Array Technologies Inc

NASDAQ:ARRY

Earnings Call Transcript 2023-Q1

[Operator]

Greetings and welcome to Array Technologies' First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to turn the call over to Cody Mueller, Investor Relations at Array. Please go ahead.

[Cody Mueller, VP, Finance and IR]

Good evening and thank you for joining us on today's conference call to discuss Array Technologies' first quarter 2023 results. Slides for today's presentation are available on the Investor Relations section of our website, arraytecinc.com.

During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website. We do not undertake any duty to update any forward-looking statements.

Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's first quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures.

With that, let me turn the call over to Kevin Hostetler, Array Technologies' Chief Executive Officer.

[Kevin Hostetler, CEO]

Thanks Cody and welcome everyone. In addition to Cody, I'm also joined by Nipul Patel, our Chief Financial Officer. Let's begin with Slide 3, where I will provide some highlights of our first quarter results. The first quarter was an incredibly strong one for Array. Revenue, profitability, and free cash flow were all better than expected as the maturity in our operating system allowed us to take advantage of the opportunities that arose in the quarter.

On the revenue side, we benefited from a minimal number of weather delays during the period, which, coupled with a more dynamic demand and logistics planning process, allowed us to overdrive revenue to $377 million, representing a 25% growth year-over-year. This revenue performance was at a gross margin of 26.9%, which is a striking 1,810 basis points better than the first quarter of 2022. Nipul will discuss in more detail the breakdown of the margin performance this quarter a little later. But this provides another important proof point of the maturation of Array's operating system.

It's also important to note that our results this quarter do not include any increased pricing for domestic content, or lower input costs from the 45x manufacturing credit. These remain a potential upside once more fully defined.

The improved gross margin and volume increase led to an impressive $67 million and adjusted EBITDA, which is up from $700,000 in the first quarter of 2022. And finally, we delivered $42 million of free cash flow in the first quarter as we saw our cash conversion cycle improve 38 days from the first quarter of 2022. This performance leaves us with $148 million of cash on hand and an undrawn revolving credit facility.

Moving to the next slide, as I normally do, I want to take some time to walk through the current demand environment, as it is constantly evolving, given the dynamics around IRA. This quarter, I will also couple that conversation with how we anticipate these market dynamics to evolve as we move into 2024 and beyond. I believe it is a key to draw this distinction because of much of what we are seeing right now is transitory as we shift from a pre IRA world into the post IRA environment. We have covered much of this for a number of quarters, so it shouldn't come as a surprise.

2023 is a year where the industry is setting the foundation for the application of the IRA benefits, as the value of the benefits and incentives included in the bill are substantial. This is going to lead to a boom in solar installations over the next 5 to 10 years. And we are already seeing the beginnings of that pipeline string. We have seen discussions move from individual product awards to portfolio awards, from 12-month discussions of project pipelines to multiyear multi-gigawatt pipeline discussions. To be clear, the overall demand landscape is incredibly strong. However, while the size of the benefits is undoubtedly a good thing, it does create an understandable incentive for our customers to wait for clarity before establishing their supply chains in a manner that would maximize their IRA incentives.

This has affected our 2023 in two specific ways. First, we have seen a slowdown in the conversion of pipeline orders, which is the driving factor behind the reduction in the order book of approximately $300 million from the prior quarter. As a reminder, we do not include an order in our order book until a specific project is awarded to Array and a start date is identified. And second, we have seen some projects get pushed out to the right as customers are giving themselves more time to evaluate the IRA provisions. As a specific example, one of our largest projects slated for 2023 has been delayed by over a quarter so that the financier and developer could better evaluate how to maximize the return with all of the various IRA provisions. This project will get built and will use an Array tracker, but we will now report less revenue in 2023 than previously forecasted. Expectedly, these two dynamics limit the upside potential and our previously communicated revenue range as that would have required an improvement in the project timing cadence here in the United States.

It is important to note, as we look outside of the U.S., we are pleased with the progress of our business. Our international markets are progressing as expected, and we remain excited about both the near and longer term growth potential. So despite these near-term volume headwinds, we will remain disciplined in our product technology and pricing strategy. We will continue to sell our value on projects that are a good fit for our product and service offerings and align well with our desired contracting terms. And we won't chase projects that don't meet our profitability criteria just for revenue sake. We believe this is a prudent approach, because we don't want to be reactive to short-term disruptions when our current path has incredibly well positioned for how we believe the market will develop.

Meaning once there is IRA clarity, we will see the top of the funnel projects accelerate through the order process, and project delivery timing will return to a more normalized cadence. This will lead to increased orders and it will be easier to predict project timing. As we discussed last quarter, this will also mean an expansion of the geographical sites and weather conditions that trackers will be asked to account for.

This is why our full launch of the OmniTrack and the STI H250 trackers that complement the DuraTrack coupled with our expanding SmartTrack software offerings will be such key growth enablers for us.

Finally, we expect all of this to be met with increased profitability as we finally gain an understanding of the value, timing and P&L location of the various IRA benefits. While we obviously are disappointed in the amount of time it is taking to get clarity, we will continue to execute on the things we can control to ensure we remain incredibly well positioned for the next phase of solar adoption, which is a theme that I will dive a little deeper on as we move to Slide 5.

