ARRY - NASDAQ

Greetings and welcome to Array Technologies Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you host, 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 2023 results. Slides for today's presentation are available on the Investor Relations section of our website, arraytecinc.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 first 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 Nipul 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 year's 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 and affirmation that Array's 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 US 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 but 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 one 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. But 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 have 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 the 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 pushout assumptions at that time. For the remaining 10% or approximately $200 million that we needed to backfill, we had roughly quarters 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 outs 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 Nipul 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 million to $100 million more in free cash flow this year than we had originally forecast. Vipul 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 valuation 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 topline number. So, while we obviously would have liked to deliver additional topline, 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 comps. 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 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 DuraTrack 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 moved the needle on our and our customers' cost base. 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 DuraTrack 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've 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 Nipul 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 $0.107 per watt to $0.112 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 $0.34 compared to basic and diluted loss per share of $0.11 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 adjusted 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 eight, 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 on 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 $1.7. Importantly, these increases do not reflect any assumed benefits from the 45 tax manufacturing credits. As far as the timing of revenue, we now expect Q3 to be lower than Q4, and which is a change from normal build schedules and is reflective of the scale of pushouts 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 million 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, Nipul. 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. And 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. [Operator Instructions] 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 the rules have been out for a few more months post the quarter. get digested and then kind of what you expect 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, that 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 gimmick me, 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, 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 US. So there's still a bunch out there. And that's that additional 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 the 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 in 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 appreciate you walking through all the moving pieces. And 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. And you know 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 don't all just go away. They should be you be repeating to some extent going forward. So I'm wondering why margins are maybe a little bit better in the second half? Thanks, guys.

Yeah, sure. Hey, Brian. So for a while now, we've talked about 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 we walked through those over performance 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 mix, 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.

Brian, this is Kevin. For a couple of quarters, we've talked about those low margin STI US-based programs that will be finishing up here in the second half of the year. Those are some specific programs putting some downward pressure on that.

Okay. Understood. It makes sense. I'll pass it on. Thanks, guys.

Thank you. The next question is from Mark Strouse of JPMorgan. Please go ahead.

Yes. Good afternoon. Thank you very much for taking our questions. 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, hey Brian. So, well, 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 were going to deliver in the back half of the year, so we feel pretty good about our overall revenue guidance for the balance of the year.

Okay, okay, thanks Nipul. And then we've been talking more and more about OmniTrack and H250. 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 up front in the project relative to a DuraTrack, for example. I think the last bit of data we had is that we had over 7 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 US market. We're very pleased with that, and you'll see that at our upcoming RE+ trade show.

Got it. Thank you very much.

Thank you. The next question is from Julien Dumoulin-Smith of Bank of America. Please go ahead.

Thank you for your time. I appreciate it. Look, there are other topics coming up in the year. I wanted to focus a little bit more on 24-group margins. I mean, you said that some of the things that you looked at as far as 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 year. I mean look, I know we are not ready to talk about 2024 guidance per se, but if you put those pieces together it sounds like there could be a reacceleration especially off of maybe a temporarily depressed back half year?

Yeah, I think, hey, Julien, its Nipul, I think. You were breaking up a little bit on that question, but I think you were asking kind of what 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 –

Might be 24.

Yes. So, we stand by what we have said in the past. We see our target margins without IRA right about the mid-20s, 23%-25% gross margins. We still see that taking out the noise and the one-timers we had so far in the first half of this year.

All right. So it's sounds like there is no reason not to think that between the enhanced scale into 2024, 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 which typically anywhere between you know three to five quarters and in the past Julien our order book has resulted it has converted anywhere from 90% to 130% into revenue. Of course, we're seeing a little bit more on the 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 Julien, let me add on to 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 at a start date in our order book. We do believe that this is a practice that serves. It creates the great benefit of consistency and 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 VCA's 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 VCA's 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.

But Kevin, you wouldn't quantify the total quantum of VCAs you have today, would you?

No.

Fair enough. I tried. Thank you guys so much. Appreciate it.

Hope you, got it. Thanks, Julien.

Our next question --

Go ahead, Chris.

Our next question is from Kashy Harrison of Piper Sandler. Please 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. 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 your competitor's 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 set 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 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 are 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. 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, thanks, Kashy. So that's something we're continually evaluating. You know, we still contend that we, that there's still that $0.016that 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. Got it. Thank you.

Thank you very much. The next question is from Joseph Osha 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 utility scale?

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.

Thank you.

Thank you very much. The next question is from Colin Rusch of Oppenheimer.

Hi, there. This is Andre Adams on for Colin. Could you speak to the Gulf on pricing from the installation savings elements that you 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 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. 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. As it continues, we talked about in the prepared remarks, we're going to look to, you know, with, you know, present to our board to de-lever 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'd 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 Northland Capital Market.

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

Yes, we can Donovan.

