Earnings Call
Array Technologies, Inc. (ARRY)
Earnings Call Transcript - ARRY Q4 2021
Operator, Operator
Hello and welcome to Array Technologies Fourth Quarter and Full Year 2021 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 at Array. Please go ahead.
Cody Mueller, Investor Relations
Good evening, and thank you for joining us on today's conference call to discuss Array Technologies fourth quarter 2021 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 because of other factors discussed in today's earnings press release, the comments made during this conference call, or in our latest reports and filings with the Securities and Exchange Commission, which can be found on our website arraytechinc.com. 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 fourth quarter press release for definitional information and reconciliations of historical non-GAAP measures to comparable GAAP financial measures. With that, let me turn the call over to Jim Fusaro, Array Technologies CEO.
Jim Fusaro, CEO
Thanks, Cody, and good evening, everyone. Thank you for joining our fourth quarter earnings call. In addition to Cody, I'm joined by Nipul Patel, our Chief Financial Officer; Erica Brinker, our Chief Commercial Officer and Head of ESG; and Brad Forth, our Chairman. I'll start off today by providing an update on a few key aspects of our business and what we have done as a company to build a strong foundation in a challenging operating environment. Then I'll turn it over to Nipul to cover our fourth quarter and full year financials, as well as a more detailed discussion on our 2022 outlook. Erica will then provide some additional color on ESG efforts to date and our plans for the future. Brad will then wrap it up with comments on the CEO announcement today. Turning to Page five of the presentation. I first want to spend a little bit of time talking about three key industry-wide challenges that are present and how Array has looked for opportunities not only to mitigate risk, but how to use them to further strengthen ourselves in the market. First, in 2021, there was a rapid and significant rise in commodity and logistics costs, which put margins under an incredible amount of pressure for many in our industry. Historically, this industry was used to costs coming down the curve, not the other way around. This abrupt change has ended the way the industry thought about risk and necessitated a rapid and meaningful change in the way companies up and down the value chain thought about pricing. While we are still working through some of the short and medium-term impacts of these cost increases, back in the second quarter of 2021, we took a proactive approach with our customers and suppliers to find a way to keep projects moving forward in this volatile environment. We asked our customers what was important to them and how they perceived risk going forward. And two key themes emerged. The first theme, there was a need to take as much volatility out of the pricing as possible. In order to secure financing, pricing on trackers couldn't be a constantly moving target based on commodity price changes. And the second, material availability was a critical must-have. There was too much risk to the construction of a site if the customer could not count on the tracker being delivered as scheduled. We listened to what those must-haves were and developed and implemented our LOI process. We were able to offer our customers a fixed tracker price and confidence in material availability. We were able to shift to this process because of the longstanding relationships we have with our suppliers and confidence they had in the growth of our business. The ability for us to understand the customer needs and quickly change our business processes allowed us to go on the offensive. We began winning more business and adding more customers who wanted to do business with Array. In addition to rising cost, there was a widespread tightening of global supply chains and logistics availability. This dynamic has not only led to increased lead-times, but also has created broader challenges in getting the right parts to the right place on time. Even with our already large and geographically diverse supply chain, we faced the challenges and certainly felt the pain of having to constantly rework supply chain plans to ensure we could meet build schedules. However, because growing our supply chain was deeply ingrained in our nature, it allowed us to make meaningful additions quickly. In fact, last year, we added 20 new suppliers, and with the acquisition of STI, we have expanded our supply base by over 40%. From there we want to step further entering into long-term MSAs with key suppliers to ensure competitive pricing and availability of supply. This focus allowed us to expand our global capacity over the last 12 months by 25% in only increasing our domestic lead-times by two weeks, which we believe is the shortest increase amongst our competitors. Being able to deliver quickly and have confidence in the availability of supply have emerged as two key differentiators for us. And finally, the U.S. regulatory environment has created a significant amount of uncertainty around the availability of modules, both through the ongoing WRO enforcement and the recent AD/CVD inquiry have created a potential headwind for the entire industry. While we do not procure any modules ourselves, their availability impacts our customers and their build schedules. So, we've been addressing this issue on two fronts. The first, we are actively engaged with Washington DC, both through trade groups and directly through our local representatives. This outreach is key to educating the administration in Congress, that in order to meet its longer-term goals, there has to be a period of module stability. Second, we remain in constant contact with our customers to understand both the certainty of their module supply, but also to proactively