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spk02: Good afternoon and welcome to Shoals Technologies Group first quarter 2021 earnings conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. There is a presentation accompanying the prepared remarks which can be found on the investor relations section of the Shoals website. At this time, I would like to turn this conference over to Megan Peete, General Counsel for Shoals Technologies. Thank you, ma'am. You may begin.
spk01: Thank you, Operator, and thank you, everyone, for joining us today. Hosting the call with me are Schultz Chairman Whitaker, CFO Philip Garten, and SVP of EV Solutions, Jeff Tonar. On this call, management will be making statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of other factors discussed in today's press news release regarding first quarter earnings and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.scholes.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's 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 Brad.
spk05: Thank you very much, Megan, and good afternoon, everyone. We are excited to have completed our first quarter as a public company. We continue to execute and deliver on our strategies. We have a great team and an opportunity not just domestically but globally as well. With that, I'll now turn it over to Jason to provide an update on our business performance and strategy. Jason?
spk04: Thank you very much, Brad, and good afternoon, everyone. We have some important information referring to the slides that were posted to the investor relations section of our website earlier this afternoon on our business and growth strategies. then turned over to Shoals Chief Financial Officer, Phil Garten, who will provide financial highlights from the first quarter. And then our SVP of EV Solutions, Jeff Tolinar, will give an update on our EV business initiative. Turning to slide seven of our presentation. As most of you know, 2020 was a record year for Shoals, both in terms of revenues and profits. That momentum continued into Q1. We generated more revenue and adjusted EBITDA in the first quarter of 2021 than in any other first quarter in our history. Our results were driven by continued growth in our system solutions business, which was up 46% versus the first quarter of last year. That growth was the result of continued strong demand for utility-scale solar, as well as market share gains. More and more customers are seeing the value that our combined Ego system provides, and we're converting customers to BLA in a much shorter period of time than it took us in the past. To give you some context for how much we've accelerated the customer conversion process, we have converted four of the top EPCs in the US to BLA when we went public in January. Winning those first four customers had taken us about three years. And in just three months since our IPO, we've completed conversion of four additional EPCs to our system, bringing our total to eight. We see the strong growth we experienced in the first quarter continuing throughout the balance of this year. As of March 31st, 2021, we had backlog and awarded orders of 181 million, an increase of 42% from the same time last year. and greater than our full-year 2020 revenues. We expanded our margins again in the first quarter, with gross margin increasing 635 basis points year-over-year and approximately 290 basis points sequentially. The primary driver of our margin expansion is the continuing shift in mix from components to system solutions. System solutions carry higher margins than components. As we transition customers from purchasing components to purchasing system solutions, our margins grow. It's also important to emphasize that the labor savings our customers are achieving using our products can exceed the cost of our product. When you have a value proposition that maintain prices and earn good margins. We're seeing tremendous performance from our core combined as you go products, but we are not standing still. We're completing field testing of our IV curve benchmarking and first wire management products with selected customers now, and we're on track to generate first revenues from those products in Q4. We're ahead of schedule on our EV charging products, and we'll be accelerating the launch of those products from 2022 to the fourth quarter of this year. Now turning to slide eight for the outlook of our end markets. In our core U.S. solar business, we're seeing increasing levels of demand as the build-out of new projects accelerates. The acceleration is being driven by continued declines in LCOE of solar, which