Q3 2022 Array Technologies Inc Earnings Call
Hello, and welcome to Library technologies third quarter 2022 earnings call.
Time, all participants are in listen only mode.
What's the nine aircrafts actually will follow the formal presentation.
As a reminder, this conference is being recorded.
Oh my pleasure.
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Please go ahead Sir.
Good evening and thank you for joining us on today's conference call to discuss the array technologies third 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.
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 you should.
Refer to the information contained in the Companys third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures.
Earlier today the company filed an 8-K amended Form 10-Q for the quarter ended June 30th 2022.
The restatement was due to an accounting error caused by a clerical error in the sales order entry process for contract value, which overstated revenue and gross profit.
As well as a consolidation error understated the reclassification personnel costs from general and administrative cost of revenue.
The total income statement impact of these two errors for the three and six months ended June 32022 was a reduction of revenue and adjusted EBITDA of $5 1 million a reduction of gross profit of $7 4 million a reduction of G&A expense of $2 4 million and a reduction of debt.
Foreign to us.
These errors had no impact on the company's previous previously reported cash flow from operations and does not cause noncompliance with any financial covenants as of June 30.
Any reference to the quarter or six months ended June 32020 to today's conference call.
Our accompanying presentation flex the restated values.
For more information regarding these errors. Please refer to the appendix of the accompanying presentation as well as the form 8-K, and the explanatory note in our Form 10-QA.
With that let me turn the call over to Kevin Hostetler array technologies, Chief Executive Officer.
Thanks, Cody and good evening everyone.
Thank you for joining us on today's call. In addition to Cody I'm also joined by lethal Patel, Our Chief Financial Officer.
Let's begin with slide four where I'll provide some highlights for our third quarter.
I'm incredibly proud of our performance this quarter as we again delivered results above expectations across the board.
Revenue of $515 million this quarter represents our single largest quarter as a company and year over year growth of 173% or 112% on an organic basis.
The continued organic growth as a particular bright spot for us considering the industry wide challenges this year due to both a D. CBD in the U F. L. P.
Our order book at September 30 was $1 8 billion, reflecting an increase year over year of 77% inclusive of STI and 36% when considering only our legacy array business.
Sequentially, our order book is down approximately $100 million.
Which is reflective of the strength of our deliveries as new orders totaled almost $400 million in the third quarter, which was an increase sequentially from the second quarter.
I will talk more about it in a minute, but I do want to note that with only three months since the passage of the inflation reduction at our IRR. We're still too early in the project development process to expect any new bookings into our border.
As a reminder, our order book only considers named projects, which have been awarded to us.
Gross margin for the quarter was 15, 6%, representing our fourth consecutive quarter of growth as we continue the margin improvement path. We've previously laid out.
Adjusted EBITDA in the third quarter, a $55 million represents a year over year improvement of $59 million and a sequential improvement of approximately $35 million from the second quarter after giving effect to a $5 million downward adjustment in the second quarter from the <unk>.
<unk> referred to earlier.
Looking at our ending cash flow and liquidity position for the quarter I'm extremely pleased with our execution.
Nathan will walk through this in more detail a bit later, but we delivered $102 million of free cash flow in the quarter.
Which has significantly strengthened our balance sheet as we prepare for the next phase of our growth.
To that end, we currently have $329 million of liquidity inclusive of the Blackstone preferred shares and $166 million and availability on our revolver.
This is up significantly from $153 million of total liquidity in the prior quarter.
Turning to our next slide.
As I did last quarter I'll take some time to provide an update on the domestic market as we continue to operate in a dynamic landscape.
First an update on the IRA and where we currently stand.
In the month since the past we have seen an incredible amount of enthusiasm in the industry around the undeniable impact that the IRA will have on solar deployments over the next 10 years.
However.
It is important for us to remind everyone that this act one that is certainly not small and easy to implement is only three months old.
There is still a lot of work that needs to be done by the various governmental agencies tasked with rolling it out to define and clarify critical aspects of the bill before the industry can wholesale shifts to the new paradigm.
During this critical rollout period, we are actively engaged with key trade association groups governmental agencies and legislators to ensure that when completed the application of this act benefits the solar industry in general, but also array specific.
In parallel we are also continuing to push for internally with what we do know.
Yeah.
There are three key areas I would point out.
First we are having daily conversations with customers around building out the framework for pricing agreements under the IRS.
These have progressed as far as discussing reserved capacity agreements and revisiting pricing for certain orders under varying levels of domestic content.
Second we are engaged with our suppliers on the domestic manufacturing credits to begin to craft the parameters under which these will be shared in the value chain.
I can appreciate that everyone would like us to provide our view of those splits but it is too early to give that definitive of an answer and we will also avoid having these negotiations in public.
Lastly, we are evaluating our own manufacturing footprint, along with our key supplier relationships to ensure that we are maximizing the benefit to array, while ensuring we continue to maintain our key strategic relationships.
Yeah.
Overall with such a large and meaningful piece of legislation I am thrilled with the progress that has been made to date and look forward to updating everyone on our continued progress as key aspects of the IRA or further defined.
Moving to the next area the U F L. P. A.
We've been consistent in calling this out as a risk to project timelines and that we did not expect meaningful resolution by the end of this year.