work with them on site redesign efforts for module swap-outs. It's also important to note that with the acquisition of STI, we have diversified our portfolio so we have less concentration in the U.S., which also helps to reduce our exposure. When I look back at the difficult operating conditions that have existed for our industry over the last year or so, I am proud of the position we're in today. We've been nimble. We've remained focused on the customer, and we've adapted in ways that have built a strong foundation for which to grow. Moving to Slide 6. You'll see a key element of that foundational strength. Our executed contracts and awarded orders, which we refer to as the order book, over the last 12 months has more than doubled from $705 million to over $1.4 billion. This is our legacy Array business, not including STI. The majority of this increase has come by way of increased volume, with roughly 20% coming by way of price increases. When we add STI, Array is currently sitting at over $1.8 billion, which is a 163% increase from a year ago. Also note because of the STI acquisition, a quarter of our order book is now represented by projects outside the U.S. There's a lot of momentum going into 2022. Turning to Slide 7. If we breakdown our order book to just what is scheduled to deliver in 2022, you can see that we have $1.75 billion, that based on current delivery schedules would have shipments expected to ship during 2022 at a forecasted revenue midpoint of $1.6 billion. This would mean we need only to convert just over 90% of this order book to reach our number. And that does not factor in any projects that we will book and ship within the year. Compare that to our actual order book conversion in 2021, which is shown on the left, where we finished the year at 130% of the order book scheduled to be delivered in 2021. And you can see that we have assumed that project delays will continue to be an issue we need to contend with. However, and even we'll discuss this more later, even with that level of delay expected, our implied growth of our revenue at the midpoint of our guidance is over 85% when you include STI and 40% on an organic basis. Finally, today we announced that April 18th will be my last day as CEO. It's been such an honor and privilege to lead this company over the last four years. As I look back at all that the team has accomplished, I could not be more proud. We've had a number of significant achievements, including our IPO, acquiring STI and hitting $1 billion order book last quarter for the first time, only to set another record this quarter. But what I will remember most from my time here is how much everyone rallied together when there were challenges. There is a grit to Array that I believe is built into its DNA, which has served the company so well really since the company was founded. Over the last few years, we've transformed into a global renewable energy leader with an incredible platform to grow even bigger. The pieces are in place, and I look forward to seeing the great things this company will do in the future. So, I would like to not only thank my management team, but the entire organization for their support over the last several years. It has been quite a ride. With that, I'd like to turn it over to Nipul.
Nipul Patel, CFO
Thanks, Jim. Before I discuss our results, on behalf of the entire management team and company, we want to thank Jim for his efforts over the last few years. Jim and I have known each other for a long time now, and it has been a pleasure working alongside him here at Array. I'm grateful for his leadership and his friendship. With that, I'll turn to Slide 9. Despite the continued project push-outs, revenues for the fourth quarter increased 22% to $219.9 million compared to $180.6 million for the prior year period, which also included about $40 million in ITC-related orders. Adjusting for those additional ITC orders in the prior year, our growth would've been approximately 57%. Gross profit decreased to $10.3 million from $35.5 million in the prior year period driven primarily by a majority of our shipments being legacy, lower-priced orders, coupled with higher input costs for commodities and logistics to fulfill those orders. Gross margin decreased from 19.6% to 4.7%, driven by this high concentration of lower price contracts. We were also impacted by slightly higher material costs in the quarter due to supply chain changes, which I will discuss in more detail later. Operating expenses decreased to $30.3 million compared to $37.7 million during the same period in the prior year. The decrease was driven primarily by an $8.8 million reduction in contingent consideration expense. This decrease was offset by higher costs associated with being a public company, as well as increased headcount to support our growth. Net loss attributable to common shareholders was $32.1 million compared to a net loss of $9.8 million during the same period in the prior year, and basic and diluted loss per share were negative $0.25 compared to basic and diluted loss per share of negative $0.08 during the same period in the prior year. It is important to note here that our net loss attributable to common shareholders was impacted by $10.2 million in preferred dividends this quarter, with no comparable dividends last year. Adjusted EBITDA decreased to $500,000 compared to $20 million for the prior year period due to lower gross margins. Adjusted net income decreased to a loss of $7.8 million compared to income of $10.6 million during the same period in the prior year, and adjusted basic and diluted net loss per share was $0.06 compared to income per share of $0.08 during the same period in the prior year. Finally, our free cash flow for the period was negative $98.5 million versus positive $103.6 million for the same period in the prior year. The use of cash during the fourth quarter of 2021 was primarily driven by our