Q4 2021 Array Technologies Inc Earnings Call
Hello, and welcome to array technologies fourth quarter and full year 2021 earnings call. At this time, all participants are in a listen only mode.
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A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded its now my pleasure to turn the call over to Cody Mueller Investor Relations. Please.
Please go ahead.
Good evening and thank you for joining us on today's conference call to discuss our Ray technologies fourth quarter 2021 results slides for today's presentation are available on the Investor Relations section of our website are right Jackie dotcom.
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 the call.
Call or in our latest reports and filings with the Securities and Exchange Commission, which can be found on our website <unk> dot 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 Companys 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 a few sorrow array technologies CEO .
Thanks, Cody and good evening, everyone. Thank you for joining our fourth quarter earnings call. In addition to Coty I'm joined by people to tell our Chief Financial Officer, Eric <unk>, Our Chief commercial officer, and head of ESG and Bryan <unk> our chairman.
I'll start off today by providing an update on a few key aspects of our business. What we have done as a company to build a strong foundation and a challenging operating environment.
Then I'll turn it over to <unk> to cover our fourth quarter and full year financials as well as a more detailed discussion on our 2022 outlook.
Eric will then provide some additional color on ESG efforts to date and our plans for the future Brad.
Brad will then wrap it up with comments on the CEO announcement today.
Turning to page five of the presentation.
I first want to spend a little bit of time talking about three key industry wide challenges that are present, and how array has looked for opportunities not only to mitigate risk, but how to use them to further strengthen ourselves in the market.
First in 2021, there was a rapid and significant rising commodity and logistics costs, which put margins under an incredible amount of pressure for many in our industry. Historically this industry was used to cost coming down the curve not the other way around this abrupt change up ended the way the industry thought about risk and necessitated a rapid.
Meaningful change to the way companies up and down the value chain thought about pricing.
Well, we're still working through some of the short and medium term impacts of these cost increases back in the second quarter of 2021, we took a proactive approach with our customers and suppliers to find a way to keep projects moving forward in this volatile environment.
We asked our customers what was important to them and how they perceived risk going forward and two key themes emerged.
The first thing there was a need to take as much volatility out of the pricing as possible.
In order to secure financing pricing on trackers couldn't be a constantly moving target based on commodity price changes.
The second material availability was a critical must have there was too much risk to the construction of a site if the customer could not count on the tracker being delivered are scheduled.
We listen to what those must haves, we're and developed and implemented our LOI process, we're able to offer our customers a fixed tracker price and confidence and material availability.
We were able to shift to this process because of the long standing relationships, we have with our suppliers and confidence they have in the growth of our business the ability for us to understand the customer needs and quickly change our business processes.
<unk> us to go on the offensive, we began winning more business and adding more customers, who wanted to do business with the rate.
In addition to rising cost there was a widespread tightening of global supply chain and logistics availability.
This dynamic has not only led to increased lead times, but also has created broader challenges in getting the right parts to the right place on time even.
With our already large and geographically diverse supply chain, we face the challenges and certainly felt the pain of having to constantly rework supply chain plans to ensure we could meet customer build schedules. However, because growing our supply chain was deeply ingrained in our nature it'll allow us to make meaningful additions quickly.
In fact last year, we added 20, new suppliers and with the acquisition of STI, we have expanded our supply base by over 40%.
From there we went a step further entering into long term msas with key suppliers to ensure competitive pricing and availability of supply.
This focus allowed us to expand our global capacity over the last 12 months by 25% and the only increasing our domestic lead times by two weeks, which we believe is the shortest increased amongst our competitors.
Being able to deliver quickly and have confidence in the availability of supply have emerged as two key differentiators for us.
And finally, the U S regulatory environment has created a significant amount of uncertainty around the availability of modules.
Both the ongoing Wrol enforcement in the recent 80 CVD inquiry have created a potential headwind for the entire industry.
While we do not procure any modules ourselves the availability of them impacts our customers and their build schedules. So we have been addressing this issue on two fronts. The first we are actively engaged with Washington D. C. Both through trade groups and directly through our local representatives. This outreach is key to educate the.
<unk> Congress that in order to meet its longer term climate goals. There has to be a period of module stability second we remain in constant contact with our customers to understand both the certainty of their module supply, but also to proactively work with them on site redesign efforts for module is swap outs.
It's also important to note that with the acquisition of STI, we have diversified our portfolio. So we have less concentration in the U S, which also helps to reduce our exposure.
When I look back at the difficult operating conditions that have existed for our industry over the last year or so I am proud of the position we're in today.
Been nimble, we remain focused on the customer and we've adapted in ways that have built a strong foundation from which to grow.
Moving to slide six you will see a key element of that foundational strengths.
Our executed contracts and rewarded orders, which we refer to as the order book over the last 12 months has more than doubled from $705 million to over one 4 billion. This is our legacy <unk> business not including STI.
