Array Technologies, Inc. (ARRY) Q4 2021 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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.

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.

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 cost coming down the curve, not the other way around. This abrupt change have ended the way the industry thought about risk and necessitated a rapid and meaningful change 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 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 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, the availability of them 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 educate the administration in Congress, that in order to meet its longer-term kind of 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 rewarded 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 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. There's been such an honor and privilege to lead this company over the last four years. As I look back at all of the team has accomplished, I could not be more proud. We've had a number of significant achievements, 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.

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 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 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 AR 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 difference in timing and the total value of the underlying projects have 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 adjusting 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. It also reflects a higher AR balance due to higher sales in the fourth quarter, as well as the increase in unbuild receivables discussed earlier. 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 that 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 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 discuss our outlook in total 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 and update should anything materially change. Moving down to adjusted EBITDA. We expect to be in the range of $170 million to $210 million. The midpoint of this range is slightly below the $200 million of combined earnings power we previously discussed, but reflects two changes since that time. One, increased certainty around project timing, which has led us to be more conservative on our revenue outlook. And two, an increase in our adjusted SG&A spend, which we expect to run between $25 million to $30 million per quarter in 2022. The increase in our SG&A spend is reflected of a need to invest in our business systems, processes and people to ensure we are ready for the next phase of growth. We expect adjusted EPS to be in the range of $0.55 to $0.74 per common share. This implies growth of over eight times at the midpoint from our 2021 adjusted EPS of $0.07. Additionally, for the full year 2022, we expect to return to being free cash flow positive with us generating over $100 million, the bulk of which we anticipate to occur in the second half. Complicit in these numbers are an expectation that our Q1 revenue will be approximately 20% higher than the 2021 fourth quarter, and our adjusted EBITDA will be slightly below breakeven due to the margin expectation for the quarter and the increase in SG&A, both of which I've previously mentioned. We don't expect to provide quarterly guidance going forward, but given the industry-wide challenges, we believe it is to give a look into Q1 to set expectations and trajectory correctly to start in 2022. Finally, we have also provided a breakdown of revenue and gross margin ranges by company and will report actual results for these two metrics discreetly for the remainder of the year in order to give visibility into the two businesses. However, as we more fully integrate, we may not continue to provide this level of separation. You will note here that Array margins in the mid to high teens are reflective of the progression we showed on the previous slide. The STI margin expectation in the low 20s is expected to be down year-over-year due to a mix shift in its business. In 2022, the company is expecting to see a larger proportion of its revenue from outside of Brazil, where margins are lower. Altogether, we believe this is an exciting outlook for Array and a return from a tough 2021. The top line is growing in excess of what we expect the market to grow at, and with the margin recovery here in the U.S. and the addition of STI, we will see significant improvement in our adjusted EBITDA. Now I'll turn it over to Erica to give you an update on our ESG efforts. Erica?

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 and 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. With that, I'll turn it over to Brad to discuss the announcement of our new CEO.

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 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. And 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, executive advisor to Wind Point Partners where he served as CEO of two portfolio companies. He 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 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.

Thank you. And at this time we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your question.

Hey, guys. Thanks for daily 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.

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 is 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.

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?

No. They are on plan. We see activity strong in both of those regions. It's just that Spain has just picked up more.

Okay. Fair enough. And then, just -- my second question on the margin trajectory. Appreciate you guys giving us an update on that. Just -- I know the beginning of the call, Jim talked about some of the pricing and cost mitigation efforts you guys have gone through over the course of the past six, 12 months. With steel prices spiking again here recently, I think investors are sort of keen to understand how you're mitigating those cost challenges again as they pop up here real-time. And are you seeing that in your pricing as you're capturing new bookings here, which obviously are very strong, but you're now having to deal with this spiking cost input environment? Again, just wondering what you're seeing here real-time and what your customer discussions, engagements on pricing are at the moment?

Yeah. I can actually start with that and Jim can add anything you'd like. But -- yeah, hey, Brian, so, because -- since we started the new LOI process in Q2 of 2021, we basically kind of had a different kind of engagement with our customer. They know and they look for the different changes in the commodities as well and they are now getting used to us with our new process and the LOI. What we found out, Brian, is our customers are really keen on securing supply. So, they are willing to pay it with locked-in prices. So, we feel that the demand continues to be strong. We get -- we're getting customer engagement with the LOI process, and we're not seeing anything really slow down from that perspective. I don't know, Jim, if you have anything.

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. So.

Okay. Very clear. Thanks, guys. I will pass it on.

Thanks, Brian.