net loss coupled with investments in inventory and higher accounts receivable due to an increase in sales and an increase in unbilled revenues due to the timing of our shipments versus required billing milestones. Now turning to our full year results on Slide 10. I do want to note here that the amounts presented for 2021 represent the restated values that were disclosed in our Form 8-K filing last week. The total net impact to our 2021 results was a reduction of revenue and adjusted EBITDA of $7.3 million and a reduction of net income and adjusted net income of $5.7 million. A corresponding increase from these adjustments is expected to be recognized in future periods as these changes merely represented differences in timing and the total value of the underlying projects has not changed. Revenue for the year decreased 2% to $853.3 million compared to $872.7 million for the prior year period. The reduction in revenue resulted from both increased lead-times for project deliveries caused by supply chain and logistics tightness, as well as projects that have pushed to the right. Gross profit decreased to $82.9 million from $202.8 million in the prior year period, driven by the sharp increase in material and logistics costs that occurred during the year, which were not able to be fully passed along via price increases to our customers. Gross margin decreased from 23.2% to 9.7% driven by the lower price contracts. Operating expenses were flat at $107.6 million. In 2021, we had higher costs associated with being a public company, as well as an increase in headcount to support our growth that was offset by a $23.7 million reduction in contingent consideration expense. Net loss attributable to common shareholders was $66.1 million compared to net income of $59.1 million during the same period in the prior year, and basic and diluted loss per share was negative $0.51 compared to basic and diluted income per share of $0.49 during the same period in the prior year. It is important to note here that our net loss attributable to common shareholders was impacted by a $15.7 million in preferred dividends this quarter with no comparable dividends last year, and an increase in interest expense of $20.4 million. Adjusted EBITDA decreased to $43.2 million compared to $160.5 million for the prior year period due to lower gross margins and higher operating expenses. Adjusted net income decreased to $8.7 million compared to $112.4 million during the same period in the prior year, and adjusted basic and diluted net income per share was $0.07 compared to income per share of $0.93 during the same period in the prior year. Finally, our free cash flow for the year was negative $266.5 million versus negative $123.5 million for the same period in the prior year. The increased use of cash reflects higher inventory balances as forecasted volumes are higher, delivery lead-times have increased, and the need for additional safety stock has increased. Now, if we move to Slide 11, I want to talk a little bit more about our margin progression and specifically about margin in Q4 2021, as well as provide an update on our expected recovery in 2022. Gross margin for the fourth quarter was 4.7%, which was slightly below what we had anticipated. However, it is important to note the drivers behind that and what it means as we look forward. First, we shipped a higher proportion of the lower margin contracts in the fourth quarter than forecasted. As we have discussed previously, there are a finite number of contracts, but the timing of when they land within quarters is largely out of our control. So, we just shipped more here than expected, which was a little bit of a drag. Second, during the quarter, we had to make a number of supply chain changes to ensure that we could meet customer delivery schedules. This meant using parts that were more expensive, but were faster to the project site. These are difficult trade-offs that occur when supply chains are tight and shipping lead-times get extended. However, as Jim mentioned, we have been quickly expanding our supply base to create even more flexibility, so this is not something we anticipate will be an issue for much longer. We do expect to see sequential margin improvement for the legacy Array business in the first quarter. However, we do have a number of large lower margin projects that will have significant deliveries in the first quarter, so we expect the recovery to be gradual at the mid to high single digits before we begin to see a more rapid recovery during the second quarter. Finally, as you can see displayed here, despite the ongoing macro headwinds, we continue to expect margins in the mid-teens for the first half of 2022 and in the high-teens to low 20s in the second half. With that margin progression in mind, I'd like to go to Slide 12, where I'll discuss our outlook for 2022. For the full year 2022, we expect revenue to be in the range of $1.45 billion to $1.75 billion. As Jim noted, this range implies growth at the midpoint of greater than 85% from 2021, 40% of which is organic. Our order book is incredibly strong as we enter the year, but the wider range we have forecasted represents the ongoing uncertainty around project timing. Our forecast assumes that there is no material negative impact from the recently announced AD/CVD inquiry. I would remind everyone that we do not procure any modules ourselves, so the impact to our business stems from our customer's ability to do so. To that end, since the announcement, we have been in constant contact with our customers to understand the impact this ruling might have on their ability or willingness to secure modules for their projects. To date, these conversations have not resulted in any canceled contracts, but at this time we have no further information. We will continue to constantly monitor the situation, and we will provide the market an update should anything materially change.
