Array Technologies, Inc.

Greetings, and welcome to Arrow Technology's second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Cody Mueller, Investor Relations at Array. Please go ahead.

Good evening, and thank you for joining us on today's conference call to discuss Array Technologies' second quarter of 2023 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. 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 a duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the 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 welcome, everyone.

In addition to Cody, I'm also joined by Nipal Patel, our Chief Financial Officer. Let's begin with slide three, where I'll provide some highlights of our second quarter results. I'm proud to say that Array has delivered yet another strong performance across the board. For the quarter, we delivered $508 million in revenue, representing 21% year-over-year growth. In the second quarter, we also expanded gross margin year-over-year by over 2,000 basis points to an impressive 29.6%. It's important to point out this result does not include any benefits from the IRA's 45x manufacturing credits. Rather, We continue to drive internal cost savings initiatives while delivering on our efforts to develop higher margin non-tracker revenue. Adjusted EBITDA for the quarter was $116 million, an increase of almost $95 million from prior year. To put this in context, we have produced more adjusted EBITDA in the first half of 2023 than we did in the full years 2021 and 2022 combined. This is a testament to the focused and dedicated efforts of everyone at Array. And finally, we recorded bookings in the quarter of nearly $600 million, bringing our ending order book value to $1.7 billion. This number does not include any volume commitment agreements where the project and start date have not been specifically identified. I will also note that our bookings in the quarter were very heavily weighted to the last two months of the quarter after we received preliminary IRA guidance in the middle of May. I'd also like to point out that the company is very pleased with the recent dismissal of a class action shareholder lawsuit that was filed in 2021. We view the court's decision as a strong rejection of the plaintiff's claims, an affirmation that arrays directors and officers were always on the right side of this dispute. Moving on to the next slide. There has obviously been a lot of discussion around bookings, as well as U.S. market share and momentum over the last few months, so I thought it would be helpful to offer a deeper dive of our perspective on how the industry operates and the specific dynamics that have impacted us this year. First, it is important to note that our business operates on a large-scale project basis, with each project having its own individual characteristics. A good demonstration of this fact is that the average size of projects in our June 30th Legacy Array Order Book is 230 megawatts, and we have multiple projects that are nearing a gigawatt in size. Key elements of our value proposition, including greater flexibility in panel selection and changes, ease of installation and commissioning, and our high domestic content all become increasingly important as the size of projects increases. As we all have become very aware of, the timing and speed of projects through the sales and delivery cycle is also dependent on things like regulatory pace and the obtainability of other project elements like modules, electrical components, and availability of labor. Each project has its own set of hurdles before it is won and before we begin deliveries. This means that growth, and by extension, bookings and revenue, are rarely linear. This can be true of full-year timeframes, but it is most certainly true when comparing quarters. A change in characteristics on only a few projects can impact short- to medium-term bookings revenue, and perceived market share. What this does not mean, however, is that any individual quarter defines the trajectory or momentum of our business. At the midpoint of our updated annual guidance, we will have grown the legacy array business by nearly 50% from 2021 to 2023 on an organic basis. During that time, our legacy array business has had quarterly bookings ranging from $150 million to $650 million, and quarterly revenue, ranging from $200 million to $400 million. And even more recently, we had one of our lowest bookings quarters in Q1, immediately followed by one of our largest this quarter. I provide this context to point out, while on the path to sustained profitable growth, individual quarterly data points have a wide range of outcomes and can be misleading. To that, I offer caution on reading too much into these sequential movements, whether good or bad. With this background, let's talk a little bit more about the specific characteristics we are seeing this year, both as it relates to the near term, but also the momentum we are seeing for the longer term. First, on the near term. As we have discussed previously, The buildup of our revenue outlook is largely dependent on two factors. One, the timing of projects already contained in our order book. And two, the assumed backfill rate of new project wins that will book and ship within our forecast window. When we updated our outlook last quarter, we had approximately 90% of the midpoint of our guidance covered by our order book. This figure reflected our assumed project push-out assumptions at that time. For the remaining 10%, or approximately $200 million that we needed to backfill, we had roughly a quarter and a half to secure those orders. However, over the past few months, a couple of things have occurred. One, we have seen a larger level of push-out than we anticipated. There is not one single driver, but rather the combination of continued module availability challenges, requirements for further clarity around the IRA, and increasingly a permitting backlog. This past quarter, we saw an additional $150 million of revenue get moved from 2023 to 2024. This was incremental to the pushouts we had already assumed in our previous analysis. To be clear, these are still projects that Array will deliver. The timing of them has just shifted out of 2023. And two, While we added approximately $600 million of new bookings this quarter, a smaller percentage of those orders represented 2023 deliveries than we would have normally anticipated. The same issues, causing an elevated level of pushouts, are also minimizing the incentive for customers to begin construction before December 31st on newly won projects. The net impact of these two factors is a reduction in our near-term revenue outlook which NEPA will discuss in more detail. The reduction in revenue for this year is not an indication of loss in market share or any significant shift in the underlying dynamics of this industry. It is merely a function of some quarterly lumpiness driven by factors outside of our control. To illustrate this point, at June 30th, even after our $600 million in bookings, We have an additional $320 million worth of projects sitting in our high-probability pipeline that are awaiting final IRA clarity