Q3 2023 Array Technologies Inc Earnings Call
Greetings and welcome to <unk> technologies third quarter, 2023 earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host coding Mueller Investor Relations theory. Please go ahead.
Good evening and thank you for joining us on today's conference call to discuss our rail technologies third quarter 2023 result.
Slides for today's presentation are available in the Investor Relations section of our website array checking dotcom.
During this conference call management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect.
Mission.
It 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.
With that let me turn the call over to Kevin Hostettler array technologies, Chief Executive Officer.
Thank you Cody and welcome everyone in.
In addition to Coty I'm also joined by Depot Patel, Our Chief Financial Officer.
Before I start with a discussion on the quarter I'd like to first discuss our transition into the CFO position that we announced earlier today.
Starting on November 13th Kirkwood will take over as the CFO array technologies, replacing people.
We are grateful that people has agreed to stay on board in an advisory role until the end of the year to ensure that we have a smooth transition.
Yeah.
We'd like to thank nipple forget the instrumental role in the success of a rate.
Leading the company through the IPO to being a driving force behind the gross margin recovery and the improvements in our cash and liquidity position.
We certainly would not be where we are today without nipple.
The entire team at array wishes him the best in his future endeavors.
I am also extremely pleased to welcome Kurt what I'm bored.
It brings an incredibly strong finance and operational background to a rate that will be invaluable to us as we continue to grow and mature as a company.
With that let's move to slide three where I'll provide some highlights from the quarter.
<unk> once again delivered a strong performance against all of our key metrics.
For the quarter, we delivered $350 million in revenue, which was in line with our expectations and as people will discuss more later.
<unk> I'll say roughly $20 million reduction for a year to date reclassification of Brazilian I C. M S taxes, yes.
This quarter. We also continued to over deliver on our gross margin expectations reporting 26% on an adjusted basis, which combined with an increased expectation for Q4 as raised our full year outlook on gross margin once again.
It's important to point out. This result does not include any benefit from the Airasia forty-five backs manufacturing credits.
On the strength of our margin performance, we recorded adjusted EBITDA of $57 $4 million, which represented 16, 4% of sales an increase of 560 basis points from the same quarter last year.
I'm also happy to note that we delivered $69 million in free cash flow this quarter, bringing our year to date total to $126 million, which keeps us well on pace to our previously stated target of delivering it.
$150 million and $200 million of free cash flow in 2023.
In the quarter, we also made a $15 million prepayment of our term loan, bringing the total principal balance down to $239 million.
Finally.
This quarter I'll only spend a short amount of time talking about the overall demand landscape, there's not much has changed since last quarter.
As shown by our reduced revenue outlook, we have continued to be impacted by short term project timing challenges that are outside of our control.
For instance, this quarter, we had several projects have experienced delays associated with financing as developers are focused on renegotiating P. P E rates to improve project returns and this higher interest rate environment.
While we fully expect financing and continued delays related to permitting and other items to be sorted out in the near term.
This is yet another complexity that we are working to understand with our customers.
What.
It's important to note that we've continued to execute on elements that we can control and have largely maintained our profitability and free cash flow expectations for the full year.
As we look past some of these short term project timing issues I remain optimistic about the direction of our industry.
Remember.
Solar accounted for over 50% of all new electrical generating capacity added to the U S grid at the start of this year and there was no reason to believe this will slow down.
It still represents the cheapest and fastest form of new energy generation.
Also utility scale solar is not facing any structural demand weakness or destocking issues.
Add to that the fact that the tracker market is poised to well outpace the strong overall projected utility scale solar growth over the next few years and we still have many more tailwind in this industry than headwinds.
So while our bookings number this quarter was still reflective of these near term dynamics, we are seeing lots of positive proof points on the longer term outlook, which align with these trends.
For example, we have seen our domestic project pipeline doubled from June 30th through September 30th.
This is a strong sign of the health of our demand overall, but also showcases the traction our new product offerings are gaining with our customers.
As we already have multiple gigawatts I'm quoting activity on both the H 250, and the omni track.
Also we're pleased to note that we have recently signed three long term agreements, which collectively will represent multiple gigawatts of future projects.
All of these agreements, including deposits tied to dedicated capacity and represent programs that initiate in the second quarter of 2024 and beyond.
And finally.
The $320 million of IRA related projects that were on all the June 30th we only saw a $35 million convert to orders this quarter, which leaves almost $300 million still sitting on the sidelines.
This means we have not yet unlocked anywhere near the full value of those projects into our order book.
So while we will obviously wait until our fourth quarter call to provide a more detailed discussion about 2024.
Encouraged by the positive indications we have been seeing.
If we turn to the next slide this quarter I wanted to give a brief update on two exciting business developments.
Last week, we announced our plans to expand our operations in Albuquerque by leasing a brand new built to spec 216000 square foot manufacturing campus.
This expansion is exciting as it reinforces our long standing relationship with the community, but also will give us the space to drive even more operational improvements and domestic manufacturing flexibility.