Unfortunately that is still the case documentation requirements from the customs and border patrol have not seemed to get any further clarity since we last discussed this.
This has led to more tier one suppliers, becoming more risk averse and a fear that sooner than later it will start to impact tier two suppliers as well.
While we have not been informed of any of our projects with module D payments to date our position on this remains cautious.
We continue to expect that the delays are caused by the lack of clarity surrounding the enforcement of this act will provide a headwind on deliveries in the fourth quarter and will carry through to the first quarter of 2023.
It is important to note that this is not a change in our outlook, rather a status quo assessment or where we have been all year.
In fact as <unk> will discuss more later despite this expected slowdown we are raising our full year revenue outlook at the midpoint by $150 million.
Yeah.
Finally FEMA.
<unk> currently has a proposal to increase the structural risk category of large scale utility projects.
We recently had an expert from array testifying the public hearing on this matter, where we impose the increase to the risk category.
We fully support ensuring that solar arrays are designed to work in even the most difficult weather conditions. In fact, this is a critical component of our rate specific value proposition.
Every tracker redesign is built to withstand the most severe weather conditions and counter.
To highlight that point in recent years, our trackers have withstood both the extreme snow storm in Texas and more recently hurricane in Florida.
So we believe there is a balance to achieve with ensuring the structural integrity of the solar array. While also ensuring that costs are not unnecessarily.
If there is a new classification, we're very confident in our ability to support this for our customers.
Shifting the focus to our internal operations I will now move to slide six.
I'll provide an update on the progress we have made in five key areas I outlined last quarter.
While many of these areas will take more than three months to fully address I'm incredibly pleased with our progress in this brief period.
I won't go point by point on these but there are a couple of key things I will point out first and may be most impactful in the quarter is the improvement we've seen in our working capital efficiency, which we measure through cash conversion cycle.
This quarter, we improved this metric by 12 days from the second quarter and almost 50 days from the first quarter.
Our teams drove significant improvements in both our receivables and our inventory, which we previously highlighted as key focus areas.
The net impact of this was seen in our free cash flow performance this quarter.
Excluding the impact of the significant legal settlement previously noted we generated $60 million of cash. This quarter. This obviously is incredibly important and strengthening our balance sheet and allowed us to fully pay off our revolving facility as well as paying $12 million in interest on our preferred shares which had.
Previously paid in kind.
The other area I will note is the evolution of the STI business.
First on the construction side.
Early in my tenure, we noted the need to reduce our focus on the construction activities within our STI business.
With a particular focus on construction in Brazil, and the U S.
When compared to Q1 quarter, ending head count we have now reduced our construction head count by approximately 20% in Spain, where we have been more selective in where we offer this service.
In Brazil, we have reduced our construction head count by approximately 70% since the first quarter and we currently have no active construction projects slated for 2023.
Next on the integration side.
We recently concluded a 14 week spreads on the integration, which delivered several important steps forward for us as a combined company.
We solidified and formally rolled out our combined organization.
We will drive functional activities from a one array standpoint, while enabling our regional leadership to execute day to day activities and to quickly make decisions at a point, which is closest to our customers.
Next we've recently announced that the U S. G. I H $2 50 will become fully available in the U S market in the coming months.
This is an important development as the deployment of solar projects becomes more geographically diverse.
I wanted to close with something not listed on the slide here.
We have also had a lot of positive momentum in our innovation and development activities highlighted by the recent announcements of omni track.
We have also been granted 15, new patents over the past three years, taking us from six active patents protecting our portfolio at the end of 2019 to 21 active patents surrounding our products. Currently the largest portion of these patents have been received over the last 12 months.
I look forward to more announcements in the future displaying some of these more recent developments.
With this I will turn the call over to <unk> for a deeper review of our third quarter financial performance and an update on our full year outlook.
Thanks, Kevin I'm glad to speak with you all today.
Turning to slide eight I will walk.
Walk through our results for the quarter.
Revenues for the third quarter increased 173% $515 million compared to $188 7 million for the prior year period.
$515 million in revenue reflects $401 million from the legacy of <unk> and $115 million from the FDIC.
As Kevin mentioned 400 million from their legacy business represents organic growth of 112% compared to the prior year and is reflective of both an increase in the number of megawatts shipped and an increase in ASP of approximately 30%.
The better than expected revenue performance from our rate is a combination of projects moving from a more to delivery faster than expected as well as a significant burn down of our past due shipments.
The $115 million from the MDI segment represents growth of $42 million or 58% from the second quarter and is reflective of the natural seasonality of this business were more deliveries are expected to occur in the second half of the year.
Gross profit increased to $80 2 million from $5 9 million in the prior year period, driven primarily by the increase in Bom and ESP.
Gross margin increased from three 1% to 15, 6%.
Gross margin for the legacy Wright business was 16% and represents the fourth consecutive quarter of margin improvement and was in line with our expectations.
Yes, he I business had gross margin of 14, 2%.
Which represented sequential improvement as we had less volume on the U S construction business.
Improved margin.
Our sustained projects.
Operating expenses increased to $61 7 million compared to $25 4 million during the same period in the prior year.
The higher expense is primarily related to a $17 4 million increase in amortization expense related to the Mci acquisition.
