Operator
Good morning, and welcome to the Shoals Technologies Group 4th Quarter 2025 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 Matt Trachtenberg, Vice President of Finance and Investor Relations for Shoals Technologies Group. Thank you. You may begin.
Thank you, Karina, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss, and our CFO, Dominic Bartos. 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 and should not be considered guarantees of performance or results. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings. 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 the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investor Relations section of our website at investors.scholls.com. With that, let me turn the call over to Brandon.
Thank you, Matt, and thanks to everyone joining us on the call. I'll begin by sharing key results from the fourth quarter and our full year key wins and milestones. We'll then discuss the current demand environment and review progress on our strategic growth initiatives. Dominic will dive deeper into the fourth quarter results and provide our first quarter and full year 2026 outlook. look. We'll finish the call with questions from our analyst. Fourth quarter revenue was in line with our expectations at approximately $148 million, up 38.6% over the prior year period. Our commercial team also drove significant growth in our book of business, adding approximately $175 million in new orders in the period. This resulted in a company record backlog in Awarded Orders, or BLAO, of approximately $748 million, an 18% year-over-year increase. We delivered a seasonally strong book-to-bill of 1.2 this quarter, which continues to support the growth we see in 2026. As of year-end, approximately $603 million of our BLAO has shipment dates in the upcoming four quarters or full year 2026. We are set up very well for another successful year of growth. Commercially, we are achieving our objectives of growth and diversification. Profitability, however, was softer than anticipated in the fourth quarter. Our fourth quarter adjusted EBITDA of approximately $30 million grew by 15% year-over-year, representing 20.4 percent of revenue. This was largely driven by higher legal expenses, the ongoing impact of tariffs, product mix, and high labor and shipping costs in the period. As we discussed with you last year, we see very strong underlying demand drivers across the markets we serve. This, when paired with the incremental capacity we will have at our new facility warrants a more flexible and agile approach to how we determine which projects and which customers to engage with. Opening the lens with which we look at the opportunity set to drive higher revenue in 2026 and beyond while remaining within a reasonable margin range will ultimately result in higher profit dollars and free cash flow which will be reinvested back into the business. This approach removes self-imposed constraints, enabling us to make the right decisions for the long-term health of the business. Again, I'm very proud of our performance in 2025. It was a busy but exciting year for us. After a challenging 2024, we came back strong and grew top-line revenue by 19 percent, exceeding our initial expectations and the long-term Rain shared with you at our 2024 Investor Day. Our U.S. utility-scale solar business grew by almost 11% for the full year, accelerating in the back half of the year and growing 30% when compared to the second half of 2024. International revenue expanded from less than a million in 2024 to approximately $13 million in 2025. Our CC&I and OEM businesses exceeded expectations, and we've laid the foundation for our best business that is poised for rapid growth in 2026. Engaging with our customers, we introduced multiple new products in 2025, effectively expanding our addressable market and capturing additional share. We continue to diversify our customer list to include several new EPCs. For example, in 2023, we had three customers that accounted for less than $6 million of revenue. Today, those same customers account for almost $140 million of our BLAO. And we've made big, meaningful operational changes as well, including our ongoing move into a consolidated, state-of-the-art manufacturing facility. This will enable critical improvements to productivity and scalability as we continue to grow and diversify our business. Given the industry growth we see, it couldn't happen at a better time. During the year, we also completed remediation for all reported instances of the defective Prismian wire. This effort was funded through our own cash flow and reinforced our commitment to customers that we stand behind our products and services. So in summary of the full year, we're pleased with our performance. We've come a long way in the last few years. Our strategy of protecting and growing our core business while diversifying our offering and exposure to end markets is yielding results. Our focus on improving our operating capabilities while maintaining the commercial momentum you've seen is how we intend on driving attractive returns for our shareholders. Turning to our various business lines, I'd like to provide some context to our performance in the fourth quarter. The fourth quarter was another strong period of growth within our core utility scale solar market. Our quote volume in the quarter exceeded 700 million dollars of unique projects, adding to our strong pipeline. Note that these are projects that would generate revenue in 2027 and beyond, further supporting our long-term growth trajectory. And also related to the core U.S. utility scale solar market, in early 2025, Scholz brought a second patent infringement case against voltage before the U.S. International Trade Commission, utilizing our new and expanded patent portfolio. While the legal process will likely continue for another quarter or two, we're very pleased that the court recently issued its initial determination in our favor. It's a great first step and will remain patient for the commission's final ruling in early June. I'm also encouraged by the progress we are making in international markets, as evidenced by our increased quote activity and customer engagement. The products introduced in 2024 are generating interest with key decision makers, while our