Q2 2022 FTC Solar Inc Earnings Call
[music].
Good day, and welcome to the FTC or second quarter of 2022 earnings Conference call.
Okay.
Turning to you.
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After todays presentation, there will be an opportunity to ask questions.
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They reported.
At this time I will now turn the conference Vice President of Investor Relations. Mr. Bill Mitchell. Please go ahead.
Thank you and welcome everyone to <unk>.
Second quarter 2022 earnings conference call.
Today's call you've likely had opportunity to review our earnings release supplemental financial information and slide presentation, which was posted earlier today.
If you've not yet reviewed these documents they are available on the Investor Relations section of our website at FTC solar Dot com.
I'm joined today by Sean Hustler, FTC soldiers, President and Chief Executive Officer, Phelps Morris, the Companys, Chief Financial Officer, and Patrick the Companys Chief Commercial officer.
Before we begin I remind everyone that today's discussion contains forward looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date.
These forward looking statements include risks and uncertainties and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors, we assume no obligation to update such information, except as required by law.
As you would expect we will be discussing both GAAP and non-GAAP financial measures. Today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure.
In addition, we'll discuss our executed contract and awarded orders in our definition for that metric is also included in our press release with that I'll now turn the call over to Sean.
Thanks, Bill and good morning, everyone.
I'm going to start again this quarter with an update on the market environment as there's been a fair amount of activity.
As you may recall at the time of our last update in May the anti dumping countervailing duties investigation or ADC BD with its risk of significant retroactive tariffs was by far the biggest concern in the industry that along with some lingering WR unrelated import concerns had essentially.
Halted U S imports of most solar modules and module makers had idled their factories.
As a result U S solar project construction timelines and decisions on new projects were pushed to the right.
Then the president issued an executive order in June that essentially removes the ADC vd tariff risks for 24 months the market shared this news and we have seen a marked increase in customer activity and discussion around projects since the executive order at the same time, however, the weger.
Forced labor Prevention Act or U F L. P. A.
Became effective in June , resulting in new rules for module importers and reviews by customs and border patrol.
Bill a bit of uncertainty in the market around achieving full compliance with <unk>, whether related to sufficient mapping of materials or other factors. Once there is additional clarity around this and customers get line of sight to module deliveries. We believe the market will see a swift and substantial recovery.
One other potential change that is on the table is the proposed inflation reduction act, which includes incentives and an extension of the investment tax credit while there are already many underlying drivers of growth in the solar industry. We believe this bill which served to further bolster and extend future demand.
Based on our recent channel checks and customer discussions we are hearing that many EPC and developers are anticipating clarity on module supply within a late August early September timeframe.
Such a significant amount of pent up demand in the market with both delayed 2022 projects and a strong funnel of new 2023 projects that some customers are worried about the availability of sufficient labor and materials to meet the demand.
Our focus at FTC solar during this regulatory driven downturn has simply been to best position ourselves to capture that demand to emerge even stronger when module start flowing again and to grow faster than the market once again with significant enhanced profitability.
That and we are focused on a few key things.
Gross margin improvement.
Our design to value initiatives, we continue to take cost out of our tracker systems, enabling future projects to be at higher margins than historical bill.
Building, our DG business, which has higher margins.
Improving our operational efficiency and controlling costs.
Building and strengthening customer relationships.
Accelerating international growth.
And finally, one that cuts across both growth and profitability is strategic R&D, we have an incredible R&D team. We have continued to invest in this area and are excited about our R&D pipeline of new products, We will talk more about this in future calls.
So those are our focus areas and despite the recent industry environment and slowdown we've made good progress and have several highlights from the quarter. We added a significant 141 million customer bookings since our last update bringing total contracted and awarded now to 774.
This includes the addition of a new top 10 utility customer and a new strategic EPC customer. It also includes an award for our first project in Thailand, continuing our international expansion and following the additions of Kenya, Malaysia, and South Africa last quarter as <unk>.