As I mentioned before, the performance this quarter was not by accident. Array has undergone a long path of improving all aspects of the way it does business. Numerous incremental improvements the company has made add up and allow us to not only minimize risk, but also to capitalize on opportunities as they arise.

To point out some of the key areas where we've made these incremental improvements, and also, now that I'm just past my one year anniversary, provide an update on what some of our new focus areas will be as we look forward. This quarter marks our sixth consecutive quarter of gross margin expansion. This continued expansion was anchored by the change to our contracting framework, where we minimize the risk of fluctuating commodity prices.

Since the initial rollout of this process, we have continued to improve upon it. We have added more strategic suppliers, increased our visibility to longer term cost inputs, and have created opportunities to find additional cost productivity in places like logistics and indirect spending. We will continue to find ways to improve this process. But we believe, as constructed now, it offers us a competitive advantage.

This quarter, we also saw the margin of STI improve by over 1,900 basis points from the same quarter last year. If you remember, last year at this time, we outlined the issues that we needed to address to return the margins to historical norms in that business. They included improving their purchasing and logistics processes, simplifying their product portfolio and rationalizing their offerings related to construction services. A year later, I'm happy to report that we've made significant improvements in each of these areas. The purchasing and logistics processes at STI have been aligned with Legacy Array and now allow for better predictability, reduced working capital needs and cost improvement. As previously noted, we have also significantly reduced the amount of construction work that we do in this business. We now are only performing this activity where we have proven experience and a clear ability to do so and where it is strategically critical for our customers. While we were met with some unexpected challenges early in our integration, in mid-year 2022, we brought onboard additional resources and experience in acquisition integration. And now I couldn't be more pleased with where we are today.

We have also driven functional excellence through people, process and tools. Every functional area has the proof points. But a key example is the 400 basis point improvement we have seen in our past due percentage year-over-year that was driven by improved demand in logistics planning, as well as better operational execution within our own manufacturing facilities. This reduction in past due is important because it affords us the opportunity to accelerate shipments at the end of the quarter to meet customer pulling requests.

We have also focused intently on delivering product offerings that meet our customer needs. I spoke to this in more detail last quarter. But it's worth reemphasizing that the introduction of the OmniTrack and the STI H250 in the U.S., combined with an expanded SmartTrack offering, greatly expands the solutions we can offer our customers.

Finally, as I mentioned, when I first came to Array, it was critical for us to focus on our working capital efficiency to return the company to a position where it is consistently producing free cash flow. In the last 12 months, we've driven numerous initiatives that have had meaningful impact. First, we have introduced an inventory optimizer tool, which uses data and analytics to ensure that we have the right amount of inventory on hand, which has greatly minimized the need to carry unnecessary safety stock. But just in case, high levels of safety stock were a key reason for our high cash conversion cycle during much of 2021 and early 2022.

Next, we have partnered with our suppliers to introduce more standardized contractual terms. These terms not only include flow downs of key ESG requirements, but also offer more consistent payment term provisions, which provide for better predictability of our cash outflows.

And lastly, we have made some simple but impactful changes to our AR processes. These includes simplifying contractual billing terms to eliminate confusion with our customers over billing milestones. We have also done a better job of integrating our collection processes with our other customer facing organizations, eliminating the collection silos that has led to improve customer engagement and collection timing. Also the focus we've placed on these areas has led to a 38 day improvement in our cash conversion cycle and approximately $300 million of immediate liquidity between our cash on hand and revolver availability. With all the work we have done, we certainly know that the job is far from finished.

As we move into the next phase of our growth, I have listed some of the new focus areas that we will be driving in the quarters to come. First, we have invested in digital transformation and process improvements. We recognize that this has led to a temporary increase in the amount of SG&A that we are spending but we very much view these as investments to drive efficiencies and improve scalability in the future. So, as we move forward, we will focus on executing on this operational leverage and reducing our spending as a percentage of revenue.

Next, as our profitability and cash flow have improved greatly. We need to evaluate and update the market on our capital allocation strategy. We will provide a more detailed plan in the quarters to come. But for the time being, we will focus on improving our financial metrics, and identifying opportunities for strategically paying down our debt. We are intensely focused on ensuring a flawless rollout of our new product offerings.

In the last year, we've created a robust product management organization. And under their guidance, we will ensure that once we fully launch into the market, we are prepared to deliver at scale.

And finally, we have all hands on deck to ensure we strengthen our internal controls environment. We've already made key changes in third-party partners and have added significant resources and tools throughout the organization to drive improvement. This is very much a company-wide effort, and we are committed to driving excellence in this area.

And with that, I will turn the call over to Nipul for a more detailed discussion of our financial results and an update to our 2023 guidance.

[Nipul Patel, CFO]

Thanks, Kevin. Please turn to Slide 7, revenues for the first quarter grew 25% to $376.8 million, compared to $300.6 million for the prior year period, driven by both an increase in the total number of megawatts shipped by 10%, from 3 gigawatts to 3.3 gigawatts and an increase in ASP of 14% from 9.9 cents per watt to 11.4 cents per watt, resulting from improved pass through pricing to our customers.