Erica Brinker, Chief Commercial Officer and Head of ESG
Thanks, Nipul, and nice to speak with everyone for the first time. Turning to Slide 14. Beginning in the second half of 2020, we accelerated our efforts around ESG by building a strong foundation and integrating this agenda into the way we work. As a leading solar technology company, we're keenly aware of how important it is to make an impact and lead the way in our industry. This is reflected in the way we run our business, how we develop our products, and how we continue to engage our employees in the communities we serve. In January of 2021, we took our first big step as a newly public company to publish our inaugural ESG report, aligned with the SASB and GRI frameworks. Our report details our approach to ESG governance strategy in the key ESG metrics from our full year 2020. These key metrics include our corporate greenhouse gas inventory, water and energy use, waste and recycling data, employee demography, safety metrics, and much more. In the second quarter of this year, we plan to publish our full year 2021 report. In this fast follow report, we plan to include enhanced data reporting to further meet the needs of our stakeholders. Critical to our strategy, our operational discipline contributes positively to our ESG performance. This includes our supplier code of conduct, our conflict mineral policy, and our human rights policy, all which are available on our website. We are pursuing the rigorous ISO 9001 quality management certification for Array products and our compliance to leading employee safety systems. As we grow, so too do our inherent ESG qualities, and we are committed to enhancing our operational discipline to maximize these impacts. Moving to Slide 15. This year, we are continuing the great momentum from our initial ESG reporting work to advance our strategy. We will embark on a number of strategic projects, including our first ESG materiality assessment. As part of this assessment, we will engage a number of our stakeholders to identify ESG topics that are priority to each group. We will also identify internal resources so we can pulse key employees through this process as well. We would like to invite any stakeholders interested in participating to please notify us through our investor relations contact address. Array is also in the process of formalizing and operationalizing our internal steering committee to enhance our coordination of ESG efforts. Through this committee, we will establish our first set of ESG goals, which will serve as the foundation for our plan moving forward. We recognize the critical importance of our environmental, social, and governance disclosures. To this end, we will continue to enhance our ESG data availability and disclosures to meet the needs of our stakeholders and to improve key third-party ESG ratings. We look forward to sharing updates on these developments, and we welcome your engagement by reading our ESG report and sending us your ESG-related inquiries.
Brad Forth, Chairman
Thank you very much, Erica. First, I'd like to thank Jim for his time as CEO at Array. He has been instrumental in leading Array through a period of rapid growth and global market expansion and helping make Array the company it is today. With that, I'd like to welcome Kevin Hostetler as Array's new CEO. We ran a thorough process in the search for the next person to run this company, and we were gratified by the strong interest in the position. We interviewed numerous well-qualified candidates throughout the process, and we are pleased to have selected Kevin to join us. A little background on Kevin. He has a Bachelor of Science in Finance from Kings College and an MBA from New York University Leonard N. School of Business. His experience speaks for itself, with over 18 years of global industrial business leadership experience, including four as a public company CEO and seven as a public company reporting segment leader. Most recently, he served as CEO at Rotork, a FTSE 250 company, where he led the company through a transformation driving improved margins, capital efficiency, and commercial excellence. Prior to that, Kevin was CEO of FDH Velocitel, a PE-backed engineering and construction services firm serving the telecommunications and broader energy and water infrastructure industries, and has held ascending leadership roles at IDEX Corporation and progressive P&L, and leadership in business development roles at Ingersoll Rand. He brings outstanding leadership excellence to Array. He knows how to leverage technology differentiation and has a strong track record of delivering operational improvements while driving growth organically and via acquisitions in all regions of the world. The transition to Kevin as Array's new CEO represents an exciting new chapter for the company, and we look forward to benefiting from his extensive operational and commercial experience. And with that, operator, please open the line for questions.
Operator, Operator
Thank you. And at this time we will be conducting a question-and-answer session. And our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.
Brian Lee, Analyst
Hey, guys. Thanks for taking my questions. First one I had was, it sounds like you're expecting the STI business to have more of a non-Brazil mix in 2022. So, could you kind of level set us, how much of the STI sales mix came from the European region in 2021? How much are you kind of forecasting it could be in 2022? And then are you seeing demand accelerate in the region at all, just given the conflict that’s risen out there and any specific countries of note that you're seeing particular traction that you might highlight? Thanks.
