Array Technologies, Inc.

hello and welcome to the array technologies second quarter 2022 earnings call at this time all participants are in a listen only mode a question and answer session will follow the formal presentation as a reminder this conference is being recorded it is now my pleasure to turn the call over to Cody Mueller investor relations array please go ahead

Good evening, and thank you for joining us on today's conference call to discuss Array Technology's second quarter 2022 results. Slides for today's presentation are available on the investor relations section of our website, arraytechinc.com. During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our investor relations website. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's 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 Hostetler, Array Technologies' Chief Executive Officer.

Thanks, Cody, and good evening, everyone. Thank you for joining us on today's call. In addition to Cody, I'm also joined by Nipal Patel, our Chief Financial Officer. Let's begin with slide four, where I'll provide some highlights of our second quarter. This was a strong quarter for Array. We delivered on our revenue adjusted EBITDA, and adjusted EPS expectations while having a strong quarter of bookings despite the impacts of the ADCBD investigation, and we tightly managed working capital to ensure that we did not require additional financing or covenant relief. Revenue for the quarter of $425 million represents a 116% improvement year over year. Included in this number is legacy array revenue of $352 million, representing organic year-over-year growth of 79%. More impressive, this growth was achieved against a challenging set of industry circumstances with numerous project starts and stops, module changes, and delays. Our ability to achieve this operating performance is a strong reminder of three key elements of our business model. One, we offer a differentiated, patent-protected product that provides our customers with the lowest levelized cost of energy. Two, with continued redesigns due to issues with module availability, our flexible mounting structure and civil engineering expertise are key competitive advantages. And three, our large and well-established U.S. supply base, coupled with our asset light operating model, allows for the shortest and most reliable lead times in our industry. This provides our customers the confidence in our ability to deliver the right products and services for their projects on time. Despite the strong delivery volume for the quarter and the slowdown in orders due to the ADCVD investigation in April and May, we added over $200 million in new orders, ending the quarter with a $1.9 billion order book. It is important to note that in July, after the announcement of the tariff moratorium, inbound opportunities increased by 25 percent compared to April and May, and we fully expect this momentum to continue. Gross margin for the quarter was 11.1 percent, which is an improvement of 70 basis points from prior year period, and the third consecutive quarter of improvement, up 230 basis points from the first quarter. The 11.1 percent, while certainly on the right trajectory, is slightly down from where we would like to be as the STI business continued to have some cost challenges both in the U.S. construction business and in Spain. Adjusted EBITDA in the second quarter of $26 million represents a year-over-year improvement of 162 percent and a sequential improvement of approximately $25 million from the first quarter. Although we still have room for improvement in our working capital efficiency, overall, I was pleased with our execution this quarter. You'll recall coming into our second quarter, we had some constraints on our liquidity due to our debt covenants. Delivering $425 million of revenue and managing our working capital to not require either covenant relief or additional funding was a testament to this team's execution. NEPA will discuss this in more detail later, but as we look at liquidity moving forward, there are a few key aspects to keep in mind. In Q2, we were limited to only being able to pull $70 million from our revolving facility because of our existing debt covenant. Given our Q2 results and expected second half performance, we now anticipate unlocking the full $200 million value of that facility. As we've discussed previously, the combination of margin improvement, our business cyclicality, and improved working capital efficiency will provide positive free cash flow in both the third and fourth quarters. And finally, as identified in a recent current report, we reached a $42.75 million legal settlement, and these funds were received in full after our quarter end. We had not planned for this in our cash forecast. With these factors in mind, we feel confident in our liquidity position as we move forward and execute on our $1.9 billion order book. Turning to our next slide. Mindful of recent developments, I want to take some time to discuss the industry landscape here in the U.S. and what that means for Array as we progress through this year and into 2023. There are three key dynamics that are important when looking at our business moving forward. The regulatory environment, customer demand and project timing, and the health of our supply chain. First, on the regulatory side, the Biden administration's executive order providing a two-year moratorium on tariffs offered welcome relief and a window of certainty for our customers. We now expect the $240 million of projects that we previously identified as at risk during our first quarter call to move forward, and we have already secured defined start dates on several of these projects. While we are pleased to see this demand solidified, I note we do not currently expect to see a significant impact from these projects in 2022 due to lead times and the time required for our customers to get these projects into their near-term build schedule. We are also seeing some project delays due to the Uyghur Force Labor Prevention Act, or UFLPA. This is resulting in projects still requiring multiple module designs while customers navigate the potential for delays. As of today, these delays are within the range of the slower progression of projects that we have been forecasting all year. On the horizon, the Inflation Reduction Act of 2022, now passed on the U.S. Senate side, represents the biggest piece of climate related legislation in the history of the United States. While details of many of the provisions still need to be clarified, what is clear is this legislation will provide long-term certainty on incentives for both deployment and manufacturing related to solar energy. This certainty allows participants to invest in new facilities and bring jobs to the U.S. while accelerating the transition to clean energy. We strongly encourage the House to pass this bill and President Biden to sign it into law. Our initial analysis of this bill and its specific impact on array can be broken down into two areas. First, it provides a meaningful tailwind to the solar industry in total. Initial industry estimates are that the extension of the investment tax credit would add over 40% of additional installations between 2023 and 2027. This would equal approximately 46 additional gigawatts of solar energy installations over five years. Second, between the domestic content adder of 10% and the advanced manufacturing credit for torque tube and fasteners, there are additional benefits for companies who manufacture and source within the United States. On the domestic content adder, As we have stated before, we have a longstanding and mature domestic supply chain. Since this draft bill was released, we have already been in conversations with our customers to begin mapping out how we can support this provision. Our longstanding domestic capacity serves as an important strategic asset for us should this bill pass. On the manufacturing credits, clarification of how these will be calculated and who will be the direct beneficiary will be important since we do not directly manufacture torque tubes or fasteners. Regardless of the direct beneficiary, these credits provide a meaningful incentive for our industry. We estimate the current credits of 87 cents per kilogram of torque tube and $2.28 per kilogram of fasteners would amount to approximately 1.5 to 1.7 cents per megawatt. Moving on