Shoals Technologies Group Inc
NASDAQ:SHLS
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Shoals Technologies Group Inc
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Good afternoon and welcome to Shoals Technologies Group First Quarter 2022 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A.
At this time, I would like to turn the conference over to Mehgan Peetz, General Counsel for Shoals Technologies Group. Thank you. You may begin.
Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me are CEO, Jason Whitaker; and Interim CFO, Kevin Hubbard.
On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. As you listen and consider these comments, you should understand that these statements, including the guidance regarding full year 2022, are not guarantees of performance or results.
Actual results could differ materially from our forward-looking statements, if any of our assumptions are incorrect or because of other factors. These factors include, among other things, the risk factors described in our filings with the Securities and Exchange Commission, as well as economic and market circumstances, industry conditions, company performance and financial results, the COVID-19 pandemic, supply chain disruptions, availability and price of our components and materials, project cancellations, decreased demand for our products and policy and regulatory changes.
Although, we may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. We caution that any forward-looking statement included in this discussion is made as of the date of this discussion and 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 financial measures.
With that let me turn the call over to Jason.
Thank you very much, Mehgan, and good afternoon, everyone. I'd like to start off by thanking Phil Garton, who stepped down earlier this month, to pursue an opportunity with a private company. We appreciate all of Phil's hard work and his contribution to Shoals, especially in our first year as a public company. We wish Phil all the best in his future endeavors.
We're very pleased to have Kevin Hubbard on board as our Interim CFO, while we search for Phil's successor. Prior to joining us, Kevin was a partner at Ham Langston & Brezina LLP since 2017. And previously worked for Shoals on financial reporting. He has served in finance and accounting roles with other public companies, including as interim CFO at SAExploration Holdings Incorporated.
I'll start off by providing a snapshot of our Q1 performance and progress on our key growth initiatives, then I'll talk about current conditions in the solar market and how they impact our outlook and after that, turn it over to Kevin who'll provide an overview of our financial results for the first quarter.
Our results for the first quarter were in line with the outlook we provided earlier this year, despite an increasingly challenging environment for solar. Revenues and gross profits were 49% and 40% versus the prior year's quarter respectively and represented new records for the company.
More importantly, our gross margins increased more than 550 basis points sequentially to 38.7%, underscoring that the lower margins we experienced in the fourth quarter were a temporary phenomenon.
Adjusted EBITDA grew at a slower rate than our revenues and gross profit, as a result of our continued investment in SG&A to support our growth initiatives. We're investing heavily in people to expand our new product development capabilities, grow our international sales presence, scale up our EV business and support our new 219,000 square foot manufacturing facility, which became operational a little over a month ago.
Components revenue increased 73% year-over-year, driven by a combination of battery storage shipments, as well as the onboarding of a significant number of new customers. We’ve started with component purchases before transitioning to system solutions.
System Solutions grew 40% year-over-year, as a result of continued strong demand for BLA, as well as market share gains. The number of EPCs and developers using our system grew by seven to 25 total, which compares to just four at the time of our IPO last year.
We're currently in the process of transitioning an additional 15 customers to our system. And not only are we converting customers to our system solutions at an accelerating rate, our average project size is also increasing. The seven customers we converted in Q1 represent as much as 2 gigawatts of demand to be delivered this year.
The new products that we introduced in late 2021, also contributed to our growth in the quarter.
Our wire management solution continues to be very well received by customers, and we now have orders for that product to be used on over 745 megawatts of solar projects. Sales of our energy storage products, also contributed to revenue growth in the quarter and backlog in that part of our business continues to grow.
Looking ahead, the certification process is underway for BLA 2.0 and high-capacity plug-and-play harnesses. And we continue to expect first shipments, of those products to begin in the second half of this year. The former will have a higher average selling price per megawatt in our current product, and the latter will allow us to serve a new and fast-growing application.
