Earnings Call Transcript - SHLS Q4 2021

Operator, Operator

Ladies and gentlemen, apologies for the delay. Welcome to the Shoals Technologies Group's Fourth Quarter 2021 Earnings Conference Call. Today, the 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 Ashish Gupta. Thank you. You may now begin.

Ashish Gupta, Unidentified Company Representative

Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me are CEO, Jason Whitaker; and CFO, Philip Garton. 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 the first quarter '22 and 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; 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 fourth 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.

Jason Whitaker, CEO

Now I'll talk about current conditions in the solar market and wrap up with some commentary on how we see our margins evolving this year. Phil will then give an overview of our financial results for the fourth quarter and provide our outlook for 2022. During 2021, we continued to convert customers to BLA and the number of EPC and developers using our system has grown to 18, up more than fourfold from 12 months ago. We believe that eight of the top 10 solar EPCs use our combined as-you-go system on a majority of their projects, and we're currently in the process of transitioning an additional 15 customers to our system. Outside of BLA, we're starting to see significant traction from the new products we introduced last year. Since launching our wire management solutions in the fourth quarter, we received orders for more than 300 megawatts of solar projects, and the customer feedback received thus far has been incredibly positive. We plan to ship our first IV curve benchmarking products in the coming weeks and continue to expect first shipments of high-capacity plug-and-play harnesses and BLA 2.0 to begin in the second half of this year. We're also making strides in battery storage, leveraging products and expertise from our ConnectPV acquisition. We took our first orders for dedicated storage products in the third quarter last year, generated revenue in the following quarter, and have several high-profile battery projects in advanced negotiations that we hope to announce in the coming quarters. We've made significant progress on our international expansion plan. Last month, we received IEC certification for our BLA, which was the last hurdle to selling our products throughout the EU. We have our sales team in place, and our products are now fully qualified. As a result, we expect to see backlog start to build this year. We're also looking at opportunities beyond Europe, and we've started building a sales team in LATAM. Now turning to our newly formed EV charging business. We launched our products in the fourth quarter and have seen a tremendous level of market interest in quoting volume. We signed our first MSA with a charge point operator in November, shipped our first products in February, and we'll be ramping up production as planned through the second quarter of this year to meet our demand. We're also starting to see synergies between our EV business and our core solar business as our customers are increasingly active in both solar and EV charging. A great example of that is the strategic agreement we recently signed with Luminace, the North American decarbonization-as-a-service business of Brookfield Renewable. Luminace opted to collaborate with us to combine the best-in-class, high-quality distributed generation platform with our leading-edge e-mobility solutions to provide comprehensive EV charging, solar, storage, and energy-efficient solutions. We are excited about this partnership and are honored to have been selected to be a vendor to an industry leader like Brookfield Renewable. Finally, earlier this year, we unveiled the Shoals eMobility Innovation Center, a living lab that enables customers to experience Shoals’ best-in-class electric vehicle charging solutions. We're bringing innovation to how EV charging is deployed and installed, just like we did in solar. Having the center to demonstrate our products is an important tool to win new customers. The hard work we did in 2021 to convert more customers to BLA, introduce new products, enter the European market, and launch our EV business is going to accelerate our growth in 2022. To put that in perspective, we had backlog and awarded orders of $299 million at year-end 2021, which was nearly twice what it was at the end of 2020. That number has continued to grow in Q1 and underscores the momentum that is building across our business. To support our growth, we're expanding our engineering and sales team and will be opening an additional manufacturing facility that will more than double our production capacity. Now turning to current market conditions. Last quarter, we disclosed that several of our customers had pushed out the delivery date of their orders, primarily as a result of delays they were experiencing in receiving modules or other equipment required for their projects from other vendors. We noted those push outs would cause some of our revenues to shift from the fourth quarter of 2021 into 2022. That shift has played out largely as we expected with only the timing of revenue being impacted and no revenue being lost. What we didn't expect is that at the same time as we were seeing push outs from some customers, we saw tremendous growth in orders from others, so much so that we've had to add manufacturing capacity to meet the demand. So we think our experience reflects the overall solar market right now. Demand is incredible, but the exact timing of projects remains very dynamic because customers are contending with so many moving pieces within their supply chain. What that means for us in 2022 is that while we know our revenue growth rate is going to increase significantly compared to last year, it's challenging to predict exactly how significantly and which quarters will see the greatest growth. Because of that uncertainty, we've tried to capture a wide range of potential outcomes in our 2022 revenue outlook. I'll wrap up by making some comments on our margins. Many of you have asked us about the sustainability of our margins, particularly given the year-over-year compression in gross margin that we experienced in Q3 and Q4. We expect to deliver gross margins on average that are in the range of 38% to 40%. We will have blips along the way related to mix or supplier issues in any given quarter, but we are in a situation where we are delivering significant value to our customers and are able to capture the increase in our product costs over time. Nearly all of the lower gross margin we saw in Q4 were related to a price increase from one of our suppliers that we chose not to pass on to our customers on a certain set of projects. That decision will continue to impact our gross margins in the first half of 2022, with a return to normalized levels in subsequent quarters. The story on EBITDA margins will be a little bit different. We are investing heavily in our human capital infrastructure to support our growth initiatives, including EV and international, which means we are adding SG&A ahead of when we have the revenue to absorb it. That will result in EBITDA margins that will decline modestly year-over-year in 2022, even as gross margin increases. However, we believe that's a small price to pay to support the significant demand we have today and accelerate our growth. I'll now turn it over to Phil, who will discuss our fourth quarter 2021 financial results and our first quarter and full-year 2022 guidance.

