Array Technologies, Inc.

Hello, and welcome to the Ray Technologies third quarter 2022 earnings call. This time, all participants are in listen-only mode. Question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Now, my pleasure to turn the call over to Cody Hiller, Ambassador of Ray Technologies. Please go ahead, sir.

Good evening. Good evening. And thank you for joining us on today's conference call to discuss Array Technologies' third 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 third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Earlier today, the company filed an 8 and an amended form 10 for the quarter ended June 30, 2022. The restatement was due to an accounting error caused by a clerical error in the sales order entry process for a contract value which overstated revenue and gross profit, as well as a consolidation error that understated the reclassification of personnel costs from general and administrative to cost of revenue. The total income statement of impact of these two errors for the three and six months ended June 30, 2022, was a reduction of revenue and adjusted EBITDA of $5.1 million, a reduction of gross profit of $7.4 million, a reduction of G&A expense of $2.4 million, and a reduction of net income of $2.4 million. These errors had no impact on the company's previously reported cash flow from operations and does not cause noncompliance with any financial covenants as of June 30th. Any reference to the quarter or six months ended June 30th, 2022 in today's conference call and on our accompanying presentation reflects the restated values. For more information regarding these errors, please refer to the appendix of our accompanying presentation as well as the Form 8K and the explanatory note in our Form 10QA. 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 am also joined by Nipal Patel, our Chief Financial Officer. Let's begin with Slide 4, where I'll provide some highlights for our third quarter. I'm incredibly proud of our performance this quarter as we again delivered results above expectations across the board. Revenue of $515 million this quarter represents our single largest quarter as a company and year-over-year growth of 173% or 112% on an organic basis. The continued organic growth is a particular bright spot for us considering the industry-wide challenges this year due to both ADCVD and the UFLPA. Our order book on September 30th was $1.8 billion, reflecting an increase year-over-year of 77% inclusive of FTI and 36% when considering only our legacy array business. Sequentially, Our order book is down approximately $100 million, which is reflective of the strength of our deliveries as new orders totaled almost $400 million in the third quarter, which was an increase sequentially from the second quarter. I will talk more about it in a minute, but I do want to note that with only three months since the passage of the Inflation Reduction Act, or IRA, we are still too early in the project development process to expect any new bookings into our order book. As a reminder, our order book only considers named projects which have been awarded to us. Gross margin for the quarter was 15.6%, representing our fourth consecutive quarter of growth as we continue the margin improvement path we've previously laid out. Adjusted EBITDA in the third quarter of $55 million represents a year-over-year improvement of $59 million and a sequential improvement of approximately $35 million from the second quarter after giving effect to a $5 million downward adjustment in the second quarter from the restatement referred to earlier. Looking at our ending cash flow and liquidity position for the quarter, I'm extremely pleased with our execution. NEPA will walk through this in more detail a bit later, but we delivered $102 million of free cash flow in the quarter, which has significantly strengthened our balance sheet as we prepare for the next phase of our growth. To that end, we currently have $329 million of liquidity, inclusive of the Blackstone preferred shares, and $166 million in availability on our revolver. This is up significantly from $153 million of total liquidity in the prior quarter. Turning to our next slide. As I did last quarter, I'll take some time to provide an update on the domestic market as we continue to operate in a dynamic landscape. First, an update on the IRA and where we currently stand. In the months since the act passed, we have seen an incredible amount of enthusiasm in the industry around the undeniable impact that the IRA will have on solar deployments over the next 10 years. However, it is important for us to remind everyone that this act, one that is certainly not small and easy to implement, is only three months old. There is still a lot of work that needs to be done by the various governmental agencies tasked with rolling it out to define and clarify critical aspects of the bill before the industry can wholesale shift to the new paradigm. During this critical rollout period, we are actively engaged with key trade association groups, governmental agencies, and legislators to ensure that when completed, the application of this act benefits the solar industry in general, but also array specifically. In parallel, we are also continuing to push forward internally with what we do know. There are three key areas I will point out. we are having daily conversations with customers around building out the framework for pricing agreements under the IRA. These have progressed as far as discussing reserved capacity agreements and revisiting pricing for certain orders under varying levels of domestic content. Second, we have engaged with our suppliers on the domestic manufacturing credits to begin to craft the parameters under which these will be shared in the value chain. I can appreciate that everyone would like us to provide our view of those splits, but it is too early to give that definitive of an answer, and we will also avoid having these negotiations in public. Lastly, we are evaluating our own manufacturing footprint along with our key supplier relationships to ensure that we are maximizing the benefit to array while ensuring we continue to maintain our key strategic relationships. Overall, with such a large and meaningful piece of legislation, I am thrilled with the progress that has been made to date and look forward to updating everyone on our continued progress as key aspects of the IRA are further defined. Moving to the next area, the UFLPA. We have been consistent in calling this out as a risk to project timelines and that we did not expect meaningful resolution by the end of this year. Unfortunately, that is still the case. Documentation requirements from the Customs and Border Patrol have not seemed to get any further clarity since we last discussed this. This has led to more Tier 1 suppliers becoming more risk averse and a fear that sooner than later it will start to impact Tier 2 suppliers as well. While we have not been informed of any of our projects with module detainments to date, our position on this remains cautious. We continue to expect that the delays are caused by the lack of clarity surrounding the enforcement of this Act will provide a headwind on deliveries in the fourth quarter and will carry through to the first quarter of 2023. It is important to note that this is not a change in our outlook, rather a status quo assessment for where we have been all year. In fact, as Nipal will discuss more later, despite this expected slowdown, we are raising our full-year revenue outlook at the midpoint by $150 million. Finally, FEMA currently has a proposal to increase the structural risk category of large-scale utility projects. We recently had an expert from Array testify in the public hearing on this matter where we imposed the increase to the risk category. We fully support ensuring that solar arrays are designed to work in even the most difficult weather conditions. In fact, this is a critical component of array-specific value proposition. Every tracker we design is built to withstand the most severe weather conditions a site may encounter. To highlight that point, in recent years, our trackers have withstood both the extreme snowstorm in Texas and, more recently, Hurricane Ian in Florida. So we believe there is a balance to achieve with ensuring the structural integrity of the solar array while also ensuring that costs are not unnecessarily increased. If there is a new classification, we are very confident in our ability to support this for our customers. Shifting the focus to our internal operations, I will now move to slide six. I'll provide an update on the progress we have made in five key areas I outlined last quarter. While many of these areas will take more than three months to fully address, I am incredibly pleased with our progress in this brief period. I won't go point by point on these, but there are a couple of key things I will point out. First, and maybe most impactful in the quarter, is the improvement we have seen in our working capital efficiency, which we measure through cash conversion cycles. This quarter, we improved this metric by 12 days from the second quarter and almost 50 days from the first quarter. Our teams drove significant improvements in both our receivables and our inventory, which we previously highlighted as key focus areas. The net impact of this was seen in our free cash flow performance this quarter. Excluding the impact of the significant legal settlement previously noted, we generated $60 million of cash this quarter. This obviously is incredibly important in strengthening our balance sheet and allowed us to fully pay off our revolving facility, as well as paying $12 million in interest on our preferred shares, which had previously been paid in kind. The other area I will note is the evolution of the FTI business. First, on the construction side. Early in my tenure, we noted the need to reduce our focus on the construction activities within our FTI business with a particular focus on construction in Brazil and the U.S. When compared to Q1 quarter ending headcount, we have now reduced our construction headcount by approximately 20% in Spain, where we have been more selective in where we offer this service. In Brazil, we have reduced our construction headcount by approximately 70% since the first quarter, and we currently have no active construction projects slated for 2023. Next, on the integration side, we recently concluded a 14-week spread on the integration, which delivered several important steps forward for us as a combined company. First, we solidified and formally rolled out our combined organization. We will drive functional activities from a one-array standpoint while enabling our regional leadership to execute the day-to-day activities and to quickly make decisions at a point which is closest to our customers. Next, we've recently announced that the STI H250 will become fully available in the U.S. market in the coming months. This is an important development as the deployment of solar projects becomes more geographically diverse. I wanted to close with something not listed on the slide here. We have also had a lot of positive momentum in our innovation and development activities, highlighted by the recent announcement of Omnitracks. We have also been granted 15 new patents over the past three years, taking us from six active patents protecting our portfolio at the end of 2019 to 21 active patents surrounding our products currently. The largest portion of these patents have been received over the last 12 months. I look forward to more announcements in the future displaying some of these more recent developments. With this, I will turn the call over to Nipal for a deeper review of our third quarter financial performance and an update on our full year outlook. Thanks, Kevin. I'm glad to speak with you all today.