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

Hi, everyone. Thanks for taking the questions. The first one is around the 2022 revenue guide. A key assumption in there is that you see -- or that presumes no material impact from the AD/CVD inquiry. And you said multiple times you're in constant contact with customers. Seeing you just published those results of a survey of 200 companies today, highlighting the impact of the anti-circ case, and 75% of the companies reported canceled or delayed module supply, 50% of the responses reported 80%-plus of 2022 solar pipeline is at risk. So, wanted to just check in to see what is the potential downside risk to the 2022 guide. For example, how much of the 2022 guide has first solar modules tied to it? And then, how much of it has modules that are secured independent of AD/CVD? Thanks.

Yeah. Hey, Phil. I'll start and Jim, you can jump in. But as we said several times on the call, on the prepared remarks, our guidance range doesn't contemplate any material impacts related to AD/CVD and what do we mean by that. And we mean any cancellations or indefinite pauses of projects, we're in constant contact with our customers and we don't -- we aren't carrying that at this point. So that our guide doesn't contemplate that. Our guide really contemplates any potential project delays just based on supply chain and logistics issues. But right now, we're not seeing that. And we're not -- we don't provide like big info that you just asked the detail on which modules are in our backlog because we're in constant discussions with our customers, and modules are changing at all times. But we feel good about the guide that we've provided in the range.

Okay. Thanks. How much of the 2022 non-STI -- well, okay. So, let me shift over to a different question. How much of your revenue do you think could be driven by projects that are being installed without modules and just with tracker?

Hey, Phil, it's Jim. That typically doesn't happen. But obviously, as you know well, we can accommodate any type of module change. Some design attribute changes, for example. But -- yeah, I really haven't run across any utility scale site that's being built without modules. They'll take delivery on some of the mechanical balance of system, but there I say it's not being built without modules. And if you do look on -- I will point you back to Slide 7, where we talk about the 91% conversion against what our order book looks like. That's really where the conservatism is built in.

Thanks Jim. One last one here. On Slide 11, you gave us a lot of detail on that margin compression and then expansion again. And Nipul, I do think -- I think you gave details on the Q1 revenue cadence being up 20% versus Q4. I was wondering if you could talk through for the balance of the year, do you see concentration in that revenue in Q4 of this year, or perhaps give a little bit more color on the cadence of how Q2, Q3 and Q4 might evolve as we go through the year? Thanks.

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.

Okay. Thanks for taking the questions. I will pass it on.

Thanks Phil.

And our next question comes from the line of Mark Strouse with JPMorgan. Please proceed with your question.

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?

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.

Okay. Thanks Nipul. And then, does the -- just what does the guidance assume regarding the -- kind of the timing of when the low margin legacy business kind of burns off? Is that completely by the middle of the year? Or does the high-teens to low 20s margin you're targeting in the second half, does that still have some headwinds baked in?

Yeah. So, our -- if you recall, our longer term margins are in the high-teens, low 20s. So, the way that our trajectory comes out, we showed on that slide is really by second half into the third and fourth quarter, we're back to our traditional margins.

Great. Okay. Very helpful. Thank you.

Our next question comes from the line of Donovan Schafer with Collier Securities. Please proceed with your question.

Hi, guys. Congratulations on the quarter. I want to ask about the -- kind of what is it that's driving the -- so for the remaining legacy contracts? And I guess, I think, I need to break this into two sections. So, the first is, with the legacy contracts, what's driving the uncertainty around the recognition of those? And I guess, it does kind of blend -- is it related to the revenue recognition situation, because like I understand if there's some uncertainty around when you meet a performance obligation maybe with the final component or maybe you have to do a final commissioning or something that's sort of checking certain boxes that has to happen for the revenue recognition. Is that part of what's causing the uncertainty of when the legacy contracts end up getting recognized? And is that tied to kind of the revenue recognition part of it?

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 -- the difference here is that uncertainty of when that actual project delivers.

Okay. And then, if I could ask about ASPs. So, when you guys came out -- went public and then shortly after, STI went public and then there also been SolarTech and ArcTech. Everyone was kind of looking at this really closely. And Wood Mac trades some reports. And I think we all got kind of dialed in around ASPs on a per watt basis. But it's been hard -- I feel like we're kind of swimming around in the dark a little bit here with how much commodity prices have changed, which would increase ASPs, but then panel wattages have increased, which would lower ASPs. I can very broadly bracket it between maybe $0.09 to $0.15 per watt, which is a very wide range. So, can you help us kind of just understand where maybe we're kind of at -- where you guys are at industry, maybe that there's changing trends and whether piles are included or not with what you saw. So just trying to help us think about ASPs right now, because it just -- it feels like it's been a while since we've been able to tighten that up.

