Q2 2022 Array Technologies Inc (Dover) Earnings Call

August 9, 2022

Hello, and welcome to the right technologies second quarter 2022 earnings call.

At this time all participants are in a listen only mode.

And answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to Cogent.

They still relations.

Please go ahead.

Good evening and thank you for joining us on today's conference call to discuss array technologies second quarter 2022 results slides for today's presentation are available on the Investor Relations section of our website <unk> Dot com.

During this conference call management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.

Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect.

We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website.

We do not undertake any duty to update any forward looking statements.

Today's presentation also includes references to non-GAAP financial measures.

Refer to the information contained in the Companys second quarter press release for definitional information and reconciliations of historical non-GAAP measures.

The comparable GAAP financial measures.

With that let me turn the call over to Kevin Hostettler array technologies, Chief Executive Officer.

Thanks, Cody and good evening everyone. Thank.

Thank you for joining us on today's call.

In addition to Coty I'm also joined by Nipple Patel, our Chief Financial Officer.

Let's begin with slide four where I'll provide some highlights of our second quarter.

This was a strong quarter for array.

We delivered on our revenue adjusted EBITDA and adjusted EPS expectations, while having a strong quarter of bookings. Despite the impacts of the ADC CVD investigation, and we tightly managed working capital to ensure that we did not require additional financing or covenant relief.

Revenue for the quarter of $425 million.

<unk>, a 116% improvement year over year.

Included in this number is legacy array revenue of $352 million representing.

Representing organic year over year growth of 79%.

More impressively this growth was achieved against the challenging set of industry circumstances with numerous project starts and stops module changes and delays.

Our ability to achieve this operating performance is a strong reminder of three key elements of our business model.

One.

We offer a differentiated patent protected product that provides our customers with the lowest level wise cost of energy.

Two with continued redesigns due to issues with module availability, our flexible mounting structure and civil engineering expertise are key competitive advantages.

And three our large and well established U S supply base, coupled with our asset light operating model allows for the shortest and most reliable lead times in our industry.

This provides our customers the confidence in our ability to deliver the right products and services for their project on time.

Despite the strong delivery volume for the quarter and the slowdown in orders due to the ADC BD investigation in April and May we added over $200 million in new orders ending the quarter with a $1 9 billion order book.

It is important to note that in July after the announcement of the tariff moratorium inbound opportunities increased by 25% compared to April and May and we fully expect this momentum to continue.

Gross margin for the quarter was 11, 1%, which is an improvement of 70 basis points from prior year period, and the third consecutive quarter of improvement up 230 basis points from the first quarter.

The 11, 1%, while certainly on the right trajectory is slightly down from where we would like to be as the STI business continued to have some cost challenges both in the U S construction business and in Spain.

Adjusted EBITDA in the second quarter of $26 million represents a year over year improvement of 162% and a sequential.

<unk> improvement of approximately $25 million from the first quarter.

Although we still have room for improvement in our working capital efficiency overall I was pleased with our execution this quarter.

Youll recall coming into our second quarter, we had some constraints on our liquidity due to our debt covenants.

Delivering $425 million of revenue and managing our working capital to not require either covenant relief or additional funding was a testament to this team's execution.

<unk> will discuss this in more detail later, but as we look at liquidity moving forward. There are a few key aspects to keep in mind.

In Q2, we were limited to only being able to pull $70 million from our revolving facility because of our existing desk covenant.

Given our Q2 results and expected second half performance, we now anticipate unlocking the full $200 million value of that facility.

As we have discussed previously the combination of margin improvement our business cyclicality and improved working capital efficiency will provide positive free cash flow in both the third and fourth quarters and.

And finally.

As identified in our recent current report we reached a $42 seven $5 million legal settlement and these funds were received in full after our quarter end we.

We had not planned for this and our cash forecast.

With these factors in mind, we feel confident in our liquidity position as we move forward and execute on our $1 $9 billion order book.

Turning to our next slide.

Mindful of recent developments I want to take some time to discuss the industry landscape here in the U S and what that means for array as we progress through this year and into 2023.

There are three key dynamics that are important when looking at our business moving forward.

The regulatory environment.

Customer demand and project timing and the health of our supply chain.

First on the regulatory side.

The bite the administration's executive order, providing a two year moratorium on tariffs offered welcome relief and a window of certainty for our customers.

Okay.

We now expect the $240 million of projects that we previously identified as at risk during our first quarter call to move forward and we have already secured defined start dates on several of these projects.

While we are pleased to see this demand solidified I note. We do not currently expect to see a significant impact from these projects in 2022 due to lead times and the time required for our customers to get these projects into their near term build schedule.

We are also seeing some project delays due to the weaker forced labor Prevention Act or U F. L. P. A.

This is resulting in project still requiring multiple module designs, while customers navigate the potential for delays.

As of today. These delays are within the range of the slower progression of projects that we have been forecasting all year.

On the horizon the inflation reduction act of 2022 now passed on the U S. Senate side represents the biggest piece of climate related legislation in the history of the United States.

While details of many of the provisions still need to be clarified what is clear is this legislation will provide long term certainty on incentives for both deployment and manufacturing related to solar energy.

This certainty allows participants to invest in new facilities and bring jobs to the U S. While accelerating the transition to clean energy.

We strongly encourage the house to pass this bill and President Biden to signed it into law.

Our initial analysis of this bill and its specific impact on array can be broken down into two areas.

First it provides a meaningful tailwind to the solar industry in total.

Initial industry estimates are that the extension of the investment tax credit would add over 40% of additional installations between 2023 and 2027.

This would equal approximately 46 additional gigawatts of solar energy installations over five years.

Second between the domestic content adder of 10% and the advanced manufacturing credit for torque tube and fasteners. There are additional benefits for companies, who manufacture and source within the United States.

On the domestic content adder as we have stated before we have a longstanding and mature domestic supply chain.