First, turning to slide eight, I will walk through our results for the quarter. Revenues for the third quarter increased 173% to $515 million compared to $188.7 million for the prior year period. The $515 million in revenue reflects $400 million from the legacy array segment and $115 million from the SDI segment. As Kevin mentioned, the $400 million from the legacy array business represents organic growth of 112% compared to the prior year and is reflective of both an increase in the number of megawatts shipped and an increase in ASP of approximately 30%. The better than expected revenue performance from array is a combination of projects moving from award to delivery faster than expected as well as a significant burn down of our past due shipment. The $115 million from the SDI segment represents growth of $42 million or 58% from the second quarter and is reflective of the natural seasonality of this business where more deliveries are expected to occur in the second half of the year. Gross profit increased to $80.2 million from $5.9 million in the prior year period, driven primarily by the increase in volume and ASP. Gross margin increased from 3.1% to 15.6%. Gross margin for the legacy array business was 16% and represents the fourth consecutive quarter of margin improvement and was in line with our expectations. The STI business had gross margin of 14.2% in the quarter, which represented sequential improvement as we had less volume on the U.S. construction business and saw improved margins in our Spain projects. Operating expenses increased to $61.7 million compared to $25.4 million during the same period in the prior year. The higher expense is primarily related to a $17.4 million increase in amortization expense related to the SDI acquisition. Excluding this impact, the increase is primarily due to the addition of SDI Norlin in addition to higher payroll-related costs due to an increase in headcount and professional fees as we invest in key strategic areas for our growth. Net income attributable to common shareholders was $28.6 million compared to a net loss of $33 million during the same period in the prior year. And basic and diluted income per share were $0.19 compared to a basic and diluted loss per share of $0.25 during the same period in the prior year. These increases were partially driven by the legal settlement we received in August of approximately $43 million, which was reported in other income in our financial statements. Adjusted EBITDA increased to $55.4 million compared to a loss of $3.9 million for the prior year period. Adjusted EPS was $0.18 from a loss of $0.09 a year ago and was positively impacted by a largely unexpected income tax benefit this quarter due to the mix of income between our geographies. We generated $102 million of free cash flow, a $134.8 million improvement from prior year, driven by better working capital efficiency and improved profitability. Now, if we move to slide nine, I want to provide an update on our liquidity and cash flow. During last quarter's call, we outlined some of the key metrics we were tracking and where we expected to finish the quarter. I am happy to announce that we have delivered on each one of those metrics. Excluding the Blackstone preferred shares, we ended the quarter with $229 million of liquidity against an outlook of $200 to $245 million. Inherent in that number is the full availability of our revolver now that our secured debt to EBITDA ratio is 3.4, far below the 7.1 ceiling. As we look forward to the fourth quarter, we still expect $100 million of free cash flow for the full year, inclusive of $12 to $15 million of capital spent. I will end this slide knowing that as we progress forward and continue to produce free cash flow, we will first use that cash to fund our organic growth and then evaluate other options, such as de-levering should we have excess capital. Moving to the next slide, we are modestly updating our full year 2022 guidance. We now expect full year 2022 revenue to be in the range of 1.5 to 1.6 billion. We are modestly raising the lower end of our adjusted EBITDA range to $122 million and narrowing the high end to $132 million. Lastly, we are increasing our adjusted net income per common share to be in the range of $0.32 to $0.37. The increase in our revenue range is reflective of strength in our array segment, where in the third quarter we saw projects move faster than anticipated, which will provide some tailwinds for the full year. Additionally, a part of this increase is an updated estimate that between 75 to 100 million of the projects we had pushed out of the year due to ADCVD will now be delivered in 2022. The remaining projects are still expected to be delivered in 2023. We have slightly reduced our revenue outlook for the STI segment, which is mostly due to FX headwinds, which will reduce the overall contribution to both revenue and adjusted EBITDA and a small amount of delayed project timing. We have reduced the midpoint of our adjusted EBITDA range to reflect a couple of items. First, as we discussed last quarter, we are expecting a lower gross margin from SPI for the year due to construction and logistics cost challenges. While we still anticipate SPI to exit the year in the high teens, the lower gross margins in the first three quarters of the year have our full year expectations in the mid-teens. Second, the FX headwinds are expected to reduce our adjusted EBITDA by $3 to $5 million from our original assumption. Third, the updated guidance reflects the $5 million reduction in adjusted EBITDA from the second quarter restatement which we announced earlier today. We are increasing our forecast for SG&A, and we are engaging with outside resources to assist in our IRA engagement activities and are accelerating some investments in the business to ensure we are prepared for what will be a dynamic commercial and supply chain environment post-IRA. While our adjusted EBITDA margin is slightly down from our previous midpoint, And 8.2% for our updated midpoint still represents an increase of over 300 basis points from the prior year. Finally, for adjusted EPS, we are adjusting our expectations for our full year EPR down to a range of 22 to 25% as the geographic mix of our income has changed. With that, I will turn it back over to Kevin to wrap it up.

