Hello, and welcome to the Array Technologies Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Cody Mueller, Investor Relations, Array. Please go ahead.

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

Thanks, Cody, and good evening, everyone. Thank you for joining us on today's call. In addition to Cody, I'm also joined by Nipul Patel, our Chief Financial Officer. Let's begin with slide 4, where I'll provide some highlights of our second quarter. This was a strong quarter for Array. We delivered on our revenue, adjusted EBITDA, and adjusted EPS expectations, while having a strong quarter of bookings despite the impacts of the AD/CVD investigation, and we tightly managed working capital to ensure that we did not require additional financing or covenant relief. Revenue for the quarter of $425 million represents a 116% improvement year-over-year. Included in this number is legacy Array revenue of $352 million, representing organic year-over-year growth of 79%. More impressive, this growth was achieved against a challenging set of industry circumstances, with numerous project starts and stops, module changes, and delays. Our ability to achieve this operating performance is a strong reminder of three key elements of our business model. One, we offer a differentiated, patent-protected product that provides our customers with the lowest levelized cost of energy. Two, with continued redesigns due to issues with module availability, our flexible mounting structure and civil engineering expertise are key competitive advantages. And three, our large and well-established US supply base, coupled with our asset-light operating model allows for the shortest and most reliable lead times in our industry. This provides our customers the confidence in our ability to deliver the right products and services for their projects on time. Despite the strong delivery volume for the quarter and the slowdown in orders due to the AD/CVD investigation in April and May, we added over $200 million in new orders, ending the quarter with a $1.9 billion order book. It is important to note that in July, after the announcement of the tariff moratorium, inbound opportunities increased by 25% compared to April and May, and we fully expect this momentum to continue. Gross margin for the quarter was 11.1%, which is an improvement of 70 basis points from the prior year period and the third consecutive quarter of improvement, up 230 basis points from the first quarter. The 11.1%, while certainly on the right trajectory, is slightly down from where we would like to be as the STI business continued to have some cost challenges, both in the US construction business and in Spain. Adjusted EBITDA in the second quarter up $26 million represents a year-over-year improvement of 162% and a sequential improvement of approximately $25 million from the first quarter. Although we still have room for improvement in our working capital efficiency, overall, I was pleased with our execution this quarter. You'll recall, coming into our second quarter, we had some constraints on our liquidity due to our debt covenants, delivering $425 million of revenue and managing our working capital to not require either covenant relief or additional funding was a testament to this team's execution. Nipul will discuss this in more detail later, but as we look at liquidity moving forward, there are a few key aspects to keep in mind. In Q2, we were limited to only being able to pull $70 million from our revolving facility because of our existing debt covenants. Given our Q2 results and expected second-half performance, we now anticipate unlocking the full $200 million value of that facility. As we have discussed previously, the combination of margin improvement, our business cyclicality, and improved working capital efficiency will provide positive free cash flow in both the third and fourth quarters. And finally, as identified in a recent current report, we reached a $42.75 million legal settlement, and these funds were received in full after our quarter-end. We had not planned for this in our cash forecast. With these factors in mind, we feel confident in our liquidity position as we move forward and execute on our $1.9 billion order book. Turning to our next slide. Mindful of recent developments, I want to take some time to discuss the industry landscape here in the US and what that means for Array as we progress through this year and into 2023. There are three key dynamics that are important when looking at our business moving forward; the regulatory environment; customer demand and project timing; and the health of our supply chain. First, on the regulatory side, the Biden administration's executive order providing a two-year moratorium on tariffs offered welcome relief and a window of certainty for our customers. We now expect the $240 million of projects that we previously identified as at risk during our first quarter call to move forward, and we have already secured defined start dates on several of these projects. While we are pleased to see this demand solidified, I note we do not currently expect to see a significant impact from these projects in 2022 due to lead times and the time required for our customers to get these projects into their near-term build schedule. We are also seeing some project delays due to the Uyghur Force Labor Prevention Act or