The $377 million in revenue reflects $305 million from the Legacy Array segment and $72 million from the STI segment. Gross profit increased to $101.2 million from $26.6 million in the prior year period, due to a combination of higher volume and improved gross margin. Gross margin increased to 26.9% from 8.8%.

Gross margin for the Legacy Array business was 27.4% and the STI business had gross margin of 24.9% in the quarter. The margin of 26.9% exceeded our expectations, as we benefited from the favorable project mix and from one time benefits from lower than expected logistics costs.

On the project mix side, we have discussed previously that we manage a portfolio of projects. Projects can range in margin depending on a number of characteristics. And we are constantly balancing projects on the upper and lower end of the spectrum. In the first quarter, we happen to deliver on a number of projects that were on the higher end of our portfolio from a margin perspective. As you would imagine with any portfolio, we do not necessarily anticipate this favorable mix to continue throughout the year as we will see this mix revert back to the mid.

Additionally, we had a gross margin lift from one time logistics benefit as ocean and domestic transport rates dropped faster than expected. We do expect this dynamic to normalize in future quarters as we have reduced our cost assumptions in our customer quotes to match the new rate environment.

Operating expenses decreased to $53.7 million from $64.9 million during the same period in the prior year. Decrease is primarily due to lower STI acquisition related amortization expense in addition to STI integration costs in the first quarter 2022 that do not repeat in the first quarter of 2023. Net income attributable to common shareholders was $13.6 million compared to a net loss of $37.5 million during the same period in the prior year. And basic and diluted income per share was $0.09, compared to basic and diluted loss per share $0.25 during the same period in the prior year. Adjusted EBITDA increased to 67 million, compared to approximately $700,000 for the prior year period. Adjusted net income increased to $37.3 million compared to adjusted net income of approximately $500,000 during the same period in the prior year, and adjusted basic and diluted net income per share was $0.25, compared to adjusted diluted net income share per share of less than $0.01 during the same period in the prior year.

Finally, our free cash flow for the period was $41.9 million versus a use of cash of $52.5 million for the same period in the prior year. The increase was driven by both improved profitability, and the improvement in our cash conversion cycle of 38 days that Kevin previously mentioned.

Now, I'd like to go to Slide 8, where I will discuss our updated outlook for 2023.

For the full year of 2023, we now expect revenue to be in the range of $1.8 billion to $1.9 billion, a reduction of $50 million from the top end of our original guidance. Kevin mentioned, this is merely a reflection of the ongoing delays in the IRA guidance, which have caused projects to push out of 2023 and into 2024, and a temporary slowdown in orders. However, despite the reduction to the top end of our revenue guidance, given the first quarter tailwind and the strength of our margins in our order book, we are still holding our original adjusted EBITDA and adjusted EPS guidance. The remainder of the planning assumptions we previously provided remain intact. Although with the reduction in our revenue expectations, we will obviously look to moderate our SG&A spend on the lower end of the range that was previously provided.

And finally, looking forward to the second quarter we expect a revenue increase between 15% to 20%, as we hit a seasonally higher delivery quarter. But we do expect consolidated gross margins to average in the low 20s for the year as we normalize our project mix, and do not have the benefit of the onetime logistics increases.

Now I'll turn it back over to Kevin for some closing remarks.

[Kevin Hostetler, CEO]

Thank you, Nipul. While the delays in the IRA guidance have obviously caused some short-term disruption, we are encouraged by the engagement we have seen from legislators and administrative officials as they work to find the right language. Taken as a whole, we will take 9.5 years of a well written set of regulations as opposed to 10 years poorly written. So we are not losing sight of the bigger picture and continuing to position ourselves in the best possible way to take advantage of the growth to come. We look forward to updating everyone as we all learn more in the coming months.

And with that operator, please open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Brian Lee with Goldman Sachs.

[Brian Lee, Goldman Sachs]

Maybe just starting with the project delays, appreciate all the additional clarity there. One quick question on that. It sounded like it was predominantly driven by one project. Is that fair or was it multiple projects? And then maybe just more of a forward looking question, the funnel, a lot of focus around that, obviously. Is there a way to maybe quantify Kevin for the bookings opportunity that's being held up waiting for IRA clarity? And then I feel like we ask this every quarter, but is there enough lead time maybe level setup as to if you see bookings, in May, in June, in July, sort of what's the timeframe, you might be able to actually see an impact in 2023, if you start to see that funnel move forward as it's being kind of held up or, pent up demand at the moment?

[Nipul Patel, CFO]

Brian, this is Nipul. Primarily was the one large project that shifted that reduced the volume. And as far as, as we look out, we continue to have conversations with customers on pipelines and available gigawatts. It's just a matter of clarity, as Kevin said, in his prepared remarks, it's really beneficial as we get close, what we believe to be close on the guidance from Treasury that some of these customers hold off on, actually, penciling the order. So, lots of conversations happening. We feel good about the activity that's happening. It's just prepending a few things to get over the line here before these things come through the funnel.