The majority of this increase has come by way of increased volume was roughly 20% coming by way of price increases.
When we add STI array is currently sitting at over $1 8 billion, which is 163% increase from a year ago.
Also note because of the STR acquisition a quarter of our order book is now represented by projects outside the U S.
Theres a lot of momentum going into 2022.
Turning to slide seven.
If we break down our order book to just what is scheduled to deliver in 2022, you can see that we have 175 billion that based on current delivery schedules would have shipments expected to ship during 2022 at a forecasted revenue midpoint of $1 6 billion.
This would mean, we need only to convert just over 90% of this order book to reach our number.
That does not factor in any projects that we will book and ship within the year.
Pair that to our actual order book conversion in 2021, which is shown on the left where we finished the year with 130% of the order book is scheduled to be delivered in 2021 and you can see that we have assumed that project delays will continue to be an issue we need to contend with.
However, enable will discuss this more later, even with that level of delay expected or implied growth of our revenue at the midpoint of our guidance over 85%. When you include STR and 40% on organic basis.
Finally today, we announced that April 18th will be my last day as CEO .
This is such an honor and privilege to lead this company over the last 40 years as I look back at all of the team has accomplished I could not be more proud we've had a number of significant achievements, our IPO acquiring STI and hitting $1 billion order book last quarter for the first time only just set another record this quarter.
But what I will remember most.
For my time here is how much everyone rally together when there were challenges there's a grid to a rate that I believe is built into its DNA, which has served the company. So well really since the company was founded over the last few years, we've transformed into a global renewable energy leader with an incredible platform to grow even bigger.
Pieces are in place and I look forward to seeing the great things that the company will do in the future.
I would like to not only think my management team, but the entire organization for their support over the last several years, it's been quite a ride with that I'd like to turn it over to Nick.
Thanks, Jim.
When I discuss our results on behalf of the entire management team and company, we want to thank Jim for his efforts over the last few years, Jim and I have known each other for a long time now and it's been a pleasure working alongside him hearing array I'm grateful for his leadership and his friendship.
With that I'll turn to slide nine.
Despite the continued project push outs revenues for the fourth quarter increased 22% to $219 9 million compared to $180 6 million for the prior year period, which also included about $40 million in ITC related orders.
Adjusting for those additional ITC orders in the prior year, our growth would have been approximately 57%.
Gross profit decreased to $10 3 million from $35 $5 million in the prior year period, driven primarily by a majority of our shipments being legacy lower priced orders, coupled with higher input costs for commodities and logistics to fulfill those orders.
Gross margin decreased from 19, 6% to four 7% driven by the high concentration of lower priced contracts.
We were also impacted by slightly higher material cost in the quarter due to supply chain changes, which I will discuss in more detail later.
Operating expenses decreased to $30 3 million compared to 37 $7 million during the same period in the prior year.
The decrease was driven primarily by an $8 $8 million reduction in contingent consideration expense.
This decrease was offset by higher costs associated with being a public company as well as increased head count to support our growth.
Net loss attributable to common shareholders was $32 $1 million compared to a net loss of $9 $8 million. During the same period in the prior year and basic and diluted loss per share were negative 25, compared to basic and diluted loss per share of negative eight during the same period in the prior year.
It is important to note here that our net loss attributable to common shareholders was impacted by $10 $2 million in preferred dividends this quarter with no comparable dividends last year.
Adjusted EBITDA decreased to $500000 compared to $20 million for the prior year period due to lower gross margins.
Adjusted net income decreased to a loss of $7 $8 million compared to income of $10 $6 million. During the same period in the prior year and adjusted basic and diluted net loss per share was <unk> <unk> compared to income per share of eight during the same period in the prior year.
Finally, our free cash flow for the period was negative $98 5 million versus positive $103 6 million for the same period in the prior year.
The use of cash during the fourth quarter of 2021 was primarily driven by our net loss coupled with investments in inventory and higher <unk> due to an increase in sales and an increase in unbilled revenues due to the timing of our shipments versus required billing milestones.
Now turning to our full year results on slide 10.
I do want to note here that the amounts presented for 2021 represent the restated values that were disclosed in our form 8-K filing last week.
The total net impact to our 2021 result was a reduction of revenue and adjusted EBITDA of $7 $3 million and a reduction of net income and adjusted net income of $5 $7 million.
A corresponding increase from these adjustments is expected to be recognized in future periods. As these changes merely represented a difference in timing and the total value of the underlying projects have not changed.
Revenue for the year decreased 2% to $853 $3 million compared to $872 $7 million for the prior year period.
The reduction in revenue resulted from both the increased lead times for project deliveries caused by supply chain and logistics tightness as well as projects that have pushed to the right.
Gross profit decreased to $82 $9 million from $202 $8 million in the prior year period, driven by the sharp increase in materials and logistics costs that occurred during the year, which were not able to be fully passed along the price increases to our customers.
