Welcome to the Ray Technologies Third Quarter 2022 Earnings Call. At 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. It's now my pleasure to turn the call over to Cody Miller, Vasil Regents, Ray Technologies.
Please go ahead, sir.
Good evening, and thank you for joining us on today's conference call to discuss Array Technologies' Q3 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 Q3 press release were definitional information and reconciliations of historical non GAAP measures to the comparable GAAP financial measures. Earlier today, the company filed an 8 ks and amended Form 10 Q 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 or 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 the 3 6 months ended June 30, 2022, was a reduction of revenue and adjusted EBITDA of $5,100,000 A reduction of gross profit of $7,400,000 a reduction of G and A expense of $2,400,000 and a reduction of net income of $8,400,000 These errors had no impact on the company's previously reported cash flow from operations and does not cause non compliance with any financial covenants as of June 30. Any reference to the quarter For 6 months ended June 30, 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 8 ks and the explanatory note and our Form 10 QA. With that, let me turn the call over to Kevin Hosteller, Array Technologies' Chief Executive Officer.
Thanks, Cody, and good evening, everyone. Thank you for joining us on today's call. In addition to Cody, I'm also joined by Neepul Patel, our Chief Financial Officer. Let's begin with Slide 4, where I'll provide some highlights for our Q3. I'm incredibly proud of our performance this quarter As we again delivered results above expectations across the board.
Revenue of $515,000,000 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 at September 30 was $1,800,000,000 Reflecting an increase year over year of 77% inclusive of FTI and 36 percent when considering only our legacy array business. Sequentially, our order book is down approximately $100,000,000 Which is reflective of the strength of our deliveries as new orders totaled almost $400,000,000 in the 3rd quarter, which was an increase sequentially from the 2nd quarter. I will talk more about it in a minute, but I do want to note that with only 3 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 4th consecutive quarter of growth as we continue the margin improvement path we've previously laid out. Adjusted EBITDA in the Q3 of $55,000,000 Represents a year over year improvement of $59,000,000 and a sequential improvement of approximately $35,000,000 from the 2nd quarter After giving effect to a $5,000,000 downward adjustment in the 2nd 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. Neepa will walk through this in more detail a bit later, but we delivered $102,000,000 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 $329,000,000 of liquidity, inclusive of the Blackstone preferred shares and 166 $1,000,000 in availability on our revolver. This is up significantly from $153,000,000 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 3 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 arrayed specifically. In parallel, we are also continuing to push forward internally with what we do know. There are 3 key areas I will point out.
First, 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. 2nd, 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 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 Arista 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 This has led to more Tier 1 suppliers becoming more risk averse and a fear that sooner Then 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 surrounding the enforcement of this act will provide a headwind on deliveries in the Q4 and will carry through to the Q1 of 2023. It is important to note that this is not a change in our outlook, rather a status quo assessment or where we have been all year. In fact, as Neepul will discuss more later, despite this expected slowdown, we are raising our full year revenue outlook at the midpoint By $150,000,000 Finally, FEMA currently has a proposal to increase 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 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 And the most severe weather conditions the 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 6. I'll provide an Update on the progress we have made in 5 key areas I outlined last quarter. While many of these areas will take more than 3 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. 1st and maybe most impactful in the quarter is the improvement we have seen in our working capital efficiency, which we measure through cash conversion cycle.
This quarter, we improved this metric by 12 days from the 2nd quarter and almost 50 days from the 1st 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 $60,000,000 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 $12,000,000 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 Approximately 20% in Spain, where we have been more selective and where we offer this service.
In Brazil, We have reduced our construction headcount by approximately 70% since the Q1 and we currently have no active construction projects slated for 2023. Next, on the integration side. We recently concluded a 14 week on the integration, which delivered several important steps forward for us as a combined company. 1st, We solidified and formally rolled out our combined organization. We will drive functional activities from a 1 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 announcements of OmniTrak. We have also been granted 15 new patents over the past 3 years, Taking us from 6 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 Nipol for a deeper review of our Q3 financial performance and an update on our full year outlook.
Thanks, Kevin, and glad to speak with you all today. 1st, turning to Slide 8. I will walk through our results for the quarter. Revenues for the Q3 increased 173 percent to $515,000,000 compared to $188,700,000 For the prior year period, the $515,000,000 in revenue reflects $400,000,000 from the legacy Array segment And $115,000,000 from the STI segment. As Kevin mentioned, the $400,000,000 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 megawatt Shift and an increase in ASP of approximately 30%.