to the demand side, as evidence fires substantial year-over-year growth and our $1.9 billion order book, we have consistently seen strong demand for our products and services. If we look at the current distribution of the demand within our order book, we expect between $600 million and $800 million to be delivered for the remainder of this year based on our current guidance. This means we have already secured between $1 and $1.2 billion in revenue for 2023. And at the point in time when this was measured, we still had six months to go before 2023 begins. Any impact from the passage of the Inflation Reduction Act would only represent an upside to this already strong start. With the potential for additional demand, and the intricacies of where material is manufactured and sourced from becoming increasingly important. What becomes even clearer is that a robust and flexible supply chain, coupled with strong execution, will be more important than ever. Given this as a backdrop, it's important to provide some additional information about a raised supply chain. This year, we have increased our global capacity to serve the market by more than 25%, and are now able to deliver over 30 gigawatts per year. By the end of Q1 2023, given the commitment of our existing partners and the addition of new suppliers already in queue, we expect this number to be near 40 gigawatts. Importantly, given our asset-light operating model, this scaling does not require meaningful capital expenditures and does not represent additional fixed costs to Array. Our operating model and execution provide meaningful cyclical resiliency should volumes ebb and flow. Relative to our domestic content, we currently have over 20 suppliers here in the U.S. for our major components, with five additional suppliers in various stages of our vendor qualification process. It is important to note we not only utilize steel mills located in the U.S., we also have suppliers that source the steel from the U.S. This underlying source of steel becomes a crucial factor for our customers as they look to meet domestic content requirements. So as I take a step back and look at the industry landscape, the term that I like to focus on is flexibility. We want to position ourselves to meet the additional demand as it comes, while ensuring that our operational structure does not depend upon that volume. With our recent and continuing supply chain and logistics improvements, we're in an outstanding position to do just that. As we move to slide six, I want to close out today by talking a little bit about my early observations about the company and some of the key focus areas we'll be driving as we move forward. First, let me reiterate my initial impression that Array has an incredibly solid foundation to build from. Within the legacy array segment, we continue to round out a high-quality, experienced management team who know how to scale and run a large multinational publicly traded corporation. Further, we have set in place key building blocks for continued growth and expanding profitability. In addition to the supply chain elements I discussed earlier, this also includes the change in our business process that was made this time last year reducing the company's exposure to commodity cost fluctuations and therein producing more predictable results. Our digital transformation initiatives deliver streamlined back-end processes, driving better operational efficiencies as we scale, as well as improving our interactions with our customers. And the expansion of the workforce in strategic areas like commercial excellence, commodity management, and logistics to ensure we are driving margin expansion as well as growth. On the STI side, STI is a company with a great customer reputation and product operating in high growth regions. I've recently spent a week in Brazil with our STI team. I was fortunate to meet many of our team members and our customers and to spend time in the field on utility scale solar sites, learning and understanding the STI product and service offerings and the positioning opportunities between our array and STI product lines. I've been incredibly impressed with the team at STI. They are dedicated to the company and to the industry and they continue to rally to every challenge we present them. However, as you can imagine, there are still areas where we need to get better and we will focus on going forward. First, We need to quickly mature the processes and execution within the STI business to meet its current growth trajectory and its operations under a U.S. public company. To that end, we have recently appointed Ken Staherski, our chief operations officer, as our integration leader, and we have brought in a renowned third-party operations and supply chain consulting company to further accelerate our integration efforts. Second, we need to rationalize the construction business at STI. This area of the business continues to be a drag on margins, so we need to ensure we are only offering this service where we have clarity and experience in the scope of work, a strong value proposition, and when we could deliver our required profitability. Since our last quarter call, we have made progress on this front. We discontinued quoting any construction projects in the U.S., and have significantly reduced our construction quotes in Brazil, where we have reduced our associated construction headcount by more than half since the beginning of this year. We are still evaluating the strategic alternatives in Spain, as that region has a more entrenched customer expectation that the tracker provider also performs construction. While this may take a bit more time than Brazil, we will be thoughtful and deliberate in our approach. We need to become a world-class logistics company. You'll remember we manufacture little ourselves. This means we are moving a lot of materials from multiple suppliers direct to multiple customer sites at any given time. We recognize our need to execute this in the most efficient, flexible, and predictable way possible. We've recently hired a new vice president of logistics who has extensive international experience and a proven track record of delivering operational excellence in this area. Our second half ERP system enhancements will also greatly aid our efforts here. Fourth, we need to have an intense focus on improving working capital efficiency. We fell a bit behind here as our team rightly pivoted to focus on margin restoration and improving delivery execution. Our business model inherently produces great free cash flow, and we need to ensure we are maximizing incoming cash to fund organic growth, pay down debt, and provide funding for strategic acquisitions. We have already restructured our collections process to better align with our customer-facing teams, and we have significantly improved the linearity of our shipments, allowing us to get more receivables into the billing cycle earlier in the period. This dramatically improved linearity throughout Q2 and into Q3 was critical to and evidenced by our cash management in our second quarter. While improving, there is still work to do in optimizing inventory levels and bringing our DSO levels nearer our historic levels. Finally, we will focus on becoming easier to do business with while creating a streamlined experience for our customers. We have always had a strong focus on our customers, but often this is done through extraordinary efforts and manual processes, which at times can be slow, frustrating, and exceedingly difficult to scale. This is a key area where we are focusing our near-term digital transformation efforts on. As designed, our digital transformation will improve turnaround times on customer quotes, project design, shipment scheduling, and service appointments, to name a few. All this while simultaneously providing enhanced visibility on project status and delivery directly to our customers. As a company with multiple products servicing numerous regions, we need to ensure our customers know who to go to to get the right answers in a timely manner. There is already a great deal of momentum behind these focus areas, and I'm confident that we could execute on improving them quickly. I look forward to updating you on our progress in these areas as we execute and move forward. With this, I'll turn the call over to NIPL for a deeper review of our second quarter financial performance.