before they convert to bookings. It is important to note here that despite the reduction in our revenue outlook, we are raising the midpoint of our full-year adjusted EBITDA guidance by 14% as we lift our full-year gross margin expectations. The ability to over-deliver on adjusted EBITDA on lower revenue will also drive $50 to $100 million more in free cash flow this year than we had originally forecasted. People will discuss this more later, but this additional cash flow allows us to de-lever faster than previously anticipated. Our EBITDA performance is very important in our evaluation when bidding on projects in the market this year. We are not in a scenario where we need to compromise on pricing, terms, or product offering to hit a top-line number. So while we obviously would have liked to deliver additional top-line, we are confident that this more efficient use of capital while maintaining our strategic principles will put us in an extraordinarily strong position as we enter 2024. We remain committed to growing profitably, not growth at all costs. As we look at 2024 and beyond, we echo the sentiments of others in our industry. Through a sustained reduction in costs across our supply chain, coupled with improvements in reliability and energy output, we are seeing an ever-improving LCOE for solar energy. This will undoubtedly lead to years of growth ahead as solar produces a greater proportion of global electricity generation. So when we hit times of short-term disruption, which again will happen from time to time in this industry, it is important for us to remain focused on our strategic goals to ensure that Array is at the forefront of this growth. If you turn to the next page, I will discuss in more detail about those goals and what we are doing to ensure we maintain our industry-leading margin position. While the concept of pricing discipline has been something we have discussed in the past, I thought it would be helpful to expand on what we mean by pricing discipline and provide additional insight into the work we are doing outside of pricing, which will lead to sustainable and consistent margin improvement over time. There are four broad areas that we continue to focus on. First, expanding our target market. We have discussed this for a couple of quarters now. but I wanted to provide some additional insights into exactly how this interacts with pricing discipline. As we operate today, we only have one tracker to provide our domestic customers, Duratrack. This industry leading tracker platform will continue to be our patent protected flagship product. However, it is not the most ideal technology for all projects. For example, severely undulating terrain or mild weather conditions. For projects with these characteristics, currently, we would have to lower the price of our flagship product, therein diluting our value proposition, to compete with other offerings in these rapidly growing segments. In the past, we may have selectively chosen to do so, which has created more inconsistent results because the range of margins on individual projects can be wide. However, More recently, with the introduction of OmniTrack, our terrain flexible tracker, and the STI H250, our lower cost tracker, we have not been willing to take that route, and we have maintained pricing discipline on our Duratrac product to protect the value it offers. As we enter 2024, both new products will be available at scale, allowing us to expand the universe of projects where we can price to achieve our targeted margins. The lasting effect of this will not only be better revenue growth, but also more sustainable and consistent margin performance. Second, reducing our customers' overall installed cost. The work here spans multiple disciplines, including items like more efficiently designing our sites, improving pile compatibility, and more efficiently mounting modules, to name only a few. we will have over a dozen new innovative solutions, either recently launched or pending launch, which move the needle on our and our customers' cost basis. In fact, in the last 18 months, as we have increased our investment in engineering and innovation, we've applied for around 111 patents and have thus far been granted 102 patents. This is more granted patents and applications in the last 18 months than the previous 15 years combined. Many of these innovations are specifically targeting optimizing the installation and securing of domestically sourced panels. As we move into 2024, we expect our like-for-like installed cost base will be hundreds of basis points lower on the Duratrac platform when compared to 2023 due to these innovations. Third, higher margin non-tracker offerings. This means things like software, service contracts, aftermarket parts, and engineering services. Last year, we brought in a product manager to solely focus on productizing and maximizing this part of our business. While the impact on our results from these offerings will be uneven for a while as we build up our base, we saw a great example of the power of these alternate revenue streams in the second quarter as sales in this area drove 150 basis points of lift to our gross margin. Fourth, business and process maturation. The key here is reduced margin leaks and opportunistic margin enhancements. There are a lot of different initiatives that I have discussed in the past, but I thought it would be helpful to reiterate some of the crucial ones. First, we have broadly changed the incentive structure in the company to focus on driving sustained profitable growth. This ensures that members across all of our functions have the same end goal in mind and one that is clearly aligned with our shareholders. Second, in the last 12 months, we have mapped, streamlined, and standardized over 50 core business processes to eliminate waste and to ensure that we are acting quickly to changing business conditions and increasing our speed of response to our customers. These process changes have been instrumental in our ability to capture cost savings opportunities. Third, we have instituted significant changes to our manufacturing facility in Albuquerque, New Mexico, with the introduction of lean manufacturing principles. We have reorganized and changed the layout of material flow through this facility And in doing so, we have not only created a safer working environment, but we have also added additional capital equipment, increasing the capacity of the facility by 40% when compared to the same period last year. And finally, as of this week, we have launched our new configure price quote system, allowing us to capture input costs more accurately, more dynamically price our offerings, and more efficiently turn our quotes to our customers. These are a number of small yet powerful organization changes that over time compound. They are a direct indication of the hard work that has been ongoing and is necessary to deliver sustained improvements in shareholder value in a way that is not centered on raising prices to our customers. And with that, I will turn the call over to Nipal for a more detailed discussion of our financial results and an update to our 2023 guidance.