Excluding this impact the increase is primarily due to the addition of STI Norland. In addition to higher payroll related costs due to an increase in head count and professional fees as we invest in key strategic areas for our growth.
Net income attributable to common shareholders was $28 6 million compared to a net loss of $33 million. During the same period in the prior year and basic and diluted income per share were <unk> 19, compared to a basic and diluted loss per share <unk> 25.
During the same period in the prior year.
These increases were partially driven by the legal risk.
Received in August approximately $43 million, which was reported in other income in our financial statements.
Adjusted EBIT increased to $55 4 million compared to a loss of $3 9 million for the prior year period.
Adjusted EPS was <unk> 18.
Loss of nine Dr. Bell and was positively impacted by a larger than expected income tax benefit this quarter due to the mix of income between our geographies.
We generated $102 million of free cash flow.
<unk> hundred $34 8 million improvement from prior year, driven by better working capital efficiency and improved profitability.
Now if we move to slide nine I want to provide an update on our liquidity and cash flow.
During last quarter's call we outlined some of the key metrics you are tracking where we expected to finish the quarter.
I am happy to announce that we have delivered on each one of those metrics.
Excluding the Blackstone preferred shares we ended the quarter with $229 million of liquidity against the outlook of 250 <unk> hundred 45.
Inherent in that number and the full availability of our revolver now that our secured debt to EBITDA ratio of three four or below $70.
And we look forward to the fourth quarter, we still expect $100 million of free cash flow for the full year inclusive of $12 million to $15 million capital.
I will end this slide knowing that as we progressed border continue to produce free cash flow.
<unk> used that cash to fund our organic growth and then evaluate other options such as delivery should we have excess capital.
Moving to the next slide.
Honestly updating full year 2022.
We now expect full year 'twenty two revenue to be in the range of 1516.
Sure.
We are modestly raising the lower end of our adjusted EBITDA range to $122 million and narrowing the high end 232 months.
Lastly, we are increasing our adjusted net income per common share to be in the range of 32% to 37.
The increase in our revenue range is reflective of the strength of re segment.
Third quarter, we saw projects move faster than anticipated, which will provide a tailwind for the full year.
Additionally, part of this decrease and an updated estimate that between $75 million to $100 million. All the projects. We had pushed out of the year due to an 80 CVD will now be delivered in 2022.
The remaining projects are still expected to be delivered in 2023.
We have slightly reduced our revenue outlook for the STI.
Which is mostly due to FX headwinds, which will reduce the overall contribution to both revenue and adjusted EBITDA and a small amount of delayed project timing.
We have reduced the midpoint of our adjusted EBIT range to reflect a couple of items.
First as we discussed last quarter, we are expecting a lower gross margin from MTI for the year due to construction and logistics cost challenges.
While we still anticipate an exit.
A year and a high teen lower gross margins in the first three quarters of the year and our full year expectation.
Second the FX headwinds are expected to reduce adjusted EBITDA by $3 million to $5 million from our original budget.
Third the updated guidance reflects the $5 million reduction in adjusted EBITDA from the second quarter, restatement, which we announced earlier today.
Lastly, we are increasing our forecast for SG&A and we are engaging with outside resources to assist in our IRA engagement activity and are accelerating some investment.
In the business to ensure we are prepared for what will be a dynamic commercial and supply chain environment post IRS.
While our adjusted EBIT margin slightly down from our previous midpoint.
Eight 2% for our updated midpoint represents an increase of over 300 basis points from the prior year.
Finally for adjusted EPS, we are adjusting our expectations for our full year ETR down to a range of 22% to 25% as the geographic mix of our income has changed.
With that I will turn it back over to Kevin to wrap it up.
Thank you Nicole I wanted to close by saying, we had another great quarter of progression.
Every day, we are building a more consistent resilient and dynamic company that is poised to take advantage of the opportunities that are coming our way.
I very much look forward to continuing this journey with the team here at array and updating you on all of our progress.
With that operator, please open the line for questions.
Thank you well now begin the question and answer Safran. That's good question you May Press Star then one on your telephone.
We are using a speakerphone please pick up your handset before pressing the keys.
It was part of your question. Please press Star then two.
This time, we'll pause momentarily to assemble the roster.
First question will be from Brian Lee of Goldman Sachs. Please go ahead.
Hey, guys. Good afternoon, thanks for taking the questions I guess first one.
Just on the guidance update here I appreciate some of the color around all the moving pieces. So.
Maybe first off on the ADC Vd project deliveries that are coming back in for 'twenty two.
Could you remind us what that would imply is left to be recaptured in 'twenty three and is it your expectation that it all gets recaptured in 'twenty three or if some of that still kind of TBD it could be even further out.
Hey, Brian its in April regarding the CVD projects, we have about $140 million to capture in 2023, and we fully expect to capture them all in 2023.
Okay. That's great and then if I just take the 75 to 100 and then also you sort of downtick in the STI a bit at the high end it seems like you're still seeing.
Growth relative to the original guidance. So how much of that is sort of share gain how much of that is.
Other drivers, whether price or new volume or mix, just trying to understand what what else kind of surprise to the upside that gave you confidence to raise.
The revenue view for this year and then I had just one more follow up.
Sure.
We're seeing your projects convert faster in our order book.
Is it.