Thanks, Kevin. I'm glad to speak with you all today. First, turning to slide eight, I'll walk through our results for the quarter. Revenues for the second quarter increased 116% to $424.9 million compared to $196.5 million for the prior year period. The $425 million in revenue reflects $352 million from the legacy array business and $73 million from the STI business. As Kevin mentioned, the $352 million from the Legacy Array business represents organic growth of 79% compared to the prior year, and quarter-over-quarter growth of $101 million, which is partially due to our normal seasonality, where we would expect more deliveries in the second and third quarters. The $73 million from the STI business represents growth of $23 million, or 46%, from the first quarter. Taken together, Revenue exceeded our expectations as we had strong delivery execution and linearity throughout the quarter and had favorable timing of project start dates late in the quarter. Gross profit increased to $47.4 million from $20.5 million in the prior year period due to the increase in volume coupled with better pass-through pricing on the projects signed under our new business process. Gross margin increased from 10.4 percent to 11.1 percent. Gross margin for the legacy array business was 11 percent and represents the third consecutive quarter of margin improvement as it was up 250 basis points from the first quarter and was in line with our expectations. The FDI business had gross margin of 11.7 percent in the quarter, which was lower than expected as it continued to have construction and logistics cost challenges. not only in their U.S. construction projects, but also in Spain. Supply plan changes and longer shipping times are delaying materials to project sites, which is negatively impacting our labor utilization and productivity. However, as Kevin mentioned, we have all hands on deck right now to ensure we quickly address these issues. Operating expenses increased to 54.2 million compared to 21.1 million during the same period in the prior year. the higher expense is primarily related to an $18.3 million increase in amortization expense related to the FDI acquisition. Excluding this impact, the increase is primarily due to the addition of FDI in Orleans, in addition to higher payroll-related costs due to an increase in headcount as we invest in key strategic areas for our growth. The increases were partially offset by a reduction in contingent consideration expense of $1.7 million. Net loss attributable to common shareholders was 15 million compared to a net loss of 5.5 million during the same period in the prior year. And basic and diluted loss per share were 10 cents compared to basic and diluted loss per share of 4 cents during the same period in the prior year. The increase in losses to common shareholders primarily represents the preferred dividend payments which began in the third quarter of last year. Adjusted EBITDA increased to $25.9 million compared to $9.9 million for the prior year period. Adjusted EPS was $0.09 up from $0.02 a year ago and was positively impacted by a larger than expected income tax benefit this quarter. Looking at free cash flow, we used cash of $12.2 million in the current quarter, primarily due to an increase in our accounts receivable balance due to the increase in revenue from the prior quarter. However, it is important to note this slight use of cash was expected for the second quarter and represents a significant improvement over the prior year when we used $92.6 million. Overall, we were pleased with the execution this quarter. The legacy array operating segment continued the margin restoration trajectory we outlined last year, and even though the STI operating segment has some near-term cost challenges that we will have to contend with, It showed improvement quarter over quarter in its margins, and we expect that trend to continue. Now, if we move to slide nine, I will provide some additional details around our sources of liquidity for the remainder of the year. We ended the second quarter with $51 million in cash on hand and $2 million in availability under our revolving facility. I will remind everyone that the $2 million of availability This quarter was due to our inability to meet our net debt to adjusted EBITDA ratio of 7.1 times, which would have been tested should we have drawn greater than $70 million. The net debt in the calculation includes only our term loan and the amount drawn on the revolver, less cash on hand. You can see here, at the end of Q2, this totaled 341 million. However, as we move into the third and further quarters, with the expected adjusted EBITDA performance, we expect we will no longer be restricted by this covenant and, therefore, will have between $150 and $170 million of availability under this facility, depending on the holdback of lines of credit. This means we now have access to between $80 and $100 million in additional liquidity. That said, we currently anticipate paying down the revolver in full in the third quarter with a combination of the funds received from the settlement Kevin discussed earlier and our free cash flow, which we expect will range from 75 to 100 million in the quarter, driven by improved margins and better working capital efficiency. As discussed previously, as we progress forward and continue to produce free cash flow, we will first use that cash to fund our organic growth, and with any excess capital, we will look at deleveraging and funding strategic acquisitions. Moving to the next slide. I won't spend a lot of time here, but you will see that we are reaffirming our full year 2022 guidance. We do see a potential for some upside from the ADCBD release, but we are currently seeing more of that impact in early 2023 due to lead times and the time it takes to get these projects aligned with build schedules. Also, as Kevin mentioned, the UFLPA is causing some slower movement on getting projects started for the remainder of our order book, So we are still planning on our backlog conversion being a little bit slower than historical norms, but in line with our previous expectations for the year. Finally, we also see some slight headwinds in STI from their margins being down a little bit from a reduction in the Euro to USD rate, which we are now assuming will be at par for the remainder of the year, putting the full year average around 1.05 versus original planning assumptions of 1.12. With that, I'll turn it back over to Kevin to wrap up.

