and I think our investment in technology that we noted is really the first step towards that. So we remain very optimistic about what we have in the M&A pipeline and we're going to continue to vet that going forward.

I understand. Lastly, I am curious about customer sentiment, whether positive or negative. Have you noticed any shift from your customers due to recent events in the ERCOT, MISO, and SPP regions following the weather events? Has this impacted your order books considering what we experienced a couple of weeks ago?

No, not at this moment, Shar, but I'm happy to report that we've got nearly 40 sites in the affected region, nearly 3 gigawatts and we have not received any word at any issue on our sites, so probably too early to tell, but really nothing notable.

Perfect. Congrats on the execution, guys.

Thank you.

Thanks, Shar.

Our next question comes from the line of Paul Coster with JP Morgan. Proceed with your question.

Yes. Thank you for taking my question. It wasn't clear to me as the impacts of these investments and other expenses during the year; how it's distributed across gross versus EBIT margins? So it sounded like it was more below the line, below operating expense related than it was direct costs. Can you just sort of give us some sense there?

Yes, Paul, this is Jim. It's about evenly split, with half allocated to innovation. This is really focused on the future. I didn't coin this phrase, but it captures the idea of managing two seemingly conflicting objectives at once: meeting short-term needs while also investing for the long-term, with half dedicated to innovation. I'll let Nipul provide further comments.

Yes. On the margin side, we have accounted for the impact of higher freight and raw material costs, which are not decreasing as quickly as we expected. This is an important factor in our guidance range, Paul.

Yes, it might be a bit unfair to ask this, but if the pandemic were to resolve more quickly, how much more EPS would we have? I mean, what amount of EPS has been lost due to the shift of things into the second half, particularly regarding international growth?

I couldn't really give you a quantifiable answer on that. My only wish and desire was that it would clear up faster, but that's just not the reality.

Yes, it has delayed, as we mentioned, in the second half.

All right. Okay, last question. You've talked of China trying to sort of nail down, most of the big EPC customers as your proxies are going into the end market at least in the United States. What proportion of the largest like 10, 20, do you think you've now got secured as sort of regular customers?

Paul, I would just lead off by saying, we added 38 new customers, eight of which were international. I would have to get back to you with respect to the mix, which is the IPPs, developers versus EPC. I don't have that readily available, but we can get back to you on that.

Okay. All right, thanks very much. Appreciate it.

Thanks, Paul.

Thanks, Paul.

Our next question comes from the line of Stephen Byrd with Morgan Stanley. Proceed with your question.

Thank you for taking my questions. I wanted to get your thoughts on the competitive landscape. Are you noticing new entrants or changes in offerings? Additionally, could you provide more details regarding your market share position and your overall competitive positioning?

Yes, Steve. I would first say that we respect all competitors. Haven't really seen any new entrants and with respect to market share, I would really just point you to our year-on-year growth. And then what we've outlined by way of the mid-point of our growth going forward into 2021 and then how that falls out with respect to share of demand, I'll let you do the math there.

Very good. Understood. And then just lastly, you talked to kind of the growth internationally, and it sounds like just, it's just rather it's just a bit of a delay, it's not as if there is a shift upwards in your cost structure to be able to execute internationally, but more of a delay. Am I sort of reading that properly?

Yes, that's exactly right. When you think of the delay, think of it in terms of certain countries had travel restrictions. So I couldn't get boots on the ground to really qualify the supply chain fulfillment and things of that nature. So that was really a delay.

That's perfect. That's all I had. Thank you.

Thanks, Stephen.

Our next question comes from the line of Michael Weinstein with Credit Suisse. Proceed with your question.

Hi, everyone. I understand you have provided guidance for a gross EBITDA margin of 16% to 18%. As the percentage from international sources increases, does that push the margin towards the higher end of that range, or does it remain consistent? I'm curious about the differences between the US and international markets.

Yes. We still plan to maintain the 16% to 18% range, and as our mix changes, we will be making fewer investments this year. Therefore, we believe we will stay within that range.

Yes. Following up on Shar's earlier question, is it expected that international will have higher gross margins compared to the US?

Yes. That hasn't changed from what we had said before, Michael. It is initially, we know that they're going to be a little bit lower margins, but over the longer term, it's going to be at or higher than the domestics because of the input costs.

Got you. So if you expect to maintain the range, what's the offset to that?

Well, as we're ramping up, if you recall in international sales, so as the investments abate from this year, and the international ramps up. That's where you get the offset.

Yes, I understand. Regarding new technologies, you mentioned that you are investing in a technology that hasn't been disclosed yet. Are we discussing something that will still be in the tracker field, or are you exploring completely new areas for solar value creation and improving efficiency?

Yes. I would say the way to look at it, Michael, is that it's going to be within the tracker itself in utility-scale, but certainly, we're not limiting ourselves there when we look at technology.