Temporary and how we've stated our order book with convert that we've seen some favorability.
It's pretty consistent with our delivery throughout the quarter and that's given us the space near the end of the quarter really to allow those projects than a drop in that we can deliver at the end of the quarter. So we saw that again here in Q3.
Okay. That's great and then just last one from me and I'll pass it on.
The STI business.
Clearly.
The margins are not where you want them to be you are seeing some progress so high teens exiting 'twenty two but this was a 30% gross margin.
Business when you bought it so how should we think about sort of the normalized margin for this.
Segment for you and then how much I guess margin recovery for STI as feasible as we think about 2023. Thanks guys.
Sure I'll take that one too. So you know it's about progress with the SDI business, Brian . It was good to see their margins go up sequentially and we expect to see continue to see that trend in the fourth quarter. The Brazil business is largely at the margin range. We expect in the acquisition and now with the U S projects substantially complete that removes a big drag.
Spanish business the way, we look at yes, yes, yes.
Margins for the combined business, we see that in the low twenties.
Similar to the array business because of the mix in Brazil, Spain, and we continue to see that as the go forward gross margin for that combined business.
Okay. Thanks, a lot guys.
Welcome Brian .
Thank you next question will be from Mark Strouse J P. Morgan. Please go ahead.
Yes, thanks, very much for taking my questions.
Wanted to go back to the comments around the FEMA decision.
And just can you kind of help me parameter is what that looks like under.
Potential different classifications, I mean, it sounds like if if it's kind of a modest increase in the requirements that could actually be.
A positive four for market share just given you're already kind of structural integrity.
Kind of what's the how do I think about the shift there was kind of the worst that gets as far as the incremental cost just kind of walk us through maybe a best case worst case scenario. Please.
Yes, Mark I don't think we were.
We're ready to talk externally about the potential change in price at the different varying levels, but suffice to say your first statement is absolutely correct that we feel that our structural integrity as it is the best in the marketplace.
As such the differential to get to a class III certification for our rate is much lower than maybe some of our competitors. So we think from a from an overall pricing perspective will have a certain advantage there for sure.
And that's that if it in fact goes to class II because the class four it's really going to come down to ensuring that everyone's competing on kind of a level playing field with our engineering and their certifications to those classifications right. So we obviously take a very high ROE didn't take structural integrity is a huge competitive advantage. So we don't.
Skip.
On that engineering content, so to the extent that competitors do that again I think the more higher classification the better it is for rate the lower the price differential we would have to do to pass on that higher level of certification to our customers. So I think we feel.
While we don't think the classification changes needed. If in fact it were to go that way I think we feel we have a pretty good advantage going into it at this point.
Okay. Thanks, Kevin and then I'm curious I know, it's only been a couple of months since omni track what was introduced but can you just kind of give us a initial customer feedback on that are you receiving orders there yet.
Are you starting to see conversations to open up for for projects that you might have been precluded from previously.
Yes, I wouldn't say, we're receiving orders yet we're receiving lots of opportunities too. So omni track. It. If you remember requires us to do some additional upfront engineering work to qualify that so we're seeing a lot more inbound opportunities to get into that qualification for omni track view. So that's certainly.
It's something that the market is excited about it as a solution that is allowing some of our customers to look differently in some of their slate of projects that they already have so it's a very active proposition at this point to be clear I wouldn't say that we've got this influx of orders, it's really an influx of opportunities that we're working our way through at this point.
Great. Okay. Thank you.
Thank you. Our next question will be from Philippine Roth Capital Partners. Please go ahead.
Hey, guys. Thanks for taking my questions as a follow up to the 75 to 100 million that was pulled in.
Can you talk through.
The situation as to why that May have been pulled in.
Specifically was it because there was a fair amount of projects that.
Were built with tracker, but without modules and then do you expect that.
Pattern to continue into Q4, and then as you look into 2023, if this U F. L. P a situation persists.
Would you think that you might be able to can the industry might continue to do that or does the industry hit a certain point where.
It can't continue to build.
<unk> without modules, but with truck thanks.
Yeah. So let me take the first part of that is if you remember our commentary around the pullback of the ADC BD revenues was one that we.
Early on indicated was a conservative approach we looked at project by project and if a customer did not have confirmed delivery of those modules already we decided to consider at risk and pull it out of the forecast. So what you've seen transpire over that is some of those customers.
Be able to get those modules in over that six months since we changed that forecast. So that's really what you're seeing I think you're seeing that coupled with as we've really focused our operations teams on improving our linearity of business.
It's allowed us to ship more and reduce the overall backlog in the business Bye Bye just really getting a very high level of linearity, we don't have a big hockey stick at the end of the quarter any longer it's really as we look through a whole quarter. It it's about a 45 degree angle.
At this point and we've had a couple of consecutive quarters outstanding operational performance and driving that linearity. So that's helped us pool additional work in as well. So that's really the answer on that as it relates to the to the U F. L. P. A.
Look I think what we're doing is still we're still having customers ask us to do multiple module designs in secondary and tertiary module designs.
As they try to mitigate which modules they may get in and which modules made clear.
I think we've always been.
Open about argue that that was going to continue throughout the end of the year and certainly in Q4 and I think we've extended that through Q1 at this point Theres lots of my peers, calling for.
