Q2 2023 Array Technologies Inc Earnings Call
[laughter], reaching and welcome to <unk> Technologies' second quarter 2023 earnings call.
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A question and answer session will follow the formal presentation.
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It is now my pleasure to join the call over to Chris.
Please go ahead good evening.
And thank you for joining us on today's conference call to discuss the right technologies second quarter 2023 results.
Slides for today's presentation are available on the Investor Relations section of our website a rain check in 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.
You 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 a duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures.
You should refer to the information contained in the Companys second quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures.
With that let me turn the call over to Kevin Hostettler array technologies, Chief Executive Officer.
Thanks, Cody and welcome everyone.
In addition to Coty I'm also joined by an equal Patel, our Chief Financial Officer.
Let's begin with slide three where I'll provide some highlights of our second quarter results.
I'm proud to say that array has delivered yet another strong performance across the board.
For the quarter, we delivered $508 million in revenue, representing 21% year over year growth.
In the second quarter, we also expanded gross margin year over year by over 2000 basis points to an impressive 29, 6%.
It's important to point out. This result does not include any benefits from the Iras 45 ex manufacturing credits.
Rather we continue to drive internal cost savings initiatives, while delivering on our efforts to develop higher margin non tracker revenue.
Yes.
21.
We view the court's decision as a strong rejection of the plaintiffs claims an affirmation that a raise directors and officers were always on the right side of this dispute.
Moving on to the next slide.
There has obviously been a lot of discussion around bookings as well as U S market share and momentum over the last few months. So I thought it would be helpful to offer a deeper dive of our perspective on how the industry operates in this specific dynamics that have impacted us this year.
First it's important to note that our business operates on a large scale project basis with each project, having its own individual characteristics.
A good demonstration of this fact is that the average size of projects and our June 30th legacy of Rain Order book is 230 megawatts and we have multiple projects, but are nearing a gigawatt in size.
He elements of our value proposition, including greater flexibility in panel selection and changes.
He's a installation and commissioning and our high domestic content all become increasingly important as the size of projects increases.
As we all have become very aware of the timing and speed of projects through the sales and delivery cycle is also dependent on things like regulatory pace and they obtain ability of other project elements like modules electrical components and availability of labor.
Each project has its own set of hurdles before it has one and before we begin deliveries.
This means that growth.
And by extension bookings and revenue are rarely linear.
This can be true a full year timeframes, but it is most certainly true when comparing quarters.
A change in characteristics on only a few projects can impact short to medium term bookings revenue and perceived market share.
But this does not mean, however is that any individual quarter to <unk>, the trajectory or momentum of our business.
At the mid point of our updated annual guidance, we will have grown the legacy of rape business by nearly 50% from 2021 to 2023 on an organic basis.
During that time, our legacy array business has had quarterly bookings ranging from $150 million to $650 million and quarterly revenue ranging from $200 million to $400 million.
And even more recently, we had one of our lowest bookings quarters in Q1 immediately followed by one of our largest this quarter.
I provide this context to point out while on the path to sustained profitable growth individual quarterly data points have a wide range of outcomes and can be misleading.
For that I offer caution on reading too much into the sequential movements, whether good or bad.
With this background let's.
Let's talk a little bit more about the specific characteristics. We are seeing this year.
Both as it relates to the near term, but also the momentum we are seeing for the longer term.
First on the near term.
As we have discussed previously the buildup of our revenue outlook is largely dependent on two factors one the.
The timing of projects already contained in our affordable and to be assumed backfill rate of new project wins that will book and ship within our forecast window.
When we updated our outlook last quarter, we had approximately 90% of the mid point of our guidance covered by our affordable.
This figure reflected our assume project push out assumptions at that time.
For the remaining 10% or approximately $200 million that we needed to backfill, we'd roughly a quarter and a half to secure those orders.
However over the past few months a couple of things have occurred.
One.
We have seen a larger level of pushups than we anticipated.
There is not one single driver, but rather the combination of continued module availability challenges.
Requirements for further clarity around the I R a and increasingly affirmative backlog.
This past quarter, we saw an additional $150 million of revenue get moved from 2023 to 2024.
This was incremental to the push ups, we had already assumed in our previous analysis.
To be clear these are still projects, but a rate will deliver the timing of them has just shifted out of 2023.
And two.
We added approximately $600 million of new bookings this quarter.
A smaller percentage of those orders represented 20 twenty-three deliveries then we would've normally anticipate.
The same issues, causing an elevated level of pushups are also minimizing the incentive for customers to begin construction before December 31, a newbie one projects.
The net impact of these two factors is a reduction in or near term revenue outlook, which nipple will discuss in more detail.
The reduction and revenue for this year is not an indication of loss in market share or any significant shift and the underlying dynamics of this industry.
It is merely a function of some quarterly lumpiness driven by factors outside of our control.
To illustrate this point at June 30th EBIT after our $600 million in bookings, we have an additional $320 million worth of projects sitting in our high probability pipeline.
Awaiting final IRL clarity before they convert to bookings.
It is important to note here that despite the reduction in our revenue outlook. We are raising the mid point of our full year adjusted EBITDA guidance by 14% as we lift our full year gross margin expectations.
The ability to over deliver an adjusted EBITDA on lowering revenue will also drive $50 million to $100 million more in free cash flow. This year than we had originally forecast.