UFLPA. This is resulting in projects still requiring multiple module designs, while customers navigate the potential for delays. As of today, these delays are within the range of the slower progression of projects that we have been forecasting all year. On the horizon, the Inflation Reduction Act of 2022 now passed on the US Senate side represents the biggest piece of climate-related legislation in the history of the United States. While details of many of the provisions still need to be clarified, what is clear is this legislation will provide long-term certainty on incentives for both deployment and manufacturing related to solar energy. This certainty allows participants to invest in new facilities and bring jobs to the US while accelerating the transition to clean energy. We strongly encourage the House to pass this bill and President Biden to sign it into law. Our initial analysis of this bill and its specific impact on Array can be broken down into two areas. First, it provides a meaningful tailwind to the solar industry as a whole. Initial industry estimates are that the extension of the investment tax credit would add over 40% of additional installations between 2023 and 2027. This would equal approximately 46 additional gigawatts of solar energy installations over five years. Second, between the domestic content adder of 10% and the advanced manufacturing credit for torque tube and fasteners, there are additional benefits for companies who manufacture and source within the United States. On the domestic content adder, as we have stated before, we have a long-standing and mature domestic supply chain. Since this draft bill was released, we have already been in conversations with our customers to begin mapping out how we can support this provision. Our long-standing domestic capacity serves as an important strategic asset for us should this bill pass. On the manufacturing credits, clarification of how these will be calculated and who will be the direct beneficiary will be important since we do not directly manufacture torque tubes or fasteners. Regardless of the direct beneficiary, these credits provide a meaningful incentive for our industry. We estimate the current credits of $0.87 per kilogram of torque tube and $2.28 per kilogram of fasteners would amount to approximately $0.015 to $0.017 per megawatt. Moving on to the demand side. As evidenced by our substantial year-over-year growth and our $1.9 billion order book, we have consistently seen strong demand for our products and services. If we look at the current distribution of the demand within our order book, we expect between $600 million and $800 million to be delivered for the remainder of this year based on our current guidance. This means we have already secured between $1 billion and $1.2 billion in revenue for 2023. And at the time this was measured, we still had six months to go before 2023 begins. Any impact from the passage of the Inflation Reduction Act would only represent an upside to this already strong start. With the potential for additional demand and the intricacies of where material is manufactured and sourced from becoming increasingly important, what becomes even clearer is that a robust and flexible supply chain, coupled with strong execution, will be more important than ever. Given this as a backdrop, it's important to provide some additional information about Array's supply chain. This year, we have increased our global capacity to serve the market by more than 25% and are now able to deliver over 30 gigawatts per year. By the end of Q1 2023, given the commitment of our existing partners and the addition of new suppliers already in queue, we expect this number to be near 40 gigawatts. Importantly, given our asset-light operating model, this scaling does not require significant capital expenditures and does not represent additional fixed costs to Array. Our operating model and execution provide meaningful cyclical resiliency should volumes ebb and flow. Relative to our domestic content, we currently have over 20 suppliers here in the US for our major components with five additional suppliers in various stages of our vendor qualification process. It is important to note, we not only utilize steel mills located in the US, we also have suppliers that source steel from the US. This underlying steel becomes a crucial factor for our customers as they look to meet domestic content requirements. So as I take a step back and look at the industry landscape, the term that I'd like to focus on is flexibility. We want to position ourselves to meet the additional demand as it comes, while ensuring that our operational structure does not depend upon that volume. With our recent and continuing supply chain and logistics improvements, we're in an outstanding position to do just that. As we move to Slide 6, I want to close out today by talking a little bit about my early observations about the company and some of the key focus areas we'll be driving as we move forward. First, let me reiterate my initial impression that Array has an incredibly solid foundation to build from. Within the legacy Array segment, we continue to round out a high-quality, experienced management team that knows how to scale and run a large multinational publicly traded corporation. Further, we have set in place key building blocks for continued growth and