Nipul Patel, CFO
Hey, Brian, it's Nipul. How are you? So, yeah, we're not prepared to give those specific details on STI as far as the region. But the way we would ask you to look at it is, Brazil continues to be strong. It's strong in 2021. It will continue to be strong in 2022. What we're seeing though is that Western Europe is picking up and even stronger in 2022, attributing to that mixed shift and the slightly lower margin than expected overall for that business.
Brian Lee, Analyst
Okay. Fair enough. I mean, would you say that in real-time, you've seen any additional either quoting activity or just on-the-ground engagement versus what your original plan might have been for the region when you first bought STI and as you moved into the new year?
Nipul Patel, CFO
No. They are on plan. We see activity strong in both of those regions. It's just that Spain has just picked up more.
Brian Lee, Analyst
Okay. Fair enough. My second question is about the margin trajectory. I appreciate the update you provided. At the beginning of the call, Jim discussed the pricing and cost mitigation efforts you've implemented over the past six to twelve months. With recent spikes in steel prices, investors are eager to understand how you are addressing these cost challenges in real time. Are you reflecting these changes in your pricing as you secure new bookings, which are quite robust? I'm curious about what you're observing in real time and how your discussions with customers regarding pricing are currently unfolding.
Nipul Patel, CFO
I can start with that and Jim can add anything you'd like. Since we began the new LOI process in the second quarter of 2021, we have had a different type of engagement with our customers. They are aware of changes in commodities and are becoming accustomed to our new process and the LOI. What we've discovered is that our customers are very interested in securing supply, so they are willing to agree to locked-in prices. Therefore, we believe demand remains strong. We're seeing active customer engagement with the LOI process, and nothing appears to be slowing down from that perspective. Jim, do you have anything to add?
Jim Fusaro, CEO
Yeah. I would just build on it, Brian. Given the assurance of supply that the customers want really leads to them wanting us to lock in the lead-time. So, that, coupled with the pricing action, is something that we're taking advantage of with respect to rising prices going forward.
Brian Lee, Analyst
Okay. Very clear. Thanks, guys. I will pass it on.
Nipul Patel, CFO
Thanks, Brian.
Operator, Operator
Our next question comes from the line of Philip Shen with ROTH Capital. Please proceed with your question.
Philip Shen, Analyst
Hi, everyone. Thanks for taking the questions. The first one is about the 2022 revenue guide. A key assumption is that there will be no significant impact from the AD/CVD inquiry. You've mentioned that you're in constant contact with customers, and today you published results from a survey of 200 companies that highlight the effects of the anti-circ case. Seventy-five percent of those companies reported canceled or delayed module supply, and fifty percent indicated that eighty percent or more of the 2022 solar pipeline is at risk. I wanted to check in on the potential downside risk to the 2022 guide. Specifically, how much of the 2022 guide is dependent on First Solar modules, and how much is secured independent of AD/CVD? Thank you.
Nipul Patel, CFO
Sure. I'll begin, and Jim can add in. As we've mentioned several times, our guidance range does not include any significant impacts related to AD/CVD. By that, we mean we are not anticipating any cancellations or indefinite pauses of projects. We maintain constant communication with our customers, and we are not factoring that into our outlook at this time. Our guidance primarily considers possible project delays due to supply chain and logistics challenges, but currently, we are not experiencing those issues. Additionally, we don't provide detailed information on which modules are in our backlog since we have ongoing discussions with our customers, and module specifications are constantly changing. Overall, we remain confident in the guidance and range we have provided.
Philip Shen, Analyst
How much of your revenue do you think could be driven by projects that are being installed without modules and just with tracker?
Jim Fusaro, CEO
Hey, Phil, it's Jim. That typically doesn't happen. However, as you know, we can accommodate any type of module change, including some design attribute changes. I haven't really encountered any utility scale site that is being built without modules. They will receive some of the mechanical balance of system, but it's certainly not being built without modules. If you look at Slide 7, you'll see the 91% conversion related to our order book. That's really where the conservatism is built in.
Philip Shen, Analyst
Thanks, Jim. I have one final question. On Slide 11, you provided a lot of information regarding the margin compression and subsequent expansion. Nipul, I think you mentioned that Q1 revenue is projected to be up 20% compared to Q4. Could you elaborate on the revenue distribution for the rest of the year? Specifically, do you anticipate a concentration of revenue in Q4 this year, or could you provide more insight into how Q2, Q3, and Q4 might progress throughout the year? Thank you.