We talked about last quarter, the vast majority of our contracted and awarded moving forward will be at a significantly improved margin profile relative to historical projects as we've taken cost out of our systems.
Our old projects roll off in Q3, and new projects begin in Q4, we expect this improvement to become very apparent in Q4 margins and Phelps will talk more about that shortly.
Continue to believe that we're well positioned to make significant progress toward our stated long term target gross margins in the 20% range when project activity normalizes.
We have grown our pipeline to a new record high at more than 86 Gigawatts. The international growth has been exceptional and now for the first time stands at more than half of our total pipeline.
We also closed on the H X transaction during the quarter and we believe it will provide many benefits, including further accelerating our international expansion, providing complementary <unk> technology and strengthening our capabilities and indeed, we've continued our progress and just yesterday announced that AUR partners.
<unk> will be our EPC partner, our DG business is focused on providing rapid design through installation services for sites under 20 megawatts. The offering includes fast quote and all the benefits of our differentiated tracker system and software with delivery lead times as short as eight weeks, we're excited about the Mas.
<unk> profile of this business and are off to a good start in terms of demand.
In summary volumes are depressed at the moment and this module constrained environment, but the pent up demand is incredibly large our legacy projects roll off after Q3, and we now have a strong cost structure as we move forward, we're building backlog and pipeline, adding new customers, including in new countries.
Simply put we believe our actions during this industry slowdown have positioned us to outpace market growth once again when module start to flow normally and to do so with significantly improved profitability with that I will turn the call over to <unk> to provide more detail.
Thanks, Sean and good morning, everyone as a follow up to Sean's comments I'd like to provide some additional color on the second cohort performance and our outlook.
Beginning with the results in the second quarter. Our results were generally in line with expectations with adjusted EBITDA and gross margins come in ahead of our midpoint of our guidance range, while revenue was at the lower end.
Specifically second quarter revenue was $30 7 million, which was at the lower end of our guidance range and reflects the lower demand environment in the U S and make the regulatory backdrop of 80 CVD W. R. O U F LTA that Shawn talked about.
This revenue represents a decrease of 38% compared to the prior quarter and a decrease of 39% year over year, driven by lower volumes and partially offset by higher asps.
GAAP gross loss was $6 5 million or 21, 2% of revenue compared to $9 3 million or 18, 7% of revenue in the prior quarter.
non-GAAP gross loss was $5 4 million or 17, 5% of revenue the margin percentage was better than our guidance range of some of the lower margin logistics revenue shifted between quarters into Q3.
On a sequential basis, the non-GAAP margin percentage was approximately flat as improved product and logistics direct margins were offset by reduced overhead cost absorption on the lower revenue levels.
GAAP operating expense was $18 $7 million on a non-GAAP basis, excluding stock based compensation and certain other expenses operating expenses were $12 4 million compared to $8 3 million in the year ago quarter.
This was a bit higher than our guidance range due to a $1 1 million allowance for doubtful accounts and a small amount of H X track or operating expenses that were not included in our guidance. The year over year increase was driven primarily by the same items as well as the necessary growth in staffing and other costs related with becoming a public company last year.
GAAP net loss of $25 $7 million with 26 per share compared to a loss of $27 8 million or 28 cents per share in the prior quarter and compared to a net loss of $52 4 million or <unk> 61 per share a year ago quarter.
Adjusted EBITDA loss, which excludes approximately $7 $9 million of expenses, such as stock based compensation expense and certain consulting and legal fees severance and other noncash items was $17 $7 million.
This was better than the midpoint of our guidance range and the results compare to an adjusted EBITDA loss of $20 million in the prior quarter and $16 7 million in the year ago quarter.
Regarding liquidity, we generated positive cash flow in Q2 of $17 million and ended the quarter with a cash balance of $66 million. In addition, we amended our revolving credit facility during the quarter, which among other modifications made reduced liquidity covenant from 125 million to $50 million for Q1 2023.
<unk> provide enhanced liquidity for the company.