Thanks, Kevin. Please turn to slide seven. Revenues for the second quarter grew 21% to $507.7 million compared to $419.9 million for the prior year period. This result was driven by both a 16% increase in the total number of megawatts shipped from 3.9 gigawatts to 4.5 gigawatts and a 4% increase in ASP from 10.7 cents per watt to 11.2 cents per watt, resulting from improved pass-through pricing to our customers. $508 million in revenue reflects $345 million from the legacy array segment and $162 million from the STI segment. Gross profit increased to $150 million from $39.9 million in the prior year period due to the combination of higher volume and improved gross margin. Gross margin increased to 29.6% from 9.5%. Gross margin for the legacy array business was 30.9%, and the STI business had gross margin of 26.7% in the quarter. The margin of 29.6% benefited from approximately 300 basis points of cost-saving opportunities, including roughly 100 basis points from the continuation of lower freight costs and 200 basis points from opportunistic material purchases. As Kevin mentioned, it also benefited from a 150 basis point lift on better than expected revenue and margin on non-tractor offerings in the quarter. And finally, we had roughly a 100 basis point lift in other items, including better absorption and lower warranty costs. Operating expenses were up slightly at $53.8 million from $53.3 million during the same period in the previous year. However, we had a $13.4 million improvement in amortization expense year over year due to lower amortization of intangible assets related to the acquisition of STI. Excluding that reduction, operating expenses were up $13.9 million due to an increase in headcount to support our growth and higher professional fees related to accounting and finance transformation initiatives. Net income attributable to common shareholders was $52 million compared to a net loss of $17.2 million during the same period in the prior year. And basic and diluted income per share was 34 cents compared to basic and diluted loss per share of 11 cents during the same period in the prior year. Adjusted EBITDA increased to $115.6 million compared to $20.9 million for the prior year period. Adjusted net income increased to $71.1 million compared to adjusted net income of $12.9 million during the same period in the prior year, and adjusted basic and diluted net income per share was $0.47, compared to diluted net income per share of $0.09 during the same period in the prior year. Finally, our free cash flow for the period was $15 million versus a use of cash of $12.2 million for the same period in the prior year. The increase was driven by both improved profitability and the continued improvement in our cash conversion cycle. Now, I'd like to go to slide 8, where I will discuss our updated outlook for 2023. For the full year 2023, we now expect revenue to be in the range of $1.65 billion to $1.725 billion due to the factors Kevin previously discussed. However, we are raising our adjusted EBITDA guidance on continued strength of our gross margin performance. We now expect to be in the range of $280 million to $295 million. At the midpoint, this is an increase of $35 million, or 14% from our previous guidance, and roughly 123% over 2022 adjusted EBITDA. Also, our adjusted EBITDA margin at the new midpoint is an increase of 300 basis points to 17% from previous guidance of 14%, and roughly 8% in 2022. Further, we are increasing our adjusted EPS range, where we now expect between $1 and $1.07. Importantly, these increases do not reflect any assumed benefits from the 45X manufacturing credits. As far as the timing of revenue, we now expect Q3 to be lower than Q4, which is a change from normal build schedules and is reflective of the scale of push-outs we have seen. Accordingly, we expect roughly 45% of our remaining revenue to be delivered in the third quarter and 55% to be delivered in the fourth quarter. Finally, with the improvement in our adjusted EBITDA margin, we are able to deliver better free cash flow this year. We now expect to deliver between $150 and $200 million for the full year. This means by the end of the year, we expect a net leverage ratio, inclusive of the convertible notes, of approximately two times. that figure, excluding the convertible notes, will be less than one times. With our ability to generate free cash flow, we believe this is an incredibly strong balance sheet position to be entering the next phase of our growth. Now, I'll turn it back over to Kevin for some closing remarks.