experience and reputation for quality is winning projects. We recognize approximately $13 million of revenue in 2025 from international projects and have a record $90 million of international BLAO, which will drive continued growth in 2026 and beyond. our community commercial and industrial or ccni business is performing well we are engaged with large well-respected electrical distributors that are driving meaningful quote volume increases our oem business is tracking ahead of expectations growing at 47 for the full year as our partner continues to see strong demand for their panels we expect to continue in 2026 with another year of attractive growth. We began disclosing our best backlog in awarded orders last quarter, which at the end of Q3 stood at $18 million. That information was designed to provide a starting point that you can use to track our progress against a rapidly evolving market opportunity. I'm excited to share with you that as of year end, we have $67 million in BLAO, a testament to the upfront engineering competencies and future manufacturing capabilities Scholls offers. We would expect more than half of this amount to be recognized as revenue in 2026. We continue to invest in scalable production capabilities for BESS. We expect our first new production line to be operational within the coming weeks. And I'm pleased to announce a partnership with On Energy, On Energy, a leading developer of advanced power systems for grid-safe data centers. Together, we will address a fast-emerging constraint for AI-driven infrastructure, securing resilient backup power at scale while enabling data centers to operate as grid-interactive and firming assets. Our partnership brings together two U.S. innovators with complementary strengths in power architecture and execution. On Energy will pair its medium-voltage, uninterrupted power supply systems with Scholl's advanced DC recombiners to deliver a solution for AI data centers that accelerates deployment timelines, safeguards operational continuity, and future-proofs energy infrastructure. 2025 saw a return to growth at Shoals. Our markets have been resilient and our competitive position continues to improve. We've entered new markets with new products, made meaningful progress on our legal actions, and began our move to our new consolidated facility. While the regulatory landscape has been distracting to many, we remain focused on executing our strategy. With that, I'll now turn it over to Dominic, who will discuss our fourth quarter financial results in more detail in our outlook for the first quarter and full year 2026. Dom?
Thanks Brandon and greetings to everyone on the call. Turning to our fourth quarter financial results, revenue increased by 38.6 percent year over year to 148.3 million dollars. The increase in revenue was primarily driven by higher domestic project volume from both new and existing customers. In addition, as Brandon mentioned earlier, our strategic growth channels of International, CC&I, and OEM contributed to year-over-year revenue growth in the quarter. Gross profit was $46.9 million compared to $40.2 million in the prior year period, an increase of 16.7%. Our GAAP gross profit percentage was 31.6% compared to 37.6% in the prior year period, and lower than we anticipated. We estimate that fourth quarter gross profit dollars were impacted by $2.1 million of incremental tariffs and logistics costs, $2.5 million of additional labor to support new products, packaging, and delivery requirements, and a half million dollars of additional plant overhead expenses, partially offset by higher volumes. These items negatively impacted our fourth quarter gross profit percentage by approximately 350 basis points versus our expectations. While you've heard us consistently communicate our long-term aspirational goal of 40-plus gross profit percentage, we were very clear in 2025 regarding our expectations of gross margin percentage to be in the mid to high 30s. In the long run, we continue to believe that a company like Scholz, who delivers highly customized and engineered-to-order solutions deserves an attractive return profile, but we must also balance those aspirations with the real market opportunities we have in front of us today. Part of the transformation you see at Shoals includes a renewed focus on innovation, flexibility, productivity, and the maximization of cash flow. The top-line strength we drove in 2025 and expect to continue in 2026 is in part attributable to a larger opportunity funnel consisting of both traditional and newly introduced products and a more flexible and customized approach to how we package and ship our solutions. Our strategy of driving incremental operating profit and finding balance between growing the business and driving profitability is one of the most important decisions we can make, and I believe we're doing the right thing. In the long run, the scale and leverage we will get on those incremental projects will allow us to continue to invest, diversify, and grow. The flexibility to make these important trade-offs to maximize profitable growth and ultimately create shareholder value cannot be done with a focus on a single profit percentage metric. For these reasons, for the foreseeable future, a gross margin percentage of low to mid-30s will provide us with the flexibility to win new customers, deliver new products enter new markets and continue the transformational journey we're on today moving on to selling general and administrative expenses sgna was 27.3 million dollars which is 5.8 million dollars higher than the prior year period driven by increased legal expenses partially offset by a reduction in stock-based compensation please note that in 2025 we spent a combined 30 million dollars of legal professional services an increase of 100 percent over the prior year recall that 18.3 million dollars of 2025 legal expense related to the case against prismian is identified and backed out of adjusted EBITDA while these elevated legal costs impacted our results in 2025 and will continue in 2026 they will not occur in perpetuity and we expect them to decline in 2027. Income from operations or operating profit was $17.4 million compared to $16.5 million during the prior year period. Operating profit margin was 11.7% compared to 15.4% a year