Yeah. Hey, Donovan. That -- all the things you just named are the things that we consider on ASPs and we don't -- we try not to really give that as a forecast or guide. We look at really revenue as the guide, because of all the things you mentioned. We have a wide variety of ASPs depending on if models are included, depending if there's -- if the project is deployed, where there's heavy snow and there's different components there that could cause the prices to increase. And, of course, the latest with the commodity increases, that's also reflected. What I can point you to is when we went -- we talked about the order book and kind of the growth in the order book, 20% of that growth in that order book is really related to pricing. So, the price that is showing that the pricing -- the costing that we're seeing in the market, we're pressing it really in pricing because it's showing up in the order book. But the rest of those things, it's hard for us to do that and that's why we don't guide to that.

Okay. And just last question for me is -- and kind of following up on Phil's question about the AD/CVD stuff. So, I do think the market -- the solar industry in general has kind of been getting beaten up a bit. And so, I think a lot of people are already sort of looking at this and maybe pricing in some -- maybe disappointments in maybe the fourth quarter or in 2023. So that may already be sort of a baseline expectation, and you're not -- that's not part of what you guys are guiding for. But I'm wondering, are the contracts structured or with your backlog or anything, is there a way where that creates sort of almost as an extreme case -- like an almost kind of non-zero risk of a big disappointment in Q4? Or if it's a contract and it's signed, but maybe they pushed the delivery times. Hypothetically, AD/CVD prevents modules from getting in. But are you in a position where sort of those revenues are still there anyway? And just trying to wonder kind of the legality, the contractual terms, how things are kind of locked-in when you look at like Q4 and rounding out the year?

Yeah. So, what I can say on that, Donovan, is that the process we started last year in Q2, the customer, when they award us the order, gives us a time to know what gives us a deposit. That gives to secure -- for us to secure the commodity portions of the bill of material. That is a significant portion that commits that customer to our product. We haven't seen -- once the customer signed LOI and provide that deposit, we haven't seen the customer back out. We've seen some obviously project shifts, hence the guide that we provided. But what I would say is that keeps kind of the skin in the game for the customer as well as us. So, we feel good about that.

That’s great. Very helpful. Thank you.

Our next question comes from the line of Kashy Harrison with Piper Sandler. Please proceed with your question.

Good evening everyone. Thanks for taking the questions and best of luck with your retirement Jim.

Thank you.

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?

Yeah. So, we -- the momentum that we talked about for the legacy Array in Q3 continued in Q4 with our bookings -- strong bookings, strong quote activity that led to strong bookings. And so, we continue to see that -- continue to see us taking orders from -- that were previously with our -- with competitors -- where our customers were not in the Array camp in the past. So, we've continued to see that, because we were delivering during these -- during the uncertain times and that's helped, and that's continued. As far as STI, they have a -- the projects are smaller. They have a shorter kind of view of their order book. So, their order book wouldn't reflect too far off. So, you'll see some more booking, I guess, book and turn business in 2022. So, we feel good the growth that we saw in STI from Q3 to Q4. And we feel that there's still -- both for Array and for STI, especially there's more time to continue to bolster that order book as we get through 2022 here.

That's helpful. And then, in the prepared remarks and in the presentation and response to a prior question, you just indicated that when you look at pricing in the order book, it's up 20% year-over-year presumably Q4 to Q4. I know this is maybe a little bit of a tough or a tricky question, but if steel prices were to theoretically decline to about $1,000 a ton or maybe even lower, would that -- can you help us think through a quick rule of thumb on how that pricing would change from where we are right now?

Yeah. We really don't have unfortunately accounts that you can do. But -- because our prices don't kind of align with steel prices one for one. We have -- we've talked about strategic partnerships we have with certain steel providers that have -- where we have fixed pricing that's favorable to Array for certain volumes. So, that kind of keeps a ceiling for certain volume for us on costs. So, I don't know that we could provide you kind of a formula if steel were to fall. Jim, I don't know if you have anything else to add?

Yeah. Kashy, I would just add to that. We continue to value price. A lot of the -- the share of demand that we continue to gain is the customers coming not only for the assurance of supply, but just the basic performance of our product out there. So, that's kind of where -- that's how we're focused on it. So, to the extent, it does decline the prices of steel, I think that's good overall for the entire industry. But again, we would be value pricing to preserve margin as well.

Got it. Got it. That's helpful. And then, just a final quick one for me. Can you help us with what's -- where you see Q4 EBITDA margins for your business on a blended basis? Are you back at the 15 plus range by the end of the year, given that margins are going to be weaker in Q1? Just some thoughts there would be helpful. Thank you.