We're also making strides in our international expansion. During the quarter, we received BLA orders from three new international customers, demonstrating our ability to convert customers outside of the US to BLA. Our European sales team is building backlog in the region, now that our products are fully qualified in the EU. Outside of the EU, our recently appointed Head of LatAm, is starting to meet with customers in the region and build awareness of our products. We believe the sales opportunity in that region could be significant.
Turning to our EV business. We're beginning to ramp up production following our successful product launch in Q4 2021. We generated revenue from EV charging products in Q1 and our backlog and award orders in this area are growing rapidly. The ease of insulation and portability of our solution is attracting customers to our EV charging products, who are pursuing school bus electrification projects. We see a big near-term opportunity in this area, after the announcement of the EPA's $5 billion Clean School Bus Program earlier this month, which is expected to significantly accelerate school bus electrification in the US.
We're also seeing good traction for our recently announced strategic partnerships, with Ernst & Young and Luminace Brookfield, which are already resulting in sales opportunities. We are pursuing additional partnerships to expand our reach in the market and we expect to announce new relationships in the near term.
Now, I'll take a moment to talk about current conditions in the solar market. The US Department of Commerce's investigation of an AD/CVD claim on solar cells and panels supplied from certain Southeast Asian countries, has caused some customers to pause their projects, as they await the outcome. We speak with our customers regularly about their projects and in most cases, we know who they are getting their modules from because that is an input to the EBOS design.
We have determined that the vast majority of our backlog is not at risk. The customers either did not procure their panels from any of the countries in question, or they are already in possession of their panels and have decided to move forward, with their projects regardless of the outcome of the investigation. As a result of that analysis, we feel confident in our revenue outlook.
Importantly, however, we expect many new projects will be delayed until the investigation is resolved, which could impact our backlog growth in future quarters. But we believe our current book of business, is more than sufficient to meet our plan until the tariff situation is resolved. To wrap up, we did a lot of work last year to set ourselves up for continued growth in 2022 despite a challenging environment. And that work is reflected in our first quarter results, as well as our backlog and award orders, which were up 67% year-over-year.
I'll now turn it over to Kevin, who will discuss our first quarter 2022 financial results. Kevin?
Thank you, Jason. I'm very excited to be here today and to be helping the Shoals team, during this transition, while they search for a permanent CFO. For the first quarter, revenue grew 49% versus the prior period to $68 million, driven by increases of 40% in System Solutions and 73% in Components. As Jason mentioned, the strength in components revenue was driven by the combination of battery storage shipments, as well as the onboarding of a significant number of new customers, which can initially lead to more of a component-level opportunity as we work towards converting them over to our System Solutions.
Growth in System Solutions reflects strong demand for Shoals' combined-as-you-go system. System Solutions represented 69% of revenue in the quarter versus 73%, in the prior period. Gross profit increased 40% to $26.3 million compared to $18.8 million in the prior year period. Gross profit as a percentage of revenues was 38.7% compared to 41.2% in the prior year period due to a higher mix of component sales in the quarter, which carried lower margins than System Solutions as well as higher raw material and logistics costs.
First quarter general and administrative expenses were $13.9 million compared to $6.8 million during the same period in the prior year. This change was primarily the result of higher stock-based compensation, planned increased payroll due to higher headcount to support our growth and product initiatives and new public company costs. Adjusted EBITDA for the first quarter increased 17% to $16.5 million compared to $14.1 million for the prior year period. Adjusted net income was $9 million in the first quarter compared to $8.8 million in the prior year period. Please see the adjusted EBITDA and adjusted net income reconciliation tables and our first quarter press release for a bridge to our GAAP results.
As of March 31, 2022, we had record backlog in awarded orders of $302.3 million, an increase of 67% year-over-year. The increase in backlog and awarded orders reflects continued robust customer demand for Shoals' products.