Thank you, Nipal. I'd like to wrap up by thanking our employees providing me with such a warm welcome to Array. I'm incredibly excited about the trajectory of our business. We are growing our market share, improving our margins, and becoming more efficient with our working capital. We are not at the finish line yet, and there are certainly areas that we are working on to improve, but I am proud of the team for delivering on a great quarter. And with that, operator, please open the line for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation turn will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys.

One moment, please, while we poll for questions. Our first question is from Brian Lee of Goldman Sachs.

Please go ahead.

Hi, guys. Good afternoon. Thanks for taking the questions. Kudos on the solid execution here. I know the business environment is still quite challenging. Maybe a couple questions really just on the margins. First, Kevin, appreciate all the sort of action plan items around FTI and integrating that. Can you give us a sense for how many quarters you think it'll take to sort of implement this strategy? As you see STI normalized in terms of margins, I know you took it down from the high teens to mid-teens in gross margin this year. It sounds like just based on the Euro. What is the new normal there? What are you kind of aspiring to get to for STI gross margins and sort of over what time frame? And then I had a follow-up.

Great question. Thanks.

I think from our perspective, we're looking at this as another two to three quarters of work, and there's work in several areas. The first, obviously, we talked about scaling down some of the construction business that's becoming more difficult to be profitable and is somewhat diluted to kind of the core product margins. So we're working very aggressively on that. I think we're really far along in Brazil. Spain is going to take us a little bit longer to evaluate, and it will be more like a transition into more construction advisory services rather than actually performing the work ourselves. So that's ongoing, and while we've been really effective, the team in STI Brazil is scaling that down very quickly. It's gonna take us a little bit longer, a few quarters to achieve that in Spain. I think the second key area of focus is really about supply chain leverage. We're working really, really aggressively with the team in both Brazil and Spain in bringing our supply chain expertise, our commodity management, teams, and logistics to bear on those businesses. We have a pretty aggressive sprint for that, frankly. We're in a 14-week, very aggressive integration program in which, through that time period, we'll be very aggressively working with them to improve their overall cost position. We're not going to be done in 14 weeks, let me be clear, but there's certainly a focused effort and push with support of a third party and able to do that over the next 14 weeks. So I think the right answer is it's going to take two or three quarters to get STI margin to where we think we really want them to be, kind of a terminal margin perspective. But you'll start to see that improvement here in the back half of the year for sure.

Okay, fair enough. That makes sense. And then, you know, with respect to that improvement in the back half, I think you guys had talked about previously kind of getting to high teens, maybe even 20% plus gross margins exiting this year. Is that still intact? And then as I think about next year, 2023, steel costs have come in quite significantly. Can you kind of give us a sense of what that means for you in terms of pricing strategy heading into 2023? And then on the margins, does this translate into maybe potential further margin upside for you guys as you take advantage of lower steel costs? on what I would presume at this point are sort of second half 23 project quotes and deployments. Thank you, guys.