With that let's turn to our outlook, we expect the third quarter represent the low watermark in terms of revenue and margin.
Third quarter revenue consists primarily of in flight legacy products with new products, largely being delayed beyond Q3 due to the module supply issues.
Our gross margin expectations reflect these low margin legacy products being delivered a higher percentage of logistics revenue compared to materials revenue, which come with lower margins as well as the overhead cost absorption being spread across a relatively lower revenue base collectively.
Collectively these factors flowed down to adjusted EBITDA offset to a degree by expense reduction initiatives, we've implemented in light of the module uncertainty in the marketplace spin.
Specifically our targets for the third quarter call for revenue between $16 $5 million to $19 million non-GAAP gross loss of eight 3% to $3 8 million or negative 50% to 20% and as you might expect the percentage range very more greatly at these lower revenue levels.
Our non-GAAP operating expenses are expected to be between 10, and $11 million and the adjusted EBITDA loss between 10% and $14 million.
Finally, looking ahead to the fourth quarter, we're starting to see some light at the end of the tunnel based upon what we see today, we anticipate new wins to begin production, helping drive strong sequential revenue growth.
Importantly, we expect significant gross margin improvements to be delivered in Q4 moving into positive territory. As these new products will incorporate our latest D. TV initiatives, coupled with having the lower margin legacy projects behind us.
Specifically, our expected targets for the fourth quarter call for revenue between 75 and $90 million again represented a significant rebound from Q3 as our new project wins begin production.
Gross margins are anticipated to between nine and 14% with our new products delivering enhanced margins relative to our historical norms and finally, an adjusted EBITDA range of plus or minus $3 million with that we'll conclude our prepared remarks, and I'll turn it over to the operator for questions.
Operator.
Thank you.
We will now begin the question answer session.
<unk> thousand 100.
On your telephone keypad.
Ladies and speaker, please pick up your handset before pressing on Q.
The majority of your question. Please press Star then two.
As a strong partner in apparel in there with some of our roster.
Our first question comes from Kashi Harrison Piper Sandler. Please go ahead.
Good morning, everybody and thank you for taking my questions.
So I wanted to maybe start on the cash management side of the equation.
It looks like you managed working capital well this quarter came down a bit.
Can you just walk us through how you were thinking about changes in working capital and cash.
Cash flow from ops as you think about the second half of the year.
Hey, Kash. This is Shawn thanks for the question, yes, So we're really happy with the company's performance in terms of cash management in the quarter.
We saw saw really good progress by the team and a great level of focus. In addition, we were able to renegotiate the revolver as well and so we feel we feel good about the position of the company.
Moving forward, so why not why don't I turn it over to <unk> to give you a little bit more color, yes, no. Thanks, hi, good morning, Kashi. So yes. So we did a great job in terms of working capital during the quarter as you look kind of future, we're not going to provide guidance on cash, but the way I think you would need to think about it as a couple of ways number one we will continue to focus on collections.
And for the prior sales bring down the accounts receivables when you look at obviously the guidance for Q3, we will burn some cash from an EBIT perspective, but there are some potential offsets there in terms of new deposits being made on new sales on the customers I think going forward. So a big continued focus I think one of the other things were really.
Really happy about is pwc removed a substantial doubt language that was placed last quarter based upon all of the activities that we put in place.
Yeah.
That's good to hear on the growing concern language.
My second question.
You indicated bookings of 140 million that's up from what you said last quarter.
And just doing the quick math here your second revenue second half revenue guidance is about 100 and your backlog is about 774.
774 last hundred gives us $674 million of backlog for 'twenty three and beyond.
Can you maybe walk us through how much of that 674 is scheduled for 'twenty three as opposed to the 24 and beyond.
So so we're really excited about the continued progress on the backlog we've seen.
Frankly speaking as we said in the prepared remarks as well the entire customer base is seems to be anticipating a very strong 23.
And in fact, as we mentioned there are some concerned about there being enough capacity manpower capacity materials capacity et cetera to be able to do what people want to see happen in 'twenty three.