ago. Net income was $8.1 million compared to net income of $7.8 million during the prior year period adjusted net income was 17.5 million dollars compared to 14.1 million dollars in the prior year period adjusted EBITDA was 30.3 million dollars compared to 26.4 million dollars in the prior year period representing 14.7 percent growth adjusted EBITDA margin was 20.4 percent compared to 24.7% a year ago, driven primarily by lower gross margin flow through. Adjusted diluted earnings per share of 10 cents was 22% higher than the prior year period. I now want to provide more color on what's driving the shift in profit percentages going forward so you can understand the gives and takes, what we can influence, and what are more macro in nature. Let's start with tariffs. While our intent was to broadly pass them on to our customers, in several cases, it does not appear to be possible at this time. We estimate tariffs had a $3.7 million impact to COGS in 2025, or an 80 basis point impact on consolidated full year gross margin percentage, heavily weighted in the second half of the year. While this issue is uncertain and rapidly evolving, at this time, our guidance incorporates a similar tariff impact in 2026. We also began our move into our new consolidated factory in late 2025. While this is a huge undertaking, the full economic benefits will not be felt for some time. There are redundancies, additional training, setup, and processes that need to be redesigned and implemented. These initial inefficiencies are incorporated into our 2026 guidance and will be reversed over time as we increase throughput and drive lean process improvement through our manufacturing organization. This was the right strategic decision that will provide the capacity we'll need for years to come. As we've stated in recent quarters, our plan is to be fully operational in the new facility by the middle of this year. You're likely familiar with the three legal actions currently in play at Shoals. Litigation against Prismian for defective wire, the related shareholder class action and derivative lawsuits and the itc case and subsequent district court case against voltage the cost for the defective wire case both in terms of legal expenses and product replacement work we've done since 2023 is shown in our filings and adjusted out of our non-gap ebitda results however the legal expense for the two remaining actions has not been called out specifically and so investors may not appreciate the impact or timing of them as a result of the expected elevated legal costs in 2026 related to these actions we will provide investors with additional visibility in 2026 we will also adjust EBITDA for the spend on the shareholder class action and derivative lawsuits our communicated strategy of defending share within our core markets and expanding our reach through new innovative products that solve customer problems has yielded tangible results it's enabled revenue growth of 19 in 2025 and an acceleration in 2026 while they have been well received by many new and existing customers not all are creative to gross margin percentage some expand our total addressable market which opens opportunities by increasing the value to developers and epcs evolving from offering a narrow product set to diversified portfolio that resonates with a broader customer set will take time and patience but it's the right thing to do for our customers and shareholders alike operationally we consumed 4.1 million dollars of cash in the fourth quarter driven by higher accounts receivable and inventory balances at year end and partially offset by higher accounts payable and higher deferred revenue on a year-to-date basis we have generated 17.1 million dollars in operating cash flow Free cash flow was negative $11.3 million in the fourth quarter, reflecting both the $7 million impact of remediation costs and elevated capital expenditures related to our new facility. These two items impacted free cash flow by a total of $14.2 million in the quarter. Our balance sheet remains high quality, and we ended the quarter with cash and equivalents of $7.3 million, and net debt to adjusted EBITDA of 1.3 times. Our net debt was $129.4 million, a slight increase over the prior quarter. Backlog and awarded orders ended the fourth quarter at a record $747.6 million, a sequential increase of $26.7 million. Backlog constitutes $326.2 million dollars of the total blnao providing us with confidence that the growth projections we have for the upcoming periods can be achieved as of december 31st 603.4 million dollars of our backlog and awarded orders have planned delivery dates in the coming four quarters with the remaining 144.2 million dollars beyond that so turning now to the outlook for the quarter ending March 31st, 2026, the company expects revenue to be in the range of $125 to $135 million, representing 62% year-over-year growth at the midpoint, and adjusted EBITDA to be in the range of $16 to $21 million, representing 44% year-over-year growth at the midpoint. Turning to the full year, as we enter the year with $603 million of backlog and awarded orders currently expected to ship in 2026 we remain mindful of the elements beyond our direct control similar to last year we estimate the volume of projects that might be delayed out of the year as well as the volume of projects that we can still add to the calendar year for this year we need to also incorporate our new best customers and product delivery schedules that are dependent upon totally different factors than our historical utility scale solar projects As a result, our expectations for revenue is a range slightly below the $603 million backlog and awarded orders on the books a year-end. We believe this range to be reasonable and achievable. Therefore, for the full year 2026, we expect revenue between $560 to $600 million, representing year-over-year growth of 22% at the midpoint, and adjusted EBITDA in the range of $110 to $130 million, representing year-over-year growth of 21% at the midpoint. In addition for the full year, we expect cash flow from operations in the range of $65 to $85 million, capital expenditures in the range of $20 to $30 million, and interest expense in the range of $8 to $12 million. dollars. With that, I'll turn it back over to Brandon for closing remarks.