People will discuss this more later, but this additional cash flow allows us to delever faster than previously anticipated.
Or even a performance is very important in our evaluation when bidding on projects in the market this year.
We are not in a scenario, where we need to compromise on pricing terms or product offering to hit a top line number but while we obviously would have liked to deliver additional top line. We're confident that this more efficient use of capital while maintaining our strategic principles will put us in an extraordinarily strong position.
As we enter 2024.
We remain committed to growing profitably not growth at all costs.
As we look at 2024 and beyond.
Oh, the sentiments of others in our industry.
Through a sustained reduction in costs are crossed our supply chain coupled.
Coupled with improvements in reliability and energy output, we're seeing an ever improving L. C O V for solar energy.
This will undoubtedly lead to years of growth ahead as solid produces a greater proportion of global electricity generation.
So when we hit the times of short term disruption, which again will happen from time to time in this industry. It is important for us to remain focused on our strategic goals to ensure that a raise at the forefront of this growth.
If you turn to the next page I will discuss in more detail about those goals and what we were doing to ensure we maintain our industry leading margin position.
While the concept of pricing discipline has been something we've discussed in the past I thought it would be helpful to expand on what we mean by pricing discipline and provide additional insight into the work, we're doing outside of pricing, which will lead to sustainable inconsistent margin improvement overtime.
There are four broad areas that we continue to focus on.
First expanding our target market.
We have discussed this for a couple of quarters now, but I wanted to provide some additional insights into exactly how this interacts with pricing discipline.
As we operate today.
We only have one tracker to provide our domestic customers dirt track.
This industry, leading tracker platform will continue to be aren't patent protected flagship product. However.
However, it is not the most ideal technology for all projects.
For example, severely undulating terrain or mild weather conditions for.
For projects with these characteristics currently we would have to lower the price of our flagship product.
There and diluting our value proposition to compete with other offerings and these rapidly growing segments.
In the past we may have selectively chosen to do so which is created more inconsistent results because the range of margins on individual projects can be wide.
However, more recently with the introduction of omni track or terrain flexible tracker and the S. T I, H 250 or lower cost tracker.
We have not been willing to take that route and we have maintained pricing discipline on our dirt track product to protect the value. It offers.
As we entered 2024, both new products will be available at scale, allowing us to expand the universe of projects, where we can price to achieve our targeted margins.
The lasting effect of this will not only be better revenue growth, but also more sustainable and consistent margin performance.
Second reducing our customers overall installed cost.
Work here spans multiple disciplines, including items like more efficiently designing our sites improving pile compatibility.
And more efficiently mounting modules to name only a few.
We will have over a dozen new innovative solutions, either recently launched are pending launch, which move the needle on our and our customers cost basis. In fact in the last 18 months as we have increased our investment in engineering and innovation, we've applying for around 111 patents.
And thus far been granted 102 patents.
This is more granted patents and applications in the last 18 months and the previous 15 years combined.
Many of these innovations are specifically targeting optimizing the installation and securing of domestic resource panels.
As we move into 2024 weeks.
We expect our like for like installed cost base will be hundreds of basis points lower on the dirt track platform when compared to 20 twenty-three due to these innovations.
Third.
Ah your margin non tracker offerings.
This means things like software service contract aftermarket parts and engineering services.
Last year, we brought in a product manager to solely focus on Productizing and maximizing this part of our business.
Well the impact on our results from these offerings will be uneven for awhile as we built up our base. We saw a great example of the power of these alternate revenue streams in the second quarter.
Sales in this area drove 150 basis points of lift to our gross margin.
Fourth.
Business and process maturation.
The key here.
Is reduced margin leaks and opportunistic margin enhancements.
There are a lot of different initiatives that I've discussed in the past, but I thought it would be helpful to reiterate some of the crucial ones.
First.
We have broadly change the incentive structure and the company to focus on driving sustained profitable growth.
This ensures that members across all of our functions, having the same and Golden mind and one that is clearly aligned with our shareholders.
Second in the last 12 months, we have mapped streamline and standardized over 50 core business processes to eliminate waste and to ensure that we are acting quickly to changing business conditions and increasing our speed of response to our customers.
These process changes have been instrumental in our ability to capture cost savings opportunities.
Third we've instituted significant changes to our manufacturing facility in Albuquerque, New Mexico with the introduction of lean manufacturing principles.
We have reorganized and changed the layout of material flow through this facility and in doing so we have not only created a safer working environment, but we have also add an additional capital equipment, increasing the capacity of the facility by 40% when compared to the same period last year.
And finally as of this week, we have launched our new configure price quote system, allowing us to capture input costs more accurately.
More dynamically price our offerings and more efficiently turn our quotes to our customers.
These are a number of small yet powerful organization changes, but overtime compound.
They are a direct indication of the hard work that it's been ongoing and it's necessary to deliver sustained improvements and shareholder value in a way that is not centered on raising prices toward customers.
And with that I will turn the call over to nipple for a more detailed discussion of our financial results in an update to our 2000 twenty-three guidance. Thanks.
Thanks, Kevin.
Please turn to slide Senate.
Revenues for the second quarter grew 21% to $577 million compared to $419.9 million for the prior year period.
The result was driven by both a 16% increase in the total number of megawatts ship from 3.9, Gigawatts to 4.5, Gigawatts and a 4% increase in Aspie from 10.7 cents per watt to $11.02 per watt, resulting from improved pastern pricing to our customers.