Turning to our full year outlook. Based on current market conditions and input from our customers and team, we are reaffirming the low end of our revenue outlook, despite industry challenges and expect 2022 revenues to be in the range of $300 million to $325 million, up 41% to 52% year-over-year. We expect adjusted EBITDA to be in the range of $77 million to $86 million and adjusted net income to be in the range of $45 million to $53 million. Further we expect 2022 capital expenditures to be in the range of $7 million to $8 million.
The change in our adjusted net income outlook from what we previously provided is larger than the change in our adjusted EBITDA outlook. This is a result of our updated expectations regarding our book tax rate as well as interest expense for the remainder of 2022 to support our growth and working capital requirements.
As discussed last quarter, we pulled forward several investments, including the addition of our new facility and significant increase to engineering, sales and HR headcount to support our multiyear growth outlook and growth initiatives over the next several years. While we saw a modest sequential increase in adjusted EBITDA margin in the first quarter, we are confident that the substantial growth we are experiencing will support expansion in our adjusted EBITDA margin as we get leverage on SG&A exiting this year.
Before I turn it back over to Jason, I want to briefly mention that earlier this month we increased our existing credit facility by $50 million to $150 million. While we have not drawn on the added liquidity, the larger revolver gives us the flexibility to invest in working capital as our business continues to grow rapidly.
Now back to Jason for closing remarks.
Thanks, Kevin. I'd like to close by thanking all of our customers for their commitment to Shoals, our employees for their contributions to our company's success and our shareholders for their continued support. We are off to a strong start in 2022. Despite challenging macro conditions, we're delivering good results for our shareholders and making steady progress on our growth initiatives. And with that thank you everyone. I appreciate your time today.
We'll now open the line for questions.
Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Philip Shen with ROTH Capital Partners. Please go ahead.
Hey, guys. Thanks for taking my questions. It looks like you booked $71 million in Q1 versus $76 million in Q4 and $130 million of bookings in Q3. Can you ballpark how much of the $71 million was for the EV business versus solar? And can you quantify in some way what your significant growth was in the EV order book? Thanks.
Hi Phil, Jason here. A pleasure to speak with you again. So, as of this point in time, Phil, we're not breaking out exact specifics from a revenue perspective as it correlates to -- a revenue opportunity perspective as it correlates to our backlog and award orders in the EV space. Very excited about the EV opportunity, especially considering the fact that we just recently launched that. But again, no further details on that at the moment.
Okay. Thanks, Jason. As it relates to 2023, I know you don't have official guidance and great job on maintaining the vast majority of your outlook for this year. And you highlighted that the modules, either are not impacted by the anti-circumvention case or have been secured. When you think about 2023, I can imagine you have good exposure to first solar. And so that gives you some security.
But when you look at the bookings and the potential for 2023, is there -- can you talk about what risk there might be for a flattish year for 2023 in terms of revenue growth, or what the impacts might be from project managers slowing down their activity given the anti-circumvention outstanding. Thanks.
Yes, no problem, Phil. I think first things first, just kind of give a little bit of idea of how we came to the 2022 outlook that we just provided today. So essentially, we took a bottoms-up approach on a per-project basis to go through the entire backlog and orders to assess many different things including things like panel manufacturer origin, as you mentioned obviously whether customers had those panels in possession.
And then once that analysis was complete, what we did is, we actually applied an incremental rigor to that information to make sure that we had some coverage for additional macro uncertainty.
And the result of that is ultimately what led us to what we just discussed, which is slightly bringing down our high end of outlook but being very comfortable with the low end, which is why we reiterated that today. But as far as specific from a 2023 perspective, Phil, no we're not guiding out to 2023 and it's really hard to say.
Okay. All right, I appreciate that Jason. Thank you. One last quick one. Is there any way you can quantify how much revenue from storage you had in Q1, maybe even if it's like a high single-digit type -- kind of qualification just for modeling purposes might be useful. Thanks.
Understood. I appreciate that Phil. What I can say is that revenue opportunities continue to grow as well as our backlog and award orders. But at this point, we're not breaking down any specifics for new products including our storage side Phil.