Yeah, so two questions there. The first is, do we still stand by our high teens, low 20s exit rate on margins? And we certainly do. We feel really good about that. We see that trajectory. And I don't think anything's changing our assumptions in that with what we see in the next six months or so. I think the second question is really about one of the changes in our business model, as you remember, that we put in place last year to protect us on the upside of rising commodity costs also don't mean that we necessarily take huge chunks of profit improvement when commodities go down. It's really about managing that cycle of commodities and quoting at the time that we take that order. So don't expect that as steel comes down, our margins are going to just balloon up.

That's really not the way the industry is pricing at this point. My next question is from Philip Shen of Roth Capital.

Please go ahead.

Hey, guys. Thanks for taking my questions. First one is on the IRA. And in terms of the 1.6 cents per watt manufacturing tax credit benefit, Kevin, I think you quantified, was wondering if you could talk through how much of that you think you might be able to secure. And I know this is fluid, and technically I think the torque tube producer, seller, manufacturer gets that credit. But ultimately, how does that play out? Do you think you could get half of that or more? And I know it starts effective the first of next year, and so how would you expect that to kind of flow through margins and so forth?

Well, I think it's really going to be too early to tell. In the past when these have come, there's been some level of sharing between the manufacturer and the end users. The end users will have an expectation knowing that the manufacturer is getting that level of credit for some level of sharing that in the price. But I think it's too early to tell what that looks like. The important thing to remember is that while others are scrambling out there to identify and develop a reliable U.S. supply base, we've had a long-standing and tested U.S. supply base that is really ready-made for these provisions. So I think we feel we're sitting in a very, very good position as these provisions come into play because we've been at this for a long time in the U.S. using U.S. steel. So it's not only about where the torque tube is formed, right? So it's not... whether you run out and put a bunch of rolling mills in place in the U.S., it actually goes down to the raw steel and where your source of supply for the raw steel is. And that's something that we've really focused on very aggressively over the last several years in building out a U.S. supply base. So we're well positioned, but I think it's too early to tell how that will play out in the end market.

Right, because the 1.6 cents would accrue in the value chain, but then with your U.S. steel content, you can then enable that 10% ITC adder on the back end or down for the stream, if that makes sense. Okay. Good. Anything else you want to add on that topic?

No. I think it's just a bit early. We're still figuring out. I think everyone is figuring out. While these provisions are put in the law, the actual execution and clarifications and details of them still have yet to be worked out. I can only say that I think that we're in a great position and have a seat at the table working with several of the larger industry bodies. We certainly spend time with CEA and we have representatives on the board of CEA who will have a seat at the table in terms of helping the government work through some of the details in the language that's going to come further as these provisions get more clarity wrapped around. So I think we'll have good representation, we'll have a better understanding earlier than others, but that's still to come.

Great. Thanks, Kevin. My second question here is on working capital. I think on the Q1 call, you guys highlighted that you expected to collect on AR in Q2, but the receivables really kind of continued to increase. So can you talk to us about what happened there? And then, importantly, how much might you be able to collect in Q3? And some additional color on that overall would be fantastic. Thanks.

Yeah, hey, Phil. This is Nicole. So, yeah, we did state that our receivables were going to come down. However, we did have a large revenue quarter, larger than originally expected for Q2. Thus, the receivables did not go. But we did have a lot of receivables in the collection process, and we still expect a strong Q3 in the balance of the year. So although it's higher than we expected, the higher revenue quarter, has helped our overall conversion cycle, and we believe we're going to get our overall cash conversion cycle down into historical levels near the end of the year.

Okay. Thanks very much. I'll pass it on. Let's go.

Our next question is from Colin Rusch of Oppenheimer & Company. Please go ahead.

Thanks so much, guys. You know, I'm curious about the product evolution in the European market. And as you've started to make some progress there, what you're seeing in terms of product fit, you know, and which platform is tending to sell a little bit better, you know, whether it was, you know, the traditional U.S.

business or the one coming out of Brazil? That's a great question, Colin. I think what you see is that

One of the key reasons we acquired the STI business was to have a dual position strategy. And as we all know, Europe is not kind of monolithic, right? Where you have coastal areas, you need one product. Where you have inland areas with low wind, you may need another. When you're in the northern part of Europe where you've got snow and frost heave, all of the above, you need another. So the key in us buying STI was to give us a dual position strategy with two different price points, but similar margin levels, to be able to attack all those different regions that you need. And as we're actively, in real time, completing our go-to-market strategy globally, we're looking at being able to sell both throughout Europe. And we have a lot of large multinational customers wanting access to both product lines, depending upon the specific geography of where this particular utility-scale plant is going to go. So there's not one answer. I think we benefit by having both answers and are able to satisfy their needs at two different price points depending upon the geography, weather conditions, wind conditions for their specific locations. So there's not one that's emerging as kind of a more desired. If you will, it really comes down to the specific geography and the conditions of that individual market.