makes it more competitive with other sources of generation, growing corporate utility resources, the two-year extension of the solar IPC that was passed in December, as well as the normalization of permitting processes as more states reopen from the pandemic. The chart on the right of this slide is a reflection of how much things changed in just the past few quarters. These bars show what IHS estimates were for solar installations in June of last year versus where they were in January of this year. The total forecast for the US installations from 2021 to 2023 has increased by over 30%. That's a huge increase in the size of the market. and aligns with what we've been seeing in the marketplace and hearing from customers. It's also important to highlight that the acceleration of the solar market does more than just increase our addressable market. It also pushes customers to adopt our solution versus conventional EVOS. The reason for that is as activity levels grow, labor rates rise and labor availability falls. Many of our EPC customers are telling us that they're having difficulty staffing jobs. The opportunity right now is that big because our combined-as-you-go system installs much faster than the conventional EVOS and does not require skilled labor. We can be the difference between our customers being able to take on an incremental job versus letting it go to a competitor because they simply don't have the crews available to do the work. Turning to slide nine of our presentation. That growth in the market combined with the share gains we're seeing is reflected in our order book. Quoting activity has increased 50% from what we were seeing during the same time last year. And average project sizes have increased 25%. The latter is very favorable to us because our system solutions are customized to a particular job. We have certain fixed costs that are the same regardless of job size. So as the job size gets bigger, we get more leverage on those costs. More leverage on fixed costs usually translates to higher job margins. As I mentioned earlier, as of March 31st, 2021, our total backlog in awarded orders were $181 million, which is greater than our full-year revenues last year. and represents a 42% increase versus the same period last year. Turning to page 10 of our presentation. One of our core growth strategies is to take share with our combined as you go system. This slide gives you some perspective on how successful we've been in just the past few months, converting EPCs and developers to our system. When we went public in January, there were four major EPCs that used our system for most or all of their projects and another 10 that were in transition. We define customers as in transition when they place an order that is included in our backlog and award orders. Winning over those first four EPCs took about three years. Contrast that within the last three months where we completed conversion of an additional four EPCs. We're getting faster at winning new customers. More importantly, the amount of time it is taking for sales prospects to place their first order is compressing. You can see that in the numbers on the page. Since our IPO in January, we identified 21 new prospects. During the first quarter, five of them placed orders. That means we successfully converted a prospect to an order in less than 90 days. That is an extraordinarily short period of time for an EPC or developer to move to a new system that has different means and methods. And we think it underscores the tremendous strength and differentiation of our product offering. Turning to page 11 of our presentation. I mentioned earlier that we're not stopping with just BLA. We have additional new products for solar in our pipeline, and we're on or ahead of the launch schedule that we set out for those products during our IPO. The next two products that we'll be introducing are IV curve benchmarking systems and wire management solutions. IV curve benchmarking systems give owners unparalleled insight into the performance of their projects down to the string level. And we believe they will be a valuable tool for owners to improve production and lower O&M costs. Our management solutions are an improvement on conventional wire ties that have a high rate of failure in the field. This will be a high volume, high margin product for us. Both products are currently being tested with customers and we're on track to generate revenues from both in Q4 of this year. Now I'll turn it over to Phil to take you through page 12 of our presentation, which has our financial highlights for the first quarter. Phil? Thank you, Jason.