Okay, fantastic. So first I want to talk about non-tracker revenue. You guys, that came up in a couple different kind of contexts in the call today. Its contribution to this quarter, and then also kind of strategy going forward and I just want to clarify, when you talk about non-tracker revenue, there's kind of the obvious things, software, kind of higher margin services, and aftermarket sales or products. But there's also historically there's been the self-performing of installation work that STI does. I know you are moving away from that in the US, 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, does that include some of this just the self-performing sort of services there, which isn't per se like a gross margin kind of thing? And same thing 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. While STI 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 Nipul's sheet there rebounding to the pre-acquisition margin level. And that's really about reducing that construction 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, it's, 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 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 to drive value for us and accretive margins for us.

Okay. That's very helpful. And then I want to, as a follow-up, turn to the DG channel in the U.S. So I know an earlier questioner talked about DG in Brazil, but -- and you guys shared average project sizes, which are quite substantial. I think it was 250 megawatts or something on that order. But historically, the DG channel in the U.S., I think it ends up being effectively projects smaller than, I believe around 50 megawatts. Historically, you had an exclusive set up with Russell Pacific [ph] RPC services, and they recently were acquired by Quanta Services, I think in March or maybe May. Reading the press releases, it seems like they've suggested they might be broadening to offer additional trackers as well. And I understand fully well that this is like a whole new space. I mean, the whole idea of DG being kind of a turnkey operator and almost like a tracker wholesaler with services too, was even sort of invented by these guys. So it's a very evolving space. But I'm just wondering if we can get like an update there. Is DG still sort of material? Is that an important thing to help drive gross margins? How is that space evolving? Is it an issue that Russell Pacific might now be doing other trackers or considering that now that they're owned by Quanta? Or is it just that the space is evolving? And so they're going to just be more of these turnkey folks and having sort of an exclusive relationship just isn't as likely to be the nature of the market going forward.

Yes, I mean, great questions and great observations. Let me address a few points there. So, first of all, when you look at the overall DG market in the U.S. and our revenue with RPCS, I will tell you what we've kept as a pretty good secret all along is we are by far the leading provider of DG solutions through RPCSs in the U.S. market. So we feel very, very good about that space and about the growth we've seen in that space over the last several years. That being said, you're right, RPCS was acquired by Quanta. And as part of that acquisition, I think they will continue to look at not only being exclusive with Array, but look at other trackers that they can provide customers that are fit for other specific projects. And at the same time, your second part of your thesis is also right. There are lots of other RPCSs emerging, coming to us in the market, looking for us, looking for some relationship with the rate directly to be able to provide them access to other markets where RPCS may be -- other geographic markets where RPCS may not nearly be as strong. So we feel very good about our space in that market. It is a very rapidly growing market. We're going to continue to grow with that market, with RPCS and others.

Thank you very much, sir. [Operator Instructions] Our next question is from Andrew Crocco of Morgan Stanley. Please go ahead.

Great. Thanks so much for taking my question. You provided some helpful clarity on how OmniTrack is providing some pricing flexibility with customers. I'm just wondering if there's any other product characteristics that you see in the market from competitors where you may want to increase R&D spending to stay competitive? Thanks.

Look, I think if we just go back to the comments about the number of patents that we file and have been in the last 18 months, we've taken a very, very programmatic approach to not only our tracker, but all trackers in the market. We've done those comparisons of where we think component by subcomponent we may be disadvantaged in terms of either technology or cost and we began directing our engineering efforts around those. So our goal is to have the best overall tracker platform, meaning multiple offerings, multiple products in that and we're going to continue to innovate subcomponent by subcomponent. Where we have a disadvantage, we're going to innovate. Where we have a cost disadvantage, we're going to cost reduce. There's a tremendous amount of activity that's been going on in that. And what I alluded to in my comments about the number of projects recently released or pending release in the next 45 days, substantial number of those is the exact output of that work that we started a year, year and a half ago. Very programmatic approach to optimization.

Got it. And are you guys looking at anything beyond just trackers into other balance of system products that other players in the market offer?

I don't think we're ready to comment on that publicly at this point. We're going to continue to look at adjacencies and evaluate those both from an organic and inorganic point of view. And I think it wouldn't be prudent for us to comment publicly what our next phase of growth is going to be just yet.

We'll certainly communicate it when the timing is right.

You're welcome.

Thank you. The next question is from Jordan Levy of Truist. Please go ahead.

Afternoon all. And I appreciate you taking my questions. Recognizing the free cash flow generation you're seemingly slated to realize this year and moving into next year with the higher growth periods, maybe if you could just talk to your targets for free cash flow use beyond clearly deleveraging up front.

Sure, yes. What I can say, obviously, with the better use of capital this year, the higher margins were able to drive over a 75% increase in our free cash flow targets for this year. But what we are looking at here is probably about a six -- we look at a free cash flow conversion as a metric internally. And we're looking at about 65% to 75% free cash flow conversion as kind of our target moving forward.

Appreciate that. And any specific areas you want to direct that beyond deleveraging or time will tell kind of on that?

Yes, it is. We want to make sure, we do have a lumpy business that requires some capital, so we want to keep some capital or some cash on the books for quarters when we ramp up for large deliveries. However, we also do want to make sure that we're funding the business during its growth period. But the biggest one right now is deleveraging and just being opportunistic on funding the business.