$508 million in revenue reflects $345 million from the legacy of race segment and $162 million from the S. T I sing.
Gross profit increased to $150 million from $39.9 million in the prior year period.
The combination of higher volume improved gross margin.
Gross margin increased to 29.6% from 9.5 per cent.
Gross margin for the legacy array business was 39% in the F B I business and gross margin of 26.7% in the corner.
<unk> of 29.6% benefited from approximately 300 basis points cost saving opportunities, including roughly 100 basis points from the continuation of lower freight costs and 200 basis points from opportunistic material purchases.
It's Kevin mentioned it also benefited from the 150 basis point lift in better than expected revenue and margin and non tracker offerings in the corner.
And finally, we had roughly a 100 basis point lift and other items, including better absorption and lower warranty costs.
Operating expenses were up slightly at $53.8 million from $53.3 million during the same period in the previous year.
However, we had a $13.4 million improvement amortization expense year over year due to lower amortization of intangible assets related to the acquisition of S. T I.
Excluding that reduction operating expenses were up $13.9 million due to an increase in headcount to support our growth and hire professional fees related to accounting and finance transformation initiatives.
Net income attributable to common shareholders was $52 million compared to a net loss of $17.2 million during the same period in the prior year.
Basic and diluting income per share was 34 cents compared to the basic and diluted loss per share the 11th during the same period in the prior year.
Adjusted EBITDA increased to $115.6 million compared to $29 million for the prior year period.
Justin net income increased to $71.1 million compared to adjusted net income of $12.9 million. During the same period in the prior year and adjusting basic and diluted net income per share was 47.
Compared to adjusted diluted net income per share of nine during the same period in the prior year.
Finally, a free cash flow for the period was $15 million versus they use of cash $12.2 million for the same period in the prior year.
The increase in driven by both improve profitability and the continued improvement in our cash conversion cycle.
Now I'd like to go the slight ache, where I will discuss our updated outlook for 2023.
The full year 2023, we now expect revenue to be in the range of $1.65 billion to $175 billion due to the factors Kevin previously discussed.
However, we are raising our adjusted EBITDA guidance on continued strength or gross margin performance we.
We now expect to be in the range of $280 million to $295 million.
At the mid point, if there's an increase of $35 million or 14% from our previous guidance and roughly 123% over 2022 adjusted EBITDA.
Also are adjusted EBITDA margin at the new midpoint, and an increase of 300 basis points to 17% from previous guidance of 14% and roughly 8% in 2022.
Further we are increasing our adjusted EPS range, where are we now expect between one dollar and $1.07.
Importantly, steep increase and do not reflect any assumed benefits from the 45 X manufacturing credits.
As far as the timing of revenue, we now expect Q3 to be lower than Q4, which has it changed from normal bell schedules and is reflective of the scale of push ups, we have seen.
Accordingly, we expect roughly 45 per cent of our remaining revenue to be delivered in the third quarter and 55% to be delivered in the fourth quarter.
Finally, with the improvement in our adjusted EBITDA margin, we are able to deliver better free cash flow this year.
We now expect to deliver between 150 and $200 million for the full year.
This means by the end of the year, we expect a net leverage ratio inclusive of the convertible notes of approximately two times.
That figure excluding the convertible notes will be left in one times.
With our ability to generate free cashflow. We believe this is an incredibly strong balance sheet position to be entering the next phase of our growth.
Now I will turn it back over to Kevin for some closing remarks.
Thank you in April .
I wanted to make sure and leave you with this.
We are confident about the direction of the utility scale solar industry and our position within it.
Soon enough higher rate will be a settled regulation.
More module capacity will open up and other hiccups like the permitting backlog boop, he's leading to a new era of growth.
As we transition into our next phase we are working incredibly hard to make sure that we execute on what is within our control.
So we will continue to do the exciting things like drive innovation, but we.
We will also continue to put our nose down and to ensure we are building a better more efficient business day in and day out.
With that operator, please open the lines for questions.
Mmm that'll.
That'd be conducting a question and answer session.
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My first question is from Brian Lee Oh Goldman Sachs. Please go ahead.
Hey, guys. Good afternoon. Thanks for doing the questions had two of them here first just as you alluded to during your prepared remarks, Kevin lots of focus on the bookings environment here just given.
Domestic content clarity coming out in mid May and as you knowledge.
Big pickup in order sort of at the tail end of the quarter.
I know, it's lumpy, but maybe give us a sense of what you're seeing here in early three Q now that the rules have been out for a few more months post the quarter.
To get digested and then kind of what you expect bookings levels to look like moving two year and should we expect to see continued sequential growth from Ya.
Yeah.
Thanks, Good good question Bryan.
What we've.
You said in our prepared remarks, but most of the bookings that we really really did see we're really in may and June after what we had expected to be somewhat of a light.
April following the uplift from the May 12th domestic content announcement.
I think we need to remember that that announcement was more preliminary guidance and what it did was help inform some customers that the bonus was gonna be kind of very difficult to achieve and that was you know we had always described a couple of buckets of customers. So for that bucket of customer that said, okay look that's not going to be a slam dunk it's not.
Gimme, it's gotta require real work I'm Gonna go ahead and start progressing with my programs and that's what we began to see in that May and June timeframe.