Thank you, Nifl. I want to close by saying we had another great quarter of progression. Every day we're building a more consistent, resilient, and dynamic company that is poised to take advantage of the opportunities that are coming our way. I very much look forward to continuing this journey with the team here at Array and updating you on all of our progress. With that, operator, please open the line for questions.

Thank you, and I'll begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To solve your question, please press star then two. This time we'll pause momentarily to assemble a roster. First question will be from Brian Lee, Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions. I guess first one, Just on the guidance update here, appreciate some of the color around all the moving pieces. So maybe first off, on the ADCVD project deliveries that are coming back in for 22, could you remind us what that would imply is left to be recaptured in 23, and is it your expectation that it all gets recaptured in 23, or is some of that still kind of TBD and could be even further out?

Hey, Brian, it's Naples. Yeah, regarding the ADCBD projects, we have about 140 million to capture in 2023, and we fully expect to capture them all in 2023.

Okay, that's great. And then if I just, you know, take the 75 to 100, and then also you sort of down-ticking the STI a bit at the high end, you know, it seems like you're still seeing... growth relative to the original guidance. So how much of that is sort of, you know, share gain? How much of that is, you know, other drivers, whether price or new volume or mix? Just try and understand what else kind of surprised you to the upside to give you confidence to raise the revenue view for this year. And then I had just one more follow-up.

Sure. We're seeing our projects convert faster in our order book. You know, we've We've been a bit tempered in how we've stated our order book would convert, but we've seen some favorability. You know, we've been pretty consistent with our deliveries throughout the quarter, and that's given us the space near the end of a quarter really to allow those projects that drop in that we can deliver at the end of the quarter. So we saw that again here in Q3.