[Kevin Hostetler, CEO]

I mean, certainly, as we're with our customers, they're talking about, obviously, increasing volumes of business that are quite substantial. We're just, again, in that holding pattern to get them to translate into orders received by us.

[Brian Lee, Goldman Sachs]

And then I guess, again, on the IRA benefits, you mentioned, Kevin, during your prepared remarks, you're expecting increased profitability going forward as you get some of these credits that are embedded in the legislation. I know, it's still early, but any sort of range of expectations around how much uplift you could see based on your current understanding of the IRA credits, and also conversations you're having with your suppliers. And then maybe also an update on how you think specifically your Clamp product will be treated in the context of those credits?

[Kevin Hostetler, CEO]

Yes. I think it's still premature for us to comment publicly, right? To be honest. We've said that we'll continue to pull back on commenting and quantifying until we have that level of clarity. And I think we're still in that mode, honestly, to just wait until we have that level of clarity. They're still, the main buckets that we're still focused on is obviously the definition of Made in USA, and what that translates to in terms of this additional pricing power or ability to increase our Bill of Material content. We've talked about the steel and the portion that is the steel and I would say historically, we've been pretty open on the call to0 say we expect to get at least 1/3 of that. I would only say in more recent conversations, I think we'll get better than that.

I think lastly, relative to the Clamp, we're certainly focused on working with the legislators to ensure that the definitions are correct and inclusive of all those fastening systems that we would want, and we're hopeful of that but again, until that clarity is done and inked and available, we're just not going to be able to quantify that for you just yet. But, look, we all know it's substantial, it's healthy. We're working on it. We're focusing on everything we need to do operationally to maximize. But we just need that clarity of definitions first.

[Operator]

Our next question comes from the line of Mark Strouse with JPMorgan.

[Mark Strouse, JPMorgan]

Maybe I'll take the other side of Brian's question there. And if we go a few more quarters here with no IRA guidance, can you just talk about the ability to hit the low end of the revenue range this year? I'm just trying to figure out how derisked that might be?

[Kevin Hostetler, CEO]

Yes, I think we feel pretty good about that. Because we use the similar process we've done in the past where we've done order by order, communicate with our customers, understood potential for delay, understood modules, all of the above. So I think we feel fairly good as good as we can sitting here today that that low end of the range is an accurate low end of the range.

[Mark Strouse, JPMorgan]

And then you spent some time talking about the operational improvements and the impact on gross margins. It understand what you're saying about the logistics costs being kind of more of a timing issue, one time issue, and that you're reiterating this low 20s, kind of somewhat vague guidance. Can we read your commentary, though, about the operational improvements to be that you're seeing kind of slight improvements and what you were talking about a couple of months ago on the last call?

[Kevin Hostetler, CEO]

Yes, absolutely.

[Operator]

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America.

[Julien Dumoulin-Smith, Bank of America]

Let me try on this a little differently and ask more about the timeline for orders to move forward? How much of a knock on effect that we get domestic content in a few months? Will we get in terms of A, a trueup? Or B, do we actually get more of these projects kicked out to '24? i.e. said differently how much will work will need to be ready to get going pending that clarity of that point? Just want to understand how much of a of a needle mover there would be still at this point on '23 and/or '24 to the extent to which we get clarity, or is it really firmly out?

[Kevin Hostetler, CEO]

Yes, look, Julie, I guess the only point of reference of fact that I have is the conversations I'm having with my top customers, my sales team, I was with one of our largest customers just yesterday, in fact, and their order books are bigger than they've ever been. What they're working, what they're designing, what they're engineering to right now are bigger than they've ever been. But their conversion of that pipeline into actual orders placed upon us is what's delayed, right? Because you have both the financiers, developers all looking at how do you put a package together to maximize every bit of that return under the IRA. And I think it's our belief that once there's clarity, that conversion is going to move fairly quickly. I mean, it's not going to take -- I don't think it's going to take months and months to convert. I think it's going to convert very quickly, i.e., quarter, that those things will start getting cut loose once there's clarity. So I think you got about it?

[Julien Dumoulin-Smith, Bank of America]

Yes. And then related that I mean, thinking about this being effectively a delay in transposing into '24 I mean, how much could we be looking at in terms of A, record order books; and B, some of that trueup in '23 and into '24 now? I mean, how are you thinking about that dynamic here?

[Kevin Hostetler, CEO]

I mean, we're thinking that as it stands now we're hopeful of getting that level of clarity within the quarter, second quarter. Maybe it spills over a little bit into the third quarter. But even then, that allows us to convert it early in 2024, given our current lead times and cycles, right? So it's not like -- look, I'm hopeful, we don't have to wait till the end of Q4. But we think it's going to come a little bit sooner, and we think we're going to be able to capitalize on it. Our supply chains ready is for the volume, we're ready for the volume. So hopefully, it converts and can show up in revenues fairly quickly.

[Julien Dumoulin-Smith, Bank of America]

Kevin, so it sounds like you're assuming kind of end of 2Q, 3Q resolution as part of your baseline for the guidance. Is that correct?

[Kevin Hostetler, CEO]

Yes, that's right.