We are appreciative of our partners in the state of New Mexico, and we look forward to updating you the progress of our new facility as we move forward.
Next building upon what I discussed last quarter, our non tracker revenue streams last week, we also announced the rollout of our services and training offerings.
These offerings include commissioning.
Preparation and process training.
Installation training with a golden rule operations and maintenance and page turn best practices.
While these offerings will be a small portion of our revenue initially we do see a path for these services to become a larger part of our business overtime.
And will positively contribute to our overall gross margin.
Each of these value added services are designed to reduce operational downtime and increased productivity.
While improving our customers overall experience with each of our res product platforms.
To support these offerings, we have also expanded our customer and product support teams over the last year, which has included hiring a director of services product management and training and development.
While we remain early in our journey on the expansion of non tracker offerings elements like these training offerings have already helped to increase our margin expectations for the full year and people will now discuss in more detail along with a further analysis of the quarter.
Yeah.
Thanks, Kevin and I appreciate the kind words.
After nearly a five year run them turning a privately held company into a successful public company listed on NASDAQ is the right time for me to step down as CFO.
I'm grateful for the opportunity to have worked alongside such as collaborative and talented team.
I think Kevin for his leadership and for supporting my career growth and I believe a raise well positioned strategically and financially to continue its growth and drive value for our customers and shareholders.
I'm highly confident in our leadership and future and I look forward to working with my successor, Kurt on the smooth transition in the upcoming months.
I'd also like to thank the employees that are right for their hard work and support over the years.
We're working alongside them.
That being said, let's get into a summary of our third quarter financials. Please turn to slide six.
The third quarter, we reported revenue of $354 million compared to $515 million for the prior year period.
It's important to note that our third quarter revenue, excluding the impact of about $21 million, Brazil value added tax or Ics that was reclassified from revenue to cost of revenue.
This reclassification was determined to be appropriate after we evaluate the expected treatment of governmental incentives for the 45 ex manufacturing credits under the inflation reduction Act, but has no impact on profitability or cash flow.
Comparable amount in the prior year was $8 2 million and was not reclassified out of revenue.
Our reported $350 million in revenue reflects roughly $245 million from the legacy of re segment and $106 million from the STI segment.
This result was driven by both a 22% decrease in the total number of megawatts shipped from 4.4 Gigawatts to three four gigawatts and a 12% decline in NSP from 11, six cents a lot to 10.2 cents per watt.
As communicated last quarter. This wasn't expected volume decline in change in project timing year over year, given the scale of project push outs, we've seen due to the various macroeconomic elements at play.
Additionally, the ASP decline was also anticipated given the reduction in steel aluminum and logistics costs year over year.
This quarter, we introduced adjusted gross profit and margin as a new non-GAAP metric following the reclassification American technology amortization expense.
Operating expenses to cost of revenue.
Do you believe this reclassification aligns the presentation of our financials more broadly with industry peers and this change did not affect operating income net income or earnings per share for any current or historical periods.
That said adjusted gross profit increased $91 million from $82 $4 million in the prior year period due to improved gross margin despite the reduction in volume.
Gross margin increased to 26% from 16% on an adjusted basis.
Adjusted gross margin was 25, 3% for the legacy array business and 27, 6% in U S T I business in the quarter.
We were pleased to see our margin performance continues to benefit from our operational improvement and focus on our non tracker revenue opportunities.
Operating expenses of $47 $2 million were down $12 $2 million from $59 $4 million during the same period in the previous year.
However, we had a 12 million dollar improvement amortization expense year over year due to lower amortization of intangible assets related to the acquisition of STI.
Excluding this impact our operating expenses are roughly flat year over year.
Net income attributable to common shareholders was $10 1 million compared to $28 $4 million during the same period in the prior year.
Basic and diluted income per share was <unk> <unk> compared to basic and diluted income per share up 19 sets during the same period in the prior year.
The decline year over year was largely due to a $43 million legal settlement, we received in the third quarter of 2022.
Adjusted EBITDA increased to $57 $4 million compared to $55 4 million for the prior year period.
Adjusted net income increased to $31.4 million compared to adjusted net income of $28 $9 million during the same period in the prior year.
Basic and diluted net income per share was 21 cents compared to adjusted basic and diluted net income per share of <unk> 19. During the same period in the prior year.
Finally, our free cash flow for the period was $69 $4 million versus $102 million for the same period the prior year.
Year to date basis, our free cash flow of $126 4 million, representing a 238% year over year increase.
Now I'd like to go to slide seven where I will discuss our updated outlook for 2023.
For the full year 2023, we now expect revenue to be in the range of 152 $5 billion to $1 $5 $75 billion.
Update to our top line guidance was driven by three factors.
First the ICM S reclassification, which will reduce our outlet by approximately $25 million.
Second we had four projects that were delayed due to a developer financing challenges.
While we fully expect these challenges to be alleviated in the near future, we no longer can count deliveries to occur in 2023.
And third we have several projects with permitting delays in Spain, which we now expect to deliver at the beginning of 2024.