The better than expected revenue performance from Array It's a combination of projects moving from award to delivery faster than expected as well as a significant burn down of our past due shipments. The $115,000,000 from the STI segment represents growth of $42,000,000 or 58% from the Q2 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 $80,200,000 from $5,900,000 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 4th 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 we had less volume on the U. S. Construction business and saw improved margins in our Spain projects. Operating expenses increased to $61,700,000 compared to $25,400,000 during the same period in the prior year. The higher expense is primarily related to a $17,400,000 increase in amortization expense related to the FTI acquisition.
Excluding this impact, the increase is primarily due to the addition of FTI 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 $28,600,000 compared to a net loss $33,000,000 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 $43,000,000 which was reported in other income in our financial statements. Adjusted EBITDA increased to $55,400,000 compared to a loss $3,900,000 for the prior year period. Adjusted EPS was $0.18 from a loss of $0.09 a year ago It was positively impacted by a largely unexpected income tax benefit this quarter due to the mix of income between our geographies.
We generated $102,000,000 of free cash flow, a $134,800,000 improvement from prior year, Driven by better working capital efficiency and improved profitability. Now if we move to Slide 9, 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 $229,000,000 of liquidity against an outlook of $200,000,000 to $245,000,000 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 Q4, we still expect $100,000,000 of free cash flow for the full year, inclusive of $12,000,000 to $15,000,000 of capital spend. I will end this slide noting that as we progress forward, we continue to produce free cash flow. We will first use that cash to fund our organic growth and then evaluate other options such as delevering 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 $1,500,000,000 to $1,600,000,000 We are modestly raising the lower end of our adjusted EBITDA range $122,000,000 and narrowing the high end to $132,000,000 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 Our strength in our array segment, where in the Q3 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 $75,000,000 to $100,000,000 of the projects we had pushed out of the year Tutu, AD CBD 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 STI for the year due to construction and logistics cost challenges. While we still anticipate STI to exit the year in the high teens, the lower gross margins in the 1st 3 quarters of the year Have our full year expectations in the mid teens. 2nd, the FX headwinds are expected to reduce our adjusted EBITDA by $3,000,000 to $5,000,000 from our original assumptions. 3rd, the updated guidance reflects the $5,000,000 in adjusted EBITDA from the 2nd quarter restatement, which we announced earlier today. Lastly, we are increasing our forecast for SG and 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, at 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 ETR 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, Neefal. I want to close by saying we had another great quarter of progression. Every day we are 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. We'll now begin the question and answer session. First question will be from Brian Lee, Goldman Sachs. Please go ahead.
Hey, guys. Good afternoon. Thanks for taking the questions. 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 AD CBD project deliveries that are coming back in for 'twenty two, Could you remind us what that would imply is left to be recaptured in 2023?
And is it your expectation that it all gets recaptured in 2023? Or Is some of that still kind of TBD and could be even further out?
Hey, Brian, it's Neepul. Yes. Regarding the AG CBD projects, we have about $140,000,000 to capture in 2023 and we fully expect to capture them all in 2023.
Okay. That's great. And then if I just take the 75 to 100 and then also you sort of down ticking the STI a bit at Hi, Ann. It seems like you're still seeing growth relative to the original guidance. So How much of that is sort of share gain?
How much of that is other drivers, whether price or new volume or mix? Just trying to Stan, what else kind of surprise 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. We've been A bit tempered in how we've stated our order book with convert, but we've seen some favorability. We've been pretty consistent with our deliveries throughout the quarter and that's given us Space near the end of the 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 for me and I'll pass it on. The STI business, clearly, The margins are not where you want them to be. You're seeing some progress, so high teens exiting 2022.
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 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 trend in the Q4. 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 SCI 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.
Welcome, Rick.
Thank you. Next question will be from Mark Strouse, 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 your potential different classifications? It sounds like It's kind of a modest increase in the requirements that could actually be a positive for market share 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 The incremental cost, just kind of walk us through maybe a best case kind of worst case scenario, please.
Yes. Mark, I don't think we've 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 2 certification for Array 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 2. If it goes to Class 4, 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 and 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 customer.
I think we feel while we don't think the classification changes needed, if in fact it were to go that way, I 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 OmniTrak 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 OmniTrak, if you remember, requires us do some additional upfront engineering work to qualify that. So we're seeing a lot more inbound opportunities To get into that qualification for omni track view. So that's certainly it's 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.