Gross margin decreased from 23, 2% to nine 7% driven by the lower priced contracts.
Operating expenses were flat at $107 $6 million.
In 2021, we had higher costs associated with being a public company as well as an increase in head count to support our growth that was offset by a $23 $7 million reduction in contingent consideration expense.
Net loss attributable to common shareholders was $66 $1 million compared to net income of $59 $1 million. During the same period in the prior year and basic and diluted loss per share was negative 51 cents compared to basic and diluted income per share of 49 during the same period in the prior year.
It is important to note here that our net loss attributable to common shareholders was impacted by a $15 $7 million in preferred dividends.
This quarter with no comparable dividends last year, and an increase in interest expense of $24 million.
Adjusted EBITDA decreased to $43 $2 million compared to $165 million for the prior year period due to lower gross margins and higher operating expenses.
Adjusted net income decreased to $8 $7 million compared to $112 $4 million during the same period in the prior year and adjusted basic and diluted net income per share was seven <unk> compared to income per share of <unk> 93. During the same period in the prior year.
Finally, our free cash flow for the year was negative $266 5 million versus negative $123 5 million for the same period in the prior year.
The increased use of cash reflects higher inventory balances as forecasted volumes are higher delivery lead times have increased and the need for additional safety stock has increased.
It also reflects a higher air balance due to higher sales in the fourth quarter as well as the increase in Unbilled receivables discussed earlier.
Now if we move to slide 11, I want to talk a little bit more about our margin progression and specifically about margin in Q4 2021 as well as provide an update on our expected recovery in 2022.
Gross margin for the fourth quarter was four 7%, which was slightly below what we had anticipated.
However, it is important to note that drivers behind that and what it means as we look forward.
First we shipped a higher proportion of the lower margin contracts in the fourth quarter than forecasted.
As we have discussed previously there are a finite number of contracts, but the timing of when they land within quarters is largely out of our control. So we just shipped more here than expected, which was a little bit of a drag.
Second during the quarter, we had to make a number of supply chain changes to ensure that we can meet customer delivery schedules.
This meant using parts that were more expensive, but we're faster to the project site.
These are difficult trade offs that occur when supply chains are tight and shipping lead times get extended.
Over as Jim mentioned, we have been quickly expanding our supply base to create even more flexibility. So this is not something we anticipate will be an issue for much longer.
We do expect to see sequential margin improvement for the legacy array business in the first quarter. However, we do have a number of large lower margin projects that will have significant deliveries in the first quarter. So we expect the recovery to be gradual at the mid to high single digits before we begin to see a more rapid recovery during the second.
Quarter.
Finally, as you can see displayed here despite the ongoing macro headwinds we continue to expect margins in the mid teens for the first half of 2022 and in the high teens to low twenties in the second half.
With that margin progression in mind I'd like to go to slide 12, where I discussed our outlook in total for 2022.
For the full year 2022, we expect revenue to be in the range of 1.45 billion to $1 $75 billion.
As Jim noted this range implies growth at the midpoint of greater than 85% from 2021, 40% of which is organic.
Our order book is incredibly strong as we entered the year, but the wider range. We have forecast that represents the ongoing uncertainty around project timing.
Our forecast assumes that there is no material negative impact from the recently announced a D CVD inquiry.
I would remind everyone that we do not procure any modules ourselves so the impact to our business stems from our customers' ability to do so.
To that end since the announcement, we have been in constant contact with our customers to understand the impact this ruling might have on their ability or willingness to secure modules for their projects.
To date. These conversations have not resulted in any canceled contracts, but at this time, we have no further information.
We will continue to constantly monitor the situation and will provide the market an update should anything materially change.
Moving down to adjusted EBITDA, we expect to be in the range of $170 million to $210 million.
The midpoint of this range is slightly below the $200 million of combined earnings power. We previously discussed but reflects two changes since that time.
One increased uncertainty around project timing, which has led us to be more conservative on our revenue outlook.
And to an increase in our adjusted SG&A spend which we expect to run between $25 million to $30 million per quarter in 2022.
The increase in our SG&A spend.
Is reflective of our need to invest in our business systems processes and people to ensure we are ready for the next phase of growth.
We expect adjusted EPS to be in the range of 55 to 74 per common share.
This implies growth of over eight times at the midpoint from our 2021 adjusted EPS of seven cents.
Additionally for the full year 2022, we expect to return to be free cash flow positive with us generating over $100 million, the bulk of which we anticipate to occur in the second half.
Implicit in these numbers are an expectation that our Q1 revenue will be approximately 20% higher than the 2021 fourth quarter and our adjusted EBITDA will be slightly below breakeven due to the margin expectation for the quarter and the increase in SG&A, both of which I previously mentioned.
We don't expect to provide quarterly guidance going forward, but given the industry wide challenges. We believe it is important to give us a look into Q1 to set expectations and trajectory correctly to start in 2022.
Finally.