CVP too.
To get greater level of clarity and to accelerate the clearance of these these modules we certainly.
We harmonize with that right we need this to get cleared up for the industry to have a robust year next year or so but that being said, we're not counting on it in our current Q1 forecast either so.
Thanks, Kevin.
As it relates to 2023 from a booking standpoint, you had a nice new orders in Q3 over Q2, how do you see the bookings trending through this quarter you had a nice order yesterday, but as you look into Q1 and two would you expect the.
Bookings momentum to sustain or do you think it might slow down.
Well look I don't think we're ready to give a full year view of next year, yet and we'll certainly do that with our earnings call in Q1, but the conversations we're having with customers on the back of the eye or a REIT that was really about how much capacity can they secure with us we have customers approaching us looking to to purchase a certain level of capacity.
And then the purchase.
Definitely a certain level of U S content within that capacity. So I think we're fairly excited about next year and certainly the year after relative to our position in the market or are we.
Leading domestic supply chain I think we feel pretty good about our position in and if you just look at.
The momentum vis vis some of the competitors have come out with their numbers, we feel pretty good we think were winning.
Other than losing and of our organic growth rates are amongst the best in the industry at this point.
One last one if I may you brought up domestic content. We've picked up on there was any P. C maybe that.
<unk> may be able to provide 40% domestic content without the module.
Do you see yourself in that kind of position, where you think you could.
Really enable that 40% threshold of course, we have to get the definitions out from treasury soon.
But you know the way things work our water now do you see a fair path to helping your customers get to that 40% level.
Yeah. So if you think about our current product without making a whole lot of modifications were roughly isn't it isn't a 70, 576% range of what I would call pure domestic content.
Minor tweaks to the bill of materials puts us up in the Ninety's.
And again, when we talk about varying levels for customers, we're gonna be able to provide them that that that very level that they need to either get seven points towards their domestic content or nine points towards their domestic content and clearly theres some pricing differential at that so if you're a customer out there who need those additional percentage points, yes, we can shift from some of the <unk>.
Offshore suppliers to domestic suppliers to increase that 40 years. So that's really some of the conversations we're having with our customers is what is that price differential to get from say, 75% to 95% domestic content wherever needed.
Great Thanks, Kevin and congrats on the strong quarter.
Thank you.
Thank you. Our next question will be from Martin Malloy with Johnson Rice. Please go ahead.
Thank you for taking my question.
First question.
Given the progress you've made in working off the legacy backlog and your exit rate.
You've talked about for gross profit margins for this year.
Any factors that we should think about that would prohibit you getting from it.
Into the low 20 ish percent gross profit margin range for next year.
It's already at Stifel.
As we as Kevin mentioned.
Not prepared to give a full year of 2023 guidance, but if you look at momentum.
Still feel we'll exit this year in the high teens in and back to our legacy historical margins in 2023.
Okay.
Thank you and then my second question.
Are there opportunities to.
Introduced some of your products into the geographic areas STI Norland.
<unk> operates in and vice versa.
Yeah. That's that's one of the key things with the integration that we've been cross pollinating, our products into their markets and their products into ours, both from a geographic standpoint, as well as top customer standpoint, we've been able to go to some of our larger multinational customers and provide this tool portfolio approach for them.
And that's just been well received we're active in doing that where it's a little premature for us to talk about some of the orders. We won cross Pollinating already maybe we will do that on a future coal, but it has certainly been one of the core elements of the integration process.
Great. Thank you congratulations on the quarter.
Thank you.
Thank you next question will be from Donovan Schafer Northland capital. Please go ahead.
Hey, guys.
I'm kind of a play.
Playing off of the last question about the portfolio approaches US Jan Orleans tracker and kind of your editions of products I'm curious I know it helps us sort of close rates and winning projects. Because you can presents you know a couple of different you know products, but I'm curious if there's.
It could also factors than if you're ever in a situation, where you end up kind of mixing and matching so I know for instance, with next trackers you know train following solution yeah. They don't use that for the whole project. They only use it on a certain segment, where there's a steep grade.
So I'm wondering you know.
Do you does this put you in a position to be able to start working on this for you know maybe some projects the kind of core of it would be the traditional M.
Hei tracker centralized design and then you could do that.
<unk> and Orleans tracker on.
We're trained gets a bit more challenging or vice versa, maybe you do.
You know the traditional array tracker for for higher wind loads on the periphery and then do some Sci norland trackers in the middle I'm just curious if there's kind of a benefit there for site designs with being able to potentially mix and match if that's of interest to customers.
I think some of them, but I don't think that's our current solution and the challenge with that really comes into software, which drives the overall site operations right and it's a different software platform between our solutions.
So I think our current focus is really about an overall array of.
Platform for certain market conditions.
And then obviously an STI for different.
And again.
The difference also comes in the positioning at the price points right, so where a customer doesn't need the overall full robust array design and once something at a different price point, we can then and maybe that customer where to go use it.
You know a third tier tracker supplier today right.
We have a different operating at a lower price point, if they don't need the level of robustness and structural integrity. That's a core rig prototypes, but we really don't see us going to a site today.
And mixing and matching kind of half S. T I N half away at this point because the software control systems would be different.
Okay.
Well and then.