Excellent. This is maybe just a silly question, but from a supply chain diversity and resiliency perspective, can you talk a little bit about any additional sources of materials that you guys are looking at? Is it even necessary at this point? But I'm curious if there's something to do there in terms of driving some cost out and driving a little bit of competition into the supply chain.

I think when you think about the opportunities in supply chain, there is much about logistics. You're hard-pressed to have a competitive advantage when your largest commodities are steel and aluminum. To say that you're buying that commodity at a dramatically improved rate than your competitors probably isn't really sustainable longer term. So it's really about being able to convert that commodity and then logistically get it to site in the cheapest way possible for your customers. It's a huge portion of the cost is on the logistics side. So what we've been more focused on is not worrying about... the source of supply of our steel tube, for example. We know we have several U.S. suppliers of that. We can also bring it in for Asia if it's a large enough scale project that warrants that. It really comes down to geographically adding those suppliers so that the distance between those suppliers and where the largest sites are now being built is smaller. So, again, your overall landed cost is cheaper, but it's less about that individual commodity, if you think of it that way.

Perfect. Thanks so much, guys. Our next question is from Mahip Mandloi of Credit Suisse.

Please go ahead.

Hey, good evening, and thanks for taking the questions, and congratulations on the strong quarter here. Most of the stuff was somewhat answered in your slide deck, but maybe just a question on international mix. or just the growth on the international projects next year? Could you just probably throw some light around that? And is it just mostly going to be Brazil, or you have, like, a mix of Europe or Brazil for 2023? Yeah.

Hey, Mahib, it's Nebel. So, yeah, we still feel that we're going to be about a 75-25 mix from a U.S. domestic to international. And, you know, similar to what we've said in the past, the international mix is going to be – primarily Brazil leading that way. And then, um, Spain and Western Europe being a majority of the rest. Um, but you have to keep in mind, you know, that mix may vary because the U S continues to be strong.

And in our forecast, we see the U S continue to have growth in 23 and beyond.

Gotcha. Uh, and, uh, maybe just like one housekeeping, uh, uh, kind of alluded a little bit on the working capital question. deferred revenues increase over higher in Q2. What is that related to? And should we expect something similar in the second half here?

Yeah, so that's related to our LOI process that we described that we instituted about a year ago now. And we'll continue to see stronger deferred revenues just as customers continue to secure their projects earlier. And as you recall with our new process, they secure that with an advance payment, which would go into deferred revenue.

Gotcha. And maybe just to follow up on that, now that given the more constraints or limitations around the IRA and what projects your customers can get, does that accelerate this deferred revenue or the share of down payments on the purchase orders there?

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

Gotcha. Thanks for taking your questions.

Our next question is from Donovan Schaefer of Northland Capital Markets. Please go ahead.

Hey, guys. Yeah, congratulations on the quarter. The revenue was great, very cool to see, and the story seems to kind of be unfolding the way you guys have signaled as far back as over a year, I suppose, with the initial steel price situation. Talking about steel and torque tubes and all that stuff, I know Nextracker has had two announcements, kind of setting up manufacturing lines for torque tubes in the U.S., domestic sourcing, kind of supports the idea that that was a really good move by you guys. But I guess that also raises the question if that can create, can make it sort of a crowded space. I mean, I don't know. How much flexibility there is among us domestic steel production to just, you know, pivot and make a lot more torque tubes. You guys also have the The octagonal cross section that's unique to your torque tubes. So I'm just curious, you know, there's, you know, game change and other U.S. tracker manufacturers with the Inflation Reduction Act are likely to be trying to source more of that from the U.S. Is there just anything to be mindful of if that gets congested? For instance, say with the NUCOR agreement you already have, does the NUCOR agreement you have, does that allow for taking up volumes there with some kind of firm commitment? Any color there would be great.

Yeah, I mean, I think what you're seeing is that in the competitive landscape, they're recognizing one of the stronger competitive advantages that we've had for a long time, and that's our ability to deliver more expeditiously than the competitors because of our localized supply closer to the sites that we're working on. So at the end of the day, we feel that we're in really great shape in terms of overall volume. In some of the prepared remarks, I mentioned that... One of the things we do is we try to build capacity well ahead of where we need it. And certainly as of today, with the vast improvements we've been making in supply chain, the additional vendors we've been qualifying and bringing on board, as of today, our current capacity that we measure and talk about as a senior leadership team monthly on a global basis is already over 30 gigawatts. And that really is over 25 gigawatts supplying the domestic market. So that's a committed... ready, available volume. By the end of Q1 next year, with the current supply base that we're bringing on, the commitment from the supply chain organizations, it will be at 40 gigawatts. So, again, we're staying well ahead of the demand, and we're building that, and those aren't just kind of soft agreements. Those are where we have some really hard commitments and support of our volumes with our vendor base. So we feel really good about the work we're doing.