The next question comes from Brian Lee with Goldman Sachs. Please go ahead.
Hey, guys. Good afternoon. Thanks for taking the questions. I know it's a challenging backdrop, so kudos on the execution. Maybe just to follow-up on Phil's question. I know you can't give us any views on 2023 necessarily. But Jason, you did comment that backlog and awarded order trends may be a bit challenged in the near to medium-term given project pushouts. So, I have two questions.
One is, this is the first time in a while we've seen sort of a flattish sequential trajectory. Should we kind of be bracing for a flattish-to-down trajectory in backlog and awarded orders over the next couple of quarters just based on what you're hearing and seeing from customer activity and actions?
And then secondly, has there been anything beyond just project timing pushouts? Have you seen anything actually fall out of the backlog that maybe you hope to recapture, but as of right now you're taking it out or you kind of consider to be a cancel?
Yes. Hi Brian, a pleasure to speak with you. So, a couple of things I want to point out. As we talked about in our prepared remarks, absolutely excited about the record revenues we're able to stand up for this quarter that we had. And one other thing I want to point out as well is that our quoting activity in Q1 was 160% -- or up 162% year-over-year. So a lot of different demand, a lot of exciting opportunity out there. And then even despite standing up record revenue for Q1, we were still able to grow our backlog, which we do continue to trend over time. But one thing that we did want to say is until AD/CVD is resolved, there is a possibility that we may see slower growth in backlog and award orders in the future. But that's but a moment in time. It's hard to say right now. And I think that if something like that does transpire once the industry moves past AD/CVD I would expect that any of that pent-up demand would ultimately come back to benefit the industry. The other thing that you asked was have we seen any particular projects cancel. We've not seen any particular projects cancel Brian when you look at the opportunities that we have in our backlog and award orders.
Okay. That's great to hear. And then just a second question for me on margins and I'll pass it on. The 38%-plus gross margin this quarter, quite impressive given all the supply chain issues as well as it sounds like mix wasn't ideal high-30s. I think we had anticipated based on the color you gave on margin trajectory last quarter that maybe that's where you'd be later this year. So given the mix and given what you're seeing in terms of supply chain, do you think we're headed back to like a 40% gross margin here in the next quarter, or are you going to kind of hold serve at this 38% plus or minus level for a few more quarters before we see any meaningful expansion on the gross margin line?
Yeah. I think a couple of things. Number one as I said before, we expect that our gross margins will be somewhere in that 38% to 40% range, as we go throughout the year. I mean obviously, there could be blips along the way that are related to mix that we've seen in any particular quarter. But again, 30% to 40% is where we expect to remain throughout this year.
The next question comes from Maheep Mandloi with Credit Suisse. Please go ahead.
Hey, good evening. And thanks for taking questions. Just a question just on the working capital here saw some usage in the quarter. Can you just talk about how should we think about working capital needs in Q2 and the second half? And will that require drawing down that revolver upsized this quarter? Thanks.
Hi, Maheep, a pleasure to speak with you again. Kevin, do you want to take that question?
Sure. Thanks, Jason. I think when we look at our working capital requirements just going through the next two quarters, we see ourselves as a use of working capital really going through Q2 and early in Q3. And as we start to exit Q3 and into Q4, we start to see those working capital needs come down. So as we look out, there may be a short drop in the end of Q2, early Q3, but certainly coming out of that in Q4.
Thanks. And then could you just elaborate on that? Is that just in terms of accounts receivables as you ship these projects, or just on inventory or something else on that?
Yeah. It really is specifically related to the growth and some of the initiatives we've got going on. So as we ramp up some AR Q2 starts to bleed back out in Q3 so.
Got it. And just one last one from me on visibility. You kind of talked about some of the backlog visibility for later this year. But could you talk about how much of visibility do you have today on 2023? And I just wanted to understand like if the AD/CVD is not announced until March 2023, does that put some of that visibility into question or rather say at risk, or do you have visibility into late 2023 as well? Thanks.