Kind of related before I think when array first came public and before I think we got kind of distracted with a lot of the steel price stuff and there's just been so many different things going on there was a trend with the tracker companies and I think of it.
You know at the time kind of we were all sort of hyper focus on you guys and next tracker, but there was a move to this sort of portfolio of bidding, but the idea was you know a.
It could either be an EPC or it could be a developer with it so well our plan is to deploy two gigawatts you know over this period of time.
And so you know when you give us better pricing and so so does does the variety of products come into that I guess kind of where are we at in the trend of portfolio of bidding and then does having the portfolio options support that.
We're very much in that now, but it's less about price concessions more about capacity confirmation right. So we are actively engaged with many of our large customers now in hey look I've got a two gigawatt portfolio to deploy in 2023 I want a rate on the entire portfolio that may be comprised of six or eight.
<unk> and what they're looking for now is not nearly as much price concession as it is capacity commitment and domestic content commitment. So those are absolutely active conversations we're having every day now, but it's less about price concessions.
Okay, and then just one more question and then I'll take the rest offline. It's just.
With you know the English and reduction Act and just even you know the.
Removal of some of the maybe D. C V D, but you know where you're forced labor stuff still going on there. There's again so much going on are you seeing kind of changes in the mix of project sizes. Yeah, you announced yesterday, the large 750 megawatt project win and that's that's fantastic that's huge.
Those projects like that really move the needle, but do you think were moved we're kind of headed in the direction of a world where it's more of these kind of elephant big elephant sized projects or is it a bunch of more small like your partnership with Russell Pacific that ends up moving things are there any kind of trends there that you're saying.
Yeah, well, we split the market to the large utility scale at which we focus on and I think one of the things lost as we are with our partnership with Russell specific we believe the largest in both community and commercial solar as well, although we don't talk externally about that nearly as much.
Those projects tend to be smaller in size and many of them and then on the utility scale, we're certainly seeing it.
An increase in average project size looked at you know you're right. The 750 megawatts is a big elephants are second largest project in history only to Gemini.
Setting those aside the you know the average of what we're seeing because of the efficiencies that have driven it.
The confidence in solar is a great energy source.
Great price.
We're seeing those project sizes get bigger and bigger.
Okay, Great interesting thanks, guys, congratulations on the quarter and I'll take the rest offline.
Perfect. Thanks Thomas.
Thank you next we will have a question from Rohit <unk>.
Oh Credit Suisse. Please go ahead.
Hey, my malaria from credit Suisse. Thanks for taking the questions.
Firstly just on the Q.
Q3 and Q4.
Our numbers on the top line could you talk about if there are any demand pull in from Q4 into Q3.
And Oh it does.
No.
It's a reflection of seasonality because historically, we haven't seen that so just curious how much is seasonality with this demand pull in in Q3.
It hit me.
As Kevin mentioned and I did as well we've had really good linearity of our shipments throughout the quarter and we've done that purposefully really it really safe space at the end of the quarter for certain projects that the customers didn't want delivered that we're able to do because we don't have a hockey stick or so look what we'd say is part of that.
Part of that increase in Q3 was what the availability of projects to ship and customers to accept them.
That was originally scheduled for Q4, so we do see that if we continue with their operational execution allow us those windows to be able to ship those items.
Got you and then in light of U F N B S still being some uncertainty around it should we expect a similar run rate in the first half of next year similar to what was on the second half of this year.
So you know, we're not really obviously prepared to provide for guidance.
For next year, but as Kevin mentioned, we still we expect.
L. P. H continue on it and caused some delays in <unk>, what we expected and continue on into the first quarter will be in better position. After our fourth quarter call to provide kind of where we think that Q1 will land, but we do still see that sticking around here for a couple of quarters.
Got it and just wanted to get a housekeeping when you talk about like getting back to legacy gross margins could you clarify that we're looking to get the 20% EBITDA margin or higher than that.
Oh, yes, so when we say legacy margins were really speaking of the gross margins in the high teens low twenties.
As far as EBIT margins were still you know, Kevin still kind of relatively new here in his role were going to come out.
Updated guidance, but for now we're still we're still sticking.
Sticking to the guidance that we provided historically in the 16% to 18% EBIT margin range.
Thank you.
Thank you. Our next question will be from GAAP, Arizona Piper Sandler. Please go ahead.
Good evening and thanks for taking the questions.
So you know it looks like the the the order book as you indicated declined a little bit by 100 million. After the lessons he business, but because you indicated bookings were up quarter over quarter in Q3.
Just wondering what are you seeing for bookings in <unk> do you expect another similar uptick quarter over quarter, just any color there would be a would be a greatly appreciate it.
Yes, Hey, How're you doing our Kashi, yet we believe that the bookings will stay consistent and strong through Q4.
No indications of that slowing down at this point.
Okay and then my second question, maybe a little bit more of a big picture bigger picture bigger picture question Bolsa Neuro just lost the Brazilian elections, and Lulu has been elected.
And so I'm just wondering.
What your thoughts are on the implications for Lula for our solar development in Brazil in the coming years.
Yeah, I mean first of all we're smarter, we're pleased that the election's over right I think the Brazilian business would've characterized.
A short period of pause while you just like the clarity.
<unk>.