Thank you, Nipal. I want to make sure and leave you with this. We are confident about the direction of the utility-scale solar industry and our position within it. Soon enough, IRA will be a settled regulation, more module capacity will open up, and other hiccups like the permitting backlog will ease, leading to a new era of growth. As we transition into our next phase, we are working incredibly hard to make sure that we execute on what is within our control. So we will continue to do the exciting things like drive innovation, but we will also continue to put our nose down and to ensure we are building a better, more efficient business day in and day out.

With that, operator, please open the line for questions. Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions. I had two of them here. First, just as you alluded to during your prepared remarks, Kevin, lots of focus on the bookings environment here, just given domestic content clarity coming out in mid-May. And as you acknowledged, you saw a big pickup in orders sort of at the tail end of the quarter. I know it's lumpy, but maybe give us a sense of what you're seeing here in early 3Q now that their rules have been out, you know, for a few more months post the quarter and to get digested, and then kind of what you expect, you know, bookings levels to look like moving through year end? Should we expect to see continued sequential growth from here?

Yeah, thanks.

Good question, Brian. What we've said in our prepared remarks, but most of the bookings that we really did see were really in May and June after what we had expected to be somewhat of a light April, following the uplift from the May 12th domestic content announcement. I think we need to remember that that announcement was more preliminary guidance. And what it did was help inform some customers that the bonus was going to be kind of very difficult to achieve. And that was, you know, we had always described a couple of buckets of customers. And for that bucket of customer that said, okay, look, that's not going to be a slam dunk. It's not a gimme. It's going to require real work. I'm going to go ahead and start progressing with my programs. And that's what we began to see in that May and June timeframe. I'll remind you that there's still a lot more clarity needed, in particular, relative to items such as steel content torque tube, whether or not it's considered structural under the guidelines and whether or not it must be manufactured in the U.S. So there's still a bunch out there, and that's that additional element bucket of orders that we identified over $320 million of orders that are in our high probability pipeline that are sitting there where the customers are very specifically telling us they're waiting for final IRA guidance before moving forward. And we're hopeful of that because, again, that has huge implications on our pricing of those orders in terms of percentage of domestic content and what's going to count. I can tell you that in terms of what we're excited about is the momentum And the overall quoting activity has certainly increased kind of at the end of Q2 about 19% higher than quoting activity in Q1. And the overall funnel, the number of new opportunities coming into our funnel is up over 24% since Q1 as well. So hopefully that gives you a sense of the momentum we're seeing. Good momentum. We feel really good about it. But I think it's too early to tell what those next couple of quarters or orders are going to be. depending upon the timing of that further guidance.

