Earnings Call Transcript - ARRY Q1 2021

Operator, Operator

Good evening, and welcome to Array Technologies First Quarter 2021 Earnings Conference Call. Today’s call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I’d like to turn the conference over to Cody Mueller, Investor Relations of Array Technologies. Thank you. You may begin.

Cody Mueller, Investor Relations

Good evening and thank you for joining us on today’s conference call to discuss Array Technologies first quarter 2021 results. 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 and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission, each of 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 first quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Jim Fusaro, Array Technologies’ CEO.

Jim Fusaro, CEO

Thanks, Cody, and good evening, everyone. Thank you for joining our earnings call. In addition to Cody, I’m joined today by Nipul Patel, our Chief Financial Officer; and Jeff Krantz, our Chief Commercial Officer. I’m going to focus my remarks today on three areas: First, how our first quarter results compared to our expectations; second, how we see demand evolving for our products; and third, the current commodity and shipping cost environment, how it impacts Array and the actions we are taking in response. Then, I’ll turn it over to Nipul for a detailed review of our first quarter results. Revenues for the first quarter of 2021 were $246 million, which was in line with our expectations. Adjusted EBITDA was $34.5 million, which was slightly below expectations, primarily as a result of higher logistics costs, resulting from unexpected increases in inbound freight costs. Demand for our products remains strong, with quoting activity at the highest levels we have seen in our history. We believe the superior value that our tracker system delivers is being recognized by a growing number of EPCs, developers, and asset owners globally, and is underscored by the up to 4 gigawatt award that we recently received from Primoris, one of the largest solar EPCs in the U.S., as well as the 350 megawatts of awards we received from nine international customers during the first quarter. Increasing panel efficiency, falling storage costs, and growing regulatory support are expanding the lead that solar has over other conventional generation and other renewables. More than ever before, solar energy is becoming the first choice for new generation. Unfortunately, at the same time, as we are seeing record demand for solar, our industry is contending with increases in steel and shipping costs that are unprecedented, both in their magnitude and rate of change. From the first quarter of 2020 to the first quarter of 2021, the spot price of hot rolled coil steel, the primary raw material used in our products, has more than doubled. Many industry analysts and market participants expected the dramatic increase in the price of steel to be temporary, which was reflected in futures markets that had indicated lower steel prices for the second half of the year throughout most of the first quarter. Based on those expectations, we felt confident in our ability to manage our input costs and maintain our margins. However, steel prices have continued to increase, with spot prices of hot rolled coil up more than 10% since April 1st, and futures now indicate higher rather than lower steel prices for the remainder of the year. Steel represents almost half of our cost of goods sold, and we do not hold large amounts of steel in inventory. So, a significant increase in the price of steel over a short period can negatively impact our results. Coinciding with the increase in steel prices has been substantial increases in the cost of both ocean and truck freight. The average cost to ship a container from Asia to the West Coast has increased by more than 145% from April 2020 to April 2021. There also remains a significant disruption across several U.S. ports, resulting from the April Suez Canal accident and the February Texas storm, which has resulted in higher storage and expediting costs that we would not otherwise have had in a normal environment. The cost of truck freight has also increased significantly, with the average cost per mile in the first quarter of 2021, up more than 30% versus last year, and costs have continued to increase in the second quarter. The continued increases in both steel and freight costs will impact our margins in Q2, and potentially in subsequent quarters, if prices do not normalize. In response, we are taking several actions to mitigate the impact on the balance of the year. First, we are increasing prices. For open contracts that we have not yet shipped product against, we are currently evaluating how much of the commodity and shipping costs increases to pass on to our customers. We will make those determinations based on the specifics of each customer and situation. Given that steel prices continue to increase and the large number of open contracts that we have, it will take time for us to evaluate each contract and determine the best course of action. The exercise is complicated, because we have to balance the possibility that customers will delay orders if we pass through too much of the increase in steel prices on the basis that they may believe prices will be lower if they wait and take their order later in the year. The two-year extension of the ITC has given customers more flexibility on when they start their projects than they had in the past. Second, we are entering into long-term supply agreements with steel suppliers at fixed prices. For example, we recently entered into an agreement with Nucor to supply us with steel components at a fixed price. Third, we are further diversifying our steel supply base. For example, we recently entered into a supply agreement with a new international steel supplier, at what we believe is an attractive price, given the current environment. Fourth, we are entering into long-term contracts with Tier 1 freight providers to give us greater certainty on logistics costs and delivery performance. And fifth, we are extending the standard order lead times that we quote to customers to give us more time to procure raw material at the best price. However, given the continuing increases we are seeing in steel and freight costs, as well as our ongoing review of open contracts to assess what costs we will pass on to customers, we are not able to affirm our previously provided guidance for the full year. We expect to update our guidance once we have completed the review of all of our open purchase orders and commodity and shipping prices remain stable for a long enough period to give us confidence in using them to develop a forecast for the remainder of the year. Importantly, we believe our competitors are being impacted by the same cost increases that we are experiencing, and in certain cases much more significantly because their smaller size gives them less buying power with suppliers. We believe the near-term pressure that is being created by the current environment may enable us to accelerate our market share gains because some of our competitors may not be able to deliver on customer commitments, given their inability to procure raw materials at a competitive price or at all. We’re in an environment where scale and deep supply chain relationships are significant competitive advantages, and we have both. Now, I’ll turn it over to Nipul for a review of our first quarter results.