Okay, that's great. And then just last one from me, and I'll pass it on. You know, the STI business, you know, clearly – The margins are not where you want them to be. You're seeing some progress. So high teens exiting 22. But this was a 30% gross margin business when you bought it. So how should we think about sort of the normalized margin for this segment for you? And then how much, I guess, margin recovery for STI is feasible as we think about 2023? Thanks, guys. Sure.

I'll take that one, too. So, you know, it's about progress with the STI business, Brian. It was good to see their margins go up sequentially, and we expect to continue to see that trend in the fourth quarter. The Brazil business is largely at the margin range we expect in the acquisition, and now with the U.S. project substantially complete, that removes a big drag from the Spanish business. The way we look at the STI margins for the combined business, we see that in the low 20s. similar to the array business because of the mix of Brazil with Spain. And we continue to see that as the go-forward gross margin for that combined business.

Okay, thanks a lot, guys.

You're welcome, Ray. Thank you. Next question will be for Mark Strauss, JPMorgan. Please go ahead.

Yes, thanks very much for taking our questions. Wanted to go back to the comments around the FEMA decision. And just, can you kind of help me parameterize what that looks like under, you know, potential different classifications? I mean, it sounds like if it's kind of a modest increase in the requirements, that could actually be a positive for market share, just given your already kind of structural integrity. Kind of what's the, how do I think about the shift though? Kind of the worst that gets as far as the incremental cost, just kind of Walk us through maybe a best-case, kind of worst-case scenario, please.

Yeah, Mark, I don't think we're ready to talk externally about the potential change in price at the different bearing levels. But suffice to say, your first statement is absolutely correct, that we feel that our structural integrity is the best in the marketplace. And as such, the differential to get to a Class II certification for a REG is much lower than maybe some of our competitors. So we think from an overall pricing perspective, we'll have a certain advantage there for sure. And that's if it in fact goes to class two. If it goes to class four, it's really going to come down to ensuring that everyone's competing on kind of a level playing field with their engineering and their certifications to those classifications, right? So we obviously take a very high road in take structural integrity as a huge competitive advantage. So we don't skip on that engineering content. So to the extent the competitors do that, again, I think the more higher classification, the better it is for array. The lower the price differential, we would have to do to pass on that higher level of certification to our customers. So I think we feel, while we don't think the classification change is needed, If, in fact, it were to go that way, I think we feel we have a pretty good advantage going into it at this point.

Okay. Thanks, Kevin. And then I'm curious, I know it's only been a couple of months since Omnitrack was introduced, but can you just kind of give us initial customer feedback on that? Are you receiving orders there yet? Are you starting to see conversations open up for projects that you might have been precluded from previously?

Yes, I wouldn't say we're receiving orders yet. We're receiving lots of opportunities to... So Omnitrack, if you remember, requires us to do some additional upfront engineering work to qualify that. So we're seeing a lot more inbound opportunities to get into that qualification for Omnitrack view. So that certainly is something that the market is excited about. It's a solution that is allowing some of our customers to look differently at some of their slate of projects that they already have. So... It's a very active proposition at this point. To be clear, I wouldn't say that we've got this influx of orders. It's really an influx of opportunities that we're working our way through at this point.

Great. Okay. Thank you. Thank you. Our next question will be from Philip Sheen, Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my questions. As a follow-up to the 75 to 100 million that was pulled in, Can you talk through the situation as to why that may have been pulled in? Specifically, was it because there was a fair amount of projects that were built with tracker but without modules? And then do you expect that pattern to continue into Q4? And then as you look into 2023, if this UFLPA situation persists, would you think that you might the industry might continue to do that, or does the industry hit a certain point where it can't continue to build projects without modules but with truck? Thanks.

Yeah, Phil, let me take the first part of that is, if you remember, our commentary around the pullback of the ADCVD revenues was one that we, you know, very early on indicated was a conservative approach. We looked at project by project. And if a customer did not have confirmed delivery of those modules already, we decided to consider it at risk and pull it out of the forecast. So what you've seen transpire over that is some of those customers be able to get those modules in over that six months since we changed that forecast. So that's really what you're seeing. I think you're seeing that coupled with as we've really focused our operations teams on improving our linearity of business, it's allowed us to shift more and reduce the overall backlog in the business by just really hitting a very high level of linearity. We don't have a big hockey stick at the end of a quarter any longer. It's really, as we look through a whole quarter, it's about a 45-degree angle of the charts at this point. And we've had a couple of consecutive quarters of outstanding operational performance in driving that linearity. So that's helped us pull additional work in as well. So that's really the answer on that. As it relates to the UFLPA, look, I think what we're doing still, we're still having customers ask us to do multiple module designs and secondary and tertiary module designs as they try to mitigate which modules they may get in and which modules may clear. I think we've always been open about our view that that was going to continue throughout the end of the year and certainly in Q4. And I think we've extended that through Q1 at this point. There's lots of my peers calling for CBP to get greater level of clarity and to accelerate the clearance of these modules. We certainly, you know, we harmonize with that, right? We need this to get cleared up for the industry to have a robust year next year. But that being said, we're not counting on it in our current Q1 forecast either.