Remind you that there are still a lot more clarity needed in particular relative to items such as.
Steal content towards to whether or not it's considered structural under the guidelines and whether or not it must be manufactured in the U S. In there for so there's still a bunch out there and that's that additional bucket of orders that we identified over $320 million of orders, but our in our high probability pipeline that are sitting there where the <unk>.
Summers are very specifically, telling us they're waiting for final irate guidance before moving forward and we're hopeful that because again.
That has huge implications on our pricing of those orders.
In terms of the percentage of domestic content and what's gonna count.
I can tell you that in terms of what we're excited about is the momentum and the overall quoting activity has certainly increased.
I know that at the end of Q2 about 19% higher than quoting activity in two one in the overall funnel the number of new opportunities coming into our funnel is up over 24% since Q1 as well. So hopefully that gives you a sense of the momentum we're seeing good momentum we feel really good about it but I think it's too early to tell what goes next.
Couple of quarters of orders are gonna be depending upon the timing of that further guidance.
Okay, that's great and I appreciate that additional color and then the second question I had was just Sun gross margin nipple I. Appreciate you walk into all the movie pieces and this is too simplistic, but if we had just for all of them. It seems like you'd still be at a 24% gross margin in the quarter If my math.
Right and you know the guidance here imply something in the low twenties like 21 22 for the second half to get to your guidance. So <unk>.
Question is it that just simply conservatism still built into the guidance here for the year or is there something we're missing on the margins here coming up in the next few quarters, just because it seems like a few of these items you called out in the second quarter that help.
Don't I'll just go away they should be you know repeating to some extent going forward. So I'm wondering why why margins are maybe a little bit better than they are in the second half. Thanks guys.
Yeah, sure Hey, Brian So yeah turnout for Awhile now we've talked about are targeting our margins in the mid twenties, excluding irate benefits. So what you're seeing in the first half really is a little bit of a overperformance, where we can expect.
To be on a run rate basis, and you know we walked through those those overperformance items that we think are are more of a one time nature that we don't see in the back half of the year. So.
So that's that's one reason the margins are coming down also we had talked about in previous corners. O'brien. There are a couple of a couple of large projects that are going to yield a little bit negative project X.
Are you willing to the low twenties.
Gross margin, where we normally see mid twenties. So those two reasons really are are the reason, we see that the back half is going to be in the low twenties and the overall for the year is going to be in the mid twenties.
Brian This is coming from a couple of quarters.
We've talked about those low margin S. T I U S based program so it'll be finish.
Finishing up here in the second half of the year that that's those are some specific programs, putting some downward pressure on that.
Okay understood makes sense I'll pass it on.
Thank you.
Richardson is from <unk> J.
J P. Morgan. Please go ahead.
Yes. Good afternoon. Thank you very much for taking my questions.
Along the same lines as Brian question on bookings.
Similar kind of question on revenue in the back half of this year.
If the I R rated continues to drag on may be into next year, even just kind of what the the impact on your your revenue guidance range might be.
For for which period Mark for this year.
Yeah for the second half of this year, yes.
Yeah, I can get that so eight hey, Brian so well.
As we talked about in the in the prepared remarks and our.
First quarter call, we had about 90% of our order book already secure for the year as we head into the second court here and our revised guidance, we've got about 99% of our orders in already secured in the order book and we've taken a little bit more conservative posture on windows were gonna deliver in the back half of the year. So.
We felt pretty good about our overall revenue guidance for the balance of the year.
Okay. Okay. Thanks, Nipple and then.
You've been talking more and more about omni tracking. These 250 can you just remind us kind of when the.
The deliveries for those can begin and is there anything more quantifiable you can give us as far as the the bookings activity that you've seen so far for those two products.
So beginning with omni track, where rapidly quoting that program now again, that's a longer cycle because it has to be designed in very early and upfront and the project.
Relative to a dirt track for example, I think the last bit of data. We had is that we had over seven gigawatts under various stages of quote for the omni track already so I think we feel pretty good about the attraction, we're getting on quoting but I wouldn't expect to see any meaningful deliveries prior to Q1 of next year.
The F C. I H 250, I'm pleased to say, it's this month that we begin formerly quoting that that's available to quote at the end of this month and again, we expect to have more meaningful deliveries into Q1 of next year.
Excited about that product and all the work that the engineering teams have done between the Spi team and the array team to really modify that product to be something pretty special.
To attack the U S market.
Very pleased with that and you will see that at our upcoming already plus trade show.
Got it thank you very much.
Thank you the.
The next question is from Julian and women Smith off Bank of America. Please go ahead.
Okay.
I appreciate it.
[laughter].
Okay.
Okay.
You said.
Right.
Fans uplift, maybe you could quantify that'll do more but also just normalizing out some of the S. T I noise in the back half of the year I mean look I know, we're not ready to talk about Ah 20, forgot it's per se, but if you put those pieces together it sounds like there could be a reacceleration, especially off maybe maybe a temporarily depressed back half year.
Yeah, I think hey, Julian Sniffle, I think you're breaking up a little bit on that question, but I think you were asking kind of what our our views on kind of normalized margins after taking out the noise from SGI and kind of the back half of this year.
The 24th.