Thank you, Dominic. As we enter the new year, I reflect on where we've come from and look ahead to where we're going. The broader U.S. market appears to be extremely resilient. Our customers are busy moving projects forward, and we remain committed to meeting their needs. As we have discussed, the need for new energy supply is real. The massive investment cycle in AI and data centers combined with the continued industrialization and onshoring of manufacturing will drive load growth far in excess of what we've seen in recent decades. Solar is still best positioned to meet these rising energy needs today and through the balance of the decade. While industry growth forecasts very greatly, and our view, sustained solar capacity additions are the most likely outcome. We are preparing Shoals to be agile in our production capabilities in a stable or growing demand environment. In 2026, Shoals celebrates its 30th year of doing business. It also marks five years since becoming a public company. Since our IPO, our annual revenue has more than doubled From $213 million to $475 million, we've generated more than $220 million of cash flow from operations that has been reinvested in the business, and we've maintained market leadership by a wide margin. We've built a company with a strong foundation on innovation and quality, and to fully achieve what we know we're capable of, transforming the company from a narrow product offering in a single market and geography to a more diverse and durable business, meaningful change will continue to occur. And today, we are in an exceptional position from both a commercial and operational perspective. The strategic plan we constructed and process improvements we've implemented have begun to yield tangible results. We've protected and grown our core markets. We've reignited the innovation engine. we are building new businesses and new markets that expand our total addressable market while aggressively diversifying our market and customer exposure. We've invested in the right physical assets, including automation and technology, that will drive productivity for years to come. And we've assembled an experienced team of business leaders that will enable us to continue the transformation of Shoals. These changes are both critical and deliberate. and come at a time where the world is struggling to keep up with energy needs both here and abroad. The long-term secular tailwinds are intact and strengthening. We're very excited about the trajectory of our business and the markets we participate in. We want to thank our shareholders and customers for their continued trust and our employees for their hard work and dedication. Operator, we are now ready to take questions.
Operator
Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. A kind reminder to pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Julian Domelin-Smith with Jeffries. Your line is open. Please go ahead.
Hey, can you guys hear me okay? Yes, sir. Sure can, Julian.
Hey, top of the morning to you guys. So just a couple questions here to hit it off. First off, just in terms of book and bill in the year, just when you think about setting that benchmark here for top-line revenue for 26. How do you think about how much you could actually book in this new environment? You guys made some comments on that in the prepared remarks. And then related here, can you comment a little bit about seasonality? What else is going on when you think about this new set of customers that you're alluding to here? It seems like a very conservative benchmark, given what you're coming into the year with and where you're setting your full year revenue numbers at. I'll throw you a quick follow-up on that, just in terms of best.
What is the right order rate when you think about the trajectory of continue to add backlog pretty impressive you know q3 q4 over q3 thanks julian uh great questions i'll start start with the first when we think about our book and term business you know historically uh last year and even the prior year in 2024 um and it's reasonable to think that 50 to 70 million dollars in book and term business is probably a pretty reasonable number to think about. And, you know, what we've got to keep in mind this year is we're still in an environment where there's some level of uncertainty, but we didn't see that level of uncertainty materialize in 2025. It still exists in our current landscape. So we wanted to be prudent about our guidance. Additionally, as we've taken on new customers, they've got different expectations, different project delivery schedules than we've experienced in the past. So we wanted to incorporate that in our guidance. And additionally, as we diversify our business into new products and markets, um and and you know those products have yet to deliver yet um we want to make sure that that we have uh given ourselves some room there as well and our guidance um so it is it relates to the order book specifically to vests um as we've mentioned in the past the bookings for uh for this particular business could be lumpy. They're large projects in nature. And we are very excited about the $67 million of backlog and awarded orders. We've effectively forexed, you know, our bookings number from last quarter. But we think that the bookings there could continue to be lumpy, lumpy while revenue recognition, once we get going with our new production line here in the coming weeks will probably be more stable got it so this is really just what is it about the business backdrop that you would if you could just elaborate quickly that gives you that pause on on right as the translation of revenue this year is there anything about the environment in particular you want to stress or it's just truly the nature of the new customers here yeah i think it's just the nature of of the new customers in our in our traditional uh solar business. We want to be mindful that they may have different project patterns that are than our historical customers. And just give ourselves room, Julian, to make sure that that book and term business either supersedes any project delays or potentially overcomes project delays. If the year materializes as planned and projects go off as scheduled, I would look for us to be, you know, at the upper end of our revenue range.