Okay, that's great, and I appreciate that additional color. And then the second question I had was just on gross margin, Nipul, I appreciate you walking through all the moving pieces. I know this is too simplistic, but if we adjust for all of them, it seems like you'd still be at a 24% gross margin in the quarter, if my math is right. The guidance here implies something in the low 20s, like 21, 22 for the second half to get to your guidance. So his question is, is that just simply conservatism still built into the guidance here for the year? Or is there something we're missing on the margins here coming up in the next few quarters? Just because it seems like a few of these items you called out in the second quarter that helped.

uh don't all just go away they should be you know repeating to some extent going forward so i'm wondering why why margins are maybe a little bit better in the uh in the second half thanks guys yep sure hey brian so yeah for now for a while now we've talked about our targeting our margins in the mid-20s excluding ira benefits so what you're seeing in the first half really is a little bit of over performance where we would expect to be on a run rate basis. And, you know, we walked through those overperformance items that we think are more of a one-time nature that we don't see in the back half of the year. So that's one reason the margins are coming down. Also, we had talked about it in previous quarters. Brian, there are a couple of large projects that are going to yield a little bit negative project picks. yielding to the low 20s gross margins where we would normally see mid-20s. So those two reasons really are the reason we see that the back half is going to be in the low 20s and the overall for the year is going to be in the mid-20s.

Ryan, this is Kevin. For a couple of quarters, we've talked about those low margin STI U.S.-based programs that will be finishing up here in the second half of the year, and that's

Those are some specific programs putting some downward pressure on that. Okay. Understood. Makes sense. I'll pass it on. Thanks, guys. Thank you. The next question is from Mark Strauss of JP Morgan.

Please go ahead. Yes. Good afternoon. Thank you very much for taking our questions. Kind of along the same lines as Brian's question on bookings, just a similar kind of question on revenue in the back half of this year. If the IRA continues to drag on maybe into next year even, just kind of what the impact on your revenue guidance range might be.

For which period, Mark? For this year?

Yeah, for the second half of this year, yes.

Yeah, I can get that. So, hey, Brian, so as we talked about in the prepared remarks in our first quarter call, we had about 90% of our order book already secured for the year. As we head into the second quarter here and our revised guidance, we've got about 99% of our orders already secured in the order book, and we've taken a little bit more conservative posture on when those we're going to deliver in the back half of the year, so we feel pretty good about that. our overall revenue guidance for the balance of the year.

Okay.

Okay.

Thanks, Neeple. And then you've been talking more and more about Omnitrack and H-250. Can you just remind us kind of when the deliveries for those can begin? And is there anything more quantifiable you can give us as far as the bookings activity that you've seen so far for those two products?

So beginning with Omnitrack, we're actively quoting that program now. Again, that's a longer cycle because it has to be designed in very early and upfront in the project relative to a Duratrack, for example. I think the last bit of data we had is that we had over seven gigawatts under various stages of quote for the Omnitrack already. So I think we feel pretty good about the traction we're getting on quoting. but I wouldn't expect to see any meaningful deliveries prior to Q1 of next year. On the STI-H250, I'm pleased to say it's this month that we begin formally quoting that. That's available to quote at the end of this month. And again, we expect to have more meaningful deliveries into Q1 of next year. We're really excited about that product and all the work that the engineering teams have done between the STI team and the array team to really modify that product to be something pretty special to attack the U.S. market. We're very pleased with that, and you'll see that at our upcoming RE Plus trade show.