Are there other investments you are currently working on, including additional bolt-on acquisitions or major acquisitions?

I would just go back to what I said earlier that our pipeline remains very robust, and as they mature, they will become apparent.

Maybe you could comment a little bit more on the R&D capabilities that you think will be available in Phoenix under the Phoenix facility?

Yes. I would just refer you back to what we said earlier. Some of the challenges our customers are experiencing involve the installation time, so labor is an area we're concentrating on. We're also exploring ways to minimize grading, which allows for more flexibility. Additionally, we're examining how to increase output or energy through software. That's what we're focusing on, and we're really excited about the tech center.

And just two last ones from me. One is, is the cost of steel becoming a problem for you, world steel? And also where internationally, which continents are you planning on focusing on first, highest priority and which will be the next ones after that?

We manage and monitor all commodities effectively and implement productivity measures to enhance our value. If your question was regarding our supply chain, could you please clarify?

Yes.

Yes, sorry...

I'm thinking about the pressure on margins from cost inputs.

Yes. I mean, there is always going to be pressure on cost. That's pretty much market agnostic and product agnostic. But that said, we've actually built up, we continue to build out our supply chain. We added 15 new suppliers in four new countries. So that's just going to be an area that we remain focused on going forward as we grow both domestic here and internationally.

All right. And also in terms of your focus on sales, where are you going to go next? What's the highest priority in terms of continents and countries? And what's the second after that?

Yes, I would actually point you back to what we've always said, and that is really a strategy of following our customers. We added 38 last year, eight of which were international, have international reach. We like to follow them into the regions that make the most sense since they are the ones that are actually investing in connecting to the grid. So I think you could look at South America and certain countries there, and then Western Europe, as well as Southeast Asia, not necessarily in that order, but those are areas that our customers seem to be gravitating towards.

Okay. Thanks a lot, guys.

Thanks, Michael.

Thank you.

Our next question comes from the line of Philip Shen with ROTH Capital Partners. Proceed with your question.

Hi, everyone. Thanks for taking my questions. First ones are around safe harbor. I was wondering if you might be able to share how many megawatts of safe harbor were in Q4? And then what do you expect in Q1 and what do you expect overall in the '21 guidance?

Yes. Hey, Phil, it's Nipul. How are you? We're not going to discuss megawatts, but I can share the revenue figures. We had about $40 million in our Q4 results and we anticipate delivering around $100 million in the first half of the year, especially considering the ITC extension.

Okay, great. And then should we not expect any in the back half of '21?

Well, the ITC is extended now. So, we would assume normal seasonal patterns where Q2 and Q3 are the high build months.

Great. You mentioned the backlog numbers of $705 million and $654 million for the next 12 months. Could you provide those same figures for the end of 2019?

Yes, Phil. We didn't monitor backlog and awarded orders in 2019 with the same detail as we are in 2020. However, the figures are generally comparable between the two years. It's important to note that the backlog at the end of 2019 reflected what our customers anticipated for the entire year. This was evident in the concentration of our revenues and profits during the first half of 2020. That's why we are confident. The backlog is at a similar level, but the $654 million we have this year essentially corresponds to about six months of deliveries, which means we have already achieved roughly 60% of our full-year midpoint guidance.

Thanks, Nipul. Regarding the margin outlook, I understand you're not offering official guidance on this, but considering the concentration of safe harbor revenues in the first half, could you discuss what the gross or EBITDA margin is expected to look like in the first half compared to the second half?

Yes. We are about the same throughout. I would just take the revenue split that we had and expect about the same margin.

Okay, great. That's all really helpful. Thank you. I'll pass it on.

Thanks, Phil.

Our next question comes from the line of Colin Rusch with Oppenheimer. Proceed with your question.

Hey, everyone. It's Joe filling in for Colin. Thank you for addressing our questions. With the increase in demand, we anticipate that a portion of this will come from unusual lot shapes, which tend to present more challenging terrains. Could you elaborate on how you're approaching these types of sites?

Yes, I'm sorry. Colin or who's speaking?

This is Joe on for Colin.

I think our strategy and product effectively address those needs, whether it's 1 to 20 megawatts. That was a key reason for our partnership with RPCS, as they excel in this area for us. We do not foresee any challenges regarding the terrain flexibility or the odd-shaped sizes we have been servicing, and we intend to continue doing so in the future.

Okay, great. And then, a little bit back to the question around input costs and supply chain. Are you guys looking at any new materials that could potentially reduce your cost of goods sold?

Yes. Now, don't ask what they are.

Okay. Well, I mean, any color you can give there would be good.

Yes. We're looking at alternative materials. That's just part and parcel of what the R&D team does.

Sounds good. Thanks very much.

Thank you.

Our next question comes from the line of Jeff Osborne with Cowen. Proceed with your question.