Nipul Patel, CFO
Yeah. No. So, Phil, the way that our order book is laid out with the delivery schedules, it's more back to the traditional seasonality where Q2 and Q3 are larger quarters. So, that's where we see it coming out for this year as well.
Philip Shen, Analyst
Okay. Thanks for taking the questions. I will pass it on.
Nipul Patel, CFO
Thanks, Phil.
Operator, Operator
And our next question comes from the line of Mark Strouse with JPMorgan. Please proceed with your question.
Mark Strouse, Analyst
Yeah. Good afternoon and thank you very much for taking our questions. I know you're still guiding Array legacy and STI separately for 2022. Just curious though if you can update us on any kind of revenue synergies that you're seeing since that deal closed?
Nipul Patel, CFO
Yeah. So, we've been in process of the integration of STI. And as part of that, we are looking at our go-to-market strategy, Mark. As far as any revenue synergies or any synergies related to STI, we have not built anything into our guidance. We have internal targets for that and that would be upside to any of the guidance that we gave today.
Mark Strouse, Analyst
Thanks, Nipul. What does the guidance assume about the timing of when the low margin legacy business will phase out? Will it be completely done by the middle of the year? Or does the high-teens to low twenties margin you're aiming for in the second half still face some challenges?
Nipul Patel, CFO
Our longer-term margins are in the high-teens to low 20s. Based on our trajectory, as shown on that slide, we expect to return to our traditional margins in the second half, specifically in the third and fourth quarters.
Operator, Operator
Our next question comes from the line of Donovan Schafer with Collier Securities. Please proceed with your question.
Donovan Schafer, Analyst
Hi, everyone. Congratulations on the quarter. I would like to ask about what is driving the remaining legacy contracts. I think I need to break this down into two sections. First, with the legacy contracts, what is causing the uncertainty around their recognition? Is this related to the revenue recognition situation? I understand that if there is uncertainty about meeting a performance obligation, such as completing a final component or doing a final commissioning, that could affect when revenue is recognized. Is that contributing to the uncertainty around when the legacy contracts will be recognized, and is it linked to the revenue recognition aspect?
Nipul Patel, CFO
Hey, Donovan. It's Nipul. It's not. The revenue recognition policy and process is not tied to that. What's really the uncertainty is project deliveries. So, certain customers will pull forward, push-out schedules. And if they happen to fall across the quarter, it'll show up in one quarter where we haven't forecasted in another. So that's really the difference here is that uncertainty of when that actual project delivers.
Donovan Schafer, Analyst
Okay. I would like to ask about average selling prices. When you went public and shortly after, STI and other companies like SolarTech and ArcTech also went public. Everyone was closely analyzing this, and Wood Mackenzie released some reports. We focused on average selling prices on a per watt basis. However, it has been challenging to get a clear picture due to fluctuations in commodity prices, which would increase average selling prices, while the increase in panel wattages would lower them. I can estimate a range of about $0.09 to $0.15 per watt, but that is quite broad. Could you provide insights on where the industry currently stands, any changing trends, and whether certain components are included in what you observed? We're trying to better understand average selling prices right now, as it seems like we haven't been able to narrow that down for some time.
Nipul Patel, CFO
Yes, Donovan. The aspects you mentioned are what we consider for average selling prices, but we prefer not to provide a specific forecast or guidance on that. We rely more on overall revenue as our indicator because of the factors you pointed out. Average selling prices can vary widely based on whether modules are included or if the project is deployed in areas with heavy snow, among other variables that can drive prices up. Recent increases in commodity prices are also a factor. Regarding our order book, we noted that 20% of its growth is attributable to pricing changes. The current market conditions are influencing our pricing strategy, as evidenced by what we see in the order book. However, providing further insights into those factors is challenging, which is why we don't offer guidance on that.
Donovan Schafer, Analyst
Okay. My last question is a follow-up on Phil's inquiry about the AD/CVD situation. It seems that the solar industry has been facing some challenges recently, and many people may be anticipating some disappointments in the fourth quarter or in 2023. This could already be a part of the baseline expectations, although it doesn’t align with what you are forecasting. I'm curious whether the contracts in your backlog could create a scenario where there might be a non-zero risk of significant disappointment in Q4. For instance, if a contract is signed but delivery times are pushed back due to AD/CVD preventing modules from arriving, do you still expect those revenues to be secured? I'm trying to understand the legal and contractual aspects that ensure revenues are locked in as we approach the end of the year.