Thanks, Kevin. As it relates to 2023, From a booking standpoint, you had nice new orders in Q3 over Q2. How do you see the bookings trending through this quarter? You had a nice order yesterday. But as you look into Q1 and Q2, would you expect the bookings momentum to sustain, or do you think it might slow down? Thanks.

Look, I don't think we're ready to give a full year view of next year yet. We'll certainly do that with our earnings call in Q1. But the conversations we're having with customers on the back of the IRA right now is really about how much capacity can they secure with us. So we have customers approaching us looking to purchase a certain level of capacity and then to purchase, you know, secondarily, a certain level of U.S. content within that capacity. So I think we're fairly excited about next year and certainly the year after relative to our position in the market, our leading domestic supply chain. I think we feel pretty good about our position. And if you just look at the momentum vis-a-vis some of the competitors that have come out with their numbers, we feel pretty good. We think we're winning rather than losing, and our organic growth rates are amongst the best in the industry at this point.

One last one, if I may. You brought up domestic content. We've picked up on there's an APC maybe that may be able to provide 40% domestic content without the module. do you see yourself in that kind of position where you think you could really enable that 40% threshold? Of course, we have to get the definitions out from Treasury soon, but the way things are worded now, do you see a fair path to helping your customers get to that 40% level? Thanks.

Yeah, so if you think about our current product without making a whole lot of modifications. We're roughly in that 75%, 76% range of what I would call pure domestic content. Minor tweaks to the bill of materials puts us up in the 90s. And again, when we talk about varying levels for our customers, we're going to be able to provide them that varying level that they need to either get seven points towards their domestic content or nine points towards their domestic content. And clearly there's some pricing differential at that. So if you're a customer out there who needs those additional percentage points, yes, we can shift from some of the offshore suppliers to domestic suppliers to increase that for you. So that's really some of the conversations we're having with our customers is what is that price differential to get from, say, 75% to 95% domestic content where needed.

Great. Thanks, Kevin, and congrats on the strong quarter. Thank you.

Thank you. Our next question will be from Martin Maloli of Johnson Rice. Please go ahead.

Thank you for taking my question. First question, given the progress you've made in working off the legacy backlog and your exit rate that you've talked about for gross profit margins for this year, any factors that we should think about that would prohibit you getting into the low 20-ish percent gross profit margin range for next year?

Hey Marty, it's Nibel. As we, as Kevin mentioned, you know, we're not prepared to give our full year 2023 guidance, but if you look at momentum, we still feel we'll exit this year in the high teens and back to our legacy historical margins in 2023. Okay, thank you.

And Jen, my second question, are there opportunities to introduce some of your products into the geographic areas that STI Norland operates in and vice versa?

Yeah, that's one of the key things with the integration that we've been cross-pollinating our products into their markets and their products into ours, both from a geographic standpoint as well as top customer standpoint. We've been able to go to some of our larger multinational customers and provide this dual portfolio approach for them. And that's just been well received. We're active in doing that. It's a little premature for us to talk about some of the orders we've won cross-pollinating already. Maybe we'll do that on a future call. But it's certainly been one of the core elements of the integration process.

Great. Thank you. Congratulations on the quarter.

Thank you. Thank you. Next question will be from Donovan Schaefer, Northland Capital.

Please go ahead. Hey, guys. I'm kind of playing off of the last question about, you know, the portfolio approach of STI New Orleans Tracker and kind of your additions of products. I'm curious. I know it helps with sort of close rates and winning projects because you can present, you know, a couple different, you know, products. But I'm curious if it also factors in if you ever are in a situation where you end up kind of mixing and matching. So I know... So for instance, with next trackers, you know, train following solution, um, you know, they don't use that for the whole project. They only use it, you know, on a certain segment where there's a steep grade. And so I'm wondering, you know, do you, does this put you in a position? You've already started working on this where, you know, maybe some projects, the kind of core of it would be the traditional, um, you know, API tracker, centralized design, and then you could do. you know, the STI Norland tracker on where terrain gets a bit more challenging or vice versa. Maybe you do, you know, the traditional array tracker for higher wind loads on the periphery and then do some STI Norland trackers in the middle. I'm just curious if there's kind of a benefit there for site designs with being able to potentially mix and match and if that's of interest to customers.

No, I think, Donovan, I don't think that's our current solution. And the challenge with that really comes in the software, which drives the overall site operation, right? It's a different software platform between our solutions. So I think our current focus is really about an overall array platform for certain market conditions, and then obviously an STI for different. And again, the The difference also comes in the positioning at the price points, right? So where a customer doesn't need the overall full, robust array design and wants something at a different price point, we could then, and maybe that customer were to go use a third-tier tracker supplier today, right? We have a different offering at a lower price point if they don't need the level of robustness and structural integrity that the core array product has. But we really don't see us going to a site today and mixing and matching kind of half STI and half array at this point because the software control systems would be different.