I think now we need just this time of unrest have calmed down so that the businesses could actually get refocused and continue to move forward.
I think from our perspective, we're really extremely excited about the prospects we have in Brazil, and that excitement was never tied to one candidate versus the other it was about getting into a known and predictable interest rate environment in Brazil, where projects can be quantified. It doesn't begin to move forward. So we feel generally pretty good about.
At and.
And I think the teams on the ground are feeling very positive as we go forward, we're looking at having a really strong year in Brazil next year.
That's very helpful. Thank you and if I could just sneak one more in and apologies if you mentioned this.
Having issues.
With everything breaking up on my end, but you guided to gross margins for the F. T I business in Q4 in the high teens.
What does that number look like for the legacy business in Q4 or are we going to cross the 20% marker or do you think that's also in the high teens for Q4. Thank you.
Yeah, we're seeing that the legacy rate businesses is similar to that in that sense, but we're going to what we're seeing in Q4 based on the projects that are lining up that will be in the high teens.
Thank you.
Thank you next question will be from Colin Rusch of Oppenheimer. Please go ahead.
Thanks, guys can you talk about the key areas of investment in Iraq in the R&D space, you know and really in terms of.
Potentially driving costs out of the structures or other innovations that you're working on.
Yeah.
Look you're bigger call and Youre going to find this answer pretty unfulfilling isn't that I don't really as a practice to talk about my innovation and new product development going forward in a public forum. It's just just something I'd tell him too.
I can tell you that I'm pretty excited about what we have going on within our innovation and new product development organization, we separated out the value engineering organization from new product development and with that we're driving many more innovations.
And again as we discussed many more patented technical innovations in our product line.
Additional versions of our product line as well as a large focus.
And where we can take cost out of the product both from a standpoint of being able to offer our customers a better value, but also to drive improved margins in our business. So suffice to say we have a lot of efforts going on in both and I for one I'm very pleased we just had an executive debrief with engineering, new product development value engineering teams on Friday.
This is something we're pretty excited about but youre going to find as a practice I'll talk about them after week delivered rather than prior to delivery of them.
Okay and then.
You guys have a little bit broader geographic footprint can you talk a little bit about the evolution of the folks that are doing some of the fabrication for you are there areas for you guys to drive cost out of that scale up with certain folks to hit volume breakpoints, just thinking about the non commodity cost here and how that evolves, particularly on a geographic basis.
Yeah, Hey, Collin, we're continually with our supply chain and building out our our supply basins.
The various countries that we operate in and that's seven suppliers in and part of it is and as our share of demand grows and we continue to you know.
Kind of on these larger projects in the region that we operate our suppliers want to invest with us in investing in our business. So we're seeing more and more of that where our suppliers are investing to get it.
Some of the solar business as we as we grow because that's been one of the leaders in this space.
But I think the other comment I'll make is that.
As you remember that 80% of our business is domestic and a lot of the.
The new business, that's coming in solar is in those areas that we didn't traditionally built out there right. So we've for years, we've done the Arizona, New Mexico, Texas, California, Florida, now, it's really about business, that's being driven up in the upper Midwest.
Northwest So a lot of what we've been doing is working with our existing supply partners for them to localize manufacturing into those regions because the the huge gain forces in reducing logistics uncertainty and the logistics costs by having the source of our product more closely available to where a lot of the new.
Developments are going to be happening and that's really what we've been focusing on to take cost out of the supply chain. It's about localizing our content with some of our already existing proven domestic suppliers.
That's super helpful. Thanks, guys.
Hello.
Yeah.
Thank you next we'll have a question from you all spoke L. Shaw all Guggenheim. Please go ahead.
Hello every one of them Yosef now that's cool.
I wonder if.
I actually had to ask okay cool.
Yeah, it's a it's very Russian anyway.
Two questions first obviously the compliments on the free cash flow. This quarter you know obviously some of that is some of these working capital accounts reversing.
You know how as we look into next year.
And maybe more generically as you talk about the deep dark and gross margin.
Longer term targets, how how should I think about how free cash flow might relate to those targets over time.
Yes, the way.
We look at it here is really a free cash flow conversion and we expect to be in in this 75% range.
60% to 80% kind of range of.
Free cash flow conversion Joey as Lee.
Got it on the head there.
Two pieces of this it's the emergent recovery, which we're on the path of doing four consecutive quarters.
And planning also continuing that in the next quarter as well as just the working capital just becoming more efficient there were two levers together give us the confidence that we can get back into that 60% to 80% range of free cash flow conversion.
And that to be clear 60 day that can get percentage of EBITDA, what what what are we talking there.
Is it EBITDA percentage.
Alright. Thank you and then the other question I had understanding that things are in a great deal of walks and we'd go up their treasury and IRS and all the rest of it.
Do you guys think you're gonna be able and be in a position to.
To book.
To the extent that you do have manufacturing tax credits are those going to show up as contra cost of sales in your in your non-GAAP financials. Starting Q1 do you think you can have enough information to be able to do that.
We just we simply don't know the answer to that yet.
Okay.
It's just too early okay.
And just on that note final question is yet.
Hi, Rajeev and IRS do you think you also need to hear from FCC Android maybe fast b, what what are the critical pieces of guidance that you. All are looking for before you might actually be comfortable.