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

What you do have is that you do have many of the steel converters and steel manufacturing companies fully recognizing that solar is going to be a hyper-growth market that happens to use a lot of high-quality steel. And as such, we have lots knocking on our doors that the leading provider in the U.S., begging for our business. So kind of the opposite is happening. We're actually getting where it's become very competitive to get our business in those suppliers because, frankly, they see it as a hyper-growth space going forward that uses a lot of their product in a high-quality version. So we feel pretty good about our position.

Okay, that's very helpful. Okay, and then pivoting to STI Norland. So... I actually did not realize that STI New Orleans was also self-performing installations in Brazil and Spain. I just kind of took for granted because of my understanding of how different types of trackers and designs and stuff, how they play in different geographies, that there was sort of a historic need for some of the non-U.S. tracker manufacturers to self-perform in the U.S., because of the high labor costs, right? They couldn't get buy in, couldn't get the EPCs to believe that it could be installed fast enough. So they had to hire their own people and kind of try and prove it either successfully or unsuccessfully. So, but I don't think of Brazil or Spain as high labor cost market. So I guess I was surprised to realize that you were doing, that you're self performing there. Um, Was that the case historically? When the acquisition was made, I think the gross margins might have been cited as something on the order of 30% to 40%. Were those really attractive historical margins with SJ and New Orleans? Was that with them doing all of this kind of self-performance work in Spain and Brazil?

Yes. And to be clear, if you think about it, Go ahead, sorry, what was your question?

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

Sure. So when you think about the construction that was going on in Spain and Brazil, and first, geez, I think it was my first 10 days here, we had kind of a come-together meeting because we saw that the construction business needed to be adapted a little bit better. And when you think about us being an engineering company and construction company ourselves in terms of developing those products, we're thinking about much more engineering and construction advisory services than actually performing the construction itself. So when you think about Brazil, if you go back to the beginning of 21, for example, we had within the STI business as many as, I think it was just over 600 employees performing construction services, right? So that is a massive amount of your workforce doing construction services. We have no competitive advantage in the actual hiring of labor. And this isn't where we had our own construction crews that we would move around the country of Brazil. This was all about, hey, we're going to start a site on the East Coast in the Sun Belt of Brazil. So we're going to go hire lots of local labor to perform on that site. So we would set up shop, hire people, qualify people, manage them throughout the construction process, teach them how to build. And then once the site's done, they're gone. And we move on to another site to do that work. And what we found was that the problems in the construction and the management of that particular labor pool was taking a disproportionate amount of our manager's time away from customers, away from focusing on the business. You can imagine you had the safety challenges. You had weather challenges, productivity, utilization, all of the above. That was really hard to run a predictive P&L when you have those kind of challenges running the construction business. So three months ago, we sat as a leadership team and said, let's start scaling that down and pivot those resources into what we call the CAS, or Construction Advisory Services Group. So we took our best field, the best people we had in the field that run those sites, and they are going and assigned. So rather than have 50 individuals on a particular site, we'll have two or three of the senior construction advisors that will go and they will source local labor, meaning that the EPC will. And we'll provide them a couple of bodies to help educate, train, oversee the construction. Best practices.

Yeah. Okay. Well, so from that standpoint, just will there be, if you do get rid of these workforces, will there be any sort of meaningful severance amounts or higher expenses, costs sort of associated? I don't think Spain is.

We've been scaling them down in Brazil as projects close because they're only hired on these short-term pieces. So, for example, I think when I made my preferred comments, we're already down to half. We're all the way down to, as of the last few weeks when I was in Brazil and checking on the progress of the scale down, we're down to maybe 120 individuals. We'll stop when we get down to about 20. That'll be our best kind of foreman, and they are what forms that construction advisory services group. Now, I want to be clear, it's going to take a little bit longer for us to do that work in Spain. Spain has much more of an entrenched expectation of construction services. So we have to work with our customers in Spain and guide them through the process of, hey, look, we're not going to leave you stranded. We're going to continue to be on site to help you construct, but we're going to let the EPC actually hire that labor, manage that labor. And it just leads us to a much more predictable set of results as we go forward.

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

Ladies and gentlemen, just a reminder, if you would like to ask a question, you're welcome to press star and then one. Our next question is from Joseph Osher of Guggenheim. Please go ahead.

Hi. Good afternoon. I've got two questions for you. First, during the prepared comments, I believe I heard something about the retention of cash for future strategic acquisitions. I was just wondering what type of moves we might be expecting from you all in the future.

I'm not a rookie enough to foreshadow that, right? Look, the integrated growth part of our business is going to be an important part of our model as we go forward. When we look around the near adjacent products to what we do, I think there's several areas that we would look at. We would look at different technology plays that increase the share of our customer's wallet in this space. I think there's something to be said for buying our way into some additional geographic expansion in particular regions that we think going forward will be hypergrowth regions for solar. And that's really the focus. So we're active in looking at these different opportunities at this point, but I want to be really clear in the near term, Our team is focused on building that muscle of integration, right? We've taken a big bite with STI. We've gone out and hired a third party to assist us and teach us how to effectively integrate a large acquisition. And I'm not saying that the future ones are going to be large, by the way. But it's certainly something that we have to develop. And how do we transfer all those core processes over in a very rapid time period? So our focus here in the near term, in the next six months, going to be to focus on integrating fully the STI and getting its business model to where we'd like it to be. While we're actively doing that, a subset of us will continue to look at these adjacencies and prioritize the geographics and the adjacencies that we want to play in. But it's too early to say the specific types and where they are at this point.