Yeah, Yeah. It's so we stand by what we said in the past as we see are kind of target margins without iras right about the mid 20th 23 to 25 per cent gross margins and we still see that taking out the noise and the one time or is that we had so far in the first half of this year.
Right. So it sounds like there's no reason not to think that between the the enhanced scale into 24, you should be able to achieve that in the first part of the year.
Yeah at this point, that's that's where we're at yes.
Okay, and then just to clarify Super quickly if you don't mind on the.
The the backlog trend if you will I mean, how much what's the duration in term of some of the deal making that you're seeing out there I mean, you can certainly be seen some of your peers talk about longer duration, we're seeing that happened on the on the table procurement side can you elaborate a little bit more on on this push out and maybe just how long are we talking.
So the way, we look at our backlog Israeli house that convert over to revenue, which typically anywhere between you know three to five quarters and in the past Julian our our order book has resulted it is converted anywhere from 90 to 130 per cent into revenue.
We're seeing a little bit more on the on the lower end because of the the items, we've talked about the irate clarity the.
Module module availability as well as now permitting issues, but that's how we kind of see it's between that range and we continue to see that 90 to about 120 to 130 per cent.
And Ah Julia let me, let me add onto that and that.
I think it's important that we continue to clarify how we define our order book because it is different than other publicly traded companies in the space and.
I'll just remind everyone that we only include executed contracts awarded orders, meaning named projects with a known start date and our order book. We don't include volume commitment agreements without specific projects and target start dates already identified so we often get that question of do you have vca's and.
It's important to note that yes, we do have <unk> and in fact, we have some that were recently signed but we do not include that committed volume without a named it project at the start date and our order, but we do believe that this is a practice that serves.
It creates a great benefit of consistency in how we reported our fingers historically and I think it gives a tighter correlation to the revenue outlook that we provide and I think that's an important piece.
Peace for analysts to to to remember and I'll remind you that those <unk> are typically larger programs approaching one gigawatt or higher.
It's typically divided by multiple projects some of which may be delivered up to six to eight quarters into the future.
And to be quite we even have vca's that we're currently executing against veterans several years of duration right.
I think the last thing I'd comment on D. C. A sense of what they are not all created equally there are V. C. As the companies are working with you to try to.
Attempt firm fixed price far into the future without sufficient hedges or indexing against commodities and and those are dangerous VCA said you only have to go back a couple of years and a raise results to see this impact right. We're really avoiding those type of vca's and rather the V. C. As that we're really focused upon in finding at this point are really about.
Customers are coming to us asking us to guarantee an amount of available capacity and in some cases, a specific level of domestic content in that capacity that we would commit to our customers. So again, they're very different we do have some we've signed some recently, we're not gonna go out and do press releases every.
Time, we signed a B C.
Giving you wouldn't quantify the total quantum a V C. If you have today.
Would you go.
Fair enough I drive. Thank you guys. So much <unk> you got it thanks Julian.
Our next question my apologies.
Go ahead, Chris.
[laughter].
That's our next question is from actually Hunter soon <unk>.
<unk>.
Oh, sorry, I was muted good afternoon, and thanks for taking my questions Kevin at a higher level. It sounds like you're you know you're focused on dramatically reduce your cost structure into 2020 Ford has given the the patent commentary that you indicated I was just.
And then just given this focus on profitable growth I was wondering if you could maybe help us with how you think about your minimum margin target. It's on on on new projects and then how does competitor pricing your competitors' pricing strategy impact your pricing structure.
So in terms of are you, saying minimum target margins on new projects that were booking.
Yeah.
Okay. So we've got out external Ain't said, we expect to be in the mid twenties gross margins on an ongoing basis. So clearly we set that end of different programs with different size you have wide burying margins, you could have plus or minus three or 400 basis points from that number depending upon the complexity of the site the size of the site.
The amount of engineering work, we're doing in the amount of additional services, but we are now selling in addition to the tracker. So that all creates a high degree of variation. So we don't set a very particular target per se. It really comes down to an individual programs and I would say the second part of the question of well relative to our competitive pricing.
The monitor our competitors pricing all the time, both in terms of our publicly traded as as well as the non publicly traded competitors in our space, we focus more about ensuring that we've got our value proposition well defined and where we were staying in lock step with our customers and what we've been focused on us again reduce.
<unk> overall costs.
Reducing their install time their maintenance, they're commissioning time all of those areas that we can continue to save their money, which in some cases, they will save money, because we'll be able to dramatically reduce our costs with a lot of our newer developments that as we said several of the just launched in several that are launching in the next 30 to 45.
Days.
We're focused on helping them drive down there cross to become the tracker of choice for that that's going to be continued to be our approach, but what we're not doing is taking the historical approach pricing down the dirt track in order to compete with what I would call. It a tier two tracker platform for a mild weather condition that were just frankly not.
Suited for prior to launching the <unk> 250.
Right. So what are you just a much different level of discipline in that.
Got it that that that's super helpful. Becca, Kevin Thanks for that that color and then maybe just a follow up question maybe for nipple.
<unk> do you think you're going to feel confident enough to include the 45 acts manufacturing credits within your numbers is this looking like a November event or does it increasingly seem like something you'll just have a cumulative catch up with a year and when you report in February or March and that's it for me. Thank you.
Yeah, Hey, Thanks, Kashi, so that's something we're continually evaluating.