spk05: Revenues in the first quarter increased 12% versus the prior year period to $45.6 million, driven by a 46% year-over-year increase in our system solutions revenues, which was partially offset by a decline in components revenue. Our first quarter revenues exceeded our plan. The growth in system solutions revenues reflects strong demand for a combined-as-you-go system. The decline in components revenue was in line with our plan and reflected a change in the timing of orders from our customers relative to last year and the conversion of certain customers from buyers of components to buyers of system solutions. Prices across our product lines during the first quarter were comparable to the prior year. Gross margins in the first quarter increased by 635 basis points versus the prior year period, to 41.2% as a result of a higher portion of revenue coming from combine-as-you-go system solutions, purchasing efficiencies from increased volumes, improved material planning, which reduced logistics costs, enhancements to product design that lowered manufacturing costs, and other manufacturing efficiencies resulting from higher production volumes. Operating expenses were $8.9 million, compared to $4.6 million in the prior period. This was driven by higher equity-based compensation, increased payroll expense related to additional headcount that we added as part of our planned international growth and new product initiatives, COVID-19-related costs, new public company costs, and non-recurring expenses related to our IPOs. Adjusted EBITDA for the first quarter was $14.1 million, up 17% from the $12.1 million in the prior year period, with adjusted EBITDA margin increasing more than 120 basis points year-over-year to 30.9%. Adjusted net income was $8.8 million compared to $8.9 million during the same period in the prior year. This was primarily as a result of higher interest expense as compared with the first quarter of 2020. Adjusted EBITDA and adjusted net income exclude amortization of intangibles, stock-based compensation, COVID-19 related expenses, and non-recurring items. Please see the adjusted EBITDA and adjusted net income reconciliation tables in the first quarter press release for a bridge to our GAAP results. Turning to our outlook for 2021. Based on current market conditions and input from our customers and team, we are reaffirming our previous guidance and expect 2021 revenues to be in the range of $230 to $240 million, representing a 34% year-over-year increase at the midpoint of the range. We expect adjusted EBITDA to be in the range of $75 to $80 million and adjusted net income to be in the range of $47 to $51 million. As we noted last quarter, we expect year-over-year revenue growth to increase in subsequent quarters. At the midpoint of our guidance, we currently anticipate approximately 45% of our full-year revenues will fall within the first half and 55% in the second half. Before I turn it back over to Jason, I wanted to make a couple of comments regarding the commodity price increases and supply chain disruptions that several companies in the solar industry and other industries have reported. We are not seeing those issues in our business. We only purchase raw materials and components after we have received a firm order from our customers, which avoids any mismatch between the price we charge our customers and the cost we pay for the inputs to our products. So far this year, all of our major suppliers have continued to meet their delivery commitments, and we have not had any difficulty procuring materials for a production process.
spk04: Jason, back to you. Thanks, Phil. I'll now turn it over to Jeff Tonar, our SVP of EV Solutions. Jeff joined Shoals earlier this year. Previously, he was the Chief Commercial Officer for GreenLots, where he was responsible for sales relationships with major fleet operators, retailers, electric utilities, and municipalities. GreenLots was sold to Shell in 2019. Jeff has a reputation as an innovator in developing charging solutions, and his knowledge and relationships are already helping us to accelerate our EV charging strategy. With that, I'll turn it to Jeff. Thanks, Jason, and good afternoon, everyone. I'll start out on slide 14 of the presentation and talk about the opportunity that we see for Shoals in the EV charging market. First, EV charging has a lot of similarities to solar. The market potential is very large. Deployments are growing very rapidly, and participants need to get more efficient to stay competitive. Installation is nearly half the cost of deployment. For a solar project, it is about 30%. And the reasons the installation is so costly revolve around a lot of the same issues, the need for trenching, complex interconnections, home run cabling, and the need for expensive skilled labor. Together, those characteristics make the EV charging market ripe for innovation, and the innovation it needs are in exactly the areas where Shoals has unique expertise and manufacturing capabilities. Turning to slide 15. This slide illustrates how most conventional EV charging stations are configured. On the left side of the page, you have the building blocks of all charging systems, transformers that step down the voltage from power line feeder and distribution dispenser. And they also function as breakers in the event of a circuit overload. Each piece of equipment is often sourced from different vendors and can arrive on site at different times. Once all the equipment arrives on site, it has to be mounted on a concrete pad and manually interconnected. The process is very time consuming and error prone. Once all of the equipment is installed on the pad, trenches are typically dug from the pad to each dispenser. Conduit is laid in the trenches and wires fished through the conduit to each dispenser individually. In most cases, there are three to four separate