However, as a testament to our continued operational improvements and our focus on high margin non tracker offerings, we are largely holding our adjusted EBITDA and adjusted EPS guidance as we have increased our gross margin outlook to be in the mid to high twenties for both segments.
Now expected to be in the range of $280 million to $290 million for adjusted EBITDA, and $1 and $1 <unk> and adjusted EPS.
It's important to note. These changes do not reflect any assumed benefits from this 45 manufacturing credits. Although we are actively finalizing with their suppliers and we will provide an update to the market. When final 45 X guidance as provided for once we complete the agreements with our suppliers and have ensured proper ret.
Ignition I'm timing under U S GAAP.
Finally, the improvement in our adjusted EBITDA margin, we are well on track to deliver our previously provided free cash flow guidance of between 150 and $200 million for the full year as Kevin mentioned.
Now I'll turn it back over to Kevin for some closing remarks.
Thank you and people I.
I am pleased with our performance this quarter as we once again delivered better than anticipated earnings.
We continue to work hard on improving our business and our product and service offerings to ensure we deliver increasingly more value to our customers and we look forward to updating the market on even more exciting progress in this area in the near future.
With that operator, please open the line for questions.
Thanks yourself.
Ladies and gentlemen, we will now be conducting a question and answer session.
I would like to ask a question. Please press star and then one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star and then two if you would like to remove yourself from the question queue.
For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Again, if you would like to ask a question. Please press star and then one now.
The first question we have comes from Mark <unk> from J P. Morgan. Please go ahead.
Yes, good afternoon, and thank you very much for taking my questions I wanted to start with the the projects that had been delayed so just to be clear. These are these are delayed you're not seeing any cancellations you know other than the the.
The Brazilian contracts that you mentioned.
And then anything on timing you know what are you hearing from your customers is this kind of a matter of months quarters is it just kind of indefinite until they are until they renegotiated.
Yeah, Mark this is Kevin.
Good question. Thank you. So we haven't seen any meaningful cancellations yet at all and what we are seeing is just these project delays and shifts.
And quite often its really relative to these customers going out and trying to renegotiate ppas prior to moving forward on projects. That's one of the biggest things, we're seeing and that's new and on top of the interconnect tissues and panel the panel availability issues that we've had for a couple of quarters now so what we're seeing in terms of.
Delays as customers pushing out not two weeks or three weeks, but they're pushing out measured in months three four months at a time right now and what they're trying to do is push it out.
And again, we get into the winter build season in North America, So they're not pushing it out to you know January February they're pushing it out to March April and May at this point, that's kind of what we're experiencing.
So as expected.
When we every quarter, we look order by order go through talk to the customers ensure that that project is on for example for a December shipment and what we're just experiencing now was on some of these they're pushing out of this year and into the end of Q1, beginning of Q2, and that's really what we're experiencing.
Okay, and then just a follow up on the 45 ex split or the I R. A forty-five acts you know understand we're still waiting on the on the government here, but yeah. We were under the impression that there was better clarity that the industry was getting as far as kind of what are the sports might be.
Between the different participants are you know within the value chain.
Any any update there that you can help us kind of quantify how to think about how you've historically talked about keeping about a third or so of that 45 days.
Thank you.
Yeah.
Good question, Mark So I can only say that as usual, we will negotiate against ourselves and putting in a public forum right, but I will tell you that well historically you've heard me say, we think it's gonna be a third a third a third what we're negotiating now and in all cases is greater than half coming to array and I think that's a substantial upside.
To what we thought previously so I think we're going to continue to negotiate each of those contracts with vendors.
Dividual basis, but I think we're more optimistic than we were perhaps a few quarters ago.
Great. Okay. Thanks, Kevin and thank you Nicole for all of your help since the IPO.
Thanks Mark.
Thank you.
The next question we have comes from Julian Good morning, Smith with Bank of America. Please go ahead.
Hey, just wanted to come back to the late question first and foremost I'm just when you think about the shift in the backlog here or perhaps contemplated within that bucket. How do you think about this adding to the backlog versus say just you.
Adding novel projects right I mean in theory, you should be seeing something of a blow out in the backlog and then maybe the secondary and the secondary question here as you said perhaps.
But before is there.
Okay.
Thank you.
B.
Hi, guys I was saying about 24 could you expect a step up.
Step up in terms of volume is that what you're asking.
Yeah, I was sitting on 24 step up here and just how you're thinking about recovery like recognizing these these projects that are delayed and and then just why are we not seeing more of a blow in the backlog kind of an expansion.
Yeah, So what we're seeing where we're seeing the bloke is really in what we call our pipeline meaning.
And I think it's incredibly significant it's the fastest growth in the pipeline that we've seen in <unk> and for our overall pipeline. That's the stuff that's coming into the top of our funnel to double in one quarter that's incredibly significant.
What we're still seeing is that delay in getting them through the pipeline converting to orders that's going to continue to be a delay until we have clarity around the irate for one aspect.