Since this draft Bill was released we have already been in conversations with our customers to begin mapping out how we can support this provision.

Our longstanding domestic capacity serves as an important strategic asset for us should this bill passed.

On the manufacturing credits clarification of how these will be calculated and who will be the direct beneficiary will be important since we do not directly manufacturer torque tubes or fasteners.

Regardless of the direct beneficiary these credits provide a meaningful incentive for our industry.

We estimate the current credits of <unk> 87 per kilogram of <unk> and $2 28.

Per kilogram of fasteners would amount to approximately one five to $1 seven per megawatt.

Moving on to the demand side.

As evidenced by our substantial year over year growth in our $1 9 billion order book, we have consistently seen strong demand for our products and services.

If we look at the current distribution of the demand within our order book, we expect between six and $800 million to be delivered for the remainder of this year based on our current guidance.

This means we have already secured between one and $1 $2 billion in revenue for 2023.

And at the point in time when this was measured we still had six months to go before 2023 begins.

Any impact from the passage of the inflation reduction Act would only represent an upside to this already strong start.

With the potential for additional demand and the intricacies of where material is manufactured and sourced from becoming increasingly important.

What becomes even clear is that a robust and flexible supply chain, coupled with strong execution will be more important than ever.

Given this as a backdrop, it's important to provide some additional information about our re supply chain.

This year, we have increased our global capacity to serve the market by more than 25% and are now able to deliver over 30 gigawatts per year.

By the end of Q1 2023, given the commitment of our existing partners and the addition of new suppliers already in queue. We expect this number to be near 40 Gigawatts.

Importantly, given our asset light operating model. This scaling does not require meaningful capital expenditures and does not represent additional fixed costs to array.

Our operating model and execution provide meaningful cyclical resiliency should volumes ebb and flow.

Relative to our domestic content. We currently have over 20 suppliers here in the U S for our major components with five additional suppliers in various stages of our vendor qualification process.

It is important to note we not only utilize steel mills located in the U S. We also have suppliers that source the steel from the U S.

This underlying source of steel becomes a crucial factor for our customers as they look to meet domestic content requirements.

So as I take a step back and look at the industry landscape the term, but I'd like to focus on is flexibility.

We want to position ourselves to meet the additional demand as it comes while ensuring that our operational structure does not depend upon that volume.

With our recent and continuing supply chain and logistics improvements we're in an outstanding position to do just that.

As we move to slide six I want to close out today by talking a little bit about my early observations about the company and some of the key focus areas will be driving as we move forward.

First let me reiterate my initial impression that array has an incredibly solid foundation to build from.

Within the legacy arrays segment, we continued to round out our high quality experienced management team, who know how to scale and run a large multinational publicly traded corporation.

Further we have set in place key building blocks for continued growth and expanding profitability.

In addition to the supply chain elements I discussed earlier. This also includes the change in our business process that was made this time last year, reducing the company's exposure to commodity cost fluctuations and theyre in producing more predictable results.

Our digital transformation initiatives deliver streamlines backend processes, driving better operational efficiencies as we scale as well as improving our interactions with our customers.

And the expansion of the workforce in strategic areas like commercial excellence commodity management and logistics to ensure we are driving margin expansion as well as growth.

On the STI Si STI is a company with a great customer reputation and product operating in high growth regions.

I have recently spent a week in Brazil with our STI team I was fortunate to meet many of our team members and our customers and to spend time in the field on utility scale solar sites learning and understanding the STI product and service offerings and the positioning opportunities between our array and STI product lines.

I've been incredibly impressed with the team at STI. They are dedicated to the company and to the industry and they continued to rally to every challenge we present them.

However, as you can imagine there are still areas, where we need to get better and we will focus on going forward.

First we need to quickly mature the processes and execution within the Spi business to meet its current growth trajectory.

And its operations under our U S public company.

To that end, we have recently appointed Ken <unk>, our Chief operations Officer, as our integration leader and we have brought in a renowned third party operations and supply chain consulting company to further accelerate our integration efforts.

Second.

We need to rationalize the construction business at STI.

This area of the business continues to be a drag on margins. So we need to ensure we are only offering this service, where we have clarity and experience in the scope of work a strong value proposition and when we could deliver our required profitability.

Since our last quarter call, we have made progress on this front.

We discontinued quoting any construction projects in the U S and have significantly reduced our construction quotes in Brazil, where we have reduced our associated construction head count by more than half since the beginning of this year.

We are still evaluating the strategic alternatives in Spain as that region has a more entrenched customer expectation that the tracker provider also performs construction.

While this may take a bit more time than Brazil, we will be thoughtful and deliberate in our approach.

Third we need to become a world class logistics company.

You'll remember we manufacture little ourselves.

This means we are moving a lot of materials from multiple suppliers direct to multiple customer sites at any given time.

We recognized our need to execute this in the most efficient flexible and predictable way possible.

We've recently hired a new vice President of logistics, who has extensive international experience and a proven track record of delivering operational excellence in this area.

Our second half ERP system enhancements will also greatly aid our efforts here.

Fourth we need to have an intense focus on improving working capital efficiency.

We fell a bit behind here as our team rightly pivoted to focus on margin restoration and improving delivery execution.

Our business model inherently produces great free cash flow and we need to ensure we are maximizing income and cash to fund organic growth pay down debt and provide funding for strategic acquisitions.

We have already restructured our collections process to better align with our customer facing teams and we have significantly improved the linearity of our shipments, allowing us to get more receivables into the building cycle earlier in the period.

This dramatically improved linearity throughout Q2 and into Q3 was critical to and evidenced by our cash management and our second quarter.

While improving there is still work to do in optimizing inventory levels and bringing our DSO levels near our historic levels.

Finally, we will focus on becoming easier to do business with while creating a streamlined experience for our customers we.