We're very excited about the continued growth of the backlog and we think 'twenty three is going to be a very very strong year.
Okay Fair enough and then maybe just one final one.
If I could sneak it in.
How are you thinking about the risks towards <unk> 2022 revenue guidance specifically.
What does it assume for <unk>.
Our module supply are you effectively assuming that the market is sort of figured out <unk> or are you still.
Effectively assuming that it takes a little bit longer for that to sort itself out that's it for me. Thank you.
Yes so.
We see the market Kashi, it's really a single issue today and Thats Thats module supply in and obviously, we've been able to put W. R O behind us as an industry, we've with the executive order, we put ADC BD behind us and now people are working through Europe LPGA. It seems that <unk> has some of the same.
Issues.
<unk> had in it the industry was able to work through in terms of just figuring out the regulatory environment. What exactly is required to module can can make their way into the U S and not be CS and so our view is and talking to the customer base is that the module for <unk> is going to get itself worked out.
Here in the coming months and so that Thats, what enables Q4 to be our inflection point.
So our assumption on Q4 revenue is based again on the module situation getting worked out by our customers.
And the other thing too cocky as we've talked about this Patrick.
<unk> growth and expansion in the international market as well. So you saw last quarter, we went out in the book.
340, plus megawatts of international sales, we expect that to.
To continue as well and so there is an international component that is not affected by <unk>.
It's going to contribute to the <unk>.
<unk> Q4 that we see.
In front of us.
Thank you.
And our next question comes from Don Chuck Berg Northland Capital. Please go ahead.
Hey, guys.
Following up on kind of cashews question about Q4.
I'm trying to what I'm kind of thinking I know.
I got to add the kind of pleasure of looking at you guys as charterers demonstration side.
<unk>, Colorado.
You kind of see all of the different components.
Coming away from that as I understand it.
The one piece that really you have to wait until you know exactly what.
Until you know exactly what module specifications whats the final module is going to be it's the perlin or some people call. It the rail.
It's kind of like where are you going to punch the holes in the rail or how long does the rail off to be those little tweaks, there, but the rest of the parts can be even knowing what thicknesses or.
Size.
No.
Piles and such are required.
No all of that ahead of time. So the orders that you are looking at in Q4 as this kind of a dynamic where you know.
Youre in a position because of course, we've had a constrained supply chain environment also just in terms of sourcing materials. So are you in a position where you kind of have everything in place for what those deliveries would be in Q4, and youre just kind of waiting on.
Knowing the final spec so that you can finalize with apparel the perlin and the rest is kind of ready to go.
Or is it more than that.
So donovan and thanks for the question. So as you said our system effectively the Voyager tracker is agnostic to the module. We can we can accommodate any module and in order to do so like you said there is some adjustment on the rail itself, but we feel very good about.
Once the module supply is resolved that.
Our view of it.
If Q4 is sound based on everything we know today.
So so frankly speaking.
It's just a matter of the module the module issue itself getting resolved in terms of the supply chain constraints. As you know we use an asset light model. So we have multiple suppliers around the world, including suppliers in the U S and so that that flexible supply chain, having multiple suppliers with multiple qualifications.
Yes, it gives us confidence that any.
Issues that that might appear.
Appear are going to be able are absolutely resolvable simply because of the fact that we have multiple suppliers and have that flexibility by the design of our supply chain.
The other thing to tack on a lot of the customers that we're talking to and inform kind of by the increased contracts in the order that we've got.
With this earnings call, it's a really narrowing in on two.
Two or three different are one to two different module manufacturers and so you've got a good sense of what the form factor is going to be with those so to your point on.
On the <unk> and the module rails, we're able to really kind of a narrow and so it's a one or two versus we don't know when the modules are going to come or who they are going to come from.
Additional clarity, we've been able to kind of narrow that down with a lot of these a lot of these awards.
Okay.
Great. That's helpful and then if I could.
Ask about the project in Thailand that did a common attention because I know back in <unk>.