Our next question will be from Philip Sheehan, ROTH Capital Partners. Please go ahead.
Hey guys, thanks for taking my questions. As a follow-up to the $75,000,000 to $100,000,000 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 be able to the industry might continue to do that? Or does the industry hit a certain point where
it can't
Yes. So let me take the first part of that is, If you remember our commentary around the pullback of the ADCDD revenues was one that we 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, 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 6 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 the 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 make 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 we harmonize with that, right? We need this to get cleared up for the industry to have a robust year next year.
So 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 IRA right now was 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 the purchase 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 position and if you just look at the momentum visavis some of the competitors 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 picked up on there's an EPC maybe that Maybe 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 worded Are awarded now. Do you see a fair path to helping your customers get to that 40% level? Thanks.
Yes. 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 7 points towards their domestic Content or 9 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 Malloy 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 from or into the low 20 ish percent gross profit margin range for next year? Hey, Marty, it's Neel. As Kevin mentioned, we're not prepared to give our full year can see historical margins in 2023.
Okay. Thank you.
And then my second question, Are there opportunities to introduce some of your products into the geographic areas that STI Northern operates in and vice versa?
Yes. 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.
We're It's a little premature for us to talk about some of the orders we 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 Shafer, Northland Capital. Please go ahead.
Hey, guys. I've kind of playing off of the last question about the Portfolio approach is STI Norlands Tracker and kind of your additions of products. I'm curious, I know It helps us sort of close rates and winning projects because you can present a couple of different 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, for instance, with NeXTrackers, train following solution, they don't use that for the whole project.
They only use it Yes, on a certain segment where there's a steep grade. And so I'm wondering, do you does this put you in a position you've already started working on So maybe some projects, the kind of core of it would be the traditional, ATI Tracker centralized design and then you could do the STI New Orleans tracker on where train gets a bit more challenging Or vice versa, maybe you do 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 into software, which Drive 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 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 want something at a different price point, we could then and maybe that customer were to go use A 3rd tier tracker supplier today, right, we have a different offering at a lower price point if they don't need the level 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's a trend with the tracker companies and I think it At the time, kind of we were all sort of hyper focused on you guys and NEXTracker, but there was a move to this sort of portfolio bidding But the idea was, a it could either be an EPC or it could be a developer where they'd say, well, our plan is to Deploy 2 gigawatts over this period of time. And so 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.
Yes. 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 2 gigawatt portfolio to deploy in 2023. I want array on the entire portfolio that may be comprised of 6 or 8 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. It's just with the Inflation Reduction Act and just Even the removal of some of the ADCVD, but Uyghur forced labor stuff still going on. There's again so much going on. Are you seeing kind of changes in the mix of project sizes?
You announced yesterday The large 7 50 Megawatt project wind and that's fantastic. That's a huge those projects like that really move the needle. You think we're kind of headed in the direction of a world where it's more of these kind of elephants, big elephant sized projects? Or is it a bunch of More small like your partnership with Russell Pacific that ends up moving things. Are there any kind of trends there that you're seeing?
Yes.
Well, we split the market to the large utility scale, which we focus on. And I think one of the things lost as 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 7 50 megawatt is a big elephant.
It's our 2nd 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. Yes, congratulations on the quarter and I'll take the rest offline.
Perfect. Thanks, Donovan.
Thank you. Next, we'll have a question from Maheep Mandali of Credit Suisse. Please go ahead.
Hey, Maheep Mandlo here from Credit Suisse. 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 and
or is this
the reflection of seasonality? Because historically, we haven't seen that. Just curious how much is seasonality versus demand pull in in Q3? Thanks.
Hey, Maheep. As Kevin mentioned and I did as well, 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 were able to do because we don't have a hockey stick quarter. So what we'd say is part of that increase in Q3 was the availability of projects to ship and customers to accept them And they 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.
Got you. 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, we're not really obviously prepared to provide for guidance for next year. But as Kevin mentioned, we still We expect the FLPA to continue on and cause some delays in Q4 as what we expected and continue on into the Q1. We'll be in better position after our Q4 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.
Got it. And just for like a housekeeping, when you talk about like getting back to legacy gross margins, could you clarify that we're looking at Like 20% EBITDA margin or higher than that?