expanding profitability. In addition to the supply chain elements I discussed earlier, this also includes the change in our business process that was made this time last year, reducing the company's exposure to commodity cost fluctuations and thus producing more predictable results. Our digital transformation initiatives deliver streamlined back-end processes, driving better operational efficiencies as we scale as well as improving our interactions with our customers. And the expansion of the workforce in strategic areas, like commercial excellence, commodity management, and logistics to ensure we are driving margin expansion as well as growth. On the STI side, STI is a company with a great customer reputation and product operating in high-growth regions. I've recently spent a week in Brazil with our STI team. I was fortunate to meet many of our team members and customers and to spend time in the field on utility-scale solar sites, learning and understanding the STI product and service offerings and the positioning opportunities between our Array and STI product lines. I've been incredibly impressed with the team at STI. They are dedicated to the company and to the industry, and they continue to rally to every challenge we present to them. However, as you can imagine, there are still areas where we need to get better, and we will focus on going forward. First, we need to quickly mature the processes and execution within the STI business to meet its current growth trajectory and its operations under a US public company. To that end, we have recently appointed Ken Stacherski, our Chief Operations Officer, as our integration leader, and we have brought in a renowned third-party operations and supply chain consulting company to further accelerate our integration efforts. Second, we need to rationalize the construction business at STI. This area of the business continues to be a drag on margins, so we need to ensure we are only offering this service where we have clarity and experience in the scope of work, a strong value proposition, and when we can deliver our required profitability. Since our last quarter call, we have made progress on this front. We discontinued quoting any construction projects in the US and have significantly reduced our construction quotes in Brazil, where we have reduced our associated construction headcount by more than half since the beginning of this year. We are still evaluating the strategic alternatives in Spain as that region has a more entrenched customer expectation that the tracker provider also performs construction. While this may take a bit more time than Brazil, we will be thoughtful and deliberate in our approach. Third, we need to become a world-class logistics company. You'll remember, we manufacture little ourselves. This means we are moving a lot of materials for multiple suppliers direct to multiple customer sites at any given time. We recognize our need to execute this in the most efficient, flexible, and predictable way possible. We have recently hired a new Vice President of Logistics who has extensive international experience and a proven track record of delivering operational excellence in this area. Our second half ERP system enhancements will also greatly aid our efforts here. Fourth, we need to have an intense focus on improving working capital efficiency. We felt a bit behind here as our team rightly pivoted to focus on margin restoration and improving delivery execution. Our business model inherently produces great free cash flow, and we need to ensure we are maximizing incoming cash to fund organic growth, pay down debt, and provide funding for strategic acquisitions. We have already restructured our collections process to better align with our customer-facing teams, and we have significantly improved the linearity of our shipments, allowing us to get more receivables into the billing cycle earlier in the period. This dramatically improved linearity throughout Q2 and into Q3 was critical, too, as evidenced by our cash management in our second quarter. While improving, there is still work to do in optimizing inventory levels and bringing our DSO levels near our historic levels. Finally, we will focus on becoming easier to do business with while creating a streamlined experience for our customers. We have always had a strong focus on our customers, but often, this is done through extraordinary efforts and manual processes, which at times can be slow, frustrating, and exceedingly difficult to scale. This is a key area where we are focusing our near-term digital transformation efforts. As designed, our digital transformation will improve turnaround times on customer quotes, project design, shipment scheduling, and service appointments to name a few. All this, while simultaneously providing enhanced visibility on project status and delivery directly to our customers. As a company with multiple products servicing numerous regions, we need to ensure our customers know who to go to, to get the right answers in a timely manner. There is already a great deal of momentum behind these focus areas, and I'm confident that we can execute on improving them quickly. I look forward to updating you on our progress in these areas as we execute and move forward. With this, I'll turn the call over to Nipul, for a deeper review of our second quarter financial performance.