2019, I think it was 2019 you also had some sales in Vietnam.
I think that.
That may have been more of kind of engineering services I can't remember if those the 18 90 tracker visitor and tracker, but it just.
We don't necessarily need to get into that but.
It doesn't.
That doesn't mean curious do you have sort of the.
Some kind of a presence or some good advocacy or <unk>.
Sales presence and that kind of part of southeast Asia that sort of peninsula, Cambodia, Thailand Vietnam.
Is that kind of something like that behind the other would be.
If you are willing to kind of disclose the size of the project.
Was it a voyager tracker checks one P tracker since that's kind of.
Trying to get into that kind of Asian territory, maybe I thought it could be the apex tracker.
And then if you can park at all if there's specific site conditions there in Thailand.
Something to do with soils or what may have caused the win of FTC I versus you know other trackers that could've gone with.
Thanks, Thanks Donovan.
The project in Thailand is relatively small it's two megawatts, but I'm really really excited about it because it's we're following the path in Thailand that we've seen in other countries as well that we've seen in South Africa that we've seen in Australia, where we get a proof of concept basically on the ground that people can come and see and countries.
That leads to additional business and the growth of the business in that country. So I'm absolutely confident we have a we have a team in southeast Asia, five people, who call on Thailand, and other countries as well and they've been making really good progress as you know we announced our first project in Malaysia recently.
As well and then on top of that the other thing that I'm excited about is with the acquisition of <unk>. We now have the Helios <unk> tracker in our in our.
Product roadmap and so we're able to sell that product as well, but this particular sale in Thailand is the Voyager <unk> tracker and I think it's going to lead to other other opportunities there as well as it has in other countries.
Thanks for the question, Okay and then.
If I could just squeeze in well actually so.
The other question about where there are certain things on the site and Thailand.
On the mid the fewer piles are or may be odd shaped block or anything like that that kind of place the <unk> design, yes.
Yes.
It fit well with the FERC <unk> solution oddly shaped parcel.
Land challenging ultimate undulation.
This is a developer that has really kind of taken a long term view on FTC and theirs.
Expect us as what we've seen in other geographies additional project wins that augment our TTP solution very well and so thats kind of a tie in with those two megawatt project earlier.
Starting with <unk>.
Is your business.
And then my last question, just because you know people.
People are looking at Europe .
With the energy security concerns.
But the Russians envision of Ukraine. So just.
Last question just if you can talk about if theres any maybe like demonstration projects, you're kind of looking at doing there if you've seen an uptick interest whether Spain has historically had a decent amount of tupi trackers.
Some of the legacy Spanish companies, Germany has had a lot of solar penetration. So maybe they're in a situation like the U S where fewer.
Fewer sites are available that are large block acreage you might have more so.
So curious if youre seeing any developments kind of in the European area.
Yes, Great question, Jonathan I mean, certainly energy independence in Europe has been a big focus over the last last several months and in terms of just kind of uptick in activity. Obviously, that's going to be some policy changes that are going to be rolled out here in Europe over the next.
Several quarters, but we have seen internally an uptick.
Kind of bidding activity as you look out into 2023 and beyond and so we've had a team on the ground there for about 12 months engaged with the developers of the Pcs in the region of a very good pulse on ultimately where that market is going into the focus point for us.
But we'll be able to capture that market.
These policy changes.
Thanks, Jonathan.
Yes, Thank you guys.
I'll take the rest offline.
Our next question comes from Sorel Multimodal Raymond James Please go ahead.
Thanks for taking the question.
Can you clarify any inflation reduction act there are references to.
The advanced manufacturing credit.
In relation to.
Solar trackers, but it's a bit.
Confusing on kind of what the what the amount of subsidy is have you.
Looked at that already.
Hey, Pablo this is Sean so we've been studying this for some time and are waiting for the bill to pass. So we think in general. This is this is very much a net positive but as you said, where we're studying the bill. So we have our folks internally as well as some folks externally study.