Still contend that that we that they are still at 1.6 cents that we've talked about before S out there and we're negotiating with our suppliers.
That split we're also working with that.
With our advisers and officers on kind of where where that would go in the in the piano, but we feel like you know what will come to the market as soon as we haven't good.
Quantic quantification of that <unk>.
And we think that that's something that may happen. This year, but we just we just.
Can't guarantee that right now.
Got it thank you.
Thank you very much.
The next question is from Joseph <unk>.
Please go ahead.
This is actually Hillary onto your account and I just wanted to touch on breakdown. If you could kind of speak to the general demand trends, we're seeing that smile, it's product next and when we might start to see that.
A little bit more towards distributed generation.
Ah drive right by our first and that <unk>.
Yeah. That's a great question. So we've seen a great rebound in Brazil. This year as you've seen in the numbers as you look at our revenues for the Sci business at a great rebound in the overall margins as well.
I think what we're anticipating is.
A shift much more towards DG next year I think we'll continue to finish this year with with the mixed that we have focused much more on utility, but that does switch over a little bit next year too much more D. G.
So 2024 at the answer.
Mmk, Great and then looking to next generations funding wondering if they're starting to get any indication from our customers that they're starting to lock in supply.
<unk>, that's why I think yeah.
No what we've done we've gone out.
And tested that theory, and most of our customers feedback has simply been they're installing panels as soon as they can get their hands on them. So they don't expect to have any.
Artificial acceleration if you will before next year's deadline, they're putting in everything they get there's no stockpiling occurring in our customer base. That's what we've tested this quarter, we've got out and asked our customers that question and they said no stockpiling putting them in as soon as we get the no artificial acceleration to get him in ahead of any deadline.
Okay. Thank you.
Got it or.
Thank you very much.
The next question is from Conan rush off off of mine.
And this is Andrea Adams on for calling could you speak to the compound pricing from the installation savings elements that you've highlighted.
Yeah. So I think what we're focused on is driving several hundred basis points of cost reduction for our customers relative to overall installation costs, we're doing that in a variety of different areas looking at engineering standards. For example, reducing the number of piles of customer would need we have.
Several new developments in clamping technology that will ease the installation of panels and speed their ability.
Through quicker assembly of panels and clamps onto the structure, we're doing a lot of that work to drive our customers installation costs down and we're we're quite confident that the work. We're doing today, we will drive hundreds of basis points of cost improvement to our customers in the very near term.
Alright, Thank you and.
Follow up.
Cash position continues to improve.
Speak to their priorities that you guys have for optimizing the balance sheet.
Yeah sure. So as as it continues you know we talked about it in the prepared remarks, we're going to look to.
Without you know present to are important to delever, our current us balance sheet here as we look at our balance sheet and look at the different Ah aspects of it are term loan.
It doesn't have any prepayment penalties and carries the highest amount of interest so that'd be that'd be something that we would target them or.
To reduce the excess cash position.
Alright, thank you so much.
Thank you.
The next question is from Donovan chesser of northern capital market.
[noise] hi, guys.
The operating or cut off a little bit there I mean, there so I'm, hoping that you're able to hear me well just real quick.
Right.
Yeah, we just kind of it.
Okay Fantastic. So first I Wanna talk about non tracker revenue you know you guys that came up in a couple of different kinds of contacts from the call today.
[noise] its contribution to this quarter and then also you know kind of strategy going forward and I just wanted to clarify when you talk about non tracker revenue you know, there's kind of the obvious things software kind of you know higher margin services.
Aftermarket sales or products.
But there's also you know historically, there's been the self performing of the installation with the S. G. I does uhm I know you are moving away from that in the U S. But it's also still kind of like a standard and really expected practice I think in places like Spain, maybe Brazil, and then historically I don't know if this is still the case the S T I.
You know once upon a time did to a certain amount of fixed and how how to fix solution and offered fixed. So when you guys talk about non tracker revenue.
You know does that include some of it's just the self performing sort of services. There you know which isn't per se like a sexy gross margin kind of thing and same thing you know.
With the fixed <unk> just wanted to understand kind of what you guys mean, when you're talking about non track of revenue.
Yeah Fair question Ottoman Thanks, so to be clear, we're not talking about construction services in that and you're right Wow STI historically had a larger portion of their business dedicated to construction services, we've talked historically about that being diluted to the tracker sale we have virtually.
I'd say eliminated 90, 95% of that work in Brazil to date.
You see the overall STI margins, but around nipples shoot their rebounding to the preacquisition margin level, and that's really about reducing that construction.
Is one of the elements, we did to drive that margin now.
You also corrected in Spain, there is still an expectation that we do a portion of that we're doing a much lower portion of that only for a handful of customers that really require us to do that but to be clear. The non tracker revenue are items like you talked about and software services. It's engineering services, it's commissioning it's.
Those are the things that were productizing and charging customers for.
Things such as change orders, ensuring that we're getting the appropriate.
Revenue in margin for change orders were customer has come in and and has done some good some material change in the design and we'd have to redo something all of those are things that we've productized.
And began standard <unk>.
Procedures for and those are really what's what's paying benefits those as you can imagine.
E P C's live and breathe <unk> change orders, so us being able to capture change orders and effectively ensure that we're not getting for lack of a better word stuck in the middle with that cost of that change that's something that we began productizing and turning around and ensuring we're getting value for so all of those are things that are really driving that bucket of revenue.