I think Maheep going back and looking at visibility, one of the things that we do we do work intimately with our customers out there. From a backlog and award orders perspective, that generally covers over the next nine months. But based upon where we are sitting now today in 2022, it's hard to say exactly what 2023 will look like, especially considering the fact that AD/CVD is a headwind that we're dealing with right now.
The next question comes from Mark Strouse with JPMorgan. Please go ahead.
Yes. Good afternoon. Thank you very much for taking my questions. Given you were certified to begin selling in Europe back in February, I believe. And then, the build-outs that you're making in your sales team in LatAm, just curious, your comments about the backlog potentially coming down or at least slowing in the U.S. do you think those international markets are enough to potentially offset that U.S. kind of hiatus near-term?
When you look at the opportunity that we have in front of us, one of the things that we had mentioned is that, we actually stood up seven new customers from a conversion perspective with our BLA. And those seven customers had a combined opportunity of about two gigawatts over calendar year 2022. And with those seven customers marked three of those specifically were outside of the U.S. which is very exciting.
And just to recap, our sales team is in place, as we talked about. Our product is fully qualified. One other thing I think is important to mention is that, we just recently hired a new Head of LatAm which is something we've been talking about for a while and very excited about the opportunities ahead, due to that bringing on that new team member. And as we gain further traction on expanding our international business and our other growth initiatives including eMobility, we do expect our business to become more diversified overtime.
Got it. Okay. Thanks for the rest of points. Thank you.
Thanks Mark.
The next question comes from Colin Rusch with Oppenheimer & Co. Please go ahead.
Thank you so much. Thanks so much, guys. Can you talk a little bit about the geographic diversity and mix on the quotation activity? I'm just trying to get a sense of, how broad the growth is going to be from a geographic perspective.
Yeah. We haven't released anything specific Colin as far as geographic location as it correlates to quote at the moment.
All right, I'll follow-up with you offline then. And then with the EV build-out and -- in the U.S. and infrastructure -- the infrastructure bill spending and that, cash is starting to flow likely in September, October this year. Can you talk a little bit about some of the time lines that you're looking at with your EV infrastructure customers? And what they're telling you right now in terms of expectation around inflection points for growth in that part of the business?
Yeah, when you look at the -- I guess, you could say the, funding that is being induced into the EV side of things, one of the things that's really a topic of conversation among many other exciting areas in eMobility is the $2.5 billion of funding that's dedicated specifically to school bus charging. I think it's roughly about $500 million a year. And we're seeing a lot of opportunity a lot of conversations around that. It's a very exciting program, because essentially it allows for grants and rebates up to 100% of the cost of replacement buses in certain areas.
And I think one of the very exciting things as you mentioned is, is that based upon that, funding the expectation is that it starts to play a fairly significant role in the incremental opportunity in that area as we go towards the latter part of the year. And one thing that has been very well received is our solution specifically for many different reasons because of the significant reduction in labor and time on site, but also the permanent but portable aspect that we bring, because it's a perfect fit because many of these school bus opportunities are a lot -- are on these properties.
The next question comes from Donovan Schafer with Northland Capital Markets. Please go ahead.
Hi guys. Yeah I want to follow-up on the school bus stuff. I was at the ACT Expo earlier I guess it was last week. And yeah, school buses were everywhere. I think there are five or six full-size school buses inside the physical conference space. So, clearly a huge amount of interest there, I'm curious, you just sort of touched on some of the benefits for a school fleet. Obviously, like you said the flexibility of having some things that are skid mounted so you can rearrange the charging. But there's also -- we talk about solar developers being a very risk-averse audience.