The bill so that we best understand how with our with our supply chain to take advantage of it but we will share some more details in future calls on what our approach is but again, we continue to study to bill when we see it is absolutely a net positive for the industry.
Okay.
Let me ask about what's happening with steel.
Spot price.
Benchmark steel futures is down 30%.
Its peak of last October .
How much of that is being reflected in your cost of goods directly.
So we're excited about the.
The improvement in steel costs as well as logistics, while both both are down and the trend is that way there is still above historical highs, but we see it as a.
Definitely a net positive moving forward.
Got it and then just a quick.
Kind of statistical question, what percentage of this year's revenue.
Do you expect to be non U S.
Okay.
Sure.
In terms of revenue so we talked.
We talked about the pipeline and the pipeline is now about 50 50, but in terms of revenue likely in the 20% 30% range.
Very clear thank you guys.
Thank you.
Your next question comes from Jeff Osborne of Cowen.
Cowen and company. Please go ahead.
Yes. Good morning, just a couple on my end I was wondering if we should use the EBITDA loss as a proxy for cash just going back to Kashi is question around the new covenants. It seems like you'll be pretty close to breaking that 50 million. So I just wanted to think about how we think about the third quarter being the bottom and the cash needs.
Yes so.
The way you guys think about number one on the liquidity covenant is unused revolver capacity plus cash right. So when you think about liquidity covenants you got to factor that in so we don't have any borrowings on the revolver other than a couple of million dollars of Lcs. So theres no borrowings, we don't have any intentions to follow that and is it.
Consequence, yes, if the cash goes down from.
From an EBITDA burn for next quarter again, what I've talked about earlier is there is potential offsets will continue to collect and really focus on the collections in the prior sales. In addition, the cash can be further supplemented by deposits or capacity to deposits that we received during the quarter for future future capacity.
Got it and on the other.
Deposits. Firstly I heard you mentioned that was is there a rule of thumb is.
You bought $100 worth of trackers do you get 5% upfront or is every deal is different.
Yes, no just generally at the time the place you're getting roughly 20% down upfront.
There's also talk within the industry just given capacity constraints for next year as we look forward to even get any higher amounts.
Got it a couple of other quick ones for you on the allowance for doubtful accounts was that a U S customer.
Or international and was that on one of the loans that you had made four developments or was that an actual trackers delivered.
This is actually on track to deliver to the U S projects.
Got it and lastly, just going back to <unk> question, the 20%, 30% International.
All of those deals denominated in U S dollars or how do we think about your FX exposure given they'll have your pipeline is in the international markets. Yes. They are all in USD.
Alright, great. Thank you that's all I had thank you.
Okay. Thanks.
Our next question comes from the line of.
Credit Suisse. Please go ahead.
Hey, thanks for taking the questions.
Just on the guidance side can you just talk about how much of.
How much does the guidance for Q4, specifically is dependent on getting modules for <unk> and <unk>.
Talking about 20, 30% international.
Most of that 70%.
<unk> and getting settled in early Q4.
So the way I would think about it is like you said the international doesn't so much.
Really arent restrictions on the international we're Super excited about the continued growth internationally the number of clients.
We've added recently this quarter.
<unk>.
You should grow and then as we've seen in other other international countries as we start with a small project eventually leads to bigger and bigger projects and so.
One of the things that we've seen during this period of a lull in the U S market is that it's been a real opportunity for us to really dig deep with the customers in the global market and we've seen progress as a consequence, and then the U S market. So we've talked to multiple customers.
Said in the prepared remarks that <unk>.
Many of our customers are indicating that they will get their module situation resolved, which includes anything related to modules today, obviously as <unk>, but our assumption is that as we've heard from the customers that the module situation is resolved and.
And that will allow things to move forward. We also hear that with the concern and with 23 being such a strong year that people are wanting to look at opportunities to pull things in so the sooner. They can get the module issue resolved I think the better it will be for Q4 and as we said today we are.
Seeing that as an inflection point for us.