Philip Garton, CFO

Thank you, Jason. For the fourth quarter, revenue grew 24% versus the prior-year period to $48 million, driven by increases of 29% in Systems Solutions and 15% in components. The growth in Systems Solutions revenue reflects strong demand for our combined as-you-go system. The strength in components revenue during the quarter was consistent with the expected change in mix. Sales of Systems Solutions represented 68% of total revenues versus 65% in the prior year period. Gross margin in the fourth quarter was 33.1% compared to 38.3% in the prior year period. The decline in gross margin year-over-year was due to approximately $1 million of higher material and logistics costs, largely related to one supplier who elected not to pass on costs to our customers. We will see approximately $3 million of additional costs in the first half of 2022, after which we expect our gross margin to normalize at levels in line with what we have achieved historically. Fourth quarter general and administrative expenses were $11 million compared to $5.6 million in the prior year period. The change was primarily a 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 fourth quarter was $11.3 million compared to $14.1 million in the prior year period. Adjusted net income was $900,000 in the fourth quarter compared to $9 million in the prior year period. Please see the adjusted EBITDA and adjusted net income reconciliation tables for our fourth quarter press release for a bridge to our GAAP results. As of December 31, 2021, we had backlog and awarded orders of $299 million, an increase of 94% year-over-year and a 10% increase versus September 30, 2021. The increase in backlog and awarded orders reflects continued robust customer demand for Shoals products. Turning to our outlook for 2022. Based on current market conditions and input from our customers and team, we expect 2022 revenues to be in the range of $300 million to $350 million, up 41% to 64% year-over-year. We expect adjusted EBITDA to be in the range of $79 million to $97 million, and adjusted net income to be in the range of $54 million to $69 million. As for the first quarter of 2022, we are updating our prior outlook. We continue to expect revenue to be in the range of $68 million to $74 million. However, we now expect adjusted EBITDA to be in the range of $16 million to $20 million and adjusted net income to be in the range of $10 million to $13 million. To help provide some context on the bridge from our first quarter outlook, in addition to approximately $3 million impact that Jason and I discussed earlier, I wanted to call out weather-related shutdowns that resulted in approximately $4 million in lost revenue and a decrease of between $1 million and $2 million of adjusted EBITDA. We expect to recapture these shipments in the coming quarters. To support our multi-year growth outlook, we are pulling forward several investments, including the addition of our new facility, which will more than double manufacturing capacity and allow us to more effectively manage our business and serve our customers. With all that said, we are experiencing significant growth and are confident that EBITDA margin will rise as we gain leverage on SG&A exiting this year. I will now pass it back to Jason for closing remarks.