We have always had a strong focus on our customers, but often this is done through extraordinary efforts and manual processes, which at times can be slow frustrating and exceedingly difficult to scale.

This is a key area, where we're focusing our near term digital transformation efforts on.

As designed our digital transformation will improve turnaround times on customer quotes project design shipments scheduling and service appointments to name a few.

All of this while simultaneously providing enhanced visibility on project status and delivery directly to our customers.

As a company with multiple products servicing numerous regions, we need to ensure our customers know who to go to to get the right answers in a timely manner.

There was already a great deal of momentum behind these focus areas and I am confident that we could execute on improving them quickly.

I look forward to updating you on our progress in these areas as we execute and move forward.

With this I will turn the call over to <unk> for a deeper review of our second quarter financial performance.

Thanks, Kevin I'm glad to speak with you all today.

First turning to slide eight I'll walk through our results for the quarter.

Revenues for the second quarter increased 116% to $424 9 million compared to $196 5 million for the prior year period.

The $425 million in revenue reflects $352 million from the legacy <unk> business and $73 million from the MTI business at <unk>.

Kevin mentioned, the $352 million from the legacy array business represents organic growth of 79% compared to the prior year and quarter over quarter growth of $101 million, which was partially due to our normal seasonality, we would expect more deliveries in the second and third quarters.

The $73 million from the Sci business represents growth of $23 million or <unk>, 46% from the first quarter taken.

Taken together revenue exceeded our expectation as we had strong delivery execution and linearity throughout the quarter and had favorable timing of project start date late in the quarter.

Gross profit increased to $47 4 million from $20 5 million in the prior year period due to the increase in volumes, coupled with better pass through pricing on the project signed under our new business process.

Gross margin increased from 10, 4% to 11, 1%.

Gross margin for the legacy array business was 11% and represents the third consecutive quarter of margin improvement as it was up 250 basis points from the first quarter and was in line with our expectations.

The STI business had gross margin of 11, 7% in the quarter, which was lower than expected and the continued to have construction and logistics cost challenges not only in the U S. Construction projects, but also in Spain.

Supply plan changes and longer shipping times are delaying material to project site, which is negatively impacting our labor utilization and productivity.

Never as Kevin mentioned, we have all hands on deck right now to ensure we quickly address these issues.

Operating expenses increased to $54 2 million compared to $21 1 million during the same period in the prior year.

Higher expense is primarily related to an $18 3 million increase in amortization expense related to the <unk> acquisition.

Excluding this impact the increase is primarily due to the addition of STI New Orleans. In addition to higher payroll related costs due to an increase in head count as we invest in key strategic areas for our growth.

The increases were partially offset by a reduction in contingent consideration expense of $1 7 million.

Net loss attributable to common shareholders was $15 million compared to a net loss of $5 5 million. During the same period in the prior year and basic and diluted loss per share for <unk> compared to basic and diluted loss per share of <unk>. During the same period in the prior year.

The increase in losses to common shareholders, primarily represents the preferred dividend payments, which began in the third quarter of last year.

Adjusted EBITDA increased to $25 9 million compared to $9 9 million for the prior year period.

Adjusted EPS was <unk> <unk>.

Up from <unk> a year ago.

Positively impacted by a larger than expected income tax benefit this quarter.

Looking at free cash flow, we used cash of $12 $2 million in the current quarter, primarily due to an increase in our accounts receivable balance due to the increase in revenue from the prior quarter.

However, it is important to note the slight use of cash was expected for the second quarter and represents a significant improvement over the prior year, when we used $92 6 million.

Overall, we were pleased with the execution this quarter. The legacy array operating segment continued the margin restoration trajectory you outlined last year and even though the FTA operating segment has near term cost challenges that we will have to contend with it showed improvement quarter over quarter in its margin and we expect that trend to continue.

Now if we move to slide nine I'll provide some additional details around our sources of liquidity for the remainder of the year.

We ended the second quarter was $51 million in cash on hand, and $2 million in availability under our revolving facility.

I will remind everyone that the $2 million of availability. This quarter was due to our inability to meet our net debt to adjusted EBITDA ratio of seven one times, which would have been tested should we have drawn greater than $70 million.

The net debt in the calculation includes only our term loan in the amount drawn on the revolver less cash on hand.

You can see here at the end of Q2 this totaled $341 million.

However, as we move into the third and further quarters with the expected adjusted EBITDA performance. We expect we will no longer be restricted by this covenant and therefore, we will have between 150 and $170 million of availability under this facility depending on the hold back of lines of credit.

This means we now have access to between 80 and $100 million in additional liquidity.

That said, we currently anticipate paying down the revolver in full in the third quarter with the combination of the funds received from the settlement Kevin discussed earlier, and our free cash flow, which we expect will range from $75 million to $100 million in the quarter, driven by improved margins and better working capital efficiency.

As discussed previously as we progress forward and continues to produce free cash flow. We will first use that cash to fund our organic growth and with any excess capital, we will look at deleveraging and funding strategic acquisitions.

Moving to the next slide.

I'll spend a lot of time here, but you will see that we are reaffirming our full year 2022 got it.

We do see a potential for some upside from the <unk>, but we are currently seeing more of that impact in early 2023 due to lead times and the time it takes to get these projects aligns with build schedules.

Also as Kevin mentioned, the U S. LPGA is causing some slower movement on getting projects started for the remainder of our order book. So we are still planning on our backlog conversion being a little bit slower than historical norms, but in line with our previous expectation for the year.

Finally, we also see some slight headwinds in STI from their margins being down a little bit from a reduction in the euro to USD rate, which we are now assuming will be at par for the remainder of the year, putting the full year averaged around one five versus the original planning assumption of 112.

With that I'll turn it back over to Kevin to wrap up.

Thank you in April .

To wrap up by thanking our employees, providing me with such a warm welcome to array.