Nipul Patel, CFO

Thanks, Jim. Before I talk about our first quarter results, it is important to keep in mind that our 2020 results were heavily first-half weighted as a result of our customers seeking to lock in the 30% ITC, prior to its step down at the end of 2019. This caused our customers to place the bulk of their orders in the back half of 2019, and then take deliveries in the fourth quarter of 2019 and the first two quarters in 2020. As a result, comparing a single quarter in 2021 to the same quarter in 2020 is not indicative of the trajectory of our business since the ITC step-down skewed revenues in 2020 to Q1 and Q2. I’ll now review our first quarter results. Revenues for the first quarter decreased 44% to $245.9 million, compared to $437.7 million for the prior year period, primarily driven by a reduction in the amounts of ITC safe harbor related shipments that I discussed earlier. Gross profit decreased 63% to $43.9 million compared to $118.4 million in the prior year period, driven primarily by lower volume in the quarter. Gross margin decreased from 27% to 18%, driven by less revenue to absorb fixed costs, somewhat lower ASPs compared to the 2020 safe harbor shipments, higher input costs, primarily due to higher steel prices and higher freight costs, resulting in part from disruptions caused by the winter storm in Texas, as well as West Coast port closures and congestion. Operating expenses increased to $30.8 million compared to $17.1 million during the same period in the prior year, primarily as a result of a $6.2 million increase in equity-based compensation due to the transition to being a public company, $2.4 million of one-time costs related to our common stock follow-on offerings, higher costs associated with being a public company, and an increase in headcount to support our product development and international growth initiatives. Net income was $2.9 million compared to $73.7 million during the same period in the prior year, and basic and diluted income per share were $0.02 compared to basic and diluted earnings per share of $0.61 during the same period in the prior year. Adjusted EBITDA decreased 69% to $34.5 million compared to $110.7 million for the prior year period. Adjusted net income decreased 71% to $23.7 million compared to $82.3 million during the same period in the prior year. And adjusted basic and diluted adjusted net income per share was $0.19 compared to $0.69 during the same period in the prior year. Total executed contracts and awarded orders at March 31, 2021 was $777.1 million, representing a 10% increase from the amount at December 31, 2020. Turning to our outlook. As Jim mentioned earlier, given the continuing increases we are seeing in steel and freight costs, as well as our ongoing review of open contracts to assess what costs we will pass on to our customers, we are not able to affirm our previously provided guidance for the full year. Looking ahead to the second quarter, we expect commodity price increases to delay some project starts, which will result in lower revenues and adjusted EBITDA versus the first quarter. Now, I’ll turn it back over to Jim for some closing remarks.

Jim Fusaro, CEO

Thanks, Nipul. I’ll conclude by saying, despite the short-term headwinds we face from commodity and shipping cost increases, we remain well-positioned in a rapidly growing industry. The outlook for solar remains very strong. Businesses and consumers continue to accelerate their efforts to decarbonize energy. The regulatory environment is extremely constructive. And solar with trackers has demonstrated it is the lowest cost and most environmentally-friendly form of new generation. We have built strong relationships with our customers and suppliers, and we will continue to work daily with them to ensure that we can continue to support the growth in the solar industry while striving to deliver strong returns for our shareholders. We believe that what we are seeing in steel prices and shipping costs is temporary and does not suggest to us a permanent change in our cost structure or margins. We believe there is more than sufficient steel production and shipping capacity globally to meet the world’s needs, and we expect prices will normalize once the restart of the global economy is complete following the pandemic shutdowns. As inventory is rebuilt and supply chains refilled, we are confident we will see more rational pricing ahead. In the meantime, we will aggressively work our mitigation efforts and look for opportunities to use the current environment to play offense by leveraging our size and scale. We believe we will emerge stronger competitively when conditions normalize than when we entered into the current environment. And with that, operator, open the line for questions.