Jason Whitaker, CEO

Thanks, Phil. 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 continuous support. We're off to a strong start in 2022. And as we've talked about, I'm extremely excited about the growth we've seen in our backlog and awarded orders. I couldn't be more proud of our progress on our growth initiatives, and we look forward to sharing future developments in upcoming calls. And with that, I want to thank everyone for their time today and apologize for the technical difficulties, which resulted in a delayed start. We'll now open the line for questions.

Operator, Operator

Thank you. We'll now begin the question-and-answer session. Your first question comes from Brian Lee from Goldman Sachs. Please go ahead.

Brian Lee, Analyst

Hey guys, good afternoon. Thanks for taking the questions. I had a couple here. I guess, just to start off on the gross margin, you're talking about a $3 million additional impact to the $1 million headwind you already had in 4Q. So if I do the math, total $4 million, which means you're going to be at about a 30% gross margin level in Q1. Is that the right ballpark? And if so, is that the trough here in Q1 and it improves in Q2? Or how should we just think about the cadence of margins in the first half as you move toward more of a normalized margin path in the second half?

Philip Garton, CFO

This is Phil. I can take that one, Brian. I'm not going to give you exactly since we don't provide guidance on gross margins. Gross margins will be the lowest we expect in the first quarter. After we kind of work through this business, it will grow in the second quarter and then we expect in the second half of the year to get back to approximately what our historical levels have been.

Brian Lee, Analyst

And so with the historical levels, I mean, you guys have been in the high 30s, you've been 40 plus. Can you kind of maybe narrow it down for us a little bit? Or are you planning to be back to the high 30s? Or are you going to be 40 plus in terms of kind of what you're thinking with respect to normalization on the margin path? And is it raising pricing in the second half? Is it your cost assumptions normalizing? What gets you the visibility that you get back to that normalized level as you quantify it?

Philip Garton, CFO

Brian, which as I said before. Go ahead, Jason.

Jason Whitaker, CEO

Hey, Brian, this is Jason Whitaker here. When you look at that, as I said in my prepared remarks, we're looking to provide the average margin profile in that 38% to 40%. And going back to the drop in Q1, that's literally a direct result, as we stated, based upon an increase in price from predominantly one vendor. That decision will continue to impact our gross margins in the first half of 2022 with a return to normalized levels in subsequent quarters.

Brian Lee, Analyst

Okay. Fair enough. Last one for me, and I'll pass it on. Again, on the margins. If my math is correct, your guidance for Q1 EBITDA margin percentage is higher than what you observed in Q4, but the gross margin percentage is down in Q1 compared to Q4. If you just do the math based on the guidance provided, are there any additional adjustments to the EBITDA in Q1?

Philip Garton, CFO

We utilize the revolver when necessary. As you know, our business is growing, which can use up cash. The cash figures were a bit lower, but that's typical depending on how we collect and pay bills at the year's end. Regarding margins in Q1, I want to remind you that weather issues will affect us, along with some cost items that are coming through. However, we expect strong growth, investing in the business for both this year and the future, with annualized growth rates roughly between 40% to 64%, depending on our guidance.

Brian Lee, Analyst

Got it, appreciate the color. I'll take it offline. Thank you.

Operator, Operator

Thank you. Your next question comes from Maheep Mandloi from Credit Suisse. Please go ahead.

Maheep Mandloi, Analyst

Hey, good evening everyone. Thanks for taking the questions. First just on the backlog growth, and I just wanted to reconcile that with the 2022 revenue guidance growth. You talked about 94% backlog growth, new quote activity up 100% year-over-year. Keeping that in mind like, can you talk to like are you seeing any pressure or push outs from '22 into '23, if you could see some upside on the supply chain side for customers, which could impact the guidance on the revenues positively.