Again, our customers are not sure what we need to quote them right. So they're telling us so that the pipeline is getting bigger because we need to be planning for demand scenarios.
That conversion from that overall pipeline into our order book is elongated and delayed simply because we don't know the rules yet. So we have had a few customers say listen I guess.
You don't do any rule. So quote me at X percent of domestic content to the best of your knowledge and ability today, because we need to give you in order to get moving so that that's happened, but that's what we what we represent of that $320 million.
Sitting on the sidelines waiting for IRA clarity, that's only happened to about 35 million of that where customers are saying look I've got to get an order out to you, let's get going others are still waiting for that additional clarity.
So I think youre still going to see that.
You won't see that blows up in the order book just yet until we have that clarity you are going to see some customers need to go forward under a looser setup of understanding if you will not fully defined so I think we're gonna see that through the end of the year.
And then the second part of your question as it relates to 'twenty to 'twenty four I think some of these challenges are going to continue into 'twenty 'twenty four for the entire industry and I think.
If you recall you can't just push.
And more to the specific size in a given year because of labor constraints interconnection constraints and things of that nature. So I don't think it's as simple as adding all the push from this year until next year plus the overall, what would've been viewed as the market growth rate of 20% to 30% CAGR previously.
I think it's gonna be a little bit more muted than that.
As we go forward into next year are still waiting for some of these things to get cleared up.
Got it and the international backlog do you feel good at this point just given the dynamics you described on the prepared remarks.
Yeah, we feel really good about Latin America, I feel good about Australia, good about Europe.
Think we feel pretty good we've had a great level of growth as you've seen this year internationally.
As we've really focused on working on those businesses and improving the quality of those businesses.
We expect that to continue going forward.
Okay excellent guys. Thank you.
Thank you the.
The next question, we have comes from Donovan Schafer of Northland Capital markets. Please go ahead.
Hey, guys. Thanks for taking my questions. So my first question on the project delays is.
Hmm.
I guess, Kevin you just hinted at a you know that they can be labor constraints and other things but.
If some of the projects that have been delayed.
If they're able to ink a P. P. A you know tomorrow or the next day.
With your customers around their customers and find the right price.
That allows them to proceed with the project.
You know can that drive like cannot be pretty quickly converted into revenue or whatever even if that was something resolved you know hyped.
Hypothetically Tomorrow would that then that still take another quarter or something before it could could flow through and have an impact.
Youre correct, it'll it'll still take a quarter of our standard lead time right. So what we're trying to be really mindful of is here is that we're not preordering and pre suppose you got all this stuff gets gets cleaned up by a particular month and therefore over investing in our supply chain right. So we're being very mindful, we're communicating with these customers literally on a daily basis.
Some of them are going out for additional Ppas, where we're truly having calls every other day to get an update from them are they successful and I can only say that in.
Every case that I'm aware of is that I can think of and these communications, they're confident that theyre going to get that revised PPA, but they're just saying these are negotiations that take longer than that a couple of weeks right and the way one of the large developments put it to me it's fundamentally.
The and utilities that are purchasing this energy.
Previously made commitments to their customers and to their shareholders of hitting very particular targets in terms of a percentage of renewable energy and we all know that the demand for energy is increasing and we all know that that's a definitively lower carbon source of energy that customers are looking for so.
Again, we feel really good about those fundamentals and we feel good that they need this renewable energy. So in all cases, we're hearing that they are they're having very favorable discussions in terms of renegotiating. These ppas, it's just a timing issue.
And again that's okay.
Most of rebate them quote from one of our large developers, whose interest bearing position right now.
And this business in general, but you know I have to ask just because yeah. We have had some other equipment providers.
That serves the U S utility scale.
Market, whether it's trackers or you know other kind of equipment.
Is that showed some sequential improvement this quarter and so you know do you think that comes down to just lumpiness and maybe kind of related if you can comment on it is is it it may be a case as there could we see something here like what we saw in Q1, where you were almost sort of being punished sure.
Having a high domestic content and not like you're if you're.
Not high domestic content and youre not compromising on pricing maybe that leads to.
More customers kind of holding out again to get the next incremental use of guidance are those any of factors anything you can share there would be exactly I think it's a consistent set of factors that we're seeing as we're really focused on that domestic content customers.
Those are the same customers and that's why we've identified the 300 million sitting on the sidelines that we had hoped would have converted but we all cannot control the pace with which the government is providing this level of clarity that's needed to go forward.
We all had hoped it was hitting their previous deadline, which was October but October obviously has come and gone without any clarity nowadays the latest update is that we made here bits and pieces by the end of the year, but likely not the whole story.
And again as I just alluded to so what you have is you have a.
A couple of customers asking for quotes with a lot of.
I should say leeway or liberty on our side as well we could give you. This at this price.
Given this definition, but we're not going to guarantee that that'll be the final definition.
And some of those customers are saying, that's okay to me I need to get going right, but that's the only you know I've got 320 million, that's 35 million only right. So it's a small percentage yet.
Moving forward, despite a lack of clarity right.