It also provided a breakdown of revenue and gross margin ranges by company and will report actual results for these two metrics discreetly for the remainder of the year in order to give visibility into the two businesses.
However, as we more fully integrate you may not continue to provide this level of separation.
You will note here that array margins in the mid to high teens are reflective of the progression we showed on the previous slide.
The STI margin expectation in the low twenties is expected to be down year over year due to a mix shift in its business.
In 2022, the company is expecting to see a larger proportion of its revenue coming from outside of Brazil, where margins are lower.
Altogether. We believe this is an exciting outlook for array and a return from a tough 2021.
The topline is growing in excess of what we expect the market to grow at and with the margin recovery here in the U S. And the addition of <unk>, we will see significant improvement in our adjusted EBITDA.
Now I'll turn it over to Eric to give you an update on our ESG efforts Erica.
Thanks, Nipple are nice to speak with everyone for the first time turning to slide 14.
In the second half of 2020, we accelerated our efforts around ESG by building a strong foundation and integrating this agenda into the way we work.
As a leading solar technology company, we're keenly aware of how important it is to make an impact and lead the way in our industry.
This is reflected in the way we run our business, how we develop our products and how we continue to engage our employees and the communities we serve.
In January of 2021 we took our first big step as a newly public company to publish our inaugural ESG report.
Aligned with the FASB N G. R. I frameworks are report details our approach to ESG governance strategy and the key ESG metrics from our full year 2020.
These key metrics include our corporate greenhouse gas inventory water and energy use waste and recycling data employee demography safety metrics and much more.
In the second quarter of this year, we plan to publish our full year 2021 report and this fast follower part we plan to include enhanced data reporting to further meet the needs of our stakeholders.
Critical to our strategy, our operational discipline contributes positively to our ESG performance. This includes our supplier code of conduct our conflict mineral policy and our human rights policy all of which are available on our website.
We are pursuing the rigorous ISO 9001 quality management certification for array products and are compliant to leading employee safety systems.
As we grow so too do our inherent ESG qualities and we are committed to enhancing our operational discipline to maximize these impacts.
Moving to slide 15.
This year, we are continuing the great momentum from our initial ESG reporting work to advance our strategy, we will embark on a number of strategic projects, including our first ESG materiality assessment.
As part of this assessment, we will engage a number of our stakeholders to identify ESG topics that our priority to each group.
We will also identify internal resources. So we can pulse key employees through this process as well.
We would like to invite any stakeholders interested in participating to please notify us through our investor relations contact address.
Array is also in the process of formalizing and operationalized, our internal steering committee to enhance our coordination of ESG efforts.
This committee, we will establish our first set of ESG goals, which will serve as the foundation for our plan moving forward.
We recognize the critical importance of our environmental social and governance disclosures to this end, we will continue to enhance our ESG data availability and disclosures to meet the needs of our stakeholders and to improve key third party ESG ratings.
We look forward to sharing updates on these developments and we welcome your engagement by reading, our ESG report and sending us your ESG related inquiries.
With that I'll turn it over to Brad to discuss the announcement of our new CEO .
Thank you very much Eric.
First I'd like to thank Jim for his time as CEO underway. He has been instrumental in leading our raised through a period of rapid growth and global market expansion and helping make a ready the company. It is today.
With that I'd like to welcome Kevin Hostettler arrays, New CEO , we ran a thorough process and search for the next person to run this company and we were gratified by the strong interest in the position we interviewed numerous well qualified candidates throughout the process and we are pleased to have selected Kevin to join us.
A little background on Kevin.
He has a Bachelor of science in finance from King's College, and an MBA from New York University, Leonard and school of business and has experienced speaks for itself with over 18 years of global industrial business leadership experience, including four as a public company CEO and serve them as a public company.
The reporting segment leader.
Most recently he served as CEO , what ROE talk a FTSE 250 company, where he led the company through a transformation driving improved margins capital efficiency and commercial excellence.
Prior to that Kevin was C E O S. T H philosophy tell a piggyback engineering and construction services firm, serving the telecommunications and broader energy and water infrastructure industries.
Executive advisor to win point partners, where he served as CEO of two portfolio companies.
Held ascending leadership roles at RPX Corporation, and Progressive P&L and leadership and business development roles of Ingersoll Rand.
Brings outstanding leadership excellence to RSV.
Knows how to leverage technology differentiation.
And has a strong track record of delivering operational improvements, while driving growth organically and via acquisitions and all regions of the world.
The transition to Kevin is it raised new CEO represents an exciting new chapter for the company and we look forward to benefiting from his extensive operational and commercial experience and with that operator. Please open the line for questions.
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One moment, please while we poll for questions.
And our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.
Hey, guys. Thanks for taking the questions.
First one I had was it sounds like you're expecting the SDI business to have more of a non Brazil mix in 'twenty. Two so could you kind of level set us on how much of the STI sales mix came from.