Jason Whitaker, CEO

Yes, hi Maheep, Jason Whitaker here. Good to speak with you again. Regarding potential pushout from 2022 to 2023, when you look at the visibility we have, and we do have phenomenal visibility. But when you look at that 2022 to 2023, it's really difficult to say and predict what that would look like over, let's say, 12 months from now. And when you look at the guidance that we've provided, we're very comfortable with the guidance.

Maheep Mandloi, Analyst

Got you, got you. And in terms of the material costs, logistics costs, can you just talk about like how should we think about that going forward if any case there was something similar? Are you renegotiating the contracts with the customers to pass it along? Or what would the strategy be impacting?

Jason Whitaker, CEO

Yes, great question, Maheep. Just to remind everyone, we've talked about in prior earnings calls. When we go and we bid a project, we actually refresh that project based upon the current commodity. With that, we've been able to pass on all of the cost that we've seen as commodities have continued to increase over time. With the one exception, which again was not specifically aluminum or copper based, it was more of a value-add increase from one vendor, of which they passed on to us at time of ship. And again, we made that decision to absorb that versus pass that on to our customers.

Maheep Mandloi, Analyst

Thanks. And just one last one, housekeeping from me and then jump back in the queue. So looking at the tax receivable liabilities on the balance sheet and they increased by around roughly $50 million in the year. Could you just remind us what is that related to? Thanks.

Philip Garton, CFO

I'll take that question. Yes, the tax receivable agreement is indeed advantageous for the company in the long run. While I'm not sure of the exact current number, I can say that when we went public, approximately 115 companies had engaged in tax receivable agreements before us. Essentially, it provides a framework for capturing future amortization tax deductions, which means lower taxes for us. Of that benefit, 85% goes to the previous owners, while 15% remains with the company.

Maheep Mandloi, Analyst

Got it. Yes, I'll follow up in detail later on. Thanks.

Operator, Operator

Thank you. Your next question comes from Philip Shen from ROTH Capital. Please go ahead.

Philip Shen, Analyst

Hi, everyone. Thanks for taking my questions. First one is on the '22 revenue guide. I was wondering if you might be able to break out the geographic mix of the guide. And maybe talk through the risk around revenues as it relates to module supply with your customers. And if you can also talk about what percentage of that '22 revenue might be new products as opposed to conventional or the older products? That would be great. Thanks.

Jason Whitaker, CEO

Hey, Phil, Jason here. Pleasure to speak with you again. When you look at the backlog and awarded orders and as far as the new products are concerned, Phil, we're not really breaking down the exact mix from new products or international. But one of the things I do want to point out alongside of the backlog and award order growth, as you can see, we talked about the number of customers that have continued to convert over to our full system BLA solution. Based upon that, a meaningful portion of that backlog and awarded orders falls in line with our BLA full system solution offering.

Philip Shen, Analyst

Great, thanks for the color there, Jason. Today, you announced a new manufacturing facility. With what's going on in Europe and the potential tremendous growth that we could see there as a result of the continent moving away from Russian gas, what would it take to expand manufacturing capacity perhaps either to Europe or another international location? Is that on the map at all? Or is that too distant to consider at this point?

Jason Whitaker, CEO

Phil, from a manufacturing perspective, as of right now, our current plans are to continue to manufacture our product in North America, which is part of the reason why we did make the decision to go ahead and invest in that additional manufacturing facility, which allows us to over double our manufacturing capacity and further optimize our footprint in our existing manufacturing locations.

Philip Shen, Analyst

Great, thanks Jason. I'll pass it on.

Operator, Operator

Thank you. Your next question comes from Colin Rusch from Oppenheimer. Please go ahead.

Colin Rusch, Analyst

Thanks so much guys. If you move into Latin America and Europe, I'm just curious about how many customers or familiar customers or folks that you already have in the pool of customers that you're speaking with for that growth?