Yeah. So, Kash, just so I'm clear, you're talking in our guide for Q4 2022?

Sorry, Q4 2022. Sorry, Q4 2022, not year.

Yeah. So, yeah, we -- obviously, we're not providing a guide for that. But what I would -- what I can say is our margins are going to back -- we believe back at -- legacy Array business back at the historical levels. Obviously, our G&A is a little bit higher as we discuss the need to invest for our next phase of growth. So, we would see that we would be back to closer to our overall kind of longer range targets in that quarter. But with the higher SG&A load, it'll be into 2023 until we get back into that range.

Got it. Thank you.

And our next question comes from the line of Joseph Osha with Guggenheim Partners. Please proceed with your question.

Hello everybody. Thanks for taking my questions. The first one, just following -- this question has been asked a lot of ways. But sort of embedded in your second half guide is the assumption that you're going to be able in the end to pass most of your higher material prices through to your customers. But when I listen to what comes out of, say utility executives at Edison and whatnot, they are all shoring up and down that they don't want to pay higher price. So, I just want to ask, is it your assertion for -- by the time we get to the second half of this year into 2023 that you're going to get back to historic margins and that your customers are basically going to bear all of the impact of higher metal pricing?

Yeah. Joe, this is Nipul. So, we're having commercial discussions doing the price discovery and where the right -- as Jim mentioned the value price would be. We've got assumptions in there based on what's in our order book. I'll point you to kind of our order book being executed contracts and awarded orders. So, these are awarded orders that we have. So, price is known on these awards. And back to our LOI process, we've got the cost block for the declining material. And in our guide we put -- we understood that there's going to be potential shifts in projects and we've only taken 90% of that into our guide. So, we're not saying that everything is going to push through. We're having commercial discussions with our customers. We're doing price discovery to see which is the -- what price would be good for both us and the customer.

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.

And that you nicely anticipated my second question. And so, I'll just maybe ask for a small amplification. Other than what you mentioned, are there levers you can pull to just -- to get metaling cost out of this in particular? I'm curious as to whether you have conversations with say wiring harness companies or whatever, any ways you can get material or even labor out of this process?

Yeah. The short answer is yes. We're looking at every aspect of the entire build, both mechanical and electrical balance of systems. So, we're working diligently within our own four walls and with key suppliers, I might add, on how you do build for manufacturability, design for assembly -- design for manufacturability. So, it goes completely through A to Z with what we do with where we take supply from. Our suppliers that is, our vendors and our customers, and then certainly working to alleviate any of the assembly needs all the way down to how we actually drop ship components to the site and how they stage. So, there is an active -- there's programs active with all of our customers on how to further optimize.

Okay. Thank you. That’s interesting. Thanks very much.

And our next question comes from the line of Colin Rusch with Oppenheimer & Company. Please proceed with your question.

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?

Yeah. Sure. So, for the legacy Array business, it's still primarily in the U.S. I would say it's 95/5 as far as that geographic dispersion. As far as the overall business, so obviously the STI business is mostly non-U.S. So, when you take the combined businesses, I would say the quote activities -- like 75% of U.S. quotes, 25% international.

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?

Yeah. So, we talked about this on previous calls. When we give our quotes out to our customers, it contemplates the latest kind of shipping costs that we can get and forecast we have. And we have a few shipping lanes in -- under contract. So, I would say it does -- it contemplates what we have. Obviously, that's a variable that we have in our cost structure. Like a lot of other companies, it's hard to fix every shipping cost. But we also have a lot of different ways we look at shipping to reduce those costs. So, we feel good about -- obviously, what we've built into our guidance as it relates to shipping costs in our overall EBITDA margin.

Okay. Thanks guys.

And our next question comes from the line of Jeff Osborne with Cowen and Company. Please proceed with your question.

Yeah. Good afternoon. Two quick ones. You talked a lot about what you're not hearing from your customers as it related to the AD/CVD, but I was wondering with the constant dialogue that you're having, can you share what you are hearing? Is it -- hey, we're working on addressing the situation and we'll get back to you? Or what specifically are you hearing that you could share?

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.

Because would you agree that it would be a bit unusual to cancel contracts just given you have a land position as well as an interconnect permit by the time you bought trackers. So, stating that you don't have cancellations, I guess, is not that surprising. But maybe just -- you anticipated my second question on the change in modules. Can you touch on what's involved there? How long that process takes? I assume the module rails, the torque tubes, other things are changed, but is that a few weeks process, a few days, a few months, can you walk us through that?

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.

Got it. Thank you.

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.

Okay. Thank you. I definitely want to thank everyone for your engagement over the past a 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.

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.