Thanks, Kevin. I'm glad to speak with you all today. First, turning to slide 8, I'll walk through our results for the quarter. Revenues for the second quarter increased 116% to $424.9 million compared to $196.5 million for the prior year period. The $425 million in revenue reflects $352 million from the legacy Array business and $73 million from the STI business. As Kevin mentioned, the $352 million from the legacy Array business represents organic growth of 79%, compared to the prior year and quarter-over-quarter growth of $101 million, which is partially due to our normal seasonality where we would expect more deliveries in the second and third quarters. The $73 million from the STI business represents growth of $23 million or 46% from the first quarter. Taken together, revenue exceeded our expectations, as we had strong delivery execution and linearity throughout the quarter and had favorable timing of project start dates late in the quarter. Gross profit increased to $47.4 million from $20.5 million in the prior year period due to the increase in volume, coupled with better pass-through pricing on the projects signed under our new business process. Gross margin increased from 10.4% to 11.1%. Gross margin for the legacy Array business was 11% and represents the third consecutive quarter of margin improvement, as it was up 250 basis points from the first quarter and was in line with our expectations. The STI business had a gross margin of 11.7% in the quarter, which was lower than expected as they continue to have construction and logistics cost challenges, not only in their U.S. construction projects but also in Spain. Supply plan changes and longer shipping times are delaying materials to project sites, which is negatively impacting our labor utilization and productivity. However, as Kevin mentioned, we have all hands on deck right now to ensure we quickly address these issues. Operating expenses increased to $54.2 million compared to $21.1 million during the same period in the prior year. The higher expense is primarily related to an $18.3 million increase in amortization expense related to the STI acquisition. Excluding this impact, the increase is primarily due to the addition of STI Norland in addition to higher payroll-related costs due to an increase in headcount, as we invest in key strategic areas for our growth. The increases were partially offset by a reduction in contingent consideration expense of $1.7 million. Net loss attributable to common shareholders was $15 million, compared to a net loss of $5.5 million during the same period in the prior year, and basic and diluted loss per share were $0.10, compared to basic and diluted loss per share of $0.04 during the same period in the prior year. The increase in losses to common shareholders primarily represents the preferred dividend payments, which began in the third quarter of last year. Adjusted EBITDA increased to $25.9 million, compared to $9.9 million for the prior year period. Adjusted EPS was $0.09, up from $0.02 a year ago and was positively impacted by a larger-than-expected income tax benefit this quarter. Looking at free cash flow, we used cash of $12.2 million in the current quarter, primarily due to an increase in our accounts receivable balance, due to the increase in revenue from the prior quarter. However, it is important to note, this slight use of cash was expected for the second quarter and represents a significant improvement over the prior year when we used $92.6 million. Overall, we were pleased with the execution this quarter. The legacy Array operating segment continued the margin restoration trajectory we outlined last year and even though the STI operating segment has near-term cost challenges that we will have to contend with, it showed improvement quarter-over-quarter in its margin, and we expect that trend to continue. Now if we move to Slide 9, I will provide some additional details around our sources of liquidity for the remainder of the year. We ended the second quarter with $51 million in cash on hand and $2 million in availability under our revolving facility. I will remind everyone that the $2 million of availability this quarter was due to our inability to meet our net debt to adjusted EBITDA ratio of 7.1 times, which would have been tested should we have drawn greater than $70 million. The net debt in the calculation includes only our term loan and the amount drawn on the revolver less cash on hand. You can see here at the end of Q2, this totaled $341 million. However, as we move into the third and further quarters with the expected adjusted EBITDA performance, we expect we will no longer be restricted by this covenant and therefore, will have between $150 million and $170 million of availability under this facility depending on the holdback of lines of credit. This means we now have access to between $80 million and $100 million in additional liquidity. That said, we currently anticipate paying down the revolver in full in the third quarter with a combination of the funds received from the settlement Kevin discussed earlier and our free cash flow, which we expect will range from $75 million to $100 million in the quarter, driven by improved margins and better working capital efficiency. As discussed previously, as we progress forward and continue to produce free cash flow, we will first use that cash to fund our organic growth and with any excess capital, we will look at deleveraging and funding strategic acquisitions. Moving to the next slide. I won't spend a lot of time here, but you will see that we are reaffirming our full year 2022 guidance. We do see a potential for some upside from the AD/CVD release but we are currently seeing more of that impact in early 2023, due to lead times and the time it takes to get these projects aligned with build schedules. Also, as Kevin mentioned, the USLPA is causing some slower movement on getting projects started for the remainder of our order book. So we are still planning on our backlog conversion being a little bit slower than historical norms, but in line with our previous expectations for the year. Finally, we also see some slight headwinds in STI from their margins being down a little bit from a reduction in the euro to USD rate, which we are now assuming will be at par for the remainder of the year, putting the full year average around 1.05 versus the original planning assumptions of 1.12. With that, I'll turn it back over to Kevin to wrap up.