I'm, making a call there.
So I think there's there's a few areas. The first is further definition in terms of specifically, what's changing so where we are now what are the common period right. So we'd certainly provided lots of commentary back through them, both trade organizations as well as directly to legislators as well.
L as directly to some of those government agencies, you've mentioned earlier.
That comment period will end with more clarity around the definitions of for example, what is considered a structural faster right and.
Those definitions could have really meaningful differences relative to what we do to our operational footprint. What we in source. What we continue to outsource all of that is what's influx.
I'd, just say that what we've been focusing on internally is driving lots of different optionality right.
If it comes down this way. This is our booth. This is our approach how will execute if it comes down. This way. This is so weird parallel pathing lots of different ways that we could maximize different.
Rules and regulations for the benefit of array and that's the mode. We're in right.
The examples of manufacturing tax credits that can be transferred one time and we're not sure could it be transferred twice from some of our suppliers to us.
Suppliers two suppliers to us so all of that is what's really influx that we're looking for better much better clarity around definitions, which are direct credits from the department of commerce purchase versus which are tax credits.
All of that is still while there is a set of definitions out there were in the comment period that will drive.
It's likely that some of that will change here over the next three to four months and what we're doing is really focusing internally on having.
An incredible amount of optionality for each direction. Some of those may change that's really we have a whole team focused on that and start meeting regularly.
In the if then.
Abuse of what we would do to our business.
Okay, that's that's pretty clear it sounds like a lot of work, but thank you so much.
Welcome.
Again, we have a question. Please press Star then one.
Next question will be from Jeff Osborne Cowen and company. Please go ahead.
Hey, good evening. Thanks for squeezing me in a quick question or actually three quick ones is there a rule of thumb on capex per gigawatt.
Mentioned, possibly making torque tubes or other items yourself and historically you are not a capital intensive business. So I wanted to better appreciate that if if that if then scenarios that you just laid out to Joe's question.
Yep.
So to be clear I don't I don't think that us going into the torque to conversion business adds a lot of value our strengths in partnerships and relationships those partners have committed to sharing any benefits tax benefits.
<unk> manufacturing credits any of that with us, which would preclude the need for us to go into that business. There are other elements of what we do in the in the fascinating and in systems that combine those torque tubes together, we outsource some of that and we in source some of that and we offshore some of that as well so it isn't that.
Balance of those three buckets of what we make in house, what we also get domestically from a from a third party source and then what we opt source. It's in the optimization of that entire mix that we're so focused on it and again, we have our partners that we.
We don't want to in source, 100%. So we have our partners, obviously willing to share those credits with us.
We will accelerate some capex here into Q4.
It's more so to focus on increasing overall capacity, so we're adding some equipment to them.
You know better enable us to serve our existing AR balance of.
Customers and again, maybe one step function change above that.
I'm, taking you know taking a forward look on what we think.
The additional incremental business from in Iraq. So, we're certainly making some some capital investments here in Q4 and Q1, but I can tell you is we spend.
Somewhere between 12 and $15 million a year in Capex.
But if I look at at <unk>.
Increasing that by 30% you're never going to see if my numbers right, it's going to be a really small portion.
Yep.
No no major things we were looking at again, how we regionalized some of our manufacturing to be closer to some of our new builds all of that so all of that is on the table, but I don't think we'll be we'll be coming forward with any.
Over the top substantial capital.
At this point.
That's great to hear our two other quick ones are similar to go into the eye Doctor Good better are the same.
<unk>.
That type of situation the U F. L. P. A outlook for Q4 relative to three months ago would you say, it's the same in your eyes in terms of risk are better or worse.
Yeah, I think it's the same.
Okay got it and then.
The last question I had for you is just to anticipate.
Anticipate any projects in your funnel and potential backlog or bookings to be delayed until the Treasury Department decision comes out around some of these items as to whether the developer would get the 30% credit or 40% credit I'm, just trying to get a sense of perspective for the first half of next year.
This item is likely to come out in Q1.
I think what we're hearing is that most of this will be retroactive right and the law states that it is retroactive we don't expect there to be a whole lot of hold back because it won't change right. So.
Again, it's all about us keeping optionality out there for our customers and that's what we're really focused on but we have not heard of any one thing we're going to wait until the full clarity here and I don't think you can wait till full clarity because I think there is this race for securing capacity in the marketplace right now.
But your contract terms will give that customer the flexibility I get it that it's retroactive, but I wasn't sure. If you have flexibility in the terms of that.
Ts and CS of contracts.
So I think.
Thank you that is New York, Washington, and clarify on that Jeff to give you. An example, as we look at those varying levels of content, we're not sitting there and saying.
Maybe like we did last year, we're not saying look this is your fixed price for the next years. This is what we see today and how we do it today and it's good for 30 days, we'll reevaluate every 30 days because we're not going to go back into a situation, where we're fixing ourselves into a box on a longer term period than we'd like so with all these customers that are coming forward. We're having these really great open.
Dialogues with them about here's how we see it today, here's what we're willing to enter into and execute today.
We're gonna come back and revisit with you every 30 days for anything that changes right.
I appreciate it.
Thank you.
We have no further questions.
At this time, we'll close the conference. Thank you for that.
In today's presentation you may now disconnect.
Okay.