Nipul Patel, CFO
What I can say regarding this is that the process we started last year in the second quarter involves the customer providing us with a deposit when they award us the order. This deposit helps us secure the commodity portions of the bill of materials, which is a significant commitment from the customer to our product. Once a customer signs the Letter of Intent and provides that deposit, we have not seen a customer back out. There have been some project shifts, which is reflected in the guidance we provided, but this arrangement ensures that both the customer and we have a stake in the outcome. Therefore, we feel confident about it.
Operator, Operator
Our next question comes from the line of Kashy Harrison with Piper Sandler. Please proceed with your question.
Kashy Harrison, Analyst
Good evening everyone. Thanks for taking the questions and best of luck with your retirement, Jim.
Jim Fusaro, CEO
Thank you.
Kashy Harrison, Analyst
So, my first question, I wanted to talk about the big jump in contracted and awarded orders during Q4. Can you maybe speak to what drove the big jump for legacy Array and then also why STI's order book didn't grow that much from Q3 to Q4?
Nipul Patel, CFO
The momentum we discussed for the legacy Array in Q3 continued into Q4, characterized by strong bookings and robust quote activity that contributed to these strong bookings. We are also observing an increase in orders from our competitors, particularly from customers who hadn't previously considered Array. This trend has persisted because we have been delivering results during these uncertain times. Regarding STI, their projects tend to be smaller with a shorter outlook for their order book, so it doesn't indicate a long-term forecast. We anticipate more booking activity for the book-and-turn business in 2022. Overall, we are pleased with the growth we saw in STI from Q3 to Q4, and we believe there is still time to strengthen both the Array and STI order books as we progress through 2022.
Kashy Harrison, Analyst
That's helpful. In your prepared remarks and response to a previous question, you mentioned that pricing in the order book is up 20% year-over-year, likely comparing Q4 to Q4. This might be a challenging question, but if steel prices were to hypothetically drop to around $1,000 a ton or even lower, could you provide some guidance on how that pricing might adjust from the current levels?
Nipul Patel, CFO
We unfortunately don't have specific accounts to share. Our prices don't directly align with steel prices. However, we have established strategic partnerships with certain steel providers that offer us fixed pricing favorable for specific volumes. This arrangement helps us maintain a cost ceiling for those volumes. Therefore, I'm not sure we can provide you with a formula for how pricing would change if steel prices were to decrease. Jim, do you have anything to add?
Jim Fusaro, CEO
Yeah. Kashy, I'd like to add that we continue to focus on value pricing. A significant portion of the demand we're gaining comes from customers seeking not only reliable supply but also the fundamental performance of our products. That's where our attention lies. If steel prices decline, it would be beneficial for the entire industry. However, we will still prioritize value pricing to maintain our margins.
Kashy Harrison, Analyst
Got it. That's helpful. Can you share where you expect Q4 EBITDA margins for your business to be on a blended basis? Will you be back in the 15 plus range by the end of the year, considering that margins are projected to be weaker in Q1? Any insights would be appreciated. Thank you.
Nipul Patel, CFO
Yeah. So, Kash, just so I'm clear, you're talking in our guide for Q4 2022?
Kashy Harrison, Analyst
Sorry, Q4 2022. Sorry, Q4 2022, not year.
Nipul Patel, CFO
We are not providing guidance for that. However, I can say that we believe our margins will return to the historical levels of the legacy Array business. Our G&A expenses are somewhat higher as we discuss the need to invest for our next phase of growth. We expect to be closer to our overall longer-range targets in that quarter, but with the increased SG&A burden, it will be into 2023 before we return to that range.
Operator, Operator
And our next question comes from the line of Joseph Osha with Guggenheim Partners. Please proceed with your question.
Joseph Osha, Analyst
Hello everybody. Thanks for taking my questions. My first question is about your second half guidance, which seems to assume that you'll be able to pass most of your increased material costs onto your customers. However, utility executives from companies like Edison are indicating they prefer not to pay higher prices. So, my question is whether you believe that by the second half of this year and into 2023, you will return to historic margins and that your customers will bear the full impact of the higher metal prices.
Nipul Patel, CFO
Yeah. Joe, this is Nipul. We're currently engaged in commercial discussions to determine the appropriate pricing based on our order book, which consists of executed contracts and awarded orders. The prices for these orders are already established. Regarding our letter of intent process, we've factored in the costs associated with declining materials. In our guidance, we accounted for potential shifts in projects, including only 90% of that in our estimates, so we are not assuming that everything will proceed as planned. We're actively engaging with our customers to find a pricing solution that works for both parties.