Operator, Operator

Our first question is from Brian Lee with Goldman Sachs.

Brian Lee, Analyst

Maybe first one, just feel like a lot of people are going to have this question. But, on the open contract construct, can you walk us through that a little bit more in detail? I was under the impression that once you accept the PO, you go straight into the market or quickly thereafter and order the required materials, so that you have a bit of a natural hedge against input cost increases. I would have imagined you would have factored in logistics costs at the same time that you’re pricing these contracts. So, could you maybe just refresh us on the timeline of you setting a price with the customer and then when you order from your supply chain and kind of what the mismatch is here?

Jim Fusaro, CEO

The typical cycle time for customer contract negotiations usually ranges from 4 to 6 weeks, depending on the project's size and complexity as well as how much engineering work is done beforehand. Once we finalize the bill of materials, we reach out to our supply chain for indicative quotes to support the quoting process we provide to the customer. Under normal conditions, with stable commodities, these indicative quotes would align closely with the future market trends. However, we've observed significant price increases recently, such as a 10% rise in hot rolled coil since April 1st. Initially, we were able to offer prices with futures pointing downward, leading us to feel confident. By the time we reached the contract signing stage, prices had risen even though futures were declining. Often, this created a situation where, after agreeing on a price and securing a purchase order, we faced further price hikes with our suppliers. This lag between pricing agreements and supplier negotiations contributed to a notable increase in our cost of goods sold. This summarizes the mechanics and timelines of our pricing and sourcing process.

Brian Lee, Analyst

Okay. That’s super helpful. And then, maybe just as we think about the rest of the year here, you’re saying that there’s definitely an impact on Q2, sounds like on margins. And then, as you contemplate how to do some of the mitigation factors, including price, sounds like you’re worried that some volume might slip into a later period, outside of ‘21, hence, why the guidance isn’t being reiterated here. I guess, what’s the sort of volume level that you still have, which you would consider in that open contract phase where you are sort of at risk of either not being able to secure the volume or you’re potentially going to have to take a going to potentially margin hit relative to what you initially were thinking when you first quoted the contracts? Just trying to get a sense of how much of the backlog awarded orders volume might actually be at play here. And then, I have one last follow-up.

Jim Fusaro, CEO

Yes. Thanks, Brian. I’ll put it in a different context. We’ve got roughly about 100 or so open contracts that we’re currently assessing, so, where there’s a lot of analytics that we have to run through. So, we’ve got price, which you mentioned; long-term supply agreements, which we obviously announced recently here with Nucor. We continue to diversify the supply chain, which, when you do that, right, you build in an element of logistics, what does that cost, and then the freight agreements that we’re executing to, because in as much as we want to lock down our suppliers on the commodity element, we want to do the same thing with freight, and then, extending lead times for our customers. So, when you factor in price and lead times, the commercial team has to work with our customers to see what appetite they have, where that stands with relative to the project within their time horizon, does it move to the right, how far to the right. So, that’s something that we’re actually assessing, and I really can’t give you an exact answer on where it is. And that’s why we have to really sit down and go through these analytics to understand how much we can control within our own four walls and then the impact to our customer.

Brian Lee, Analyst

All right. Fair enough. And then, maybe just one last housekeeping one and I’ll pass it on. There was a $10 million line item called investment in equity securities on the cash flow statement this period. Could you elaborate on what that was? Just I hadn’t seen that before.

Nipul Patel, CFO

Yes. And hey Brian, it’s Nipul. How are you? So, this is what we had talked about in our Q4 call. We did take an investment in a company, and that’s what that represents.

Operator, Operator

Our next question is coming from the line of Michael Weinstein with Credit Suisse.

Michael Weinstein, Analyst

I guess, what’s your decision-making process for not hedging steel using, let’s say, financial hedges going forward? You’re talking about locking in a fixed price contract with Nucor at this point. But, why not hedge what you think the volume will be for the next year?

Nipul Patel, CFO

Yes. Hey Michael, this is Nipul. In the past, we have not adopted that strategy. We worked with our suppliers and allowed them to assume that risk. When commodity prices were stable, it was manageable. However, we are open to exploring different approaches in the future for securing supply over the long term.