The European region in 'twenty, one how much of your kind of forecasting it could be at 22.
And then are you seeing demand accelerated in the region at all just given.
The conflict Thats there isn't out there in any specific countries of note that youre seeing particular traction that you might highlight.
Yes.
Hey, Brian It's Dave already so we're not we don't we're not prepared to give those specific details.
As far as the region, but the way we would ask you to look at it as you know Brazil is continues to be strong. It is strong in 2020 . One it will continue to be strong in 2022, what were seeing though is that western Europe is picking up and even stronger in 2022.
Attributing to that mix shift and the slightly lower margin than expected overall for that business.
Okay.
Okay Fair enough I mean, what would you say that in real time, you have seen any additional either.
Quoting activity or just on the ground engagement versus.
You know what your original plan might have been for the region. When you first bought SGI and as you move into the new year.
So you know they are on plan, we see activity strong in both of those region. Its just that Spain has just picked up more.
Okay Fair enough and then just second question on the margin trajectory I appreciate you guys.
Giving it a stop giving us an update on that.
You know I know the beginning of the call are Jim talks about some of the.
The pricing.
And cost mitigation efforts you guys have gone through over the course of the past.
Six to 12 months with steel prices spiking again again here recently I think investors are sort of keen to.
Understand how you are.
Mitigating those cost challenges again as they pop up here real time and are you seeing that in your pricing as youre, capturing new bookings here, which obviously are very strong, but youre not having to deal with this.
Oh spiking cost input environment again, just wondering what youre seeing here real time and whats your customer.
Discussions engagements on pricing are at the moment.
Yeah, I think I actually wanted to start with and Jim again, if you'd like but yeah, hey, Brian So because since we started the new LOI process in Q2 of 2021, we basically kind of had a different kind of engagement with our customer they they know and they they look for are the different changes in the commodities as well and they're now getting.
To us with our new process and the LOI, what we've found out variety is our customers really keen on securing supply. So they're you know they're willing to pay it with with the locked in prices. So.
We feel that the demand continues to be strong we get we're getting customer engagement.
With the LOI process, and we're not seeing anything really slow down from that perspective.
Yeah, I would just feel a lot Brian .
Given the assurance of supply with the customers want really leads to them wanting us to lock in the lead times, so that coupled with the pricing action is something that we.
We're taking advantage of with respect to rising prices going forward. So.
Okay.
Okay very clear thanks, guys I'll pass it on.
Thanks Ryan.
Our next question comes from the line of Philip Shen with Roth Capital. Please proceed with your question.
Hi, everyone. Thanks for taking the questions.
The first one is around the 22 revenue guide you know a key assumption in there is that you see or that presumes no material impact from.
The ADC with your inquiry and you said multiple times here in <unk>.
Constant contact with customers.
So you just published results of a survey of 200 companies today are highlighting the impact of the empty circuit case, and 75% of the company's reported canceled or delayed module supply 50% of the respondents reported 80 plus percent of 'twenty two.
Pipeline is that risk so wanted to just check in to see.
What is the potential downside risk to the 'twenty two guidance. So for example, how much of the 22 guide.
Has first solar modules tied to it and then how much of it has modules that are secured are independent of a D. C D. Thanks.
Yeah, Hey, Hey, Phil I'll start and Jim you can jump in but.
And yes, as we said several times on the call in the prepared remarks.
Our guidance range.
Contemplate any material impacts related to a b C D and what do we mean by that and we mean any cancellations or in definitely positive. The projects were in constant contact with our customers and we don't we arent carrying debt at this point, so that our guy doesn't contemplate that our guide really contemplate any potential project delays just based on supply chain logistics.
But right now we're not seeing that and we're not we don't provide like big and tall.
Just as the detail on which models that are in our backlog and so we're in constant discussions with our customers and models are changing all the time, but we feel good about the guidance that we've provided in the range.
Okay. Thanks.
Okay.
How much of the 22 non STI well, okay. So let me shift over to a different question.
How much of your <unk>.
Revenue do you think could be driven by projects third.
Being installed without modules and just with tracker.
Yeah.
So this is Jim.
Typically it doesn't happen, but obviously as you know well.
We can accommodate any.
Any type of module will change.
Some desired attribute changes for example, but I really haven't run across any utility scale side. We've seen go without modules they'll take delivery on some on some of the mechanical valve system.
There I would say, it's not being built without modules.
We do look.
Back to slide seven where we talk about 91% conversion against what our order book looks like but that's really where the conservative conservatism is built in.
Thanks, Jim one last one here on slide 11, you gave us a lot of detail on that margin.
Compression and then expansion again in knee, but I do think I think you gave details on the Q1 revenue cadence being up 20% versus Q4 I was wondering if you could talk through for the balance of the year do you see concentration that revenue in.
Q4, this year or perhaps give a little bit more color on the cadence of how Q2, three and four Mike.
Might evolve as we go through the year. Thanks.