Got it. Thank you very much. Thank you.

The next question is from Julian .

Thank you very much for the time. I appreciate it. Look, I heard about the second half of the year. I wanted to focus a little bit more on 24 gross margins. I mean, you said that some of the clues that you laid out thus far, structural improvement, domestic contents, uplift, maybe you could quantify that a little bit more.

but also just normalizing out some of the STI noise in the back half of the ear. I mean, look, I know we're not ready to talk about 24 guidance per se, but if you put those pieces together, it sounds like there could be a re-acceleration, especially off of maybe a temporarily depressed back half ear.

Yeah, I think, hey, Julian, I think you were breaking up a little bit on that question, but I think you were asking kind of what are – Our view is on kind of normalized margins after taking out the noise from STI and kind of the back half of this year. You know, we stand by what we've said in the past is we see our kind of target margins without IRA right about the mid-20s, 23% to 25% gross margins. And we still see that taking out the noise and the one-timers that we had so far in the first half of this year.

Right, so it sounds like there's no reason not to think that between the enhanced scale into 24, you should be able to achieve that in the first part of the year.

Yeah, at this point, that's where we're at, yes.

Indeed, and then just to clarify super quickly, if you don't mind, on the backlog trend, if you will, I mean, how much, what's the duration in terms of some of the deal-making that you're seeing out there? I mean, certainly we've seen some of your peers talk about longer duration. We're seeing that happen on the panel procurement side. Can you elaborate a little bit more on this push out and maybe just how long are we talking?

So the way we look at our backlog is really how does that convert over to revenue? It's typically anywhere between, you know, three to five quarters. And in the past, Julian, our order book has resulted, has converted anywhere from 90% to 130% into revenues. We're seeing a little bit more on the lower end because of the items we've talked about, the IRA clarity, the module availability, as well as now permitting issues. But that's how we kind of see it between that range, and we continue to see that 90% to about 120% to 130%. And, Julian, let me add on to that in that

I think it's important that we continue to clarify how we define our order book because it is different than other publicly traded companies in the space. And I'll just remind everyone that we only include executed contracts and awarded orders, meaning named projects with a known start date in our order book. We don't include volume commitment agreements without specific projects and target start dates already identified. So we often get that question of do you have VCAs, and it's important to note that, yes, we do have VCAs, and in fact, we have some that were recently signed, but we do not include that committed volume without a named project and a start date in our order book. We do believe that this is a practice that serves. It creates the great benefit of consistency in how we've reported our figures historically, and I think it gives a tighter correlation to the revenue outlook that we provide, and I think that's an important piece for analysts to remember. And I'll remind you that those VCAs are typically larger programs approaching one gigawatt or higher, and it's typically divided by multiple projects, some of which may be delivered up to six to eight quarters into the future. And to be clear, we even have VCAs that we are currently executing against that are in several years of duration, right? And I think the last thing I'd comment on VCAs is that, look, they're not all created equally. There are VCAs that companies are working with you to try to attempt a firm fixed price far into the future without sufficient hedges or indexing against commodities, and those are dangerous VCAs, and you only have to go back a couple of years and erase results to see this impact, right? We're really avoiding those type of VCAs, and rather the VCAs that we're really focused upon and signing at this point are really about where customers are coming to us and asking us to guarantee an amount of available capacity and in some cases a specific level of domestic content in that capacity that we would commit to our customers. So, again, they're very different. We do have some. We've signed some recently. We're not going to go out and do press releases every time we sign a VCA.

Kevin, you wouldn't quantify the total quantum of VCA's you have today, would you?

No.

Fair enough. I tried.

Thank you guys so much. Appreciate it. You got it. Thanks, Julian. Our next question. Apologies. Go ahead, Chris.

Our next question is from Tashi Harrison of Piper Sandler.

Please do go ahead.