I am incredibly excited about the trajectory of our business, we are growing our market share improving our margins and becoming more efficient with our working capital. We are not at the finish line yet and there are certainly areas, where we are working on to improve but I am proud of the team for delivering on a great quarter and with that operator. Please open the.

Line for questions.

Thank you.

At this time, we will be conducting a question and answer session.

It's not just a question. Please press star and then one on your telephone keypad.

<unk> 10 million to catch your line is in the question queue.

It's a star and then two if you would like to remove your question from the queue.

For participants using speaker equipment, it might be necessary to pick up your handset before pressing the star Keith one moment, please close the call for questions.

Our first question is from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon, thanks for taking the questions kudos on the solid execution here.

Business environment is still quite challenging.

Maybe a couple of questions really just on the margins.

First Kevin appreciate all that sort of action plan items around.

STI and integrating that and can you give us a sense for.

How many quarters do you think it'll take to sort of implement these.

Strategy and then <unk>.

As ECS Ti normalize in terms of margins I know you took it down from the high teens to mid teens in gross margin. This.

This year it sounds like just based on the euro.

What is the new normal there what are you kind of aspiring to get to for STI gross margins and sort of over what timeframe and then I had a follow up.

Okay. Great question I think from our perspective, we're looking at this as another two to three quarters of work in this work in several areas first obviously, we've talked about scaling down some of the construction business, but that's becoming more difficult to be profitable.

Is somewhat dilutive to kind of the core product margins. So we're working very aggressively on that I think we're really far along in Brazil.

Spain's going to take us a little bit longer to evaluate and there'll be more like a transition into more construction advisory services, rather than actually performing the work ourselves. So that's ongoing and while we have been really effective team in STI, Brazil scaling that down very quickly.

Take us a little bit longer a few quarters to achieve that.

In Spain.

I think the second key area of focus is really about supply chain leverage we're working really really aggressively with the team in both Brazil, and Spain, and bringing our supply chain expertise, our commodity management teams and logistics to bear on those businesses, we have a pretty aggressive spread for that frankly, we're in a 14 week very aggressive integration.

Program in which through that time period will be very aggressively working with them to improve their overall cost position.

We're not going to be done in 2014 weeks, let me be clear, but there is certainly a focus effort and push with supportive of third party and able to do that over the next 14 weeks. So I think the right answer is it's going to take two or three quarters to get STI margins, where we think we really want them to be kind of a.

The terminal margin perspective, but.

You'll start to see that improvement here in the back half of the year for sure.

Okay fair enough that makes sense and then.

With respect to that improvement in the back half I think.

You guys had talked about previously kind of getting too high.

High teens, maybe even.

20% plus gross margins exiting this year is that still intact and then as I think about next year 2023.

<unk> costs have come in quite significantly can you kind of give us a sense of what that means for you in terms of pricing strategy heading into into 'twenty, three and then on the margins.

Does this translate into maybe potential further margin upside for you guys as you take advantage of lower steel costs.

What I would presume at this point or sort of second half of 'twenty three.

<unk> quotes and deployed.

Deployments. Thank you guys.

Yes so.

Two questions. The first is.

So we still stand by our high teens low <unk> exit rate of margins and we certainly do we feel really good about that we see that trajectory I don't think anything's changing our assumptions are that with what we see in the next six months or so.

I think the second question is really about one of the.

What are the changes in our business model as you remember that we put in place last year to protect us on the upside.

Rising commodity costs also don't mean that we necessarily take huge chunks of profit improvement when commodities go down it's really about managing net debt cycle of commodities and quoting at the time that we take that order.

Don't expect it to still come down our margins are going to just ballooned up that's really not the way the industry is pricing at this point.

Our next question is from Philip Shen of Roth Capital. Please go ahead.

Hey, guys. Thanks for taking my questions first one is on the IR E.

In terms of the $1 six per watts.

Factoring tax credit benefit Kevin I think you quantified was wondering.

If you could talk through how much of that do you think you might be able to secure and I know this is fluid and.

Technically I think the torque tube.

Producers seller manufacturer gets that credits.

Ultimately how does that play out do you think you could get half of that or more.

And I know it starts are effective.

The first of next year.

So how would you expect that to kind of flow through margins and so forth.

Well I think it's really going to be too early to tell in the past when the user comes there's been some level of sharing between the manufacturer and the end users. The end users will have an expectation knowing that.

The manufacturers getting that level of credit for some level of sharing that as the price, but I think its tumor that until what that looks like I think the important thing to remember is that while others are scrambling out there to identify and develop a reliable U S.

Supply base, we've had a longstanding and tested U S supply base, but it's really ready made for these provisions. So I think we feel we're sitting at a very very good position as these provisions come into play.

Because we've been at this for a long time in the U S. Using U S deal. So it's not only about where the towards <unk> formed right.

Whether you run out and put a bunch of rolling mills in place in the U S. It's actually goes down to the raw steel and where your source of supply for the raw steel listen that's something that we've really focused on very aggressively over the last several years in building out our U S supply base. So we're well positioned but I think it's too early to tell how that will play out in the end market.

Right.

The $1 six would accrue in the value chain, but then.

With your U S. Steel content you can then enable that 10% ITC adder on the backend or down for the street.

That makes sense okay. Good.

Anything else you want to add on that topic.

No I think it's just a bit early we're still figuring out I think everyone. This figure now while these provisions are put in a lot of the actual execution clarifications and details of them still have yet to be worked out I can only say that I think that we're in a great position and have a seat at the table working with several of the larger industry.

Bodies, we certainly spend time with <unk> and we have representatives on the board of CN, who will have a seat at the table in terms of helping the government work through some of the details.

In the language that's going to come further as these <unk>.

Provisions get more clarity wrapped around them. So I think we'll have good representation will have a better understanding earlier than others, but that's still to come.