Jason Whitaker, CEO

I can't go into exact details as far as international specifics, but when you look at the customers that we're working with, we're really starting out at those utility developers and owners that we've worked with in North America. So the familiarity with Shoals and the product from that perspective is extremely high.

Colin Rusch, Analyst

Okay, and then I guess you maybe addressed this earlier, but given what's happening with labor rates and labor availability, at what point do you start rethinking your pricing strategy and thinking about potentially rising prices more than just the commodity pass-through?

Jason Whitaker, CEO

Yes, that's a great question. Right now, we're focused on providing value and enabling that value to drive significant growth for the company. We've seen our backlog and awarded orders increase by nearly 100%, and our average quoting activity has risen by well over 100%. The main goal is to continue supporting this growth initiative.

Colin Rusch, Analyst

Great, I'll hop back into queue. Thanks guys.

Operator, Operator

Thank you. Your next question comes from Joseph Osha from Guggenheim Partners. Please go ahead.

Joseph Osha, Analyst

That's an interesting interpretation of Guggenheim. Hello folks.

Jason Whitaker, CEO

Joseph.

Joseph Osha, Analyst

Very well. Thank you. Just to amplify an earlier question, as you think about this backlog that you're reporting, how have you approached dealing with material pass-throughs? Do you have formal agreements in place that provide for any additional upside on copper or aluminum to be passed through to customers? Have you just gone out and hedged all that? How are you thinking about handling your material pricing puts going forward? And then I have one follow-up.

Jason Whitaker, CEO

Yes. No problem at all. So when you look at that, generally, we don't hedge copper or aluminum. As that project becomes more mature and gets more advanced, each time that quote is cycled, we go back and we reference the current commodity pricing. That particular quote itself is good for seven days. So when we exercised that last revision before the PO is cut, we go through and we update the copper and aluminum, and we passed that information over to our customer with a correlating price increase or reduction depending upon where the commodities are at that point in time.

Joseph Osha, Analyst

Right. So if I look at your current backlog, clearly, you've got projects in there that you're not going to deliver on for a couple of quarters at least. But your customers are comfortable with this kind of series of rolling quotes and whatever that implies in terms of additional potential upside that they might have to pay to you as if copper prices go further?

Jason Whitaker, CEO

Yes. When you look at the backlog, when those particular projects are executed, we are able to lock in whether that project is delivered in, for a sake of conversation, two days or two months. We, in turn, make that commitment to our partners, aka vendors at that same level that our partners' customers made a commitment to us.

Joseph Osha, Analyst

Okay. Great. Thank you. And then just more of a housekeeping question here, just as we kind of dial in our EBITDA. Wondering if you can let us know for 2022, roughly how we should think about D&A and stock comp? And that's it for me.

Philip Garton, CFO

Well, depreciation and amortization will be about what it was this year, the uptick based upon the capital expenditures we made the prior year, but won't be a major change. We're not very capital intensive for D&A. As far as the other question, I believe, was stock-based comp? Jason, do you want to handle that? Or do you want me to?

Jason Whitaker, CEO

Go ahead, Phil.

Philip Garton, CFO

Okay. I mean we're looking upon that there will be relatively consistent year-over-year. We'll also run more of a normalized since we're now a more mature public company of more cash-based incentive comp rather than stock-based.

Joseph Osha, Analyst

Yes. No. So I see about $11 million in stock comp and about $10 million depreciation for calendar '21. I can think of those as kind of being moderate increases off of those numbers for 2022.

Philip Garton, CFO

We don't give details in those. But yes, I would think, in general, yes.

Jason Whitaker, CEO

And one other thing I want to clarify since obviously, there's a slowdown in the EBITDA from a question earlier that brought it at. He had asked about gross margins being at 30%. We are not going to be at anywhere near that particular level from a gross margin perspective.

Operator, Operator

Thank you. Your next question comes from Mark Strouse from JPMorgan. Please go ahead.