Oh, sorry, I was muted. Good afternoon, and thanks for taking my questions. Kevin, at a higher level, it sounds like you're focused on dramatically reducing your cost structure into 2024, just given the patent commentary that you indicated. And then just given this focus on profitable growth, I was wondering if you could maybe help us with how you think about your minimum margin targets on new projects, and then how does competitor pricing... your competitors' pricing strategy impact your pricing strategy.

So in terms of, are you saying minimum target margins on new projects that we're booking?

Yes, that you're booking.

Okay. So we've gone out externally and said we expect to be in the mid-20s gross margins on an ongoing basis. So clearly, we said that. And on different programs of different size, you have wide varying margins. You could have plus or minus 300 or 400 basis points from that number, depending upon the complexity of the site, the size of the site, the amount of engineering work we're doing, and the amount of additional services that we're now selling in addition to the tracker. So that all creates a high degree of variation. So we don't set a very particular target, per se. It really comes down to individual programs. And I would say the second part of the question, relative to our competitive pricing, look, we monitor our competitors' pricing standards. all the time, both in terms of our publicly traded as well as the non-publicly traded competitors in our space. We focus more about ensuring that we've got our value proposition well defined and that we're staying in lockstep with our customers. And what we've been focused on is, again, reducing their overall costs, reducing their install time, their maintenance, their commissioning time, all of those areas that we can continue to save them money, which in some cases, They'll save money because we'll be able to dramatically reduce our costs with a lot of our newer developments that, as we said, several that have just launched and several that are launching in the next 30 to 45 days. We're focused on helping them drive down their costs to become the tracker of choice for them. That's going to be continued to be our approach. But what we're not doing is taking the historical approach of pricing down the DuraTrack in order to compete with what I would call a Tier 2 tracker platform for a mild weather condition that we're just frankly not suited for prior to launching the STI-H250, right?

So we have just a much different level of discipline in that.

Got it. That's super helpful, Kevin. Thanks for that color. And then maybe just a follow-up question maybe for Nipul. At what point do you think you're going to feel confident enough to include the 45x manufacturing credits within your numbers? Is this looking like a November event, or does it increasingly seem like something you'll just have a cumulative catch-up with year-end when you report in February or March? And that's it for me. Thank you.

Yeah. Hey, thanks, Kashi. So that's something we're continually evaluating. We still contend that there's still that $0.1.6 that we've talked about before. that's out there and we're negotiating with our suppliers on that split. We're also working with, you know, with our advisors and auditors on kind of where that would go in the P&L. But we feel like, you know, we'll come to the market as soon as we have a good quantification of that. And, you know, we think that that's something that may happen this year, but we just can't guarantee that right now.

Got it. Thank you. Thank you very much. The next question is from Joseph Osher of Guggenheim. Please go ahead.

Hello. This is actually Hillary. I'm for Joe. And I just wanted to first touch on Brazil and if you could kind of speak to the general demand trends you're seeing there as well as product mix and when we might start to see that shift a little bit more towards distributed generation being a driver there versus predominantly utilities. Yeah.

Yeah, that's a great question. So we've seen a great rebound in Brazil this year, as you've seen in the numbers as you look at our revenues for the STI business and a great rebound in the overall margins as well. I think what we're anticipating is a shift much more towards DG next year. I think we'll continue to finish this year with the mix that we have, focus much more on utility, but that does switch over a little bit next year to much more DG. So 2024 is the answer.

Okay, great. And then looking to next year, I was just wondering if you're starting to get any indication from customers that they're starting to lock in supply ahead of the tariff moratorium going away in June. That's all I had. Thank you.

No, what we've done, we've gone out and tested that theory, and most of our customers' feedback has simply been they're installing panels as soon as they can get their hands on them, so they don't expect to have any artificial acceleration, if you will, before next year's deadline. They're putting in everything they get. There's no stockpiling occurring in our customer base. That's what we've tested this quarter. We've gone out and asked our customers that question, and they've said no stockpiling, putting them in as soon as we get them, no artificial acceleration to get them in ahead of any deadline.

Okay, thank you. You got it, Hillary. Thank you very much. The next question is from Colin Rush of . Hi there.