[Operator]

Our next question comes from line of Christine Cho of Barclays.

[Christine Cho, Barclays]

So maybe if I could just start with the IRA. For customers who are looking to hit the 40% threshold for domestic content, I'm sure they'll come to you and want as much of the product domestically sourced as possible. And I generally think the expectation at this time is that customers get their domestic adder, you get your 45x credit, and there isn't really any sharing. Each side has their own credit.

So who knows how Treasury will come out. But in the event that the bar is set high for modules, how do we think about what you would do if the customer isn't requiring a tracker that is requiring still from the U.S., because they don't think that they can get the 40% anyway? Does it generally make sense for you to still domestically source as much as possible and get the 45x credit? And if so, should we think that the customer is going to want to share in that credit?

[Kevin Hostetler, CEO]

Yes, I think what we're seeing Christine is where customers say they have a certain volume of supply of domestic panels, right? And we all understand who that is and they're sold out for many years to come here, right? And then they have an ability to get certain elements. So if they pay, the prevailing wage with apprenticeship program, then the labor contracted on the site, the engineering services contracted on the site, which means that they can easily get to that 15% to 20% through those buckets; with a tracker, maybe another 7 to 9 points, and then allows them to, for lack of a better word, share their domestic panels between multiple sites.

So what we're talking to customers about is that they won't use a first solar panel 100% exclusively on a site, they'll use the amount they need to hit that 40% threshold and spread those to multiple sites to get to 40%. So that's why the domestic tracker becomes so important. It's not as binary as look, if I can't get a domestic panel, I can't hit it. There will be an ability to hit it by spreading out through domestic panel allotment between multiple sites.

[Christine Cho, Barclays]

So mixing and matching essentially?

[Kevin Hostetler, CEO]

Right. And again, that's where Array has a great advantage and the flexibility of our system.

[Christine Cho, Barclays]

And then just on your STI, I don't know if -- so, your backlog went from 500 to 300, when only 72 million was shipped? I think it would imply that your bookings was negative for the quarter. So is there -- was there a project that was cancelled here?

[Nipul Patel, CFO]

No, that's just takes -- Christine it’s Nipul. That's just a rounding issue because we get the number in hundreds of millions, right? So it's essentially was flat for STI and mainly due to timing. We still feel good about the overall STI forecasts. You see, we have not updated that we didn't bring anything down from the STI revenue forecast. The timing of bookings just led to Q2 not being a large bookings quarter -- or Q1 sorry.

[Operator]

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

[Philip Shen, ROTH Capital]

I just wanted to talk through bookings a little bit more here. As it relates to the '23 guide, I know you touched on this a little bit, but to what degree does that assume new bookings in order to hit the low end of the guidance? Do you need -- and then how much do you need in order to get there? Or do you have all the orders in hand to hit that low end?

[Kevin Hostetler, CEO]

It would be very little. Most of that 1.8 guidance is in hand, a disproportionate amount of it is in hand at this point.

[Philip Shen, ROTH Capital]

Great. And then can you talk through your multiyear framework deals? Are those discussions happening actively? Are you close to getting some of those done or more of those done? And do you think -- and once we get the guidance from Treasury, can you talk about what kind of acceleration of bookings we could see? Can you quantify in any way relative to either current levels or even prior levels of your historical 400 million to 500 million a quarter? Could we see a multiple on top of that? Thanks.

[Nipul Patel, CFO]

Yes, as far as that first part of the question, yes. And we're in discussions with several customers on multiyear multi-gigawatt pipelines. And those continue to, as Kevin mentioned, in the prepared remarks, those are strong conversations, top of the funnel type of discussion. So as soon as that guidance comes out, we think those will also move and accelerate. As far as bookings up, it's hard to say right now, what that pace will be once we get clarity from Treasury. However, we do feel that it will accelerate when we do get clarity on the domestic content. It's just hard right now to say how much that would be.

[Kevin Hostetler, CEO]

You know, guys, what you have to remember is that our customers are trying to figure out how much they have to give Array under different definitions of domestic content. That's one of the big challenges, right? Under one extreme definition, we have to get a disproportionate amount of their business; on the other, then we're fairly equal with our peers, right? So we're no worse off. But in one, we're dramatically better. So those customers have to understand what that looks like. Because again, there will be some -- if the domestic content goes in extreme way, there's likely going to be some additional cost to maximize from 76% up to over 90% domestic content, and whether or not they need that how much they need to pay for that. We have to have those definitions before those orders get set in stone and launched. And that's part of what's driving this. It's not unexpected. This is this is where we said we'd be we'd hoped for clarity by now, but it's simply hasn't happened yet.

[Operator]

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

[Kashy Harrison, Piper Sandler]

So Kevin, Nipul just want to make sure we're all 100% on the same page? Is it just the domestic content that your customers are waiting for? Are there perhaps other definitions from Treasury maybe around, prevailing wages or apprenticeship hours or something else that your customers are waiting for?