Yeah, that's even transparent here. Excellent. Thanks, guys.
Yep. Karina, next question, please.
Operator
Your next question comes from the line of Philip Shen with Roth Capital Partners. Your line is open. Please go ahead.
You guys, thanks for taking my questions. I wanted to check in with you guys on the margin outlook. Dominic, you talked about this new range of low to mid-30s due to a number of reasons, new customers, and delivered new products, et cetera. And so I was wondering if you could give a little more color there. How long should we expect this level or this new range to be in place. So beyond 26, do you think we should kind of think about this as the range also for 27 and 28? And then can you talk about pricing? To what degree have you guys lowered pricing? And is that a big driver of this new margin range? Thanks.
Sure, Phil. So let me start with the 2026 outlook on margin where we've said it's the low to mid 30s. I think it's very important for us to really focus on some of the more transitory things and then also what might be take a little more time to evolve. As we said in the prepared remarks, we do include some tariff impact that is expected to be absorbed by shoals. As we saw on Friday, this is a very fluid situation, but we do have inventory that has capitalized tariff expense that will still be with us for the first half of the year. Another thing that we've been talking about is the move into our new mega facility. We expect to be moved in in the first half of the middle of this year, first half of the year we're moving in. But in the meantime, we do have some inefficiencies created by still operating now in three facilities during this transitional period. So that is something that is certainly factored into our guide with the lower gross margin percentage. As we talk about gaining efficiencies over time, we absolutely will have cost out initiatives and margin improvement initiatives going into 27 and beyond. But I do believe with our product mix, the third component, that we have talked about introductions of new products, capturing new share and new customers that don't use the VLA product system. And those have a margin percentage dilutive issue, an example being a long tail VLA product as an example. And we've talked about the fact that product mix is important. So I would characterize this year's margin guide as one that should see the lowest margin percentage of the year in the first quarter. And then we'll start to see a gain back as we start getting some synergies and get some costs out as we move into the new facility and we get the scale that we've been talking about to leverage those new fixed costs. So for the short term, I think this is the right margin percentage. And I expect that the 2027's margin would be higher, but we're taking off the table any discussion of 40% return in the near term. I just want to be very clear about that.
Okay, great. Thanks, Dominic. That's very helpful. And then shifting over to the comment I think you guys had in your Q1 guide, I think you guys talked about certain customers changing order patterns. Can you talk about what that is and then also what the seasonality of the – or what the kind of cadence of revenue might look like by quarter for the year as well?
Yeah, Phil. I mean, just, I guess, first and foremost, we believe the market's very, very strong. I don't want this to get misinterpreted as we've got – we don't have confidence in the market. We certainly do. There's very strong near-term indicators, whether it's crew counts on the ground, installing solar products, tracker installations, which we follow, are very strong. And as we all know, the long-term fundamentals for energy consumption is certainly there. And that's evidenced by a really strong quarter of quoting for us at $700 million. dollars is you know probably as good as anybody fourth quarter is usually a softer month as it relates to to quoting and installation and we saw a very strong uh you know very strong quarter i think as important as anything we continue to believe there's a strong preference uh for our solutions that that we're providing and executing in the field and uh as as we mentioned in the prepared remarks, our core business accelerated about 30% in the back half of last year, and that gives us a lot of confidence. We're optimistic about our sustained bookings growth. We've had great bookings growth all year. If you think about 2025 specifically, Q1, we did a 1-1 book to bill. Q2, we did a 1-2. We reached record revenue in Q3 and still did a 1-4 book to bill. And then we surpassed that revenue record in Q4 and still did a 1-2 book to bill. So similar to last year, we see probably the cadence of our revenue recognition is probably being somewhere in the neighborhood of 45 in the, you know, in the first half of the year, moving to 55% in the second half of the year. But, you know, we feel very, very good about our book of business right now.
Thank you, Phil. Appreciate it. Karina, next question, please.
Operator
Your next question is from the line of Colin Root. Sorry, my apologies. Brian Lee with Golden Saks. Your line is open. Please go ahead.
Thanks for taking the questions. Maybe just focusing on the top line guidance here for a moment. There's a lot of moving pieces here. If I back out the kind of 35 million or six points of growth you're implying for best shipping in 2026, there's still a good 15% growth being implied for the core business. So can you kind of walk us through the pieces, kind of how much is coming from new markets like CCNI and how much is international and then how much of this is just pure market share gain in an environment where I don't think most people are expecting double-digit utility scale volume growth in the U.S. in 2026. So you guys do seem to be outpunching your weight here a little bit. So if you could walk us through a couple of the pieces beyond the best that you already quantified.