Great. Thanks, Kevin My second question here is on working capital I think on the Q1 call you guys highlighted that you expect it to collect on in Q2.

But the receivables really kind of continued to increase.

So can you talk to us about what happened there and then.

Importantly.

How much do you might you be able to collect in Q3.

And some additional color on that overall would be fantastic. Thanks.

Yeah, Hey, Bill.

So yes, we did state that our receivables are income down. However, we did have a large revenue quarter larger than our originally expected for Q2.

Receivables did not go well.

We did have a lot of receivables in the collection process and we still expect a strong Q3 and the balance of the year. So we.

Although it's higher than we expected.

The higher revenue has helped our overall conversion cycle and we believe we're going to get the overall cash conversion cycle down into historical levels near the end of the year.

Okay. Thanks, very much I'll pass it on.

Thanks, Joe.

Yes.

Our next question is from <unk> <unk> of Oppenheimer <unk> Company. Please go ahead.

Thanks, So much guys I'm curious about the product evolution in the European market and started to make some progress there what youre seeing in terms of products.

And which platform is I need to sell a little bit better.

The traditional U S business or the one coming out of Brazil.

That's great question call. It I think what you see is that.

One of the key reasons, we acquired the MTI business was to have a dual position strategy and as we all your.

Although Europe is not kind of monolithic right, where you would have coastal areas unique one product where you are inland areas with low wind you may need. Another when you are in the northern part of Europe , where you've got snowed properties all of the above you need another so the key in US playing MTI was to give us a dual position strategy.

Two.

Different price points, but similar margin levels to be able to attack all of those different regions that you need and as we are actively.

In real time, completing our go to market strategy globally, we're looking at being able to sell both throughout Europe .

And we have a lot of large multinational customers wanting access to both product lines, depending upon the specific geography of where this particular.

Utility scale plants is going to go.

So theres not one answer I think we benefit by having both answers and we're able to satisfy their needs at two different price points, depending upon the geography, whether conditions wind conditions for their specific locations.

So theres no because that's emerging as a kind of a more desires. If you will it really comes down to a specific geography and the conditions of that individual market.

Excellent and then this is maybe just a silly question, but just from a supply chain diversity and resiliency perspective can you talk a little bit about any additional sources of materials that you guys are looking at it is there is that even necessary at this point, but im curious if theres something to do there in terms of driving some cost out and enjoy.

Im a little bit of competition into the supply.

The supply chain.

Yes, I think when you think about the opportunities in supply chain there as much about logistics so.

You're hard pressed to have a competitive advantage when you or when your largest commodities are our steel and aluminum to say that you are buying that commodity and a dramatically improved rates than your competitors.

Probably isn't really sustainable longer term, so it's really about being able to convert that commodity and then logistically get at this site in the cheapest way possible for your customers is a huge portion of the cost is on the logistics side. So what we've been more focused on is not worrying about.

The source of supply of our of our steel tube. For example, we know we have several.

U S suppliers of that we can also bring in intra Asia.

If it's a large enough scale project award.

It really comes down to geographically, adding those suppliers so that the distance between those suppliers and we're the largest sites are now being built is smaller so again. Your overall landed cost is cheaper, but it's less about that individual commodity if you think of it that way.

Perfect. Thanks, so much guys.

The next question is from Mohit <unk> of Credit Suisse. Please go ahead.

Hey, good evening and thanks.

Thanks for taking our questions.

Congratulations on the strong quarter here.

No.

Most of the silver so I will answer it in your slide deck, but let me just.

Question on international mix, how much of the growth on the international projects next year can you just told me so some lights around that.

And then just mostly youre going to be Brazil, or you have a mix of Europe or Brazil for 2023.

Yes, <unk>, yes.

We still feel that we're going to be about a 70 525 mix from a U S domestic to international and similar to what we've said in the past the international mix is going to be.

Primarily Brazil leaning that way and then Spain in Western Europe , the majority of the rest.

Keep in mind that mix may vary because the U S continues to be strong in our forecast.

<unk> continued to have growth in 'twenty three and beyond.

Got you no.

Thats helpful.

Let me just make one housekeeping.

And then kind of alluded a little bit on the working capital question differed.

Deferred revenues increase.

In Q2.

Related to <unk>.

Should we expect something similar in the second half here.

Yes, so thats related to our LOI process that we described that we instituted about a year ago now and we'll continue to see stronger deferred revenues just as customers continued to secure their projects earlier and as you recall with our new process. They are.

Secure that with an advanced payment, which would go into deferred revenue.

Got you and then.

Maybe just a follow up on that now that given the more.

Constrains or.

The limitations around.

So the projects.

Customers can get accelerated.

Absolutely it does.

Deferred revenue.

Sure.

Downpayments on their purchases all Brazil.

So as we've said before you're obviously, having supply is a really good resource in the commodity that we have so as we continue to grow and we we had we continue to have greater amount of supply we absolutely believe thats going to allow us to secure projects earlier, thus impacting our deferred revenue positively.

Got it alright, thanks for taking my questions.

Okay.

Our next question is from Jonathan <unk> of Northland Capital markets. Please go ahead.

Hey, guys.

Yes, congratulations on the quarter.

Revenues.

Great great.

Cool to see in the story seems to kind of be unfolding. The way you guys signaled as far back as.

Over a year I suppose.

Initial steel price situation.

Talking about still towards tubes, and all that stuff yes.

I know next tracker has had two announcements.

Kind of setting up supply of lives setting up manufacturing lines for torque tubes, and U S domestic sourcing.

It kind of supports the idea that that was a really good move for you guys.

But I guess that also raises the question if.

That can create can make it sort of a crowded space I mean, I don't know how much flexibility.

There is among U S domestic steel production to just.

And make a lot more torque tubes, you guys also have the.

The octagonal cross section that's unique to your torque tubes. So I'm just curious.

Game change in.

Other.