Okay. Well, and then kind of related, before I think when array first came public and before I think we got kind of distracted with a lot of the steel price stuff and there's just been so many different things going on, There was a trend with the tracker companies, and I think at the time we were all sort of hyper-focused on you guys and Nextracker, but there was a move to this sort of portfolio bidding where the idea was it could either be an EPC or it could be a developer where they'd say, well, our plan is to deploy two gigawatts over this period of time. And so, you know, will you give us better pricing? And so does the variety of products come into that, I guess, kind of where are we at in the trend of portfolio bidding? And then does having the portfolio options support that?

Yeah, so we're very much in that now, but it's less about price concessions, more about capacity confirmation, right? So we are actively engaged with many of our large customers now in, hey, look, I've got a two gigawatt portfolio to deploy in 2023. I want array on the entire portfolio that may be comprised of six or eight projects. And what they're looking for now is not nearly as much price concession as it is capacity commitment and domestic content commitment. So those are absolutely active conversations we're having every day now, but it's less about price concessions.

Okay. And then just one more question and then I'll take the rest offline is just with, you know, the inflation reduction act and just even, you know, the removal of some of the ADCVD, but, you know, we reinforce labor stuff still going on. There's, there's again, so much going on. Are you seeing kind of changes in the mix of project sizes? Um, you know, you announced yesterday the large 750 megawatt project when, and that's, that's fantastic. You know, that's a huge, those projects like that really moved the needle. do you think we're kind of headed in the direction of a world where it's more of these kind of elephant, big elephant-sized projects, or is it a bunch of more, you know, small, like your partnership with Russell Pacific that ends up moving things? Are there any kind of trends there that you're seeing?

Yeah, well, we split the market to the large utility scale, which we focus on, and I think one of the things lost is we are, with our partnership with Russell Pacific – We believe the largest in both community and commercial solar as well, although we don't talk externally about that nearly as much. Those projects tend to be smaller in size, and many of them. And then on the utility scale, we're certainly seeing an increase in average project size. Look, you're right, the 750 megawatt is a big elephant. It's our second largest project in history, only to Gemini. Setting those aside, the average of what we're seeing because of the efficiencies that are driven and the confidence in solar as a great energy source at a great price, we are seeing those project sizes get bigger and bigger.

Okay, great. Interesting. Well, thanks, guys. Yeah, congratulations on the quarter, and I'll take the rest offline. Perfect. Thanks, Thomas.

Thank you. Next, we'll have a question from Mahit Mendeley of Credit Suisse. Please go ahead.

Thanks for taking the questions. Firstly, just on the Q3 and Q4 numbers on the top line, could you talk about if there were any demand pull-in from Q4 into Q3, or is this a reflection of seasonality? Because historically we haven't seen that, so just curious how much is seasonality versus demand pull-in in Q3. Thanks.

You know, as Kevin mentioned and I did as well, you know, we've had really good linearity of our shipments throughout the quarter, and we've done that purposely, really, is to really save space at the end of the quarter for certain projects that the customers did want delivered that we weren't able to do because we don't have a hockey stick quarter. So what we'd say is, you know, part of that increase in Q3 was the availability of projects to ship and customers to accept them in Q3. that were originally scheduled for Q4. So we do see that and we continue with our operational execution to allow us those windows to be able to ship those items.

Gotcha. And then in light of UFLPA still being some uncertainty around it, should we expect a similar run rate in the first half of next year, similar to what we saw in the second half of this year?

So, you know, we're not really obviously prepared to provide for guidance for next year. But as Kevin mentioned, we expect the UFLPA to continue on in cost and delays in Q4 as what we expected and continue on into the first quarter. We'll be in better position after our fourth quarter call to provide kind of where we think the Q1 will land. But we do still see that sticking around here for a couple of quarters.

And just for like housekeeping, when you talk about like getting back to legacy gross margins, can you clarify that we're looking at like 20% EBITDA margin or higher than that?

Yeah, so when we say legacy margins, we're really speaking of the gross margins in the high teens, low 20s. As far as EBITDA margins, we're still, you know, Kevin's still kind of relatively new here in his role. We're going to come out... updated guidance. But for now, we're still sticking to the guidance that we provided historically in the 16% to 18% even of margin range.

Thank you. Thank you. Our next question will be from Kathy Harrison of Piper Sandler. Please go ahead.

Good evening, and thanks for taking the questions. So it looks like the The order book, as you indicated, declined a little bit by $100 million for the legacy business. But as you indicated, bookings were up quarter over quarter in Q3. Just wondering, what are you seeing for bookings in 4Q? Do you expect another similar uptick quarter over quarter? Just any color there would be greatly appreciated.

Yes. Hey, how are you doing, Akashi? Yes. believe that the bookings will stay consistent and strong through Q4. No indications of that slowing down at this point.

Okay. And then my second question, maybe a little bit more of a bigger picture question. Bolsonaro just lost the Brazilian elections and Lula has been elected. And so I'm just wondering what your thoughts are on the implications for Lula for solar development in Brazil in the coming years.

Yeah. I mean, first of all, we're pleased that the election is over, right?