Other comment just on the Q4 result, Q4 guidance, specifically that it's going to be more equally weighted between U S and international products based upon our current rollout.
The 20% to 20% to 30% was on the aggregate all year. It was on the full year 2022.
Okay.
No.
Yes, it doesn't say like 50% in Q4, Youre, saying U S and internationally.
Roughly equal U S and international in Q4.
Got you.
And then just one.
In the previous coming down just around this.
Potentially the visibility improving in Q4 as well.
So if it gets resolved EBIT.
Later Q3 Q4.
Hum.
So kind of can you just help us understand.
When do you recognize revenue on shipments from the.
From our factories.
On site delivery of.
And you would see some demand.
Demand pull in and make people just installing these trackers and just waiting for deals to come in whenever they come in in December or January or February .
So generally speaking when someone someone places a contract with us they will have the modules identified because of the meeting to understand that just to get the design completed so we aren't seeing too many situations where people are asking for a tracker in advance of the.
Our module situation getting resolved so we see that again the macro situation is the key area and then in terms of revenue recognition, we follow the standard rules.
Yes, so specifically on the materials revenue, that's generally going to be recognized through the manufacturing process and then if you look at the service revenue breakdown, that's really tied to logistics and that would be once the underlying materials is delivered.
The final destination.
Got you.
Alright, Thats really helpful.
Opex side I think.
Guidance kind of implies you're expecting almost $9 million of Opex in Q4.
To shop.
So a decline from Q2 could.
Could you talk about the drivers to that.
Is it something you're expecting in the near term and obviously as the sales come back in 'twenty. Three we expect to go back to the historical Opex run rate, how should we be thinking about that thanks.
Yes, so we've been really mindful on the Opex, obviously, given given the near term challenges within the marketplace given all of the regulatory issues. So we've really cut out discretionary spend taking a look at.
Ross the organization for the overall spend.
As you look towards 2023, obviously, we're not providing guidance at this point, but we would expect with the protect projected industry growth that we would start to scale up some of the opex to support the delivery of the online projects, but in the near term again, we've taken across the organization view on Opex and really really curtail that significantly.
Got you and I appreciate you taking my questions.
Thank you.
And as a reminder, if you have a question. Please please press star then one.
Next question comes from Phil Shen Roth Capital Partners. Please go ahead.
First one is a follow up on the inflation reduction Act.
So the incentive there is for <unk> <unk> per kilogram.
Of incentive for the tour tube supplier. My sense is you guys don't manufacture your own torque tubes.
So I was wondering.
How you might <unk>.
Sure that incentive with your supplier.
And how those economics might work thanks.
So Phil.
Sure.
Super excited about the inflation reduction act and the prospect of it.
Passing we've been studying it back to the time of build back better before it and so as you know we.
We have multiple partners in our supply chain and so we've been studying it we've been in discussions and we will we will have further comments on this in the future, but it's absolutely a positive for the industry and something that we definitely plan to take advantage of.
Great.
Thank you John as it relates to.
I have a follow up here in terms of.
Does it need to be U S steel it seems like it might be and if so how do you think the U S steel.
It has to be defined for example, iron ore and coking coal mines in the U S.
Steel produced in the U S blast furnace or could it be scrapped melted in the U S furnace.
How would you look at the requirements there.
Over what time do you think that might be.
Clearer for us thanks.
So we're looking at it very closely at.
It appears to be the ladder in terms of definition for U S steel, but again, that's something that we're we're working through very closely and we will follow very closely.
In terms of how it is interpreted but we tend to see it as a ladder.
Okay. Thanks, Sean and then as it relates to the Q4 guide can you talk through the skew of deliveries between October through December .
Say again, Phil Im sorry that broke up.
Sorry can you talk about the.
The revenue recognition that you expect by month in the quarter. So for example, if it back.
And waited for Q4 or do you think it's more evenly weighted.
As we get through the quarter between October so.
Typically so we don't we don't give guidance by month, but but.
As I said before I feel very confident about our performance and.