And again I caution people to not thinking about bookings on a quarterly basis. As you did in Q1, and then Q2, we had a great level of bookings that surprised to the upside significantly that lumpiness in that sea salt I think is going to continue for a couple of quarters.
Thank you. So the next question we have comes from Tristan Richardson with Scotia Bank. Please go ahead.
Hey, good evening guys. Appreciate all the comments on what Youre seeing in the market. Maybe if you could just help us out from a update on average project size either in the pipeline today or or at least in the backlog it either from a.
Ah megawatts perspective, or or even a dollar perspective.
Yeah, Chris Anthony bolt on average in our order book and backlog, it's about 150 megawatts.
Great. That's helpful. And then and then maybe just you know are there any other characteristics kind of where you're seeing this.
Hum.
This thing amick with respect to developers.
Is it for smaller projects or larger projects that are.
Perhaps a little bit more dependent on financing et cetera.
Is this just to or is this more broad based.
It is broad based so as you know, we do quite a bit of work in the C&I space as well.
We believe we're the largest provider of trackers to the C&I space it well we've been experiencing experiencing this.
For now a couple of quarters on the utility scale. We're also seeing it in the C&I space in the last quarter, it's really coming to light up these delays.
So I think it's something that's more broad based than and I don't think anyone's immune from this in the industry. So if anyone out there, saying look this isn't happening to us at all I don't believe that it's it's consistent I'm constantly.
On the phone with developers.
And our partners and it's a consistent theme that I'm hearing in the marketplace that's not it.
Re issue to be clear.
I appreciate it Kevin Thank you nipple all the best.
Thanks Crystal.
Thank you.
Ladies and gentlemen, just a reminder, if you would like to ask a question. Please press star and then one now.
The next question we have comes from Jordan Levy from <unk> Securities. Please go ahead.
Afternoon all.
Just to Echo everyone's comments Naples, thanks for.
Everything.
Maybe just to start sort of on I'm curious how all of these dynamics in the market right now with the project delays and that sort of thing. If that's had any influence on what you're seeing from a competitive landscape perspective.
Yeah.
Broader update there from what you're saying.
Think that's abating somewhat now as we get into the back half.
Outside of that not really seen any changes in market dynamics there.
Noteworthy.
I appreciate that and then maybe just as it relates to the new product Rollouts in 2024, and as we think about.
Got it.
Same center.
Okay.
Our new product development going into next year look.
We've talked about a little bit on the last call. We still have several exciting announcements to make in terms of new products to come out.
Both in Q4, and then into next year and I would just say just stay tuned and let us get through our timing internally as we will make those announcements as appropriate, but but there are some exciting things going on here in Q4, yet and then again into next year.
Thanks, so much for everything.
Thank you. The next question we have comes.
The next question we have comes from Brian Lee of Goldman Sachs. Please go ahead.
Yeah.
Hey, guys. Good afternoon. Thanks for taking the questions nipple you will be missed pleasure.
Pleasure working with you best of luck in your next adventure.
Right I guess.
Question, I had and I apologize I had to jump on late if you already covered this I you know a couple of quarters ago, you mentioned $150 million being pushed from 'twenty three to 'twenty four yeah at the midpoint. There is about another 150, <unk> not quite coming out of the guidance our revenue wise so.
Is it fair to assume that you have visibility that that you know roughly $300 million of revenue, which has come out of this year is firmly in 'twenty four.
Timing versus you know some of this stuff actually maybe just moving out into the right and not coming back.
Yeah, Brian I think that's a great question and I'll tell you, it's almost 100% excuse exclusively timing.
Not had project cancellations at this point.
The bulk of these has slipped to the right, but you know historically, if something would have slid to the right. It would have slipped to the right weeks or maybe six weeks right. What's happening now is they are sliding to the right.
You know certainly three months four months.
So we do have visibility to these next year as I said, none of them have been cancelled we're not renegotiating.
Rates on these for our products. So this is simply about getting financing getting supply of panels getting the supply of labor and or getting a revised P. P. A R connects today, that's what we're doing.
None of these have been canceled.
Fair enough no that clarification is super helpful. I guess the second question I have is just around I know you alluded to it in a in a prior question, but maybe just diving into that a bit more if you could elaborate.
On a quarter to quarter basis, I know, we shouldn't get too infatuated with the bookings number and sort of what the implied share ebbs and flows are between you and other attractive players in the space, but you know over the balance of this year.
Yeah, Theres been a couple of push ups for you all that maybe others in your peer group had been seeing.
So the natural question is are there.
Yeah.
I think theres a few things to think about the first well I'll tell you is I think market share flexes from quarter to quarter quite a bit with the inclusion of one two or three projects when you're looking at the increasing size of the utility scale landscape here projects. So that's certainly something I think there's a secondary component, which really has to do with the percentage of bits.
U S base experiencing nice versus international and we all recognize that we have a higher percentage of domestic revenue.
In our business that maybe some of our other public peer companies.