I think the Brazilian business would have characterized, you know, a short period of pause while you just lack the clarity. I think now we need this time of unrest to calm down so that the businesses could actually get refocused and continue to move forward. I think from our perspective, we're really extremely excited about the prospects we have in Brazil, and that excitement was never tied to one candidate versus the other. It was about getting into a known and predictable interest rate environment in Brazil where projects can be quantified and then begin to move forward. So we feel generally pretty good about it. And I think the teams on the ground are feeling very positive as we go forward. We're looking at having a really strong year in Brazil next year.

That's very helpful. Thank you. And if I could just sneak one more in, and apologies if you mentioned this. I've been having issues with everything breaking up on my end. But you guided to gross margins for the FTI business in Q4 in the high teens. What does that number look like for the legacy array business in Q4? Are we going to cross the 20% marker, or do you think that's also in the high teens for Q4? Thank you.

Yeah, we're seeing that the legacy array business is similar to SKI in that sense, where we're seeing Q4 based on the projects that are lining up that will be in the high teens.

Thank you. Thank you. Next question will be from Colin Rush of Oppenheimer. Please go ahead.

Thanks, guys. Can you talk about the key areas of investment in the R&D space, you know, and really in terms of potentially driving costs out of the structures or other innovations that you're working on?

Yeah. Look, Colin, you're going to find this answer pretty unfulfilling in that I don't really, as a practice, talk about my innovation and new product development going forward in a public forum. It's just... There's something I don't do. I can tell you that I'm pretty excited about what we have going on within our innovation and new product development organization. We've separated out the value engineering organization from new product development. And with that, we're driving many more innovations. And again, as we discussed, many more patentable innovations in our product line, additional versions of our product line, as well as a large focus on where we can take cost out of the product, both from a standpoint of being able to offer our customers a better value, but also to drive improved margins in our business. So suffice to say, we have a lot of efforts going on in both. And I, for one, am very pleased. We just had an executive debrief with engineering, new product development, value engineering teams on Friday. And this is something we're pretty excited about, but you're going to find as a practice, I'll talk about them after we've delivered rather than prior to delivering them.

Okay. And then, you know, if you guys have a little bit broader geographic footprint, can you talk a little bit about the evolution of the folks that are doing some of the fabrication for you? Are there areas for you guys to drive costs out of that, you know, scale up with certain folks to hit, you know, volume breakpoints? Just thinking about the non-commodity cost here and how that evolves, particularly on a geographic basis.

Yeah. Hey, Colin.

You know, we're continually, with our supply chain, building out our our supply base and, you know, with the various countries that we operate in and the several suppliers. And part of it is as our, you know, share of demand grows and we continue to, you know, kind of these larger projects in the regions that we operate, our suppliers want to invest with us and invest in our business. So we're seeing more and more of that where suppliers are investing to get, you know, piece of the solar business as we grow, as being one of the leaders in the space.

I think the other comment I'll make is that, as you remember, that 80% of our business is domestic. And a lot of the new business that's coming in solar is in those areas that we didn't traditionally build out in, right? So for years, we've done the Arizona, New Mexico, Texas, California, Florida. Now it's really about business that's being driven up in the upper Midwest, Northwest. So a lot of what we've been doing is working with our existing supply partners for them to localize manufacturing into those regions because the huge gain force is in reducing the logistics uncertainty and the logistics costs by having the source of our product more closely available to where a lot of the newer developments are going to be happening. And that's really what we've been focusing on to take cost out of the supply chain. It's about localizing the content with some of our already existing proven domestic suppliers.

That's super helpful. Thanks, guys. Thank you. Next, we'll have a question from Yosef Yosha of Guggenheim. Please go ahead.

Hello, everyone. I'm Yosef now. That's cool. I actually had to ask Cody.

Sorry.

Yeah, it's very Russian. Anyway, two questions. First, obviously, compliments on the free cash flow this quarter. Obviously, some of that is some of these working capital accounts reversing. How, as we look in the next year, or maybe more generically, as you talk about those EBITDA and gross margin longer-term targets, how should I think about how free cash flow might relate to those targets over time?

Yeah, the way that we look at it here is really a free cash flow conversion. And, you know, we expect to be in this 75% range, 60 to 80% kind of range of free cash flow conversion, Joe. And as we, you know, you hit it on the head, there's two pieces of this. It's the margin recovery, which we're on the path of doing for consecutive quarters. And we plan on also continuing that in the next quarter. as well as just the working capital just becoming more efficient there. Those two levers together give us the confidence that we can get back into that 60% to 80% range of free cash flow conversion.

And that, to be clear, 60% to that is the percentage of EBITDA. What are we talking there?

That is the EBITDA percentage.

All right. Thank you. And then the other question I had, understanding that things are in a great deal of flux and we still have to hear from Treasury and IRS and all the rest of it, Do you guys think you're going to be able to be in a position to book to the extent that you do have manufacturing tax credits? Are those going to show up as contra cost of sales in your non-GAAP financials starting Q1? Do you think you can have enough information to be able to do that?

We simply don't know the answer to that yet. Okay.

It's just too early to know. Okay. And just on that note, final question, is it Treasury and IRS? Do you think you also need to hear from SEC and or maybe FASB? What are the critical pieces of guidance that you all are looking for before you might actually be comfortable making a call there?