For us and as I said that was something that we initiated last year, we brought in a product manager to fully productize as the words, we use all of those areas and as we know convert those items into products. We are now selling them not only upfront, but after the fact going behind the scenes and selling those two existing customer so.
I think it's something that as I said in my opening remarks, that's going to be something that's continue to be lumpy for several quarters, but I think it's something that will continue over the long term to drive value for us and accretive margins for us.
Okay. That's very helpful. And then I want a as a follow up turned to the D. G channel in the U S. So I know.
Earlier questioner talked about two G in Brazil, but.
And you got a shared average project sizes, which are quite substantial he goes nor is 250 megawatts or something on that order, but you know historically the D. G channel in the U S.
I think you it ends up being effectively projects smaller than I believe around 50 megawatts.
You know historically, you had an exclusive sorta setup with Russell Pacific R. P C services.
And they recently were required by Qantas services I think in March or maybe may.
And they've reading the press releases it seems like they've suggested there might be [noise] broadening to offer you know additional trackers as well and I'm a I understand fully well that this is like a whole new space I mean, the the whole idea of D. G. You know being.
Kind of a turnkey operator, and almost like a track or a wholesaler with with services too was even sort of invented by.
These guys. So it's a very evolving Smith, but I'm just wondering if we can get like an update there is is is G. G.
Still sort of material is that an important meeting to help drive you know gross margins how does that space evolving is it is it a issue that's Russell Pacific Mcnabb, you're doing other trackers or considering that now that they're owned by quanta or is it just that the space is evolving and so there.
They're gonna just be more of these turnkey folks and having sort of an exclusive relationship just isn't as likely to be the the nature of the market going forward.
Okay, great great questions and great observations, let me address a few points. There. So first of all when you look at the overall DG market in the U S. At our revenue with our P. C. S. I will tell you what we've kept as a as a pretty good secret all along as we are by far the leading provider of DG solutions.
Through Rps in the U S market. So we feel very very good about that space and about the growth we've seen in that space over the last several years that being said you're right R. P. C. S was acquired by Quanta.
And as part of that acquisition I think they will continue to look at not only being exclusive with the ray but look at other.
Other trackers that they could provide customers that are fit for other specific projects and at the same time you or your second part of your thesis is also right. There are lots of other art P. C. S is emerging coming.
Coming to us in the market looking for us looking for some relationship with the right directly to be able to provide them access to other markets, where our P. C. S. Maybe other geographic markets, where our P. C. S may not nearly be as strong. So we feel very good about our space in that market. It is a very rapidly growing market.
We're going to continue to grow with that market with our P. C S and others frankly.
[laughter]. Thank you very much Sir medicine, <unk>, if you could wish to also a Christian <unk> and the new one we will sauce <unk> interest of time, you limit your questions to <unk>.
Next question is from Andrew Andrew <unk> <unk> <unk>.
Great. Thanks, so much for taking my question you probably have some helpful clarity on how omni tracking providing some pricing flexibility with customers and I'm. Just wondering if there's any other product characteristics that you see in the market from competitors were you may want to increase R&D spending to stay competitive. Thanks.
Okay I I think if we just go back to the the comments about a number of patents that we file and have been in the last 18 months, we've taken a very very programmatic approach to not only our tracker, but all truckers in the market. We've done those comparisons of where we think component.
By Subcomponent.
We may be disadvantaged in terms of either technology or cost and we began directing our engineering efforts around those so our goal is to have the best overall tracker platform meeting multiple offerings multiple products and that and we're going to continue to innovate subcomponent by Subcomponent, where we have.
Of a disadvantage we're going to innovate where we have a cost disadvantage, we're gonna cost reduced there's a tremendous amount of activity that's been going on in that and what I alluded to in my comments about the number of projects recently released or pending release in the next 45 days substantial number of those is is the exact output of that.
Work that we started a year year and a half ago.
Very programmatic approach to optimization.
Got it and I are you guys looking at anything beyond just trackers intent other balances system.
[noise] products than other players in the market offer.
I don't think we're ready to comment on that publicly at this point, we're going to continue to look at Adjacencies and and evaluate those both from an organic and inorganic point of view and I think it wouldn't be prudent for us to comment.
Of what our next phase of growth is going to be just yet.
Well certainly think indicated by the timing is right.
You're welcome.
Thank you. The next question is from <unk>.
<unk> of truth. Please.
Afternoon, all I'm appreciated.
Uhm, recognizing the free cash flow generation.
Mmm was related to real out of this year and moving into the next room to hire groceries, maybe if you could just talk to your targets for free Costco used beyond clearly deleveraging upfront.
Sure yet what what can say you know obviously with the the better use of capital issue of the higher margins were able to to drive over 75 per cent increase in our free cash flow targets for this year, but what we are looking at here is probably about a sixth we look at.
Free cash flow conversion as a metric internally and we're looking at about 65 to 75 per cent free cash flow conversion is kind of our target moving forward.
Appreciate that and and any specific areas you want a direct that beyond deleveraging. Your time will tell all kinds of on that.
Yeah. It is you know we all we want to make sure you know we have we do have a lumpy business that requires some capital. So we ought to keep some capital or some cash on the books for corners, when we ramp up for large still to Greece.
However.
We also do want to make sure that we're funding the business during its growth throughout the period.