So you know if you were to sat here and talked about this in Q1 or Q2, you would have been looking at us in our our publicly traded competitors and looking at us within a half of a percentage point of market share domestically right and I think that was indicative of a strong gain in 2022.
For array and a rapid loss of market share for one of our competitors.
Right on the back of that what we saw with some really aggressive pricing in the market and we chose to hold our discipline in price.
Yeah, and I think that's still in my God. It was the right decision to not dilute our value proposition delude, our price and I think.
That will serve us well in the maintaining of margins and hitting our margin aspirations as weak as we finish this year and turn into 'twenty 'twenty four.
Outside of that no different dynamics, but really I want to talk about it I don't think there's any real changes look as it relates to new product and software every quarter. One of US has went up and the other in a in a small percentage back and forth back and forth and I think that's gonna continues we both.
We are investing a lot of new product development, both in terms of our product portfolio as well as our software portfolio. So I think youre going to continue to see that and I think it's going to continue to be.
Largely a few players controlling the bulk of the domestic market as we go forward and we're certainly going to be at that table.
Okay makes sense I'll pass it on guys. Thanks, a lot appreciate it.
Thank you. The next question we have comes from Colin Rusch from Oppenheimer. Please go ahead.
Thanks, So much guys you know with the new products in hand can you.
Can you talk about the competitive environment outside the U S and just how intense it is at this point and how much progress you're making in terms of customers through the sales funnel.
Yeah, I think that the difference outside of the U S again.
None of the markets are monolithic, they're all very different and the experience we're having in in Brazil in terms of tremendous market share recovery.
And Australia is different than Europe, and the price points are radically different in each one of these regions and I'd say the biggest focus for us is increasing our competitiveness by leveraging our global supply chain first second is taking our joint engineering organization and cost reducing our product portfolio.
As an example, as we rapidly launched the H $2 50 for the U S and again will be it.
Initiate deliveries of that in January of 'twenty, four we quickly had such demand for that product for both the EU and Latam region for that improved product line and I think I don't think we gave the data on the call, but we've got over six gigawatts at various stages of quotes of that already on a global.
Basis, and there's a significant amount of that that is outside the U S. So that revised product platform is getting a lot of attention globally.
And I think that's probably one of the biggest efforts will do to be more competitive internationally. It's the launch of that product on a global basis. The addition of the array software on top of that product and then leveraging that global supply chain to continue to cost reduce and be more competitive on a price basis internationally. So those are the three levers.
We're pulling and we feel really good about our traction that we have thus far.
Perfect. Thanks, So much and then just in terms of how you execute against that and spend levels on the R&D line. How are you talking about the trend.
<unk> been able to get some pretty significant operating leverage today is there something you're going to need to spend in a meaningful way to deliver on all of those elements or are you going to be able to do that with and you know a pretty reasonable pace similar to what you might call them.
Recently.
Yeah, I think if you look at the the uptick I believe this year, we were up circa 40% in terms of R&D as a percentage and I think that's more respectable level than what we were historically and I think the team's going to deliver a phenomenal funnel of new product development for that spend.
But I wouldn't be absolutely clear on this I think the use of our.
Profit to generate more incremental new product development I really believe it and if the team continues to bring me.
Great New product ideas that are vetted by both sales product management and the engineering organization I'm going to continue to fund them, even if I have to increase that right.
Running and engineered products company your new product development, it's one of the lifeblood.
Of your company and we're going to continue to spend there because I think the more we dive in and the more we.
Open our eyes to what Adjacencies, we could get into with our products, we feel stronger and stronger about it. So we're going to continue to emphasize new product development will be spending at least a similar amount next year, if not accelerated further.
Thanks, so much guys.
Yeah.
Thank you the.
The next question we have comes from Joe Osha from Guggenheim Partners. Please go ahead.
Oh, hi, Thanks for taking my question Nigel I Hope you have some some great plans.
Just to return to the issue we've all been talking about obviously, you've got some golfers going back and trying to open about real ppas.
Puc's don't always necessarily rollover, sometimes they do things like say, we'll give you half a bit go go find the rest elsewhere. So I am just wondering how you feel about the issue of potentially some of these developers coming back to you next year and saying no. We didn't get everything we wanted we need you.
To reopen conversations on the on the contracted price.
Yeah, that's a great point, so it clearly what you're seeing is that.
As these developers over the last year has had settled for a particular IRR and interest rates are rising.
IRR is no longer attractive when you could go put your money in a C D and get 5% today right. So they're raising their hurdle rates. So they have two choices that right. That's either go back in and raise PPA. So their de facto raising revenues or the flip side of that is they've got to go and reduce costs. So.
Are we having conversations with developers on how we can redesign sites to take cost out of those sites for those developers. We absolutely are that would be a natural occurrence for us at this stage. So we're having those dialogues.
I would say.
In some cases, there are some pricing concessions on that but again.
Thus far we've been able to offset those with cost reductions.
But certainly that's a natural dynamic that we could see as we go into next year absolutely.
And thank you and just to follow up I mean, obviously this is happening but the fact that you know rates are high is not surprise for anybody is the fact that this seems to be hitting now just a function of PS.