Yeah, Brian, Great, great question. Great to hear from you. You know, maybe I turn your attention back to think about our investor day in 2024. We identified about 30 percent of the market that we did not think we were attacking. We were attacking at that point. We believe that we have addressed about two thirds of that piece of the market. And I think that's really evidence. We had three specific customers where we did, you know, less than a million dollars with that now have about $140 million of our backlog and awarded orders. So again, as I mentioned, you know, to Phil's questions, we do think that there's a strong preference for our product. And I do think we have the ability to continue to outpace the general market growth in the solar landscape um we have seen you know specific to uh you know the different business units we grew our solar solar business uh about 11 11 last year uh we did see uh a record year in our international business um driving you know three projects about 13 million dollars and i think what is maybe even more exciting than that, we replaced that backlog and reached record backlog and awarded orders in the international space of about $90 million. Our C&I business continues to grow rapidly. The numbers are dotted. Quite frankly, it's a small piece of the business, but we continue to see really nice growth in our C&I business. In our OEM business last year, you know, which is our J-Box business grew 47%. You know, I don't know that we'd anticipate another 47% growth here, but we do expect that business to be very, very strong. So I guess net net, when you look across all of our business units outside of our battery energy storage business, all are performing quite well. And we expect, you know, continued growth in 2026.
And then maybe just to follow up on the margin question, I might have missed the number, but Dominic, I think you mentioned something like three percentage points, maybe a little over three percentage points of tariff impact in 2025 and expecting a similar level in 26. Obviously, that's fluid. But how much of the tariff impact is related to IEPA? And then if, you know, the recent sort of changes stay as advertised in the second half of the year, it sounds like you'll be working through the inventory that has the higher costs and paid the tariffs. Do you get all of that back or what's sort of the rough net math on kind of what, you know, margin recapture. You could see if tariffs do relax here as we move through the year. Thanks, guys.
Sure, Brian. So the tariff question is a bit complicated for us because there are instances where we very specifically are passing through tariff costs to customers. So any reduction in tariffs would also then reduce what we're passing through. It's just a pass-through impact. There are some components where we are structurally holding onto the tariff costs as part of our cost of goods sold. And for that piece, then we would have a benefit if the tariffs are reduced in the back half. For aluminum, we still have 232s. There's still some relatively high tariffs on aluminum, but we would get the benefit of a reduced reciprocal tariff environment there. So I don't want to get too wrapped up over the timing of when tariffs will play through. It's going to be something that as we get more information, as we get guidance, We'll be able to share more information in the coming weeks and quarters. But I think right now we don't know if we're going to get a windfall repayment of tariffs. That would clearly be a lift. I wouldn't bet the bank on that one, but it's certainly an option for this year.
Yeah, maybe just to provide some more color on tariffs. And as Dominic said, it's a fluid environment, to say the least. IEBA tariffs are no longer to be collective, I believe, as of today. There has been no decision on refunds, and I agree with Dominic that, you know, we have not baked refunds into our plan, and that's probably prudent not to do that. The new Section 122 tariffs are expected to begin being collected and are assessed at 15%. It's notable that those tariffs effectively are in addition to the 232 tariffs. So just so everybody understands, we would pay the 232 tariff on the metals content, aluminum specifically, and then the 122 tariffs would be assessed on top of the non-aluminum components. So, you know, while the change does not benefit our current inventory as those tariffs have been capitalized, it does provide some positive opportunity for future imports, assuming there are no changes to what we know as of 743 Central Time today. So, you know, we're going to continue to be as nimble as we can in this tariff environment and focus on delivering as much value as we can to our customers.
Thanks, Brian. Karina, next question, please.
Operator
Your next question comes from the line of Mark Strauss with J.P. Morgan. Your line is open. Please go ahead.
Yeah, good morning, guys. Thank you very much for taking our questions. I wanted to go back to the On Energy partnership just to confirm, is there anything embedded in the guide from that partnership this year? Do you have firm orders yet? And just kind of a reasonable time frame of when you might expect to see orders and associated revenue. I know kind of the conversion of that backlog to revenue is a bit up in the air, but anything you can provide would be great.
Sure. Yeah, and we've alluded to, you know, excitement over the course of the last year around this opportunity in the battery energy storage space. There is a portion of our backlog and awarded orders that is attributed to ON Energy, and we are very excited about that potential partnership with them. I mean, they are a leader in building and operating hyperscale systems that, you know, specifically is serving the AI data center landscape and other mission-critical facilities. I think what we offer in this space to them and other customers is scale and really bankability. Um, we are, uh, we have built a production line, uh, that is, uh, that is a position to drive, uh, you know, ample capacity in the coming years. And we're very excited about that as it relates to the order patterns. Um, again, like, like other customers, it will continue to be, uh, to be lumpy. And, um, like all of our customers, whether it be in the solar space or better energy storage storage we've got you know delivery schedules and we take the purchase orders and and we adhere to those those uh those delivery schedules so um once once we get production started again as it relates to on or other customers here in the coming weeks on our new line um you will see more consistent revenue recognition uh on end of the year okay great And then just, Dominic, a real quick follow-up, just to clarify what you said earlier about still operating multiple buildings.