Yes. Good afternoon. Most of the questions have been addressed, but could you remind us what percentage of the bill of materials is galvanized steel?

Yes, it's Nipul. We don't disclose the breakdown of the bill of materials for competitive products, but we do know that steel is a significant component, being a commodity used in our overall tracker.

Got it. So just a bit, you're talking about the first half of the year fully booked based on the backlog, and when would you be buying that steel just as it's been moving quite a bit? So have you locked in the steel as you locked in that pricing, so you have high visibility into the margins or not necessarily so?

Yes. We usually order materials between six and 12 weeks before shipment, which means we maintain very low inventory levels. Therefore, the recent increase in costs will affect the second half of the year more than the first half.

Got it. And then eight new customers internationally, can you talk about any particular geographies outside of Australia? Have you had any success? People have tried to ask about continents, but the eight new people, can you without naming them talk about what countries or regions they are from or is it all in Australia?

No, it's not all in Australia. It's still Western Europe, it's South America as well as parts of Asia. So you can think of Brazil, you can think of Spain and some other regions as well in Western Europe.

Got it. And then, the last one I had is just can you remind us, given your pricing, $0.10 or $0.11, whatever the number is, you're now talking about lowering labor costs with this investment that you made. Can you remind us what the labor cost is if utility-scale solar projects is roughly $1 or what would you think is the direct labor attributable to specifically the tracker that you're trying to lower?

Yes. I couldn't give you an absolute number, Jeff, simply because every site, every project has its own DNA depending on what the site construct looks like, the number of modules per row and things of that nature. All I can say is just reinforce the technology that we're looking at substantially reduces that. So we're quite excited about that.

Our next question comes from the line of Martin Malloy with Johnson Rice. Proceed with your question.

Good afternoon.

Hey, Marty.

Hi. Could you give us an update, maybe on your strategy for monetizing the software?

Yes. Hi, Marty. So the strategy remains kind of three-fold here and that is first and foremost, to the extent, we can use that to create greater value at the point of sale, with our tracker that will always be included. And we're very pleased with the uptake that we currently have on our SmarTrack. The second one would be with respect to, in the event the customer has already an Array tracker out there and is interested in purchasing that by way of license and/or annuity going forward, we're working with several customers on that front. And then thirdly, would be to the extent there is opportunity for us to deploy and then to deploy the software at a later date, depending on the customer's request at commissioning. We have that means as well. We're still very early in the throes of deployment of the software solution, but are certainly quite excited about the uptick that we've seen thus far in the performance gains that is providing to customers where we have deployed.

Great. Thank you very much.

Thank you.

Our final question comes from the line of Kashy Harrison with Simmons Energy. Proceed with your question.

Hi, good evening, and thank you for answering my questions. In your guidance, you mentioned that you expect commodity prices and freight charges to normalize over time. I’m interested in what you believe will drive that normalization and how long it would take for costs to remain high before you seriously consider passing those costs on to customers. Also, how should we think about the potential impact on customer demand from higher costs?

Hey Kash, it's Nipul. How are you? Regarding your first question, the timeline is uncertain due to the unprecedented rise in commodity prices. As the economy starts to reopen, we still have a lot of pre-pandemic capacity that is not in use. We anticipate that operations will pick up in the second half of the year. For your second question, we continuously assess our pricing for projects and are aware that we have the option to adjust it. We will approach this on a case-by-case basis.

Okay, fair enough. On the M&A front, I know there's not a lot you can discuss, but could you at least provide a timeline for when you might be able to acquire the remaining portion of the technology company you mentioned?

I couldn't give you a definitive timeline, other than we have certain milestones that need to be met by way of technology assessment and things of that nature. As they pan themselves out, we'll check the box and then proceed accordingly. But I couldn't give you a definitive timeline because there is elements that need to be satisfied as we go through the process.

I guess maybe asking in a different way, do you think this is a 2021 event maybe, or is it probably longer-term?

Yes, I couldn't tell you. I couldn't commit to a date on that.

Okay, all right. Fair enough. And then the last one from me. Good to see you're investing with R&D for the future of the business. I was just wondering if you could talk about the four innovations that you highlight on that separate press release, how to think about the impact of ASPs over the medium term? And that's it from me. Thanks.

Yes. In the medium term, I don't expect to see a significant impact. This is a longer-term strategy as we implement it. You can consider it for the years following 2022, particularly the first half of that year and beyond.

Thanks, Kashy.

Thank you.

We have reached the end of our question-and-answer session. And I would like to turn the call back over to management for any closing remarks.

Yes, thank you. Again, I just want to reiterate how proud I am of the Array team for all that we accomplished last year. We're certainly excited about our performance and plan to carry that forward into 2021 and where we are certainly excited about our growth going forward. So with that, I'd like to thank everyone.

And with that, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.