Yeah, no worries so the way that our order book and played out with the delivery scheduled it it's more back to the traditional seasonality, where Q2 and Q3 are larger quarters. So that's where we see it coming out for this year as well.
Okay. Thanks for taking the questions I'll pass it on.
Thanks Bill.
And our next question.
Come from the line.
The line of Mark <unk> with J P. Morgan. Please proceed with your question.
Yeah. Good afternoon. Thank you very much for taking our questions.
I know, you're still guiding array legacy and an S. T. I separately for 2022, just curious, though if you can update us on any kind of revenue synergies that you're saying since that deal closed.
Yeah.
Yeah. So you know we've been in Prague.
Process of the integration.
S T I N as part of that we are looking at our go to market strategy, Mark as far as any revenue synergies or any any synergies related to S. T. I, we have not built anything into our guidance, we have internal targets for that.
And that would be upside to any any other guidance that we gave today.
Okay. Thanks for people.
And then.
Does the just what does the guidance assume regarding the kind of the timing of when the low margin legacy business kind of burns off.
Is that completely by the middle of the year or does the high teens to low twenties margin you're targeting in the second half does that still have some headwinds baked in.
Yeah. So you know our.
Youll recall, our longer term margins are in the high teens low twenty's. So the way that our trajectory comes out we showed on that slide is is really by by second half into the third and fourth quarter, we're back to our traditional margins.
Great. Okay very helpful. Thank you.
Yeah.
Our next question comes from the line of Jonathan Schaffer with Colliers Securities. Please proceed with your question.
Okay.
Hi, guys congratulations on the quarter.
But wanted to ask about the kind of what is it that's driving the so for the remaining legacy contracts and I guess I think.
I need to break this into two sections. So the first is with the legacy contracts, what's driving the uncertainty around the recognition of those and I guess I guess it does kind of blend as it related to the revenue recognition situation because I can understand if theres some uncertainty.
Around.
When you meet a performance obligation maybe with the final component or you know maybe you have to do a final commissioning or something thats sort of checking certain boxes that has to happen for the revenue recognition is that is that part of what's causing the uncertainty of when the legacy contracts ended up getting.
Recognize and is that is that tied to kind of the out of the revenue recognition part of it.
Hey, Jonathan stable now, it's not the revenue recognition.
I'll say a process is not tied to that what is really the uncertainty is it's project deliveries. So certain customers you know well, we'll pull forward or push out as scheduled.
And you know if they happen to fall across the quarter. They may you know it'll show up in one quarter, where we haven't forecasted it in another so that's really done.
The difference here is that uncertainty of when when that excellent project delivers.
Okay, and then if I could ask you about is PS. So.
You know when you guys came out.
Went public and then you know shortly after a F. T. C. I went public and then they're also been Thoratec and art Tech and everyone's kind of looking at all of this really closely and you know woodmac trade. Some reports I think we all got kind of dialed in around S. Skus on a per watt basis, but.
It's been hard you know I feel like we're kind of swimming around in the dark a little bit here with how much.
Commodity prices change, which you know would increase say this piece, but the panel waters of increase which would lower his views.
You know I can very broadly bracketed between maybe nine to 15 cents.
What which is a very wide range for <unk>.
Can you help us kind of just understand where maybe you were kind of out where you guys are a industry.
No maybe that theres changing trends and whether piles are included or not with what you saw so just trying to help us think about asps right now because it just feel like it's been a while since you've been able to tighten that up.
Yeah, Hey, Jonathan so that that all of the things you just named one of the things that we consider on Asps and we don't we try not to really give that as a forecast or guide we look at really revenue our revenue guidance because of all the things. You mentioned you know we have a wide variety of asps, depending on if novelties are included depending if there is if the.
Project is deployed where there's heavy snow and there's different components there.
Cause the price of the day increase and of course, the latest with the commodity increases. That's also reflected what I can point you to is when we went and when we talked about the order book and kind of the growth in the order book, 20% of that growth in that order book is really related to pricing. So that's the price that is showing that the pricing the costing that were.
<unk> seen in the market, we're passing it through in pricing and that's showing up in the order book, but the rest of those things thats hard for us to do that and that's why we don't guide to that.
Mhm, Okay and just last question for me is and kind of following up on Phil's question about the E. D. C. D. D stuff. So you know I do think the market the solar industry in general has kind of been getting beaten up a bit and so I think you know a lot of people are already sort of looking at this.
And maybe pricing in some maybe disappointments in maybe the fourth quarter or in 2020 through Sunday already do you sort of a baseline expectation.
And you're not you know that's not part of what you guys are guiding for but I'm wondering you know are the contracts structured or with your backlog or anything is there a way.
But where that creates sort of almost as an extreme case.
Most kind of non zero risk of a you know a big.
Disappointment in Q4, or you know if if it's a contract signed but maybe they pushed the delivery time.