The us tracker manufacturers with that with the inflation reduction act or are likely to be trying to source more of that from the U S.

Is there just any anything to be mindful of from a as that gets congested for instance, say with the new core agreement you're already out does the nuclear agreement you have does that allow for.

Taking our volumes there was some kind of firm commitment.

Any color there would be great.

Yes, I mean, I think what youre seeing is that.

In the competitive landscape there recognizing one of the stronger competitive advantages that we've had for a long time and thats our ability to deliver.

More expeditiously than the competitors because of our local and supply closer to the sites that we're working on so.

The end of the day, we feel that we're in really great shape in terms of our overall volume in some of the prepared remarks I mentioned that.

One of the things we do is we try to build capacity well ahead of where we need it.

And certainly as of today with the.

Vast improvements we've been making in supply chain. The additional vendors, we've been qualifying and bringing onboard as of today. Our current capacity that we measure and talk about as a senior leadership team monthly on a global basis is already over 30, Gigawatts and that really has over 25 gigawatts supplying the domestic market. So that they are committed.

Ready available volume by the end of Q1 next year with the current supply base that we're bringing on the commitment from our supply chain organization. So it will be at 40 Gigawatts. So again, we're staying well ahead of the demand and we're building that and those are those aren't just kind of a soft agreement closer where we have some really hard commitments.

In support of our volumes with our Oh can we feel really good.

For.

It's not the kind of thing where you get bumped if it gets competitive or.

People are finding that right yes, okay.

Okay, well, that's what you have to read is that you do have many of the.

Steel converters and still manufacturing companies fully recognizing the solar is going to be a hyper growth market that happens to use a lot of high quality steel and as such.

We have launched knocking on our doors as the leading provider in the U S.

Begging for our business so kind of the opposite is happening, we're actually getting where it has become very very competitive to get our business.

In those in layers because.

Frankly, they see it as a hyper growth space going forward that uses a lot of their product in a high quality version. So we feel pretty good about our position.

Okay. That's very helpful. Okay and then.

Pivoting to STI norland so.

I actually did not realize that STI Norland was also self performing.

<unk> in Brazil, and Spain.

I was just kind of took for granted because my understanding of how.

Different types of trackers and designs and stuff how do they play in different geographies that there was sort of a historic need for that.

Some of the non U S tracker manufacturers to self perform in the U S. Because of the higher labor costs, They couldnt get by and Couldnt get the EPC is to believe that it can be installed fast enough. So they had to hire their own people and kind of try and prove it either successfully or unsuccessfully.

So, but I don't think of Brazil, or Spain as high labor cost markets. So I guess I was surprised to realize that you were doing that yourself performing there.

Was that the case historically when the acquisition was made.

Some pretty I think the gross margins might've been cited as something on the order of 30% to 40%.

Was that were those really attractive historical margins with US Jay Norland was that was then doing all of this kind of self performance work in Spain and Brazil.

Yes.

And if.

We think of it.

I am sorry.

Well I'll, let you finish I just have a real quick follow up.

Sure. So when you think about the construction that was going on in Spain, and Brazil in first.

Geez I think it was my first 10 days here, we had kind of a come together meeting.

Because we saw the construction business needed to be adapted a little bit better and when you think about it as being.

In engineering.

And construction company ourselves in terms of developing those products, we're thinking about much more engineering and construction advisory service has been actually performing the construction itself. So when you think about Brazil. If you. If you go back to the beginning of 'twenty. One for example, we had within the MTI business as many as I think it was just over 600 employees.

<unk> performing construction services right. So that is a massive amount of your work.

Workforce doing construction services, we have no competitive advantage in the actual hiring of labor and this isn't this isn't where we had our own construction crews that we would move around the country of Brazil. This was all about hey, we're going to start a site on the east coast in the Sun belt in Brazil. So we're going to go hire lots of local law.

Labor to perform on that site. So we would set up shop hire people qualified people manage them throughout the construction process.

Teach them how to build and then once the sites done they're gone and we move on to another site to do that work and what we found was that the problems in the construction and the management of that particular labor pool was taking a disproportionate amount of art manager's time away from customers away from focusing on the business.

You can imagine you had the safety challenges you had weather challenges productivity utilization all of the above that was really hard to run a predictive P&L. When you have those kind of challenges in the construction business.

Three months ago, we set as the leadership team and said, let's start scaling that down and pivot those resources into what we call. The Aaas are construction advisory services group. So we took our debt yield.

The best people, we had in the field that run those sites and they are going into science, so rather than 50 individuals on a particular site. We will have two or three of the senior construction advisers that will go and they will source local labor, meaning that the EPC world and we will provide them a couple of bodies to help.

Educate train overseas first Rochester, but not yet okay.

Well. So first just from that standpoint, just will there be if you do get rid of these workforces will there be any sort of meaningful severance amounts or higher expenses costs associated with benzene is.

We have been scaling them down in Brazil as projects close.

Because they are only hired on these short term pieces. So for example, I think.

When I made in my prepared comments, we're already down to half, where we're all the way down to as of the last.

A few weeks when I was in Brazil, and checking on the progress of the scaled down we're down to maybe 120 individuals will stop when we get down to about 20 that'll be our best kind of performance and they are what informs that construction advisory services group down I want to be clear, it's going to take a little bit longer for us to do that work in Spain, Spain has much more of an entrenched.

<unk> construction services, so we have to work with our customers in Spain.

And guide them through the process on Hey, look we're not going to leave you stranded we're going to continue to be on site to help you construct but we're going to let the EPC actually higher that labor management labor and it just leads us to a much more predictable set of results as we go forward.

Okay.

That's great. Thank you I'll take the rest offline.

Welcome.

Ladies and gentlemen, just a reminder, if you would like.

To ask a question Youre welcome to pay Star and then one on.

Our next question is from Joseph Osha of Guggenheim. Please go ahead.