When is that complete? When do you fully move into the new building?
Our current projections are for the end of second quarter. We're fully in this building operationally. We are manufacturing already in the building. We have our big lead assembly lines are all being produced here in our new 1500 Shoals Way facility. Right now on the floor, our harness lines are going in, but they're not operational yet. Our new best lines getting the final touches on for its grand opening here in the next few weeks. So by the middle of this year, we will be in. As we've talked about, we still have a redundant facility that would be rendered redundant this year in plant four. That lease does not expire until 2027. But we will start realizing operational savings and synergies in the back half of this year.
Operator
Your next question comes from the line of Praneeth Satish with Wells Fargo. Your line is open. Please go ahead.
Good morning. Thank you. Maybe switching gears a little bit here. So, you know, you've talked, you've seen good success on the on the best side. Maybe on the on the data center BLA product that you're working on, I guess, kind of moving from prototype beta testing and i think the latest is kind of waiting on ul certification um so yeah maybe just if we could get an update on that are you still on track to potentially launch a commercial product this year um and then is the expectation to get some meaningful sales uh in 2027 and just any you know remaining technical or customer gating items to note.
Bernit, thanks for the question. Yeah, we are still, we still are on track with our data center product. Again, we've talked about revenue recognition coming probably more so in 2027 and 2026. Still getting very strong voice customer feedback for that particular product and working towards certification. So I would say the product is tracking quite well, but again, will not materially impact our financials in 2026.
Gotcha. And then you mentioned the new best production line is going to be online shortly. I guess when this is up and running, how much manufacturing headroom do you have today to kind of support growth beyond the 67 million of uh orders and that you've booked already um do you see the need for additional kind of investments in the coming years on on the best side or this kind of gets you uh gets you set for the for the balance of the next few years um and then as a follow-up to that um can we can you help us understand whether you'd need to spend incremental capital uh to support the data center bla product um as we get into 2027 and how we should think about capex and 27 at a high level sure um as far as the best line goes um nothing would give me more pleasure than to invest more
capital to build a second production line uh for that that particular product um we probably do not need to do that in the near term uh we've commented in the past that production line is is capable of producing hundreds of millions of dollars of product, you know, and is set up for scale. We do have room when you see our new facility to put a second production line in effectively next to that line, you know, which can produce the same product or variation of a similar product. So we have contemplated that in the design of our new building. As it relates to the CapEx around the data center product, that product can be run and it effectively leverages our BLA patent portfolio. So you would think of the production setup is being similar to BLA. As that product ramps, might we need to invest in capital to add additional BLA production lines? Potentially so. That is not an overly significant investment should we have to do that. So we're pretty comfortable with us being able to scale that that business in the future because it relates to overall capital spend um you know we look at our capex spending to to to decline somewhat this year um i think the midpoint of our capex guidance was about 25 million dollars we spent over 30 last year uh we are still um you know putting the finishing touches on this particular plant. And as we've mentioned before, there's some additional investment in IT and systems architecture for 26 and probably into 27. But we will continue to normalize our capex spend in the coming years.
Thank you, Praneeth. Karina, next question, please.
Operator
Your next question comes from the line of Colin Roosh with Oppenheimer. Your line is open. Please go ahead.
Thanks so much, guys. Can you talk a little bit about project timing and design related to FIAC provisions?
They're still a little bit fuzzy, but I wanted to get a sense of any sort of project delays that you're seeing given uncertainty around some of the supply sourcing that folks may be managing right now yeah thanks colin um i i would not say that we're seeing a tremendous amount of volatility in projects related to fiat there there are some uh late point changes maybe in modules which which require uh us to do some some redesigns and slow down releases of of the projects to our manufacturing floor um that happens i wouldn't say it's overly predominant um as it relates to fiac specific to uh to our product set as as you know the those uh the fiac uh guidance that came out was fairly limited and still is pointing everything back to the domestic content tables uh which eboss is is not a part of at this point in time and we continue to try to make it a part of of those uh of those tables but it's not not seen success and getting that completed at this point in time. So not a tremendous amount of volatility, Dave, related to fiat.