wire runs from each dispenser to the distribution panel. The term for those runs is the same as it is in solar, home runs. It's expensive, and it's very time-consuming, not to mention disruption to the customer site, and almost all of the work has to be done by licensed electricians. We intend to change all that. Turn to the slide 16. We will be launching four product families that we believe will reduce the installed cost of a charging deployment by 20% to 30%. Our first product family is a power conversion and protection skid solution. Skid solutions at the power entry point will package all of the components needed for an EV charging deployment onto a prefabricated plug-and-play skid. Preassembling the components in our factory will dramatically reduce field installation costs, reduce site disruption, increase quality, and will also give customers the ability to move equipment around their site or to a new site if desired. Utilization drives the return on investment for charging, so the ability of our solution to be relocated is a tremendous advantage. Our second product family is raceways. Raceways are above-ground cable trays that eliminate or minimize the need for trenching and underground conduit. Think of them as looking like a speed bump in a parking lot, but that speed bump will have cables running through it. Raceways are used today, but Scholl's intention is to develop a more aesthetically pleasing and effective solution. Eliminating trenching and fishing wire through conduit will make installation much faster, cut work dramatically, and minimize disruption to the customer site during installation. Our third product family is our EVBLA. Our EV BLA takes our solar BLA technology and applies it to EV charging to eliminate the multiple home runs from each dispenser to the distribution panel. EV BLA will have the same plug and play features and benefits as our solar BLA. Our fourth product family is our quad charger skid. Our quad charger is a prefabricated skid with four dispensers that is designed to sit at the intersection of four parking spots. The quad charger minimizes placement and cabling costs because each skid supports four vehicles. We think this will be an ideal product for fleets. Importantly, each of our product families can be used individually or in concert with one another. We will encourage customers to purchase a complete system, which will be a value multiplier. But we designed to want to purchase only certain components. We see an opportunity to disrupt the market, and we are moving forward. Our phase and the quad charger are already in development, and we expect to have our first units deployed with customers in Q4. Our phase two products, Raceways and EVBLA, are being developed now, and we expect to have our first units deployed with customers in the first quarter of next year. We currently expect full commercial launch of all products in 2022. Turning to slide 18. We're targeting two types of customers for our EV charging products, EPCs that build stations and charge point operators. We already had preliminary conversations with several EVs about our products. It helps that some of them are already solar customers and that they have seen how our technology can impact their cost and efficiency. Our value proposition for the EPCs that use our EV solutions will be competitive. And second, to allow them to take on more jobs with the same number of staff because of less time. We're targeting charge point operators as a beneficiary of lower installation costs. And because they typically specify which vendors' equipment they will allow EPCs to use for their stations. Our goal is to demonstrate the benefits of our system to charge point operators when they solicit bids from EPCs to build stations. Importantly, we don't have to spend a lot of money to penetrate this market. We think we can cover both groups with a relatively small investment in sales and market development resources. Today, the industry is fairly concentrated, and you can get to roughly 80% of the addressable market through only about a dozen companies. Turning to slide 19. I'd like to close by talking about the large potential that we see for our EV business. Between 2021 and 2020, there will be more than 250,000 new public and commercial charge points installed in the US. Also important to note is that estimate was prepared before the Biden administration announced the $4 billion investment in electric vehicles and charging infrastructure. We currently believe the addressable spend across our product families is approximately $5,000 per charge point deployed. Keep in mind that number will be lower on smaller level two chargers and significantly higher. What that translates to is cumulative revenue potential of about $1.3 billion over the next four years in the U.S. alone. Our goal is to maximize share and grow revenue per charge point, while maintaining gross margins consistent with our solar business. Even if you assume relatively small share for Shoals, you get to some pretty meaningful revenue numbers, and we don't intend to be a small player. Now I'll turn it back over to Jason. I think you can see from Jeff's slides that we're very active and fully committed to building out our EV business. We see an opportunity to bring real innovation to that market and build an entirely new leg for our company. I couldn't be more pleased with our team's execution thus far, and we are just getting started. We look forward to reporting on our progress in the coming quarters. With that, I'd like to ask the operator to open the line for questions.
spk02: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tool will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. One moment while we poll for questions. Our first question comes from the line of Brian Lee with Goldman Sachs. You may proceed with your question.