People getting your ducks in a row for the end of the year or was it just it's interesting to me that.
This appears to be occurring now when the rate environment has been with us for a while.
Yeah, I agree and that's it.
We.
Absolutely, 100% agree with you the rate environment has been with us a while so we're a little bit caught off guard that this is happening more now more recently, but we've had conversations with developers who are simply raising their internal rates of return expectations. Given this environment, and obviously, where a lot of a lot of our.
<unk> are counting on the IRA.
Benefits to support that coupled with falling.
Prices and then also the domestic content at or is the big piece that I think a lot are counting on to further move forward on some of these projects. So I think that's okay.
Mental delay is that piece that we all expect it I'm sorry.
I'm, sorry to belabor this but I do want or you said something very interesting here I want to clarify it's.
It's less it sounds like about bank financing being more expensive since most of these guys have that locked in any way it's more about.
Developer internal IRR hurdle rates is that what you're saying.
Well.
Yes, I think it's both I think its about one developer I spoke to them about.
About a week and a half ago, whose challenge with this very dilemma right. Now it's also about that developer being able to sell a project at a particular IRR in the future.
Given other interest rates and other investment alternatives right.
Thank you.
Question, we have comes from Jon Windham Pardon me of UBS. Please go ahead.
Hey, thanks for taking the questions.
I just want to talk about it too.
So the adjustment in revenue if we exclude the the Brazil related.
Accounting classification, there's about $118 million pushed off into next year.
More or less maintaining the EBIT guide, which means basically $21 million of EBIT and that's not being pushed out. So you can can you talk a little bit about what's driving the higher profitability on what you are shipping.
Yeah, Hey, Cowen staple so.
The higher profitability is continued favorability in logistics costs and material costs that we're seeing flow through for the balance of the year. We had a couple of projects we talked about that.
We're delivering in the back half of the year, it's a lower at the lower challenged margins, especially in overseas those have been a little bit delayed and so then therefore, that's that's helped with the pricing.
The overall margins, but we the reason why we're keeping the mid to high teens gross margins for the back for the full year.
Got it and then just a quick follow up how much of the project delays do you see as a function of customer selection or is it a bit more random and certain developers have certain problems with projects or what's is there anything you could do due diligence wise to try to lessen these in the future. Thanks for taking the time.
No. There's nothing I can think of that we would do differently.
No.
Thank you.
The next question we have comes from Tom <unk> from Seaport Global Securities. Please go ahead.
Hi, Thanks for taking my question.
Would you share with non tracker offerings accounted for as a percentage of <unk> top line and maybe give us an estimate of a range for the likely contribution to full year 2023 revenue and then I guess part two on this topic would be as I think about the non tracker side. It seems to consist of four drivers aftermarket.
Sales engineering services Smart track monetization and then better change order capture.
Perhaps could you provide us an update on the progress youre, making with each.
No Tom sorry, I don't I think it's too premature we've been at it for a few quarters its still going to be lumpy.
I think we're going to end the year very pleased with our overall revenues in that space because again, it's been it's been a high quality of revenue for us, but we're not at this point ready to go and delineate by sub segment or to give you a forecast for the for the full year 2023.
Okay.
Try again, maybe in 2024, but Scott Kevin could you perhaps Nathan.
Maybe just highlight.
Within those four sub segments as I'm categorizing them are there any.
Better clearly in the lead right now or.
More and more optimistic about or.
Making more progress with faster than others.
Look I think they're all contributing at a really exciting right for US you know.
If I think about smart track software for example, what's in the order book is five times, what's been deployed to date right. So that's an exciting piece for us the better change order management is really about taking what were.
Profit leaks, historically and converting them into positive both revenue and margin and that's going really really well for us and it's really about just having the discipline.
Two as we get changes to ensure that we're monetizing those changes and this is about making sure we're balanced and fair with our customers, but again, if we have to take back material or or dispose of something that we're doing that in a more effective way than maybe historically, where we may have played too much of a nice guy in the middle If you will.
We're doing that the engineering services are growing very well for us. So I think every single one of them are beginning to contribute.
But to be clear, what's driving it is really the fact that we brought in product management, we decided to product ties each of those which which meant clearly delineated value proposition sales literature content value selling training for the sales team ensuring this affordable upfront in the project going back and looking at how we harvest our installed base.
And look at some of the additional O&M services. We can do after that is it is a really comprehensive amount of work that's been done over the last six months to drive that and I'm, just really pleased with the level of traction that we're getting on all of that and again, it's a good quality revenue for us as we go forward.
Got it that was some helpful color and then.
Best of luck.
And just as you prepare to pass the Baton here would you refresh us on what was your.
Your leverage target is that as part of the ongoing debt reduction.
Hoping to get to.
Yeah. It was it was in the secured leverage is going to be under one by the end of the year and a total debt there's going to be around two two and a half.
Got it.
Thanks very much.
Very much on pace for that.
We're very pleased with the cash flow of the business at this point.
Thank you Sir.