Oh, Hi, good afternoon, I got two questions for you first during the prepared comments I believe I heard something about.

The retention of cash.

Cash for future strategic acquisitions I was just wondering.

What type of moves we might be expecting from you all and in the future.

Got it.

I am not a rookie enough to foreshadow that right.

Look.

The inorganic growth part of our business is going to be important part of our level as we go forward when we look around the near adjacent products to what we do.

There are several areas that we would look at we would look at different technology place that increase the share of our customers' wallet in this space I think there are some.

Something that bested for buying your way into some additional geographic expansion in particular regions that we think going forward will be hyper growth regions for solar.

And that's really the <unk>.

So we're active in looking at these different opportunities at this point, but I want to be really clear in the near term. Our team is focused on building that muscle of integration right.

We've taken a big bite with STI.

We've gone out and hired a third party to assist us in teach us how to effectively integrate a large acquisition in that segment. The future ones are going to be large by the way, but it's certainly something that we have to develop and how do we transfer all of those core processes over in a very rapid time periods. Our focus here in the near term in the next six months is going to be to focus on integrating fully the.

And getting its business model to where we'd like it to be.

While we're actively doing that a subset of US we'll continue to look at these adjacencies in and prioritize the geographics in the Adjacencies that we want to play it but it's too early to say no kind of specific types of where they are at this point.

Alright, I understand obviously, you cant tip your hand, but that was a helpful answer. Thank you and then a completely unrelated question for for Knight point.

Looking at debt that Q3 free cash flow number you were talking about which is quite impressive, but just thinking about that a little bit more holistically how how.

How much of that especially as we maybe think into Q4 comes from sort of one time.

Goodness is good working capital accounts.

Go back the other way and how much of it Mike we think of as real kind of sustainable recurring free cash flow.

So a portion of that is the.

Basically the flipping of the buildup of inventory.

Inventory and delivering those products and the collection of those receivables.

Our business if you step back our business is truly a free cash flow generation business as margins continue to go up in the subsequent quarters that drives free cash flow along with just more working capital efficiency, Kevin talked about what we're doing on the receivable side.

Connected with our with our front end sales side insurance receivables that are in the collection process get collected on time very quickly. So I would say that you know of course youre going to have that just normal transition of the receivables and build on through Q2.

And collected in Q3, but we do normally.

Cash flow generating business.

And feel that once our margins are back at the historical levels will continue to generate free cash flow.

Okay would you care to put a number on that I mean, I used to cover industrial and people are always talking about free cash flow to net income it through some kind of aspirational free cash flow number that you might want to share with us.

So what I can share with you and obviously as we progress down this journey, we will get.

We'll provide.

Further detail, but for the balance of this year, we still believe we're going to be free cash flow positive in the tune of around $100 million for the full year. So that obviously means we're going to be flipping from the negative free cash flow position or in the first half of the year.

Im pretty significantly here in the back half.

Yes.

Okay. Thanks very much.

Our next question is from Kashi Harrison of Piper Sandler. Please go ahead.

Good afternoon, everyone and thank you for taking my question.

So maybe just following up on Joes last question, just maybe wanted to give it another shot.

Like you said you are.

Your EBITDA margins are going to be better next year working capital management are improving attaining a historical cash conversion cycles et cetera.

So maybe moving forward.

How are you thinking about.

Either an EBITDA to free cash flow conversion or.

Maybe how do you think about just the ongoing working capital requirements of this business.

Moving forward.

When we look at Kashi is really our cash conversion cycle and trying to target an overall.

Cash conversion cycle in the low seventies, which we've historically done and when we've done that we've generated significant free cash flow to fund our business both internal.

ROI projects as well as funding for acquisition. So we'll continue to focus on all elements of that.

Cash conversion cycle, but really getting back to that around 70% in the 70% of that so that overall CCC.

That's super helpful. Thank you and then.

My next question.

The prepared remarks and in the press release, you indicated that the business organically grew by 79% year over year.

I was wondering if you could just help us think through how much of that might be driven by higher steel prices and inflation and how much of that is driven by units.

Yes, so when we looked at Asps.

We see about a 20% growth year on year on Asp's.

The remaining increase there on the organic side is really related to volume and project mix.

About 20% on the ESP side.

That's super helpful. And then just maybe my final one obviously a lot of detailed discussion surrounding that.

If you just maybe think about think about STI.

A higher level.

With all the changes that are going into play.

How are you thinking about the growth potential for this business it sounds like the series maybe.

A reset year or flattish year, but longer term, how do you think about the growth.

For STI.

Yes, so STI.

We believe we're positioned well in the regions that we're currently at so if you think about Brazil being the top player in Brazil with the majority of the share of demand. We continue we see we see the growth in Brazil over the next several years and we're in a great position to capture a lot of that growth in Spain.

We continue to grow our business as Kevin mentioned.

Sub performing less of our business and being more of the.

Delivery of the products the engineered products. We continue to believe that will be the top three top three in Spain. So if you look at those two regions will grow with the market or better in both of those and having good positions in the market. So.

We don't have an exact percentage right now, but we will grow with market and above market in those in those two regions primarily.

Helpful. Thank you.

Our next question is from Brian <unk> of UBS. Please go ahead.

Great. Thanks, very much just one quick one for me, but I'm wondering if you could provide any color on.

Kind of the revenue cadence here for the second half of the year.

It looks like relative to the second quarter.

Guidance kind of implies.

Flat to potentially.

Lower revenue for third quarter and fourth quarter. So just curious.

If you could provide any color there. Thanks.

Yes, sure well.

For Q3, I would say, we're going to be about the same.

Q2, so it stayed flat to Q3 and Q4 were seasonally down in Q4 with most of our business being in North America. So we'll continue to see that to get to the full year the guidance range that leaves us David.