So I could see on the one hand, school boards or whoever is making these purchase decisions being -- wanting to go with a company that has the under mold, over mold very highly tested product from a safety standpoint. Though at the same time, I also know, historically from some checks, there are times when labor unions, if these were to have to go to labor contract – union labor contractors for instance that sometimes they prefer just sort of doing things the old-fashioned way that frankly doesn't make a lot of sense. But – so I'm curious, if there's – if things kind of net out one direction or another from the risk aversion the safety-ness you think of with the schools as a unique customer versus maybe some of the union things. Just any unique attributes or considerations there.
Donovan, good to speak with you again. Glad to see you're out at Expo. Sorry, I missed you out there. I hear it was a very exciting show. So no those are all great questions. And I think. the reality is, is that at our core, we really focus on quality, reliability and safety and being able to create that end-to-end solution in that plug-and-play fashion in our particular environment and ship that out in order to significantly reduce the amount of time on site, I think is seen as real value in this particular market regardless of the labor type that you're consuming in that geographic location. So I'm very excited about that opportunity. And again, when you look at the flexibility that we're able to bring in to these different areas, I think really gives us a leg up in that space.
Okay. That's great. Thank you. And I also want to ask a question just about the international business. With the three international EPCs that you sort of converted, I just want to confirm that, if in these cases that that means a committed sale for some kind of a solution in specific other countries. They have a particular project some 100 megawatts or whatever it is in Brazil or in another country and that's all sort of been signed and agreed upon, just kind of confirming that.
And then the other thing would be I'm sure you don't want to give specific EPCs, specific customer names and may not want to give specific country names in case that gives anyone away. But I am curious if you could speak to sort of are there common attributes among the countries, or are these – do these tend to be more high wage labor markets or do they have similarities in terms of maybe high standards and requirements for electricians to do wiring? And so having that in place means that there's a huge gain to be had by being able to get around some of those requirements? Just are there patterns and commonalities among these geographies?
Yeah. So, I think touching base on the first question that you asked, Donovan. I don't think this is where you're going. I mean, essentially the three opportunities that we talked about were customers in the international market and we are serving an international project. So they weren't specifically customers in the international market that we're serving a project in North America. So they were for an international customer in an international market, which is very exciting.
And also, when you look at the case – the use case in the international market obviously the higher the labor, the higher the value proposition. But the reality is even outside of that, there's a lot of opportunities. We're seeing places that have very low, or relatively low labor rates that, we're seeing success with as well. So there's more than just the labor aspect when you look at the quality and the reliability of our product offerings out there.
The next question comes from Kashy Harrison with Piper Sandler. Please go ahead.
Good afternoon and thanks for taking the question. So first one for me Jason, you mentioned in your prepared remarks and I think in the press release that BLA two is still on track to be released by the end of this year. Is that -- can you give us more specifics around timing? Is that a Q3, Q4 -- or Q4? And then how long do you think it's going to take to fully transition your customer base towards BLA 2.0?
Kashy, yes so first and foremost when you look at our BLA 2.0 we are on track for that to be released out towards the second half of the year. The expectation right now is that it would be towards the latter part of the second half of the year. And as we've talked about in the past when you look at the value proposition that we're bringing you bring additional value when you deploy that particular product the I would assume that it would actually deploy relatively quickly over the top of our current generation BLA. Especially with customers that already understand the BLA and how that BLA deploys just giving them additional value over the top of that is really a no bring.
Got it. And then maybe just -- that was helpful. And then maybe just a follow-up question on international. Can you -- and I know you're not breaking up your backlog but can you just help us with 2022 revenues that split between US and rest of the world? Any thoughts on how much of that might be international versus domestic?
So when you look at the areas that we are as we've talked about in the past, we have presence in Australia. We recently, just a couple of months ago finalized our certification to be able to support Europe and the like and then just added our new team member to be able to support LatAm. So obviously that's growing. We see a lot of opportunity now. But as we play out calendar year '22, a meaningful portion of that revenue is still going to come in the form of our North American opportunity.
Ladies and gentlemen, this concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.