Mark Strouse, Analyst

Yes, good evening. Thanks for taking our questions. I think most of them have been asked. I did want to come back and ask a slightly different way of approaching Phil's question. When I look at the backlog, are you able to say kind of the materiality threshold, at least of what the EV charging portion of that is? And as we get throughout the year, and hopefully, that business becomes bigger as we expect, what are your plans as far as starting to break that out and changing your disclosures a bit?

Jason Whitaker, CEO

Hey, Mark, Jason here. So when you look at it from an EV perspective, again, as we stated before, we're not breaking that down specifically right now. It's one of the key focuses along with our other growth initiatives. Very excited about what we've been able to accomplish and absolutely elated in the feedback that we've received from our customers in the market.

Operator, Operator

Thank you. Your next question comes from Kashy Harrison from Piper Sandler. Please go ahead.

Kashy Harrison, Analyst

Good evening. And thanks for taking the questions. So first one for me, I was wondering if you could maybe just give us an update on the competitive landscape. Wondering if you're seeing any new entrants entering the EBOS space?

Jason Whitaker, CEO

Yes. From a competitive landscape perspective, as far as competitors are out there, it's pretty much the same as what we've seen. We've talked about in the past, I mean, essentially back to the time that we initially went public.

Kashy Harrison, Analyst

Got it. And then just one follow-up on the guidance. Can you give us a sense of how you're thinking about the mix of systems to components during 2022 on the revenue side? Thank you.

Jason Whitaker, CEO

I can't give an exact breakdown, but just kind of pointing back to the BLA taking market share, which is one of those slides that we continue to update. We've seen significant increase just in the last 12 months of over 4x the number of customers that we converted and an additional 15 that are currently in that prospect in conversion state.

Kashy Harrison, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Your next question comes from Jeff Osborne from Cowen & Company. Please go ahead.

Jeffrey Osborne, Analyst

Yes, good evening. I had two questions on my side. I was wondering, Jason, if you had any comments on the 8-K that you filed with Dean's departure. I was just curious how you're going to keep the culture of the company intact with his departure?

Jason Whitaker, CEO

Yes, I mean from a culture perspective, as you can imagine, a lot of the members that we have on our team have been here for a very long time. A lot feel like the company was in a great place. He's been working for well over 40-plus years. He built this company from the ground up and he essentially just wanted to take a step back and focus on other things in life at this point.

Jeffrey Osborne, Analyst

Got it. My second question is about the current capacity you have and your utilization rate. Additionally, as you establish new capacity, could you detail the expected costs for that build-out and when it will be operational?

Jason Whitaker, CEO

Yes. We haven't provided any exact specifics on the current capacity that we have, Jeff. But when you look at when this particular facility will be online, we're moving very fast.

Jeffrey Osborne, Analyst

Got it. I thought you had made comments in the past that you could double your revenue without adding capacity. So that's what I was trying to get at, but maybe I'm mistaken.

Jason Whitaker, CEO

Yes. We've not released out any updated information from that regard, Jeff. But I guess just to remind everybody what we did say is that when we closed out calendar year 2020, we had about 1.8x the available capacity that was required to support that year's system solution products.

Operator, Operator

Thank you. Your next question comes from Brett Castelli from Morningstar. Please go ahead.

Brett Castelli, Analyst

Yes, hi. Thanks for taking my questions. I guess the first one, just on the BLA products. I think you guys have seen good traction with the EPC customer community. Just curious if you can update us on discussions with the developers?

Jason Whitaker, CEO

Yes, absolutely. Those conversations with developers and owners and utilities alike are key and instrumental, because when you look at that full system BLA solution, it does provide a significant amount of day one value in the labor and material savings that you can see, but it also provides significant value over the life of that asset in the form of increased reliability and reduction in O&M.

Brett Castelli, Analyst

Okay. I'll leave it there. Thanks, Jason.

Operator, Operator

Thank you. There are no questions in the queue at this time. And that does conclude our conference for today. Once again, we do apologize for the technical difficulties. Thank you for participating. Have a pleasant day.