The next question, we have comes from Philip Shen of Roth.
Please go ahead.
Hi, all thanks for taking my questions I'm jumping on a bit late here in April it's been great working with you.
Sorry to see you go.
I know this may have been addressed on some from some angles, but wanted to just see if you could talk about any patterns you're seeing.
For the push outs, meaning are you seeing any similarity similarities with the developers or are they smaller ones or are the utilities developers.
Typically not impacted or have you seen them.
<unk> projects, even from the larger utility developers.
Are there any other patterns as it relates to access to capital I know you were talking earlier, Kevin about I'm just.
Just making internal decisions.
Requiring a higher return, but just curious if you could see where share any patterns with.
These customers thanks.
Phil It's it's it's nothing that we're willing to give any additional color on at this point I think it's suffice to say, it's been actually fairly broad based I don't think theres been any customer sub segment, that's been immune to it at this point.
All right I'll leave it at that.
Yes that is great color. Thank you.
Shifting to the.
The implied Q4 EBITDA margin was wondering you may have touched on this earlier as well with international being maybe a bit of a drag but was wondering if you could give us some more color on.
The implied Q4, EBITA margin, which seems closer to 13% versus Q3 of 16% in the first half of 'twenty.
What's driving that and would you expect a recovery back to either sustain or even 20% in first half of next year. Thanks.
Yeah, Hey, Bill I'll take that one so the implied EBIT margin is really related in the gross margins that we talked about we had some some projects that we're going to deliver in the back half of this year any update to the projects in the U S from our STI.
And there they were going to finish up and they were lower than our expected margin rate and we had we had a project or two related to the array side, which we have signed a while ago that we knew that was gonna be challenging on the margins. So similar to what we had said in Q2 those are still a deliberate here in Q4, providing the lower than expected gross margins and therefore dropping down to the.
EBIT margins.
Great. Thanks, and so I know you don't have guidance for the first half of next year, but would it be fair to presume that you go. After these projects are taken care of we get back to the normalized call. It 16 to 20.
That would be our expectation yes.
Okay. Thank you very much I'll pass it on.
Thank you. The final question, we have comes from Sean Milligan from Janney. Please go ahead.
Hey, Thank you for fitting me in this afternoon.
Just wanted to touch base on the new products H T 50, I think you quoted.
Over six Gigawatts.
In various like bidding stages globally, and then omni track also.
I guess for both as you talked about pretty robust bidding.
In terms of one.
Hi.
Do you view that as an incremental opportunity for you relative to like where you would've been dare attract before.
Kind of.
Maybe you could you address like what they.
I think the Tam is for that in terms of Gigawatts.
And then two like are those bids for 'twenty four 'twenty five how should we think about that.
So the first part of your question relative to I think you were asking how much of its incremental versus replacement or cannibalization. If you think about the array omni track.
We expect that to be a part cannibal cannibalization of dirt attract and a better fit product, but also lead to about a 10%.
Increment in intent so that's kind of how we look at it from that product as it relates to the S 250, and the strong.
Bookings that we're seeing there or the strong funnel. If you will that we're seeing there theres a portion of that that is replacing the old STI to 50, where customers are just now, saying look I really want that new product.
Would've given Arabia order previously for the old version, but.
I really want to I was just recently in Brazil, where I was in the room, where we were talking to a customer that was placing a very large order.
Who demanded that they get all new product as quickly as possible right. So I think a portion of that will be incremental and a portion of that will be replacement, but I will say that's replacement at accretive margins to the product that's displacing.
That's helpful.
That's that's helpful. And then kind of the second part would just be in terms of the bidding that you talked about in the six gigawatts is that.
Yes for 'twenty four 'twenty five how can we think about that in terms of timing potential I think I think there's it's split there's there's at least half of it I would say is really about 24 and then there's another large multi year VCA. If you will that would cover two years.
It's a big portion of that six gigawatts as well.
I would say, it's largely 24 with a portion of 25.
Okay and then just to you you mentioned in the first response, you mentioned kind of the margins being accretive to the legacy projects are let at legacy product on key 50 are they.
In line with like the margins, where you expect to see those shake out.
Yes, I mean, what you've seen if you just look at the gross margins of the STI business and certainly in this quarter. We've been focused on the recovery of the STI gross margins I think that focus over the last year has gone very well they are back to pre acquisition gross margin levels. So we're quite excited about that.
And as we launched the new product that's again, a product with really good gross margins for us as we go forward. So I think we're quite satisfied there.
Okay. Thank you for fitting me in this afternoon.
Absolutely sure.
Okay.
Thank you.
Ladies and gentlemen, there are no further questions at this time.
Today's conference call you May now disconnect your lines. Thank you for your participation.
Hum.
[music].
Okay.
Mhm.
[noise] Uh-huh.
Okay.
Uh huh.
Hum.
Hum.
Hum.
[music].
Hum.
[music].
Hum.
Hmm.
Uh-huh.
Yeah.
Uh huh.
[music].
Okay.
[music].
Uh huh.