Hypothetically a D C V D prevents modules from getting in but are you in a position where you're sort of those revenues are still there anyway and I'm just trying to wonder if kind of the the legality of the contractual terms how things are kind of locked in when you look at like two for you now and rounding out the year.
Yeah, So what I can say on that Donovan is that the process. We started last year in Q2.
Customer when they awarded the order gives us a.
Signed an LOI and gives us a deposit that gets to secure for us to secure the commodity portions of the bill of material that is a significant portion of that.
The commits that customer to our product we haven't seen.
Once the customer signed the LOI provided at the time, but we haven't seen.
The customer back out and we've seen some obviously project shifts hence the guide that we provided but well what I would say that keeps kind of skin in the game for the customer as well now so we feel good about that.
Mhm, that's great very helpful. Thank you.
Our next question comes from the line of.
She Harrison with Piper Sandler. Please proceed with your question.
Yes.
Hi, good evening, everyone and thanks for taking the questions and best of luck with your retirement Jim.
Okay.
Thank you so.
So my first question I wanted to talk about the big jump in contracted and awarded orders during Q4.
Can you maybe speak to what drove the big jump for legacy array and then also why S. T. I S order book didn't grow that much from Q3 to Q4.
Okay.
Yeah. So we.
We you know the momentum that we talked about the legacy array in Q3 continues in Q4 with our bookings strong bookings strong quote activity strong quote activity that led to strong bookings and we continue to see that continue to see us.
Taking orders from that were previously with or what.
Letters.
Where our customers were not in the array campus in the past. So we've continued to see that because we were delivering during these during the the uncertain times and that's helped and that's continued as far as and S. T. I. They have a their projects are smaller they have a shorter kind of view of their order book. So there are but wouldn't reflect too far out.
See some more bookings I.
I guess book in term business in 2022, so we feel good and the growth that we saw in STI from Q3 to Q4, and we feel that there is still.
Oh for Ray ban for STI, especially theres more more time to continue to.
To bolster that order book as we get through 2022 here.
That's helpful and then in the in the prepared remarks and in the presentation and in response to a prior question. You just indicated that you know when you look at pricing in the order book.
Up 20% year over year up presumably Q4 to Q4.
I know this is maybe a little bit of.
A tough or a tricky question, but.
If steel prices were to theoretically declined to about $1000, a ton or or maybe even lower.
Would that can you help us think through a quick rule of thumb on how that pricing.
Would change.
From where we are right now.
Okay.
Yeah, we really don't have them. Unfortunately account that you can do but because our prices don't kind of align with steel prices. One for one we have we've talked about strategic partner.
Partnerships, we have with certain steel providers that have where we have.
Fixed pricing, that's a favorable to array for certain volumes, so that that kind of keeps our keeps a ceiling for certain volume for us on cost. So I don't know that we can we can provide you kind of a formula.
Still were to fall Jean I don't know if you had any austere Kashi I would just add to that you know we continue to value price a lot of the.
The share of demand that we continue to gain as the customers coming not only for the assurance of supply, but just the basic performance of our product out there. So that's kind of where that's how we're focused on it.
It does decline in the prices of steel I think that's good overall for the entire industry, but again, we wouldn't be value pricing to preserve margin as well.
Uh huh.
Got it got it that's helpful. And then just a final quick one for me can.
Can you help us with what's you know where do you see Q4 EBITDA margins for your for your business on a on a blended basis are you back at the.
You know 15 plus range by the end of the year given that margins are going to be weaker in Q1, just some thoughts there would be helpful. Thank you.
Yeah, so kind of just unfair you're talking in our guide for Q4 2022.
Alright, Q4, 'twenty two sorry, yeah, yeah. So yeah. We were obviously, we're not providing guidance for that but what I would what I can say is our margins are going to be back we believe back yet for the legacy Wright business back at the historical levels, obviously, our G&A is a little bit higher as we discussed the need to invest for our.
Next phase of growth. So we would see that we wouldn't be back to closer to our overall kind of longer range targets in that quarter, but with with the higher SG&A load.
It'll it'll be into 2023 until we get back into that range.
Got it thank you.
Yeah.
And our next question comes from the line of Joseph Osha with Guggenheim Partners. Please proceed with your question.
Hello, everybody. Thanks for taking my questions. The first one just following this question has been asked a lot of ways, but it's sort of embedded in your second half guide is the assumption that you're gonna be able in yen to pass most of your higher material prices through to your customers, but you know when I listen.
To what comes out of it.
Hey, utility executives that you know at Edison and it wasn't out there, they're all squaring up and down but they don't want to pay higher pricing sorry, I. Just wanted to ask is is it your assertion for you know by the time, we get to the second half of this year into 2023 that youre going to get back to historic margins and that your customers are basically going to bear all of the impact.
Apart of metal pricing.