The biggest one right now is deleveraging and just being opportunistic on funding the business.
Thanks, so much.
Thank you.
The next question is from <unk> <unk> <unk> <unk>.
Hey, guys. Thanks for taking my questions. Congrats on a strong Q2 results in the bookings a quick follow up on the booking saw here can you share it at some level the mix of the bookings as it relates to domestic and international and then also contracted meeting with the <unk>.
Posits and then also a watered orders, which I believe would be without deposits and then in terms of our margins shifting there you know you highlighted in terms of your outperformance at this corner Ah three sources, who are reasons why logistics was not mentioned, but I think logistics has.
Been a tailwind for others just curious if you could talk through if logistics fix was buried in one of those three drivers and then also going forward.
We expect that to be a benefit for Q3 with it may be telling off Q for thanks.
Okay. So I'll start with the the logistics piece, we did and the prepared remarks spill set about 300 basis points of.
Of the margin lift for this quarter was related to cost saving opportunities.
Which 100 basis points was continuing lower freight costs. So that's come down from a couple hundred basis points or so in the first quarter. So we are seeing less of that and we don't expect as we talked about in the first quarter we.
<unk>, you know that to be priced into quotes.
Quotes going forward the lower cost so we won't see as much of a lift on that.
As far as the order book, where you know we're not we're not going to break out the the portion of the bookings between domestic and.
International and you know we feel good about the bookings in in an emerging we have on the bookings are more at her traditional kind of mid twenties margins.
Great. Thanks, that's all I had.
So.
Thank you.
Next question is from Sean Milligan Jenny. Please go ahead.
Hey, guys. Thanks for taking my questions I guess first.
Would you be willing to kind of talk about.
The market that you'll be able to you know work to penetrate but on the track in H 250, you know more fully next year like in in terms of.
You know maybe dollars like what does that market look like for you in the U S.
Yeah. So I think our view is that the.
The.
The omni track that terrain following tracker represents as much as 10 or 15% of the overall market initially that would be really great.
Target opportunity for us so we feel really good about the omni track being 10 or 15% and again. It is it is priced slightly higher than the dirt track. So there is a margin accretion opportunity there and it's and it's really targeted at the amount of earthmoving savings that the omni track will drive omni tracked as we've disk.
Previously has the greatest post to post capability in the market, 30% greater than our competitors out there. So we feel really good about that product.
As we get to put that into the field and growth.
Relative to the F. T. I H 250 again, that's targeted at a market that is look at that really fast growing market, where you don't need the extreme capabilities of a dirt track or there.
The capabilities of one of our larger publicly traded competitors, it's really about a market that's price sensitive less robust rapidly growing and this is an area that we feel really good about the value proposition of the H 250 attacking that market.
We think that's probably circuit, 25% to 30% the size of the market that Derek trucks, probably currently it. So we feel that's a really fast growing market, it's attractive our value proposition in terms of our price point and the features and benefits that product will have basically the competition in that space.
<unk>.
Really excited about the H 250, and hopefully next year will be talking about some great revenue growth specifically around both of those new products.
Okay. Thanks, that's really helpful. And then just just to clarify when you're talking about the 10% to 15%.
For army tracking.
You said, 25% to 30% for Ht 50, that's relative to the dirt track market size.
That's correct.
Okay, and then just big picture I guess.
I'm trying to think about how you view 2023 so.
I guess the question is like are you viewing this year they transition year, you know and.
The new guidance sort of implies flat growth year over year and you still don't have you know the.
The I R. A tailwinds fully crystallized.
The setup for 2024.
You know winds up looking more attractive from a revenue standpoint.
Yeah, I mean I'd characterize it at this 2023 is a transition year, we've stayed focused on.
Driving those parts of the business are with are within our control. So wallet baby flat on a revenue basis at our current guide you're talking about doubling.
Adjusted EBITDA on a business on flat revenue and you're doing that through a lot of hard work and effort throughout the company and I again I just wanted to congratulate the array team members for the amount of work going in so many different areas to drive that level of operating performance. So it is a transition year.
It it does again create a lot of free cash flow to set us up for great much better balance sheet as we exit the year into our next phase of growth being 2024, I think if anything we've been able to prove our ability to deliver those mid twenties margins and I've historically said that we'd be mid twenties margins by 2024 thing in 2002.
We're just doing that at an accelerated pace at this point just due to that same execution, we've talked about and then when we think about all the additional innovation that we've been working on very aggressively over the last 18 months, that's now coming to fruition.
Really looking looking at at market share take away for.
For next year is a great Avenue for growth for us so not only were gonna participate in other fast growing segments of the market, but we think our court dirt track product is going to be much more competitive next year.
Great. Thank you for taking my questions.
Absolutely.
Thank you very much. The next question is from <unk> Cantor Fitzgerald. Please go ahead.
Yeah, Hey, guys. Thanks for squeezing me in here just a quick one on the competitive landscape any change there and let the I R. A maybe you guys are starting to see some more aggressive bidding any change to sort of the nature of the business or who you're seeing competitively for projects any changes over the past few months. Thanks.
No no not at all very consistent.
Awesome I appreciate it.
[laughter]. Thank you very much ladies and gentlemen that concludes today's conference. He might disconnect. Your lines at this time. Thank you for your participation.
Mmm Mmm Mmm Mmm.
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