So I think there's a few areas. The first is further definition in terms of – specifically what's changing. So where we are now, we're in the comment period, right? So we've certainly provided lots of commentary back through both trade organizations as well as directly to legislators as well as directly to some of those government agencies you've mentioned earlier. That comment period will end with more clarity around the definitions of, for example, what is considered a structural fastener, right? And Those definitions could have really meaningful differences relative to what we do to our operational footprint, what we insource, what we continue to outsource. All of that is what's in flux. So suffice to say that what we've been focusing on internally is driving lots of different optionality, right? If it comes down this way, this is our move, this is our approach, how we'll execute. If it comes down this way, this is... So we are parallel pathing lots of different ways that we can maximize... different rules and regulations for the benefit of array. And that's the mode we're in now, right? The examples of manufacturing tax credits that can be transferred one time and we're not sure can it be transferred then twice from some of our suppliers to us or some suppliers to suppliers to us. So all that is what's really in flux and we're looking for much better clarity around definitions which are direct credits from the Department of Commerce versus which are tax credits. All of that is still, while there's a set of definitions out there, we're in the comment period that will drive, it's likely that some of that will change here over the next three to four months. And what we're doing is really focusing internally on having an incredible amount of optionality for each direction some of those may change. That's really, we have a whole team focused on that that are meeting regularly

in the if-then views of what we would do to our business.

Okay, that's very clear. It sounds like a lot of work, but thank you so much.

You're welcome.

Again, if you have a question, please press star 1. Next question will be from Jeff Osborne, Cohen & Company. Please go ahead.

Hey, good evening. Thanks for squeezing me in. Quick question, or actually three quick ones. Is there a rule of thumb on capex per gigawatt? You mentioned possibly making torque tubes or other items yourself, and historically you're not a capital-intensive business, so I wanted to better appreciate that if-then scenario that you just laid out to Joe's question.

So to be clear, I don't think that us going into the torque tube conversion business adds a lot of value. Our strength in partnerships and relationships, those partners have committed to sharing any benefits, be they tax benefits, manufacturing credits, any of that with us, which would preclude the need for us to go into that business. There are other elements of what we do in the fastening and systems that combine those torque tubes together. We outsource some of that, and we insource some of that, and we offshore some of that as well. So it's in that balance of those three buckets of what we make in-house, what we also get domestically from a third-party source, and then what we outsource. It's in that optimization of that entire mix that we're so focused on. And again, we have our partners that we don't want to insource 100%. So we have our partners obviously willing to share those credits with us. We will accelerate some CapEx here in the Q4. It's more so to focus on increasing overall capacity. So we're adding some equipment to, you know, better enable us to serve our existing balance of customers. And, again, maybe one step function change above that, taking, you know, taking a forward look on what we think. the additional incremental business from an IRA. So we're certainly making some capital investments here in Q4 and Q1. But I can tell you, as we spend, you know, somewhere between 12 and 15 million a year in CapEx, even if I look at, you know, increasing that by 30%, you're never going to see the numbers, right? It's going to be a really small portion. No major things. We have We're looking at, again, how we regionalize some of our manufacturing to be closer to some of our new builds, all of that. So all of that is on the table, but I don't think we'll be coming forward with any over-the-top substantial capital needs at this point.

That's great to hear. Two other quick ones, similar to going to the eye doctor, good, better, the same type of situation. The UFLPA outlook for Q4 relative to three months ago, would you say it's the same in your eyes in terms of risk, better or worse?

I think it's the same and very consistent.

The last question I had for you is just to anticipate any projects in your funnel and potential backlog or bookings to be delayed until the Treasury Department decision comes out around some of these items as to whether the developer would get the 30% credit or 40% credit. I was just trying to get a sense of perspective for the first half of next year as those items likely come out in Q1.

I think what we're hearing is since most of this will be retroactive, right, and the law states that it is retroactive, we don't expect there to be a whole lot of holdback because it won't change, right? So, again, it's all about us keeping optionality out there for our customers, and that's what we're really focused on. But we have not heard of anyone saying, we're going to wait until there's full clarity here. And I don't think you can wait until full clarity because I think there is this race for securing capacity in the marketplace right now.

But your contract terms will give that customer the flexibility? I get it that it's retroactive, but I wasn't sure if you have flexibility in terms of the T's and C's of the contract.

Got it. Yes. Thank you. Thank you. That concludes our question.

I want to clarify on that, Jeff. To give an example, as we look at those varying levels of content, we're not sitting there and saying, maybe like we did last year, we're not saying, look, this is your fixed price for the next year. It's This is what we see today and how we do it today, and it's good for 30 days. We'll reevaluate every 30 days because we're not going to go back into a situation where we're fixing ourselves into a box on a longer-term period than we'd like. So with all these customers that are coming forward, we're having these really great open dialogues with them about here's how we see it today, here's what we're willing to enter into and execute today. We're going to come back and revisit with you every 30 days for anything that changes, right?

Appreciate it. Thank you. We have no further questions. This time we'll close the conference. Thank you for attending today's presentation. You may now disconnect.