I think Q4 is definitely an opportunity for the inflection point.
So we would our expectation is a solid Q4 again under the assumption that the module situation is resolved but.
Very very excited about the prospect for Q4.
Great. Thanks, Sean I'll pass it on.
Thanks Bill.
And as a final reminder.
Please press Star then one.
Next question comes from Julien Dumoulin Smith.
Central America. Please go ahead.
Hey, good morning team, thanks for the time and the opportunity.
Can you guys hear me.
Yes, hi.
Excellent. Thank you guys.
Following up on where we started the call here a little bit can you talk a little bit about the gross margin.
Implied.
In your backlog here, especially as you think about 'twenty three obviously you talk about this inflection for <unk>.
What do you see as implied by what you know today.
Missing.
Your cost structure relative to what you've locked in otherwise here.
Into 'twenty three if you could just talk about this a little bit like how much of a of a structural uplift in gross margin. We are seeing some <unk> here.
And then I've got a follow up.
So we're we're very optimistic in terms of gross margin we've done throughout the despite the focus on Opex and spend we've continued to invest in R&D. Our team. Our R&D team has done some pretty phenomenal things in terms of looking at the steel content.
About our <unk> initiative. In addition, we further strengthened our partnerships with our suppliers and our asset light model and so those things have really helped us in terms of reducing cost and and Thats why we feel good about the inflection point and we also feel that we feel good about the long term gross.
Margins that we talked about during the IPO as well and seeing that happen in the 'twenty three time frame.
Okay, all right fair enough and then I just want to come back to the liquidity conversation a brief here can you talk about.
Again relative to the Q here the $50 million I've described here for the credit facility what is the latitude relative to at a minimum that you have today just under under the definition number one and then related to that can you talk about especially considering the deposit dynamic that you just alluded to.
How that might trend here into the back half of the year and ultimately how you think about extending that for versus the 331 'twenty three maturity.
What options do you have as you think about it.
Hey, Julien itself, let me just let me just reconfirm, how the covenant works right. So today the way the liquidity Covenant is calculated as cash plus unutilized credit facility. So prior to the amendment to the revolver Amendment was $125 million, which meant you needed cash plus unused revolver of $125 million or greater.
By reducing the liquidity covenant to $50 million effectively you'd have the entire credit facility of $100 million utilized minus a couple of million dollars LC.
<unk> cash balance that needs to be above $50 million. So effectively your total liquidity at quarter end that we calculated was about $164 million.
Versus the new liquidity covenant of $50 million right, you had $98 million of revolver capacity plus $66 million of cash gives you. Our total liquidity of $1 64 quarter and so it gives you a lot of significant runway even in the light of some cash burn that you are not going to run a fault that liquidity covenant.
Does that makes sense.
No.
I wanted to establish that at the outset, and then pivot here as to how you think about this trending.
The back half and then into 'twenty three here and ultimately how you think about.
Youre refinance options here, just I know you alluded to this deposit dynamic to the extent to which that you see orders come in how much could that actually contribute to the liquidity profile here for instance.
Yes, so it's obviously outside if you look at overall cash for the quarter right. We're now providing cash guidance for the quarter. However, as we've talked about you have the you have the EBITDA, which is a potential cash usage.
But we'll continue to focus on the collection efforts on the ER for prior sales we've done a really good job on that and then secondarily I think you look at the deposits of upside to the cash balances as the orders come in as people try to lock in capacity for 2023.
Want to put down deposits us an upside to the cash on a go forward basis and the way we structure our customer contracts is Phelps alluded to at the onset here is get about a 20% down payment from our from our customers and then really maintain cash flow positive through the life of these of these projects and as capacity is constrained and we've seen that.
With the uptick in contract.
On awarded folks are more willing to put down larger down payments, which will potentially improve that cash flow profile as well.
Yes.
Got it alright fair enough I'll leave it there. Thank you guys.
Thanks, David.
This concludes our question and answer session.
The conference has now concluded thank you for attending today's presentation.
Correct.
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