Jim Fusaro, CEO
The other element that I would add to is we are a constant engineering design phase to really look at how we can further optimize the system. So, this whole inflationary period that we're facing right now has really opened up the communication with customers on the engineering front. So, we're designing for more efficient systems that will hopefully keep the net-net down on their price. And you've got to keep in mind too, whether you're using 10% or 15% of tracker and post as a proxy for the total site, there's still a substantial amount of cost rolled up in the labor as well. So, there's other components of utility scale site that will factor in here. And one of the areas that we remain focused on is how can we eliminate that labor, reduce that labor.
Joseph Osha, Analyst
You anticipated my second question well. Can you provide a bit more detail? Besides what you've mentioned, are there any additional ways to reduce material costs in this area? I'm interested in whether you engage with companies like wiring harness manufacturers or if there are any methods to lower material or labor costs in this process.
Jim Fusaro, CEO
Yes, we are examining every part of the entire build, including both mechanical and electrical systems. We are diligently working within our company and with key suppliers to improve manufacturability and design for assembly. Our approach covers the entire process from sourcing to assembly, which includes how we deliver components to the site and how they are staged. We currently have active programs with all our customers focused on further optimization.
Operator, Operator
And our next question comes from the line of Colin Rusch with Oppenheimer & Company. Please proceed with your question.
Colin Rusch, Analyst
Thank you so much. I guess, can you talk a little bit about the geographic disbursement of the quotation activity that you're engaged in right now?
Nipul Patel, CFO
For the legacy Array business, it is still mainly based in the U.S., with a distribution of approximately 95% in the U.S. and 5% elsewhere. Regarding the overall business, the STI segment is primarily international. Combining the two, I would estimate that about 75% of our quotation activities are in the U.S. and 25% are international.
Colin Rusch, Analyst
Okay. And then, if you look at the margin recovery through the balance of the year, how much of any sort of savings around shipping is being embedded into those numbers and assumptions?
Nipul Patel, CFO
We have discussed this in previous calls. When providing quotes to our customers, we take into account the most recent shipping costs we can estimate. We have some shipping lanes secured under contract. Therefore, our quotes reflect our current situation. It’s important to note that shipping costs are variable and like many businesses, we find it challenging to fix every shipping cost. However, we utilize various strategies to manage and reduce these costs. Consequently, we are confident in how we have factored shipping costs into our overall guidance and EBITDA margin.
Colin Rusch, Analyst
Okay. Thanks guys.
Operator, Operator
And our next question comes from the line of Jeff Osborne with Cowen and Company. Please proceed with your question.
Jeffrey Osborne, Analyst
Good afternoon. I have two quick questions. You've shared quite a bit about what you're not hearing from your customers regarding the AD/CVD issue, but I'm curious about what you are hearing during your ongoing discussions. Are customers indicating that they're working on resolving the situation and will follow up with you? What specific feedback can you share?
Jim Fusaro, CEO
Yeah. I would say the customers are looking at it from the lens of unknown as well, but they are certainly looking at it where they can source modules elsewhere. And I think that's where we bring considerable strength given that we're fairly module agnostic and that you can do a module swap-out without substantial changes to the overall system. So, that's kind of where their focus is right now. Obviously, it still remains an uncertainty for everyone in the industry.
Jeffrey Osborne, Analyst
It seems a bit unusual to cancel contracts when you have both a land position and an interconnect permit by the time you purchased trackers. So, stating that there are no cancellations isn't surprising. However, could you elaborate on the changes in modules? How long does that process take? I assume it involves changes to module rails, torque tubes, and other components, but is it a process that takes a few days, weeks, or months? Can you walk us through that?
Jim Fusaro, CEO
Yeah. Depending on the size of the project, you could use two weeks as a proxy on typically what it takes. The post count, the post dimensions, module spacing, things of that nature with the module wattage per row, things of that need to be done, but typically two weeks that can be done.
Operator, Operator
And we have reached the end of the question-and-answer session. I'll now turn the call back over to management for closing remarks.
Jim Fusaro, CEO
Okay. Thank you. I definitely want to thank everyone for your engagement over the past year and a half. And certainly, special thanks to everyone at Array. It's truly an amazing team. I really look forward to seeing what Array accomplishes under Kevin's leadership. So, with that, thank you everyone.
Operator, Operator
And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.