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

Thank you. We will now begin the question-and-answer session. Our first question is from Brian Lee of Goldman Sachs. Please go ahead.

Hi, everyone. Good afternoon. Thank you for taking my questions. Congratulations on the strong execution. I understand that the business environment remains quite challenging. I have a couple of questions regarding the margins. First, Kevin, I appreciate the details regarding the action plan for STI and its integration. How many quarters do you estimate will be needed to implement this strategy? Also, as STI's margins normalize, I know you revised the gross margin estimation from the high teens to the mid-teens this year, likely due to the euro. What do you consider the new normal for STI's gross margins, and what timeframe are you aiming for? I also have a follow-up question.

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

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

Yes. So, regarding the first question, we still stand by our expectation of a high teens to low 20s exit rate on margins, and we feel confident about that trajectory. We don't anticipate any changes in our assumptions based on what we see in the next six months. The second question concerns the modifications to our business model implemented last year to safeguard against rising commodity costs. However, this does not guarantee that we will see significant profit improvements when commodity prices decline. It's really about managing the commodity cycle and the timing of our pricing when we take orders. Therefore, we do not expect that if steel prices decrease, our margins will significantly increase; that is not how the industry is currently pricing.

Our next question is from Philip Shen of ROTH Capital. Please go ahead.

Hey, guys. Thanks for taking my questions. First one is on the IRA. And in terms of the $0.016 per watt manufacturing tax credit benefit, Kevin, I think you quantified. I was wondering if you could talk through how much of that you think you might be able to secure? And I know this is fluid and technically, I think the torque tube producer, seller manufacturer gets that credit. But ultimately, how does that play out? Do you think you could get half of that or more? And I know it starts effective the first of next year. And so how would you expect that to kind of flow through margins and so forth?

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

Right. Because the $0.016 would accrue in the value chain, but then with your US steel content, you can then enable that 10% ITC adder on the back end or down for the strength, if that makes sense?

Yes.

Great. Anything else you want to add on that topic?

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

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

Yes, this is Nipul. We did mention that our receivables counted as income. However, we received a larger revenue order for Q2 than we initially anticipated, which contributed to the growth in receivables. We have a significant amount of receivables currently in the collection process, and we continue to expect a strong Q3 and the remainder of the year. Although the receivables are higher than expected, the increased revenue has improved our overall conversion cycle. We aim to reduce the overall cash conversion cycle back to historical levels by the end of the year.

Okay. Thanks very much. I’ll pass it on.

Thanks, Philip.

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

Thanks so much, guys. I'm curious about the product evolution in the European market. And as you've started to make some progress there, what you're seeing in terms of product fit and which platform is tending to sell a little bit better, whether it was the traditional US business or the one coming out of Brazil?

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

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

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

Perfect. Thanks so much, guys.

Our next question is from Maheep Mandloi of Credit Suisse. Please go ahead.

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

Yes. Hey, Maheep it's Nipul. So, yes, we still feel that we're going to be about a 75-25 mix from a US domestic to international. And similar to what we've said in the past, the international mix is going to be primarily Brazil, leading that way and then Spain and Western Europe being a majority of the rest. But you have to keep in mind that mix may vary because the US continues to be strong and in our forecast, we see in the US continue to have growth in 2023 and beyond.

Got you. That's helpful. And maybe just like one housekeeping. I know you kind of alluded a little bit on the working capital question, deferred revenues increase were higher in Q2. What is that related to? And should we expect something similar in the second half year?

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

Got you. And then maybe just a follow-up on that. Now, that given the more constraints or limitations around the IRA and what projects your customers can get. Does that accelerate this deferred revenue or the share of down payments on the purchase orders here?

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

Got you. Thanks for taking the questions.

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

Hey everyone. Congratulations on a strong quarter. It's encouraging to see the impressive revenue, and things seem to be progressing as you indicated over a year ago regarding the initial steel pricing. Speaking of steel, Nextracker's recent announcements about establishing supply lines for torque tubes and sourcing domestically in the US seems like a great strategic move. However, this does raise concerns about whether this could lead to a saturated market. I'm uncertain how flexible US domestic steel production can be in ramping up torque tube manufacturing. Additionally, your unique octagonal cross-section for the torque tubes sets you apart. With other US tracker manufacturers likely looking to source more due to the Inflation Reduction Act, is there anything we should consider as competition increases? For example, does your current core agreement support scaling up volumes with a firm commitment? Any insights on that would be appreciated.

Yes, what we’re observing is that in the competitive landscape, there’s acknowledgment of one of our longstanding competitive advantages, which is our ability to deliver more quickly than our competitors due to our local supply being closer to the sites we are working on. Ultimately, we believe we are in a strong position regarding overall volume. In my previous remarks, I mentioned that we aim to build capacity well in advance of our needs. As of today, thanks to significant improvements in our supply chain and the additional vendors we are qualifying, our current capacity, which we review monthly as part of our senior leadership discussions, has already surpassed 30 gigawatts, with more than 25 gigawatts available in the domestic market. This represents a committed and readily available volume. By the end of the first quarter next year, based on our current supply base and the commitments from our supply chain organizations, we expect to reach 40 gigawatts. Thus, we are proactively staying ahead of demand and building capacity, with firm commitments from our vendors in support of these volumes.