That's super helpful. And then just on the energy storage product, you know, as we start to see some evolution around some of the configurations, you know, and voltage considerations for folks, you know, I'm curious about how quickly you guys can adjust to some of those some of those adjustments and how much of that is built into this on contract you know as you look at the evolution of the market you know moving towards 800 gold it seems like there's going to be a significant number of new opportunities and wanted to get a sense of the dexterity of the product to meet some of those needs yeah we you know we have We've standardized our recombiner line around specific amperages to handle the configurations
that we see in the marketplace today. We've got a 1,200 amp recombiner product, 2,000 and 4,000 amp. That 4,000 amp recombiner is probably the preferred product in larger AI data centers. We engineer those products specific to our customer base. And those products are capable and are handling effectively 800 volts of power at 4,000 amps. and are, you know, doing somewhere probably north of 3.3 megawatts. So I think we've got the right product at the right time for these particular, you know, solutions that are going into larger data centers. Thank you, Colin.
Operator
Your next question comes from the line of Chris Dendrinos with RBC Capital Markets. Your line is open. Please go ahead.
Yeah, thank you. I just wanted to ask about the backlog and the composition of it. I think you mentioned $67 million related to bets. But what is the composition of maybe the CC&I products and that long tail BLA solution? And I'm just trying to get a sense for how much that's kind of evolved and changed over the past year or so. Thanks.
Yeah, the CC&I product is a really that particular market you almost think of as book and term. So very little of our backlog and awarded orders would be related to the CNI business. It's it's, you know, it's a very small number. As it relates to long tail BLA. probably more so than the ccni business i don't know an exact number we would have to look at project project but uh the adoption of that particular product has been has been strong in the marketplace um and is driving some of the new customer uh customers that that that we've got in our backlog and awarded orders uh that that prefer that solution i i don't know the exact number of that off the top of my head.
Yeah, I don't either. Of the 140 million of the customers, the new customer BLAO, I don't know how much of that was long tail, but I do know that some customers have a very strong preference for that solution to centralize their load break disconnect. So we haven't broken down our domestic utility scale solar BLAO beyond that.
About, you know, just to give maybe additional context, you know, a lot of focus on new products, whether it is long tail BLA our super harness super jumper products mini bla um about six percent of our 2025 revenue was related to new products um in in the solar core business not not related to best um and we expect that number to continue to to grow uh as we're partnering with our customers got it thank you that's it for me for me thanks chris karina last question your last question comes from the line of david arcaro with morgan stanley your line is open
please go ahead hey thank you so much good morning um you mentioned a couple of discrete margin um factors as we look into 2026 but i was wondering if you could just maybe comment on the competitive environment and what you're seeing there more broadly you know is there kind of increased pressure from a pricing perspective or new entrants, or are you seeing more products pop up in the market that you're competing against here?
Tom, you want to take the margin piece, and then I'll take the competitive ones.
Sure. So some of the margin items that we called out and are going to continue in our guide for this year are a little bit more transitory in nature. I think from a competitive pricing standpoint, we have already recognized revenue in 2025 to win new customers over. So the pricing incentives that we offered for folks to change to shoals is not really considered an ongoing item for us. That's pretty much behind us at this point. From a competitive product set standpoint, our big lead assembly product does face competition and has faced competition from Voltage. As you know about the findings from the administrative law judge, we have to be patient and work through that. And the IPC market, which, you know, others, other competitors have been competing with and will fight for scraps over that share of the business. We believe developers are more and more inclined to avoid IPCs, but that's still playing out in the marketplace. But I think from a margin standpoint, the pricing pressures, every job that we do is a negotiation. Every opportunity that we have to look at the competitive set and the quality of Schultz products, we will take advantage of that and emphasize our product quality and delivery. And then the last thing I would say on the margin side is, as we build back some of the margins and have the opportunity to convert people to big lead assembly away from home run solutions or other types of harness solutions, I think what that does for us is it gives us a chance to push people to a better value driving product for themselves and also gives us a better margin. But we need the flexibility in margins to do what we need to do to drive operating profit. And that's really where we're focusing, driving cash flow, taking business if we have capacity? Is there a reason I shouldn't take a 30% margin job? Absolutely not. I should take it. It's the right thing for the shareholders.
Yeah, I think it's just important to reiterate, I still believe there is a strong preference for our solutions and our quality product. And that's evidenced in the increase in our book of business and our outgrowth of the overall solar market. I think the commercial team is performing quite well in the new solutions that our product team is bringing to market are being adopted by our customers. So we are very confident in our book of business and continue to be confident to grow that book of business.
Great. Thank you, guys. To our audience, that's all the time that we have for questions today. I want to note that we have a very active IR calendar through March. Those events are listed on the Investor Relations section of our website. So if you're attending any conferences you'd like to meet with us, please let us know. if we can help you further please reach out to investors at shoals.com with any questions thanks for joining us today have a great day everyone thank you this concludes today's call thank you for attending you may now disconnect