Yeah. Joe This is Nathan so we're having commercial discussions doing the price discovery on where whereas them right as Jim mentioned the value price would be we've got assumptions in there based on what's in our order book I'll point, you to in our order book being executed contracts and awarding orders. So these these are awarded orders that we have salt prices known on diesel.
And that's where the LOI process. We've got we've got the cost locked for the cloudy material and in our guide we put 90.
Understood that theres going to be potential shifts in projects in the building, taking 90% of that into our guidance. So what.
Sure.
We're not saying that everything got pushed through we're having commercial discussions with our customers, where we're doing price discovery to see which is at what price would be good for both us and the customer.
But I would add too is we are constantly.
Engineering design phase to really look at how we can further optimize the system. So there's this whole inflationary period before we're facing right now has really opened up the communication with customers on the engineering front. So we're designing.
For a more efficient systems that will hopefully keep that sat down on their price and you got to keep in mind too, whether using 10 or 15% of tracker and pose as a proxy for the total site theres still a substantial amount of cost rolled up and the labor as well. So there's other components of the utility scale side that will factor in.
In here and one of the areas that we remain focused on is how can we eliminate that labor reduce that labor.
And that you've nicely anticipated my second question and then I'll, just maybe ask for a small youre amplification that at all.
Other than what you mentioned or are there levers you can pull to just to get metal and cost out of this in particular I'm curious as to whether you have conversations with say you know wiring harness companies or for whatever any ways, you can get material or even waiver waive around at this process.
Yeah. The short answer is yes, we're looking at every aspect of the entire build both mechanical electrical balance of system. So we're working diligently within our own four walls of our key suppliers I might add on how you do build for manufacture ability designed for assembly design for manufacture ability. So.
It was completely through our agency with what we do with where are we where we take supply from our suppliers that is our vendors and our customers and then certainly working to.
Alleviate any of the assembly needs all the way down to how we actually drop ship.
Components to the site and how they stage. So there is a active.
Theres programs active with all of our customers on how to further optimize.
Okay. Yeah. Thank you that's that's interesting thanks very much.
And our next question comes from the line of calling them a rush with Oppenheimer and company. Please proceed with your question.
Thank you so much but could you talk a little bit about the geographic disbursement of the quotation activity that you're engaged in right now.
Yeah sure so for the legacy array business, it's still primarily in the U S. I would say is 95 five as far as that geographic dispersion as far as the.
The overall business. So obviously the U S. T. I did and this is mostly to non U S. So when you take the combined businesses I would say the quote activity is like 75% of U S close to 25% International.
Okay, and then as you look at the margin recovery through the balance of the year how much of.
Any sort of savings around shipping is being embedded into those numbers.
Yeah. So we you know we talked about this on previous calls when we.
Do you ever closer to our customers and it contemplates the the the latest kind of shipping.
So we can get broken and forecast we have and you know we have a few a.
A few shipping lanes and in.
Under contract. So I would say is it does it kind of a place where we have obviously that's a variable that we have in our in our cost structure like a lot of other companies are trying to fix every shipping costs, but we also have a lot of different ways.
We look at shipping to reduce those costs, we feel good about obviously, what we built into our guidance as it relates to.
<unk> shipping costs in our overall EBITDA margin okay.
Okay. Thanks, guys.
And our next question comes from the line of Jeff Osborne with Cowen and company. Please proceed with your question.
Yeah. Good afternoon, two quick ones you you've talked a lot about what you're not hearing from your customers as it related to the 80 CVD, but I was wondering what the constant dialogue that you're having can you share. What what you are hearing is it hey, we're working on addressing the situation and we'll get back to you or what what what specifically are you hearing that you could share.
Yes, I would say.
Customers are looking at it from the lens I'm doing as well, but they are certainly looking at it where they can source modules elsewhere and I think that's where we bring considerable strength given that there were fairly module agnostic and then you can do a module swap out without substantial changes to the overall system. So that's that's kind of.
Their focus is right now obviously it still remains an uncertainty for everybody in the industry.
Cause would you agree that it would be a bit unusual to cancel contracts just given you have a land position as well as an interconnect permit by the time you bought trackers. So you know, stating that you don't have cancellations I guess.
Not that surprising but maybe.
Maybe just you anticipated my second question on the change in modules can you touch on whats involved there how long that process takes I assume that the module rails the torque tubes, other things or change, but is that a few weeks process. A few days a few months can you walk us through that.
Yeah, depending on the size of the projects you could use two weeks as a proxy I'm typically what it takes.
So you know the posts counterproposal dimensions module spacing things of that nature.
Module wattage per row things of that need to be done, but typically two weeks that can be done.
Got it thank you.
And we have reached the end of the question and answer session now I'll turn the call back over to management for closing remarks.
Okay. Thank you I definitely want to thank everyone for your engagement over the past year and a half.
Certainly a special thanks to everyone had to raise its truly an amazing team I really look forward to seeing what array accomplishes under Kevin's leadership, so with that thank you everyone.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Oh.
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