Very helpful. Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session and with that this concludes today's conference. Thank you for joining US you may now disconnect your lines.

[music].

Yeah.

Okay.

Yeah.

Okay.

[music].

Hello, and welcome to the right technologies second quarter 2022 earnings call.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to coating you, let Victor relations. Please.

Please go ahead.

Good evening and thank you for joining us on today's conference call to discuss array technologies second quarter 2022 results.

Slides for today's presentation are available on the Investor Relations section of our website <unk> Dot com.

During this conference call management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.

Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect.

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 second 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 Kevin Hostettler array technologies, Chief Executive Officer.

Thanks, Cody and good evening everyone.

Thank you for joining us on today's call. In addition to Coty I'm also joined by Nipple Patel, Our Chief Financial Officer.

Let's begin with slide four where I'll provide some highlights of our second quarter.

This was a strong quarter for array.

We delivered on our revenue adjusted EBITDA and adjusted EPS expectations, while having a strong quarter of bookings. Despite the impacts of the AED CVD investigation, and we tightly managed working capital to ensure that we did not require additional financing or covenant relief.

Revenue for the quarter of $425 million.

Represents a 116% improvement year over year.

Included in this number is legacy array revenue of $352 million representing.

Representing organic year over year growth of 79%.

More impressively this growth was achieved against the challenging set of industry circumstances with numerous project starts and stops module changes and delays.

Our ability to achieve this operating performance is a strong reminder of three key elements of our business model.

One we offer a differentiated patent protected product that provides our customers with the lowest level <unk> cost of energy.

Two with continued redesigns due to issues with module availability, our flexible mounting structure and civil engineering expertise are key competitive advantages.

And three our large and well established U S supply base, coupled with our asset light operating model allows for the shortest and most reliable lead times in our industry.

This provides our customers the confidence in our ability to deliver the right products and services for their project on time.

Despite the strong delivery volume for the quarter and the slowdown in orders due to the ADC CVD investigation in April and May we added over $200 million in new orders ending the quarter with a $1 $9 billion order book.

It is important to note that in July after the announcement of the tariff moratorium inbound opportunities increased by 25% compared to April and May and we fully expect this momentum to continue.

Adjusted EBITDA in the second quarter of $26 million represents a year over year improvement of 162% and a sequential improvement of approximately $25 million from the first quarter.

Although we still have room for improvement in our working capital efficiency overall I was pleased with our execution this quarter.

Youll recall coming into our second quarter, we had some constraints on our liquidity due to our debt covenants.

Delivering $425 million of revenue and managing our working capital to not require either covenant relief or additional funding was a testament to this team's execution.

Nathan will discuss this in more detail later, but as we look at liquidity moving forward. There are a few key aspects to keep in mind.

In Q2, we were limited to only being able to pull $70 million from our revolving facility because of our existing debt covenants.

Given our Q2 results and expected second half performance, we now anticipate unlocking the full $200 million value of that facility.

And finally.

As identified in our recent current report we reached a $42 seven $5 million legal settlement and these funds were received in full after our quarter end we.

We had not planned for this and our cash forecast.

With these factors in mind, we feel confident in our liquidity position as we move forward and execute on our $1 $9 billion order book.

Turning to our next slide.

Mindful of recent developments I want to take some time to discuss the industry landscape here in the U S and what that means for array as we progress through this year and into 2023.

There are three key dynamics that are important when looking at our business moving forward.

The regulatory environment.

Customer demand and project timing and the health of our supply chain.

First on the regulatory side.

The bite the administration's executive order, providing a two year moratorium on tariffs offered welcome relief and a window of certainty for our customers.

Yes.

We are also seeing some project delays due to the weaker forced labor Prevention Act or U F LPGA.

This is resulting in project still requiring multiple module designs, while customers navigate the potential for delays.

As of today. These delays are within the range of the slower progression of projects that we have been forecasting all year.

On the horizon.

The inflation reduction act of 2022 now passed on the U S. Senate side represents the biggest piece of climate related legislation in the history of the United States.

This certainty allows participants to invest in new facilities and bring jobs to the U S. While accelerating the transition to clean energy.

We strongly encourage the house to pass this bill and President Biden to signed it into law.

Our initial analysis of this bill and its specific impact on array can be broken down into two areas.

First it provides a meaningful tailwind to the solar industry in total.

Initial industry estimates are that the extension of the investment tax credit would add over 40% of additional installations between 2023 and 2027.

This would equal approximately 46 additional gigawatts of solar energy installations over five years.

On the domestic content adder as we have stated before.

We have a long standing and mature domestic supply chain.

Since this draft Bill was released we have already been in conversations with our customers to begin mapping out how we can support this provision.

Our longstanding domestic capacity serves as an important strategic asset for us should this bill passed.

On the manufacturing credits clarification of how these will be calculated and who will be the direct beneficiary will be important since we do not directly manufactured torque tubes or fasteners.

Regardless of the direct beneficiary these credits provide a meaningful incentive for our industry.

We estimate the current credits of <unk> 87 per kilogram of torque too.

$2 28.

Per kilogram of fasteners would amount to approximately one five to $1 seven per megawatt.

Moving on to the demand side.

As evidenced by our substantial year over year growth in our $1 $9 billion order book, we have consistently seen strong demand for our products and services.

If we look at the current distribution of the demand within our order book, we expect between six and $800 million to be delivered for the remainder of this year based on our current guidance.

This means we have already secured between one and $1 2 billion in revenue for 2023.

And at the point in time when this was measured we still had six months to go before 2023 begins.

Any impact from the passage of the inflation reduction Act would only represent an upside to this already strong start.

With the potential for additional demand and the intricacies of where material is manufactured and sourced from becoming increasingly important.

What becomes even clear is that a robust and flexible supply chain, coupled with strong execution will be more important than ever.

Given this as a backdrop, it's important to provide some additional information about our res supply chain.