[Kevin Hostetler, CEO]

It's all of the above that adds up to that ability to get to the 40% domestic content, right? They're looking for clarity in every one of those buckets. Final clarity and for example, there had been some discussion earlier about whether or not there's a sliding scale under the prevailing wages over a couple of year period, under the apprenticeship program, for example. In year one, it's you demonstrate you're on the way to do it a year or two you have. Those are the kinds of definitions that they need to figure out. So they stack up each of those elements to see how they get to the 40%. And how important that tracker is going to be to get there.

[Kashy Harrison, Piper Sandler]

And then as my follow-up, can you just speak to the broader demand trends you're seeing in Brazil, Spain for the STI business? Elections are behind us in Brazil, Spain is supposed to be quite strong this year. So just what are you seeing on the demand side, maybe talk about market dynamics, market share, et cetera?

[Kevin Hostetler, CEO]

Yes, we feel really good about Brazil. And the demand we're seeing there is very strong. We feel good about our market share in Brazil, the backdrop, our ability to deliver. I think Brazil is going to be a great success story for us this year. In Spain, we're still waiting for additional incentives to come through Europe. I mean, it's a good business, it's doing well, but the acceleration in Spain will nearly be as much as Brazil in the near-term, which it's really more about waiting for additional incentives throughout Europe.

But to be clear, the STI business in Spain is really focused outside of Spain. We're focusing all throughout Eastern Europe, and other regions where we know we've got a great play for that product line right now that are still very healthy.

[Kashy Harrison, Piper Sandler]

Thanks for that color there. If I could just sneak one more quick one in. Is there any way to quantify the magnitude of the onetime logistics benefit that you had this quarter?

[Nipul Patel, CFO]

Kashy, it’s Nipul. That's about couple of hundred basis points. That was an impact of the logistics and freight costs.

[Operator]

Our next question comes from the line of Maheep Mandloi with Credit Suisse. Please proceed with your question.

[Maheep Mandloi, Credit Suisse]

Just to clarify one of the previous comments. You're expecting a resolution or clarification from IRA end of Q2 early Q3, but that's not in the guidance, right. Is that thing right?

[Nipul Patel, CFO]

Yes, Maheep this is Nipul. Yes. We're -- that what Kevin said is, that's our current expectations, end of Q2, sometime in Q3. And you're correct. We have not updated the guidance for any impact of IRA.

[Maheep Mandloi, Credit Suisse]

And then, once you get that clarification, how much more capacity do you have to meet any incremental customer demands in Q4?

[Kevin Hostetler, CEO]

We feel really good on an annual capacity and a quarterly capacity basis, Maheep. We've been building out our capacity for good 18 months now and adding many more suppliers throughout the U.S., qualifying them, getting them up to speed. So I think we feel really good about our domestic capacity to handle whenever volumes coming in our way. And keep in mind that when that volume comes our way, it's not -- they're not all going to rush for Q4 delivery. These larger -- programs are getting larger and larger but the number of them are getting more and more. And they'll be phased out throughout 2024. There may be some opportunistic programs that you get yet for delivery in Q4. But I think the vast majority of what we would expect to come in from IRA is going to be a 2024 phenomena.

[Maheep Mandloi, Credit Suisse]

And then just maybe last one from me. You talked about customers pushing out projects because of IRA clarification. But are they ordering product or they do not need any domestic content?

[Kevin Hostetler, CEO]

I am sorry, we didn’t hear that.

[Nipul Patel, CFO]

Can you repeat that again? Sorry.

[Maheep Mandloi, Credit Suisse]

Yes. Are the customers ordering products for which they don't need any clarification on domestic content? Or are they going ahead of the rest of the projects and the modules and trackers and few other things?

[Kevin Hostetler, CEO]

No, we made it to be clear, we've had customers say they're not worried about that 40%, they're just going to continue to go and build. So some are doing that. And that's some of the orders that you do see us getting in and do executing, and are executing on. So not everybody's waiting to maximize all elements under the IRA. Other customers and developers are saying, we get it, we have a good enough return. As I said, one of the best quotes from one of the CEOs of a large customer, we'll let the lawyers and accountants worry about get going after those credits later. We're in build mode, right? So but there's different behaviors, obviously on different customers.

[Operator]

Our next question comes in the line of Colin Rusch with Oppenheimer.

[Colin Rusch, Oppenheimer]

Can you just give us an update on the work that you've been able to do with any incremental EPCs in terms of qualification, design-ins particularly outside the U.S.?

[Kevin Hostetler, CEO]

Can you repeat that again? Sorry Colin.

[Colin Rusch, Oppenheimer]

Yes, can you give us an update on qualification and design-ins with EPCs outside the U.S.? I'm just curious about the number of folks you're working with, in Europe how that's growing and trending, and in Australia?

[Kevin Hostetler, CEO]

I think Australia is a unique animal, and under the [VRET] program, where we're certainly getting qualified as domestic content leading to additional new volume for us there. I think the rest is -- look, it's you're hard pressed to find an EPC around the world that we haven't done something with in our existing markets. So it's not like we're needing to qualify ourselves with a lot of new EPCs. In the markets that we're currently participating in, we've done work before, and we have a steady strong relationship with existing EPCs.

[Nipul Patel, CFO]

And also we -- with our strategy of just getting close with developers, they take us into various regions and markets, that we formed relationships with EPC. So that continues as well as we expand into different regions.