Michael Weinstein, Analyst

And why not give revenue guidance now? Is the supply chain tightness impacting project construction schedules to an extent that you can’t give revenue guidance?

Jim Fusaro, CEO

Yes, Michael, I would just reiterate what we mentioned earlier. There’s a new pricing structure we are implementing for our customers, and they will need time to adjust to it. Our lead times will also increase, which they will need to consider. These are the two main factors we will work on with our customers to determine what is feasible and what is not. Therefore, it is still too early for us to provide any volume commitments or revenue guidance at this time.

Michael Weinstein, Analyst

Do you have any recourse built into your contracts for existing deliveries? Is there any flexibility in your current contracts that allows you to pass along these costs, or are they fixed?

Jim Fusaro, CEO

Every contract is different. So, there’s some customers that will work with us on lead times relative to what buffer they put in their contract. So, everyone is different. There’s typically a little bit of headroom to work with. Everyone gives themselves a little bit of white space, if you will, on delivery. But, given where logistics are today in the current environment, it becomes quite challenging.

Operator, Operator

The next question is coming from the line of Paul Coster with JP Morgan.

Mark Strouse, Analyst

Yes. Good afternoon. This is Mark Strouse on for Paul. Thanks for taking our questions. Jim, I appreciate your comments about the futures market in the second half of this year. Just curious what you’re hearing from your actual suppliers, though. Are they looking to add any incremental capacity or anything like that that might lead to a different outcome?

Jim Fusaro, CEO

They all have a different investment thesis, and their demand profiles vary. You’ve got some out there that are supplying the automotive industry, others for more infrastructure-focused, structural, if you would. Demand remains relatively high across the board, at least this is what we’re telling us. You’d have to do your own deep dive on what they’re saying in their earnings releases. But for the balance of the year, at least what futures are indicating that they continue to rise. So, that’s indicative of the demand. To the extent they’re going to add capacity, that’s really how they’re going to really deploy their capital, whether they’re going to bring those furnaces and mills back up or not. And part of that, Mark, I think this is Mark, correct?

Nipul Patel, CFO

Yes.

Jim Fusaro, CEO

Mark, that’s part of our analytics. When we deal with our suppliers and these long-term supply agreements, we’re obviously looking for the commitment to support the capacity, because one of the things I want to press upon is, as when we go into these supply agreements, we want to make sure that we’re locking down the assurance of supply. And that’s resonating with a number of our customers here.

Mark Strouse, Analyst

Okay. And then, as far as the balancing act between kind of near-term financial impact and longer term, keeping your customers happy and potentially gaining share, I mean, looking at approximately or approaching 50% of your bill of materials that’s steel in those prices doubling, I mean, are you willing to accept very near term, at least, kind of close to breakeven or even negative gross margins in order to gain some share? Just any kind of color you can provide as far as near-term pain versus long-term gain would be helpful.

Jim Fusaro, CEO

Yes. I would preface it, Mark, by saying, first of all, the industry is still very healthy with respect to the growth and what solar does overall for new electricity generation. So, the train has left the station there. But again, this is part of the analytics that we’re driving here to really balance between these short-term projects, i.e., those 100 contracts or so that we’re flushing through versus their overall portfolio and where that lands. But, I wish I could give you more color. But, we just got to put pen to paper here and sit down with the customers and really flesh this out.

Operator, Operator

Our next question is from the line of Stephen Byrd with Morgan Stanley.

Stephen Byrd, Analyst

I guess, thinking about the nature of the contracts, you’ve given us a lot of color to think through. At a high level, I guess, stepping back, is there a chance that this kind of a commodity shock could result in sort of different structure contracts in the future, sort of fundamental changes in how contracts are structured? I know, it’s early days, but just curious, do you think this is something where you and your customers can sort of look at this and think through a different approach in the future in terms of how to mitigate these risks?

Jim Fusaro, CEO

That’s exactly what we’re doing, Steve. These are the conversations we’re having with the customer. I think, what Nipul alluded to earlier, we have a very strong supply chain, very diversified. So, we never really had to give that volume commit. So, when you add times where commodities were somewhat normalized, that worked well. I think, I even mentioned on the last earnings release that we certainly want to be working with our supply chain and firming it down. I’m not a strong proponent of giving volume commits, but certainly, in these times, that’s kind of where we’re heading. Now, how that changes the contractual language, what that means for the customer and how that construct really comes forward, that’s customer by customer. And that’s exactly what we’re doing here throughout the balance of the year.