We believe it's not the type of situation where you get replaced if it becomes competitive or if others are discovering it.

No.

Yes. Okay. Well…

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

That's very helpful. Regarding STI Norland, I was surprised to learn that they were also self-performing installations in Brazil and Spain. I had assumed that non-US tracker manufacturers needed to self-perform in the US due to high labor costs and the challenge of getting EPCs to trust that installations could be completed quickly, which led them to hire their own teams to demonstrate their capabilities. However, Brazil and Spain don't strike me as high labor cost markets, so it was unexpected to find out that they were self-performing there. Was this the case historically at the time of the acquisition? I believe the gross margins were cited as being in the range of 30% to 40%. Were those historical margins at STI Norland really attractive due to their self-performance work in Spain and Brazil?

Yes. And –

Okay. And…

Go ahead. Sorry, what was your question?

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

Sure. When considering the construction activities in Spain and Brazil during my first ten days here, we realized that the construction business needed some adjustments. As an engineering and construction company, we are focusing more on engineering and construction advisory services rather than on executing construction ourselves. Back in early 2021, our STI business had over 600 employees dedicated to construction services, which was a significant portion of our workforce. We didn't have a competitive edge in labor hiring, as we relied on local labor for various sites across Brazil. We would set up operations, hire qualified local workers, and manage them through the construction process, teaching them skills along the way. However, managing this labor pool took a considerable amount of our managers' time away from serving our customers and focusing on our business. With safety concerns, weather issues, and productivity challenges, it became difficult to maintain a stable financial outlook in the construction sector. Three months ago, our leadership team decided to downscale this approach and redirect those resources to what we call Construction Advisory Services. We took our top field personnel to oversee fewer sites, where instead of having 50 workers, we would have two or three senior construction advisers to recruit local labor and provide support and training.

Best practices

But not just the construction.

From that standpoint, will there be any significant severance payments or increased expenses associated with reducing the workforce?

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

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

Welcome.

Our next question is from Joseph Osha of Guggenheim. Please go ahead.

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

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

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

A portion of this involves the transition of inventory buildup, delivering those products, and collecting receivables. If we take a step back, our business fundamentally generates free cash flow. As margins improve in the coming quarters, this will enhance free cash flow and increase working capital efficiency. Kevin mentioned our efforts on the receivables side. We are closely aligned with our sales team to ensure timely collections of receivables. It's expected that the usual shift in receivables collection after Q2 will occur in Q3. However, we typically generate free cash flow, and we believe that once our margins return to historical levels, we will continue to produce free cash flow.

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

As we move forward on this journey, we will provide more details. However, for the remainder of this year, we still believe we will be free cash flow positive to the tune of around $100 million for the full year. This indicates a significant improvement from the negative free cash flow position we experienced in the first half of the year.

Our next question is from Kashy Harrison of Piper Sandler. Please go ahead.

Good afternoon, everyone, and thank you for your questions. To follow up on Joe's previous inquiry, I wanted to address it again. As you mentioned, we expect our EBITDA margins to improve next year. Our working capital management is getting better, and we are achieving historical cash conversion cycles. Looking ahead, how do you view the conversion of EBITDA to free cash flow, or how do you assess the ongoing working capital needs of the business as we move forward?

What we focus on is our cash conversion cycle, aiming to keep it in the low 70s, which has been our historical target. Achieving this has allowed us to generate substantial free cash flow to support our business, including both internal ROI projects and funding for acquisitions. We will continue to prioritize aspects of the cash conversion cycle, particularly getting it back to around the 70s.

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

Yes. So when we look at ASPs, we see about a 20% growth year-on-year on ASP. So the remaining increase there on the organic side is really related to volume and project mix, but about 20% on the ASP side.

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

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

Helpful. Thank you.

Our next question is from William Grippin of UBS. Please go ahead.

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

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

Very helpful. Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And with that, this concludes today's conference. Thank you for joining us. You may now disconnect your lines.