Yes. So when we say legacy margins, we're really Speaking of the gross margins of in the high teens, low 20s, we're as far as EBITDA margins, we're still we're Kevin is still kind of relatively new here in his role. We're going to come out with updated guidance. But for now, we're still Sticking to the guidance that we provided historically in the 16% to 18% EBITDA margin range.
Thank you.
Thank you. Our next question will be from Kevin Harrison of Piper Sandler. Please go ahead.
Good evening and thanks for taking the questions. So it looks like The order book, as you indicated, declined a little bit by $100,000,000 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, Akash? Yes, we 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 election then 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?
Yes. I mean, look, first of all, we're pleased that the election is over, right? I think the Brazilian business would have Characterize 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 Next year.
That's very helpful. Thank you. And if I could just sneak more 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 TI 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 Send marker or do you think that's also in
the high teens for Q4? Thank you.
Yes. We're seeing that the legacy Array business It's similar to SKI in that sense. We're going to what we're seeing in 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 Rusch Wappenheimer. Please go ahead. Thanks, guys. Can you talk about the key areas of investment around in the R and D space and really in terms of potentially driving cost out of Structures or other innovations that you're working
on? Yes. Look, Colin, you're going to find this answer Pretty unfulfilling and I don't really as a practice talk about my innovation and new product development going forward in a public forum. It's just Something I don't do. I can tell you that I'm pretty excited about what we have going on within our innovation new product development organization.
We separated out the value engineering 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 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 1 am very pleased. Just had an executive debrief with engineering, new product development and 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 as 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 cost out of that, scale up with certain folks to hit volume breakpoints? Just thinking about the non commodity cost here and how that evolves, particularly on a geographic basis?
Yes. Hey, Colin. We're continually with our supply chain building out our supply base and with Various countries that we operate in and several suppliers and part of it is as our share of demand grows and we continue to Conor, 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 a piece of the solar business as we grow as being one of the leaders in the 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 we've 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 forces 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.
Thanks. Thank
you. Next, we'll have a question from Youssef Joshi of Guggenheim. Please go ahead.
Hello, everyone. I'm Youssef now. That's cool.
I wondered if you could turn to I actually had to ask Cody to go.
Yes, it's very Russian. Anyway, two questions. First, obviously, the compliments on the free cash flow this Obviously, some of that is in these working capital accounts reversing. How as we look into next year, 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 We'll wait to those targets over time.
Yes. The way that we look at it here is really Free cash flow conversion. And we expect to be in the 75% range, 60% to 80 1% kind of range of free cash flow conversion, Joe. And as we you hit it on the head, there's 2 pieces of this. The merchant recovery, which we're on the path of doing 4 consecutive quarters up and we plan on also continuing that in the next quarter As well as just the working capital just becoming more efficient there.
Those 2 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, $60,000,000 to that as a percentage of EBITDA, what are we talking there?
Yes, that is an 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 stopped there 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. Just too early
to go.
Okay. And just on that note, final question, is it pressuring 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 I'm 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 in source, what we continue to outsource. All of that is what's in flux. So I 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 could 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 they be transferred then twice from some of our suppliers to us or sub suppliers to suppliers to us. So all that is what's really influx 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 Well, 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 3 or 4 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. Next question will be from Jeff Osborne, Cowen and Company.
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 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 and 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 in source some of that and we offshore some of that As well. So it's in that balance of those 3 buckets of what we make in house, what we also get domestically from a third party source And then what we off source. 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 in source 100%. So we have our partners obviously willing to share those credits with us. We will accelerate some CapEx here into Q4. It's more so to focus on increasing overall capacity. So we're adding some equipment to better enable us to serve our existing balance of customers.
And Again, maybe one step function change above that, 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 Somewhere between $12,000,000 $15,000,000 a year in CapEx. Even if I look at increasing that by 30%, you're never going to see it for numbers, right? It's going to be a really small portion.
No major things. 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. 2 other quick ones, similar to going to the eye doctor, good, better, the same Type of situation, the UFLPA outlook for Q4 relative to 3 months ago, would you say it's the same in your eyes in terms of risk, better or worse?
Yes, I think it's the same. Got it.
And the last question I had for you is just do you 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 that 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 But we have not heard of anyone saying, look, we're going to wait until this 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 contracts. Got it. Yes.
All right. Thank you.
Thank you. That concludes our question. Just to
clarify on that, Jeff. To give you 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. 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 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. At this time, we'll close the conference. Thank you for attending today's presentation. You may now