Stephen Byrd, Analyst

Understood. And in some other parts of clean tech, we’ve seen sort of ideas around shared pain and gain. And I’m guessing that could be at least one option that you could consider here as well.

Jim Fusaro, CEO

Potentially.

Stephen Byrd, Analyst

Okay, understood. Lastly, you mentioned in your prepared remarks how this situation is affecting you and your competitors. Could you expand a bit on how you view your competitive position? I know it's not always easy to precisely gauge where your competitors stand, but based on what you've observed, can you provide some additional insights?

Jim Fusaro, CEO

Yes, I want to emphasize our belief that our size and scale, along with our shipments, contribute to our value. When we interact with companies like Nucor and others, they recognize the benefits we offer and are willing to formalize agreements based on our performance. Our supply chain is responding very positively to our growth in this industry, reflecting our capabilities. The recent press release from Primoris highlights the strengths we bring, particularly our ability to secure long-term supply agreements. This is where we focus, and we believe it will continue to be a strength for us moving forward.

Stephen Byrd, Analyst

Understood. This could potentially lead to a situation where smaller players may not be able to provide the necessary volume and could exit the business if they face enough challenges. We'll have to keep an eye on how this develops.

Jim Fusaro, CEO

Yes. I wouldn’t speculate on that. I would just kind of point you back to where our strengths are, our demonstrated results.

Operator, Operator

Our next question is coming from the line of Colin Rusch with Oppenheimer.

Colin Rusch, Analyst

Could you speak to the geographic concentration on the projects that are getting pushed out to the right? Is that primarily in North America, or are you starting to see that in Europe as well?

Jim Fusaro, CEO

I will need to follow up regarding the geographic impact. Currently, I do not have that information available, but it will be part of our analysis. I can say we are experiencing this globally, particularly in Western Europe.

Colin Rusch, Analyst

Okay. That’s super helpful. And then just in terms of kind of normalized seasonality, you guys have a really good view on construction schedules and kind of how these time frames work. And obviously, there’s some demand inefficiencies here that you’re speaking to. But, just in terms of kind of overall demand and normalized seasonality ex some of the basic supply chain issues, are you seeing incremental growth this year in the way that you had anticipated, or is it something that’s a little bit more systemic here that may last a little bit longer around some of the seasonal impacts?

Jim Fusaro, CEO

No. I would go back to what I said earlier. The overall industry remains healthy and strong. We’re not seeing like any serious dislocation long term. Like I said, this is something that we see as rather short term. And obviously, we’re going to assess that with our customer base, but not on a longer-term basis. So hopefully, I’m answering that question.

Operator, Operator

Our next question comes from the line of Philip Shen with ROTH Capital.

Philip Shen, Analyst

Could you provide more detail on the Nucor contract? I apologize if I missed this, but could you clarify the length of the contract? Are you aligning the Nucor contract with a customer contract, for instance? Additionally, what other structures do you have in place, especially regarding pricing—when you lock in price, are you securing it at a discount to spot prices or a premium? Any specifics you can share would be greatly appreciated.

Jim Fusaro, CEO

Yes. Unfortunately, I can’t get too much specific surrounding that agreement because our size and scale and our ability to get these contracts is a competitive advantage. But, I will tell you that it certainly is a discount to spot.

Philip Shen, Analyst

Great. That's helpful. Can you, from a length standpoint, tell me if it's a year long or if it's aligned with the customer contract? Is that something you feel comfortable sharing, Jim? Thanks.

Jim Fusaro, CEO

No, not at this juncture right now. Certainly, we obviously have obligations, confidentiality with Nucor. So, I just want to respect that.

Philip Shen, Analyst

I appreciate that. You've mentioned this in various ways, but regarding Q4, which you reported just two months ago, you talked about the significant increase in steel and freight costs since early April. What additional factors do you believe influenced your decision to withdraw the guidance for now? Were those the only two factors, or were there others? Any insights would be appreciated.

Jim Fusaro, CEO

Yes. I want to reiterate what we've said before. The significant aspect has been the rate of increase. Since April 1st, hot rolled coil prices have risen by 10%, and they continue to climb. Comparatively, during the same period last year, from the first quarter of 2020 to the first quarter of 2021, the increase was twofold. The pace of this increase has been a key factor. Additionally, from April 2020 to April 2021, freight costs have surged by 145%, and that has all occurred since the beginning of April. Many things have changed significantly. At the start of April, futures were actually indicating a drop in steel prices for the latter half of the year, which gave us some optimism. However, those futures have now risen sharply. A lot has shifted since April 1st, prompting us to reassess pricing, revisit long-term supply agreements, enhance supplier diversity, secure long-term contracts with freight carriers, and extend lead times. These have become the main pillars that have changed since our last discussion.