Thanks so much.

Thank you. The next question is from Philip Shen of ROTH Capital Partners. Please go ahead.

Hey guys, thanks for taking my questions. Congrats on the strong Q2 results and the bookings. Quick follow-up on the bookings here. Can you share at some level the mix of the bookings as it relates to domestic and international? And then also contracted, meaning with deposits, and then also awarded orders, which I believe would be without deposits? And then in terms of margins shifting there, you highlighted in terms of your outperformance this quarter three sources or reasons why. Logistics was not mentioned, but I think logistics has been a tailwind for others. Just curious if you can talk through if logistics was buried in one of those three drivers? And then also going forward, you expect that to be a benefit for Q3 with it may be tailing off Q4. Thanks.

Okay. So I'll start with the logistics piece we did and in the prepared remarks, Phil, said about 300 basis points of the margin lift for this quarter was related to cost saving opportunities of which 100 basis points was continuing lower freight costs. So that's come down from a couple hundred basis points or so in the first quarter. So we don't expect -- as we talked about in the first quarter, we expect that to be priced into quotes going forward, the lower costs. So we won't see as much of a lift on that. As far as the order book, we're not going to break out the portion of the bookings between domestic and international. And we feel good about the bookings and the margin we have on the bookings are more at our traditional kind of mid-20s margins.

Great. Thanks. That's all I had.

Thanks, Phil.

Thank you. The next question is from Sean Milligan of Janney. Please go ahead.

Hey, guys, thanks for taking my questions. I guess first, would you be willing to kind of talk about the market that you'll be able to work to penetrate with OmniTrack and H250, more fully next year, like in terms of maybe dollars, like what does that market look like for you in the U.S.?

Yes. So I think our view is that the OmniTrack, the terrain following tracker, represents as much as 10% or 15% of the overall market initially. That would be a really great target opportunity for us. So we feel really good about the OmniTrack being 10% or 15%. And again, it is priced slightly higher than the DuraTrack. So there's a margin accretion opportunity there and it's really targeted at the amount of earth moving savings that the OmniTrack will drive. OmniTrack is we discussed previously as drive post-to-post capability in the market, 30% greater than our competitors out there. So we feel really good about that product as we get to put that into the field and grow. Relative to the STI H250, again, that's targeted at a market that is, look, it's a really fast-growing market where you don't need the extreme capabilities of a DuraTrack or the capabilities of one of our larger publicly traded competitors. It's really about a market that's price-sensitive, less robust, rapidly growing, and this is an area that we feel really good about the value proposition of the H250 attacking that market. We think that's probably circa 25%, 30% the size of the market that DuraTrack probably currently. And so we feel that's a really fast-growing market. It's attractive. Our value proposition in terms of our price point and the features and benefits that product will have vis-à-vis the competition in that space, we're really excited about the H250. And hopefully next year, we'll be talking about some great revenue growth specifically around both of those new products.

Okay, thanks. That's really helpful. And then just to clarify, when you're talking about the 10% to 15% for OmniTrack and I think you said 25% to 30% for H250, that's relative to the DuraTrack market size?

That's correct.

Okay. And then just big picture, I guess, trying to think about how you view 2023. So the question is, like, are you viewing this year as a transition year, and that the new guidance sort of implies flat growth year-over-year and you still don't have the IRA tailwinds fully crystallized. The setup for 2024 winds up looking more attractive from a revenue standpoint?

Yes. I mean, I'd characterize it as this. 2023 is a transition year where we've stayed focused on driving those parts of the business within our control. While it may be flat on a revenue basis, at our current guide, you're talking about doubling the adjusted EBITDA on a business on flat revenue, and you're doing that through a lot of hard work and effort throughout the company. And again, I just want to congratulate the Array of team members for the amount of work going in so many different areas to drive that level of operating performance. So it is a transition year. It does again create a lot of free cash flow to set us up for a great, much better balance sheet as we exit the year into our next phase of growth being 2024. I think if anything we've been able to prove our ability to deliver those mid-20s margins and I've historically said that we'd be at mid-20s margins by 2024, being in 2024. We're just doing that at an accelerated pace at this point, just due to that same execution we talked about. And then when we think about all the additional innovation that we've been working on very aggressively over the last 18 months that's now coming to fruition, we're really looking at market share takeaway for next year as a great avenue for growth for us. Not only are we going to participate in other fast-growing segments of the market, but we think our DuraTrack product is going to be much more competitive next year.

Great. Thank you for taking my questions.

Absolutely.

Thank you very much. The next question is from Derek Soderberg of Cantor Fitzgerald. Please go ahead.

Yes, hey, guys. Thanks for squeezing me in here. Just a quick one on the competitive landscape. Any change there with the IRA, maybe -- are you guys are starting to see some more aggressive bidding. Any change to sort of the nature of the business or who you're seeing competitively for projects? Any change there over the past few months? Thanks.

No, no, not at all. Very consistent.

Awesome. Appreciate it.