[Colin Rusch, Oppenheimer]

And then just from a competitive standpoint, can you talk a little bit about how much price sensitivity there is right now with folks? And if there's any sort of meaningful change in the price competition, and how that's working for you as you go through and bid on projects?

[Nipul Patel, CFO]

Yes. As far as that, we're seeing the normal competitive behaviors in the market. Obviously, we talk about our ASPs have held on the quarter, we feel good about that. But nothing unusual that we're seeing Colin, in that regards.

[Kevin Hostetler, CEO]

Colin, I will tell you that most of the impact on an ASP on a sequential basis is just, frankly, related to the steel input costs that are changing. And we're mindful of that as we go throughout the year and were still being predicted to decline here in Q3 and Q4. That's also part of why you'd bring your revenue down, because you could expect that ASPs may decline slightly going into Q3 and Q4 for the same volume of business, right? So we're mindful of that. But outsetting that aside, we haven't seen any demonstrated changing in pricing behavior of our top competitors.

[Operator]

Our next question comes from the line of Joseph Osha with Guggenheim.

[Joseph Osha, Guggenheim]

Hey, there. One thing we haven't talked about as much as we get into next year, a new thing to worry about, the tariff moratorium goes away in June. Panels have to be put in service by the end of next year to qualify. So I've been talking to some folks who are talking about real rush to kind of get all that done. I'm curious as to whether you're beginning to hear about what it's going to be like managing that process and how it might impact your business as you get into the latter part of this year and the first part of '24?

[Nipul Patel, CFO]

We really haven't had any of our large customers come and talk to us about that being a big issue yet. We're reading the same things you are. We understand there may be -- that there is a potential for that to occur. But we haven't had our customers rush to us and kind of lack of a better word, locked down capacity in that near-term. They're more focused on the IRA overall benefits than they are the tariffs under AD CVD.

[Joseph Osha, Guggenheim]

Right. But to clarify, it is true, right, that any panel that comes in under the tariff moratorium by June has got to be placed in service by the end of '24. That's correct. Yes?

[Kevin Hostetler, CEO]

That's our understanding of it, yes.

[Joseph Osha, Guggenheim]

Okay. Interesting. So your customers aren't talking about that. They've got other stuff to worry about. Okay. Thank you very much.

[Operator]

Our next question comes from the line of Donovan Schafer with Northland Capital.

[Donovan Schafer, Northland Capital]

I want to start off and just ask for the bookings being down quarter-over-quarter. When you report bookings, do you make an adjustment for changes to the cost that you're able to pass through to customers? I mean, with steel prices, logistics, all that stuff, was there a reduced sort of ASP impacts, where sometimes you have the same megawatts, but now you say, well, when we do ship this, what we're going to have to pass through, that ends up as revenue, it's going to be lower at this point. Is that a factor?

[Kevin Hostetler, CEO]

No, because again, if you remember our contracting process, we're locking that in at that point in time, right?

[Donovan Schafer, Northland Capital]

Okay. So none of it sort of stays floating, like locking certain portions in and then a certain portion stays floating until like the shipment date, it doesn't look like that.

[Kevin Hostetler, CEO]

No, we're doing the full price sort of program.

[Donovan Schafer, Northland Capital]

Okay, great. And then, in terms of the one-off impact on gross margins, you may have said this, and perhaps I just missed it. But was that primarily on the Legacy Array side? Or was that also a factor with the STI gross margins?

[Nipul Patel, CFO]

There's primarily on the Legacy Array side, majority of that was on that. And as mentioned in my prepared remarks, it was the freight logistics cost a couple hundred basis points, and it was also project mix.

[Operator]

Next question comes from the line of Tristan Richardson with Scotiabank.

[Tristan Richardson, Scotiabank]

Just maybe following on the STI question, the gross margin improvement there. It sounds like nothing necessarily one time there. But did that benefit necessarily from mix as well? Or should we really think about the margins in Q1 is representative of the process improvements that you guys highlighted in your prepared comments?

[Nipul Patel, CFO]

That was primarily due to the mix of the product and locations and where that was sold, Tristan.

[Kevin Hostetler, CEO]

Clear though, that the project mix again, if you remember, when we talked about some of the lower margin U.S. projects that had us -- had some difficulties with their margin throughout last year. We didn't do a lot of that work, that closeout work in Q1. So we've benefited from a lack of that in Q1. We will have a portion of that in Q2 and Q3 that finishes. And then I think we're back totally to our historical margins in the STI business. So we feel pretty good about what we've been able to do. Again, a lot of it's been about leveraging the supply chain provided by the Array team into STI, a lot of product rationalization, a lot of engineering work. There's just been a tremendous amount of work done on that business through the integration. We feel pretty good about where we're headed with it.

[Tristan Richardson, Scotiabank]

Make sense, Kevin, and then maybe just to your earlier comment on SG&A sort of a temporary increase in dollars, but over time operational leverage takes the percentage down. Just thinking about temporary, is that sort of a '23 phenomenon or even just isolated to a couple of quarters?