Philip Shen, Analyst

Okay, understood. Last quarter, you mentioned that Q1 would be 20% to 25%, Q2 would be 25% to 30%, and Q3 would be the same, with Q4 expected to be 20% to 25%. I realize Q2 is now looking to be down. Can you provide any insight on what Q3 and Q4 might look like, or is it not feasible to predict that until you review those 100 contracts?

Jim Fusaro, CEO

Yes, unfortunately, we are in the situation you described. We need to go back to the customer regarding these prices. I want to remind you that we have already completed the first phase of price increases. Now, we need to determine what the extended lead time means and how these ongoing cost increases are affecting our pricing. We have to evaluate this with our customers.

Operator, Operator

The next question is coming from the line of Martin Malloy with Johnson Rice.

Martin Malloy, Analyst

The first question I had on the international markets where you continue to add customers. Are these markets where they previously were not using trackers, or are you gaining market share from customers that were previously using trackers?

Jeff Krantz, Chief Commercial Officer

Yes. Hi. Martin, it’s Jeff Krantz here. A quick answer to your question is, it’s more of the latter. We’re actually taking some share from some European tracker companies in markets that had already been established with trackers.

Martin Malloy, Analyst

Okay. In the last call and with the previous earnings release, you mentioned the ongoing R&D investments you plan to make. Can you provide any updates on the timing for when we might expect to see new product introductions?

Jim Fusaro, CEO

No. Our investment continues on the R&D. Nothing material has changed from what we plan to roll out. And I would love to invite you out to come to our research center, so you can see what we have planned.

Operator, Operator

Next question is coming from the line of Kashy Harrison with Simmons Energy.

Kashy Harrison, Analyst

So, first one, Jim, just a really simple question. What’s your base case on how long it’s going to take for the business to normalize? Are you thinking we’ll be back to normal in 2022, or are you thinking we’ll return to normal in 2023?

Jim Fusaro, CEO

I wish I knew what the future holds for steel, but no one seems to have figured it out yet. However, we are committed to understanding the impacts and ensuring we can continue our operations effectively. I don't have any special insights into steel futures or what 2022 will look like. What we are focused on right now is establishing the right agreements with our suppliers and freight forwarders to secure lead times and pricing for our customers as we navigate the significant increase in commodity prices.

Kashy Harrison, Analyst

I appreciate the honesty there. In regard to the long-term agreements you are considering or have entered into, do you have any concerns that once we emerge from this situation, these contracts might hinder your ability to meet the long-term EBITDA margin target you previously outlined?

Jim Fusaro, CEO

Great question. The key there is making sure that you have key strategic suppliers and many of them, so that you at least have some flexibility and ability to move should they go in either direction, i.e., the commodity. And then, obviously, we work with our suppliers for the proper and appropriate off-ramps to manage accordingly.

Kashy Harrison, Analyst

Okay. And then, one last question for Nipul. Working capital was a significant use of cash in Q1. How do you plan to approach it for the remainder of the year? Should we anticipate working capital becoming a source of cash, or do you think it will continue to be a cash drain from Q2 to Q4?

Nipul Patel, CFO

Yes. Hey Kashy. So, Q1, the reason it was a source was related to the linearity and the ITC order placements and the prepayments in Q4. So, we fully expected that. As we ramp up for the build seasons here in Q2 and Q3, we expect a little bit of use. But then, by full year, we expect it to be a total source of cash.

Operator, Operator

At this time, we’ve reached the end of our question-and-answer session. Now, I’ll turn the floor back to management for closing remarks.

Jim Fusaro, CEO

Thank you. And thank you, everyone. I’ll just go back to the prepared remarks for the concluding statement here, and that is the headwinds we face from these commodity and shipping cost increases, we definitely feel we’re well-prepared and positioned and are executing to the plans that we have outlined. And solar remains to be very strong. We continue to build relationships with our customers and suppliers, and we’re going to continue to work with them on a daily basis. So, with that, we’re fully committed. We certainly appreciate your time. And with that, I’ll turn it back to the operator to close.

Operator, Operator

Thank you. This will conclude today’s conference. Thank you for your participation. You may now disconnect your lines at this time.