I understand. Obviously, you can't tip your hand, but that was a helpful answer. Thank you. And then a completely unrelated question for NYPOI. Looking at that Q3 free cash flow number you're talking about, which is quite impressive, and just thinking about that a little more holistically, how much of that, especially as we maybe think in the Q4, comes from the sort of one-time goodness as the working capital accounts go back the other way, and how much of it might we think of as real kind of sustainable recurring free cash flow?

So a portion of that is basically the flipping of the buildup of inventory and delivering those products and the collection of those receivables. But our business, if you step back, our business is truly a free cash flow generation business. As margins continue to go up in the subsequent quarters, that drives free cash flow along with just more working capital efficiency Kevin talked about what we're doing on the receivable side. We're more connected with our front-end sales side to ensure that our receivables that are in the collection process get collected on time very quickly. So I would say that, you know, of course you're going to have that just normal transition of the receivables that are built through Q2 being collected in Q3, but we're normally a free cash flow generating business. and feel that once our margins are back at the historical levels, we'll continue to generate free cash flow.

Okay. Would you care to put a number on that? I mean, I used to cover industrials, and people were always talking about, you know, free cash flow and net income. Is there some kind of aspirational, you know, free cash flow number that you might want to share with us?

So, what I can share with you, and, you know, obviously, as we progress down this journey, we'll provide further detail, but For the balance of this year, we still believe we're going to be free cash flow positive in the tune of around $100 million for the full year. So that obviously means we're going to be flipping from the negative free cash flow position we're in the first half of the year pretty significantly here in the back half.

Okay. Thanks very much. Our next question is from Pleshy Harrison of Piper Sandler.

Please go ahead.

Good afternoon, everyone, and thank you for taking my questions. So maybe just following up on Joe's last question, just maybe wanted to give it another shot. Like you said, your EBITDA margins are going to be better next year. Working capital management is improving, attaining historical cash conversion cycles, et cetera. So maybe moving forward, How are you thinking about, say, either an EBITDA to free cash flow conversion, or maybe how do you think about just the ongoing working capital requirements of this business moving forward?

What we look at, Kashi, is really our cash conversion cycle and trying to target an overall cash conversion cycle in the low 70s. which we've historically done. And when we've done that, we've generated significant free cash flow to fund our business, both internal ROI projects as well as funding for acquisitions. So we'll continue to focus on all elements of the cash conversion cycle, but really getting back to that around 70s, in the 70s for that overall CCC.

That's super helpful. Thank you. And then for my next question, You know, in the prepared remarks and in the, you know, press release, you indicated that the business organically grew by 79% year over year. I was wondering if you could just help us think through, you know, how much of that might be driven by higher steel prices and, you know, just inflation and how much of that is driven by units.

Yeah, so when we looked at ASPs, we see about a 20% growth year on year on ASPs. So the remaining... increase there on the organic side is really related to volume and project mix, but about 20% on the ASB side.

That's super helpful. And then just maybe my final one, you know, obviously a lot of detailed discussion surrounding STI. You know, if you just maybe think about STI at a higher level, you know, with all the changes that are going into play, how are you thinking about the growth potential for this business? It sounds like this year is maybe a reset year or a flattish year, but longer term, how do you think about the growth for STI?

Yeah, so STI, we believe we're positioned well in the region that we're currently at. So if you think about Brazil being the top player in Brazil, with the majority of the share of demand. We see the growth in Brazil over the next several years, and we're in a great position to capture a lot of that growth. In Spain, as we continue to grow our business, as Kevin mentioned, with self-performing less of our business and being more of a delivery of the products, the engineering products, we continue to believe that we'll be the top three you know, top three in Spain. So if you look at those two regions, we'll grow with the market or better in both of those and having good positions in the market. So, you know, we don't have an exact growth percentage right now, but we will grow with market and above market in those two regions primarily.

Helpful. Thank you. Our next question is from William Griffin of UBS.

Please go ahead.

Great. Thanks very much. Just one quick one for me, but wondering if you could provide any color on kind of the revenue cadence here for the second half of the year. You know, it looks like relative to the second quarter, you know, guidance kind of implies flat to potentially lower revenue for third quarter and fourth quarter. So just curious if you could provide any color there. Thanks.

Yeah, sure. Well, for Q3, I would say we're going to be about the same as Q2, so stay flat to Q3. And in Q4, we're seasonally down in Q4 with most of our business being in North America, so we'll continue to see that to get to the full year guidance range that we've stated.

Very helpful. Thank you. Ladies and gentlemen, we have reached the end of the question and answer session.

And with that, this concludes today's conference. Thank you for joining us. You may now disconnect your lines.