This is Andre Adams on for Colin. Could you speak to the Delta on pricing from the installation savings elements that you've highlighted?

Yeah.

So I think what we're focused on is driving several hundred basis points of cost reduction for our customers relative to overall installation costs. We're doing that in a variety of different areas. looking at engineering standards, for example, reducing the number of piles a customer would need. We have several new developments in clamping technology that will ease the installation of panels and speed their ability through quicker assembly of panels and clamps onto the structure. We're doing a lot of that work to drive our customers' installation costs down, and we're we're quite confident that the work we're doing today will drive hundreds of basis points of cost improvement to our customers in the very near term.

Great. Thank you. And as a follow-up, as your cash position continues to improve, can you speak to the priorities that you guys have for optimizing the balance sheet?

Yeah, sure. So, as it continues, you know, we talked about in the prepared remarks, we're going to look to you know, present to our board to deliver our current balance sheet here. And as we look at our balance sheet and look at the different aspects of it, our term loan doesn't have any prepayment penalties and carries the highest amount of interest. So that would be something that we would target to look to reduce with the excess cash position.

Got it. Thank you so much. Thank you. The next question is from Donovan Schafer of Northern Capital Market.

Hi, guys. The operator cut off a little bit there on the end there, so I'm hoping that you're able to hear me well. Just real quick, are you guys hearing me all right?

Yeah, we just got a bit.

Okay, fantastic. So first I want to talk about non-tracker revenue. You know, you guys, that came up in a couple different kind of contexts in the call today. You know, its contribution to this quarter and then also, you know, kind of strategy going forward. And I just want to clarify, when you talk about non-tracker revenue, you know, there's kind of the obvious things, software, kind of, you know, higher margin services and aftermarket sales or products. But there's also, you know, historically there's been the self-performing of the installation work that STI does. I know you're moving away from that in the U.S., but it's also still kind of like a standard and really expected practice, I think, in places like Spain, maybe Brazil. And then historically, I don't know if this is still the case, but STI, you know, once upon a time did a certain amount of fixed tilt and had a fixed tilt solution and offered fixed tilt. So when you guys talk about non-tracker revenue, you know, does that include some of this just the self-performing sort of services there, you know, which isn't per se like a sexy gross margin kind of thing? And same thing, you know, with the fixed tilt. Just want to understand kind of what you guys mean when you're talking about non-tracker revenue.

Yeah, fair question, Donovan. Thanks. So to be clear, we're not talking about construction services in that. And you're right. Well, FTI... historically had a larger portion of their business dedicated to construction services. We've talked historically about that being dilutive to the tracker sale. We have virtually, I would say, eliminated 90, 95% of that work in Brazil to date. You see the overall STI margins that are on NIPL's sheet. They're rebounding to the pre-acquisition margin level, and that's really about reducing that construction cost is one of the elements we did to drive that margin. Now, you're also correct that in Spain there's still an expectation that we do a portion of that. We're doing a much lower portion of that, only for a handful of customers that really require us to do that. But to be clear, the non-tracker revenue, our items like you talked about, it's software, it's services, it's engineering services, it's commissioning, those are the things that we're productizing and charging customers for. Things such as change orders, ensuring that we're getting the appropriate revenue and margin for change orders where a customer has come in and has done something that's a material change in the design and we have to redo something. All of those are things that we productized and began standard procedures for, and those are really what's paying benefits. Those, as you can imagine, EPCs live and breathe on change orders. So us being able to capture change orders and effectively ensure that we're not getting, for lack of a better word, stuck in the middle with that cost of that change, that's something that we began productizing and turning around and ensuring we're getting value for. So all those are things that are really driving that bucket of revenue for us. And as I said, that was something that we initiated last year. We brought in a product manager to fully productize, is the word we use, all of those areas. And as we now convert those items into products, we are now selling them, not only up front, but after the fact, going behind the scenes and selling those to existing customers. So I think it's something that, as I said in my opening remarks, that's going to be something that's continued to be lumpy for several quarters, but I think it's something that will continue over the long term.