[Kevin Hostetler, CEO]

Now, this is a '23 phenomenon where we've agreed to invest literally millions of dollars in additional IT infrastructure that allow us to scale. And if you think about it, it's in terms of having the ability to very quickly, rapidly design sites at this scale up that we expect under the IRA, you can't just keep throwing bodies at the volume of business that's coming down, right? So we had to invest in some of the IT infrastructure that would allow us to take that volume and scale very effectively. But that's the investment you see this year getting ready for that scale next year. So we feel pretty good about it coming down next year.

[Operator]

Next question comes from line of Jordan Levy with Truist.

[Mo Chen, Truist Securities]

Hey, this is Mo on for Jordan, thanks for taking my question. It's great to hear that Brazil and Spain are still holding up nicely. So just one quick one piggybacking on Brazil. I'm just wondering, in terms of the mix, utility scale versus distributed generation products, what have you seen so far the mix change in Brazil market? And how are you positioned competitively in Brazil? Thanks.

[Kevin Hostetler, CEO]

Yes, so I would say a lot of what we're seeing in the first six months of the year here is really utility scale. That really goes on through Q3. I think we're starting to see a lot of inbound activity on the distributed generation as well. And we're hopeful that that'll come in. And that's quicker turn and has that ability as it comes into to help us out here in Q3, Q4.

[Operator]

Our next question comes from the line of Alex Kania with Wolfe Research.

[Alex Kenya]

Just curious about how you're seeing the evolution of kind of product mix from the discussions you're having? Has there just been any trend towards, if there's price sensitivity on for H250? Or is there a lot of adoption and embracement of OmniTrack? I am just kind of curious about how you're looking at that over the next 12 to 18 months?

[Kevin Hostetler, CEO]

Yes, I can, I can tell you that both are really exciting for us. So we've had a tremendous amount of inbound interest in OmniTrack. And if I were to guess, as we go forward, it'll be a real large piece of the portfolio, meaning it's very, very helpful, and our customers are very appreciative of it. I think since February alone, we've got over 3 gigawatts of OmniTrack projects in various stages of the quotation process. So we feel really good about that. We think it really launching the OmniTrack into what we call our alpha sites here in Q3. And then we just begin scaling them up in Q4 and into Q1 in terms of the size and complexity of the sites. So we're just taking a very measured approach to launching that product. We feel really good about the traction it's getting and the demonstrated savings to our end customers. So that feels really good. And again, probably the biggest part of that slow scale up is really about some of the newer component pieces that it's taken some time to get the supply chain up and ready to do that at scale, right? So we feel good about that.

And as it relates to the STI -- please go ahead. Sorry.

[Alex Kenya]

Oh, no, no, go ahead. Sorry.

[Kevin Hostetler, CEO]

Yes. So -- and as it relates to the STI H250 in the U.S., I'll remind you that look, today, we still can sell the Spanish version in the U.S., although we prefer not to yet just to chase in order for price point. What we've really done is had our engineering teams from Array work very closely with the Spanish team and will have a much better version of that product to launch in the U.S. There's just a great story of the integration between STI and Array and product management, engineering, field engineering, global sourcing, working at changing that product to have -- the first part was to ensure we can be at a price point that's very, very competitive with others in the market at that price point and that we can win. And we feel really good about that. We've simplified the product, made it easier to install, simplified the drive line, reduced the SKUs in terms of the torque tube. We've resourced the torque tube in a size that's more available readily from U.S. steel suppliers to ensure we can get U.S. content up. So we've done a tremendous amount of work on that product. And as we launch it, “in early Q3” we'll expect to be shipping it in Q4. And I think we're going to have a really compelling product line to compete at a different price point.

[Alex Kenya]

And then I guess just a question just on cash flows. Nipul, you mentioned that there was a thinking about capital allocation, maybe, debt reduction, obviously decent momentum on the cash flow front. I'm just -- I am kind of curious about when you feel like you'd be in a position to give a little bit more detail on that capital allocation plan?

[Nipul Patel, CFO]

Yes. It'll be coming in the coming quarters, as continue to print the good free cash flow numbers, we -- as we get in Q3 through our hot high delivery quarters upcoming here in Q2 and Q3, I think we'll be in a good position, and near the end of the year to really lay that out.

[Operator]

There’s time for one last question. Our last question comes from the line of Derek Soderberg with Cantor Fitzgerald.

[Derek Soderberg, Cantor Fitzgerald]

Hi, guys, just one for me. Curious if you're seeing anything changing from a competitive standpoint? It sounds like demand is there, I would imagine orders are ramping up capacity to get ready to scale. Are you seeing a growing number of competitors bidding on contracts, more competitive price bidding? Any change to what you've seen in the past, any change this year on the competitive landscape? If you can provide some color on that, that'd be great.

[Kevin Hostetler, CEO]

Look we really haven't seen a substantial amount of changes from our top competitors this year, yes. There's been some dialogue about competitors getting more strict on the terms of business they'll accept. Obviously, when you're publicly traded, you'll have to do that. So we expect that to occur. Other than that, that's been the commentary from when I'm talking to our key customers.

[Operator]

That concludes our question-and-answer session. This does conclude our teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.