spk00: Hey, guys. Good afternoon. Thanks for taking the questions. First, on the gross margin, you know, 41% plus, that's pretty impressive. It seems like you're running, you know, pretty ahead of plan. Is there any reason margins don't stay at these levels or grind even higher moving through the year? Because it sounds like, you know, for you. And if that's the case, does that make some of your profit targets for 2021 a bit on the conservative side? Or how should we just be thinking about that, given how well you're doing on gross margins already? And then I had a follow-up.
spk05: Hello, Brian. This is Philip. I do think our gross margins will be consistent through the year and do have upside. The big driver here is mix. We are combined as you go system solutions do have excellent margins because they provide excellent value and we continue to see the market transitioning to those. And that's where the sales growth is going to happen this year. As far as conservative nature for the year, being prudent as we look at our forecast for the year and guidance. And I'll turn it over to Jason in case he has any more comments on that.
spk04: That's good. Go ahead, Brian.
spk00: All right. Yeah, second question. That's helpful. I wanted to ask around the EV, which is a great disclosure here. Nice to see you guys accelerating that and breaking it out a bit. I don't want to put you on the spot, but at the IPO, I think you talked about a $30 million annual opportunity. If I take the new $5,000, and assume the 25% market share, like you said, at the IPO. That seems like it's an $80 million annual opportunity, just, you know, assuming a linear average. So, you know, first, is that right? And then, you know, second, what's driving that much bigger potential here versus the prior view? Thanks, guys.
spk04: Good question, Brian. Good to talk to you again. So, you know, first of all, I'd like to start off, there's a lot of tailwinds, as we well know, particularly behind EV, especially when you look at the Biden infrastructure plan. And, you know, when we first initiated our plan from an EV perspective, we really focused on one of the products. And as you can see here, you know, we're updating to show what our full product launch looks like as of right now into two different phases. So it tended further into the opportunity within the EV space. And again, referring back to what Jeff covered, you know, what I can say at this point is, you know, the opportunity is $3 billion when you look at that, you know, cumulative opportunity from 2020. And I think the most exciting, you know, thing about that is that we believe that that's a very conservative estimate, and it definitely doesn't include the latest announcements from the Biden administration plans. But, you know, at this particular point, Brian, I can't go into any specific details other than, you know, we see significant upside to what we've already talked about and definitely look forward to providing more, you know, clear direction on that in quarters to come. I appreciate it. Thanks again, Brian.
spk02: Our next question comes from the line of Shara Peruzza with Guggenheim. You may proceed with your question.
spk04: Hey, guys, good evening. Thanks, R. How's it going? So just a couple of quick questions here. First, the BLA conversion data that's on slide 10 is super helpful. 21 incremental prospects since deal launch, especially with the 16 that have yet to place orders.
spk03: Can you maybe frame the size of these opportunities and the potential timing of these opportunities as we sort of think about revenue recognition? Clearly, you know, your conversions have been very strong and it's been happening at a much faster pace, but how do we?
spk04: That's a good question, Char. So, you know, first of all, when you look at, you know, VLA specifically, you know, as a percentage, At this point in time, I can't go into any particular further detail as to exactly what that looks like. When you look at what we've been able to accomplish in such a short window, especially we've spent a lot of time in previous conversations talking about conversion time. A few of the takeaways here is the fact that we've doubled the number of EPCs and developers that are converted. But I think the most exciting thing is when you go out and you look at the prospects that we've identified and we've been working on is that conversion from those 21 prospects where 16 still remain in that prospect category, but five almost immediately moved up to in-transitions. So we're very excited about that. You know, we see, you know, a significant amount of the growth going forward from a revenue perspective this particular year, you know, coming based upon the transition of our combine-as-you-go or bill-like product. Got it. And then I know the sales team, you know, has seen an increase in quoting on sort of that rip and replace opportunities that remain kind of fully
spk03: incremental to your forecasting and that $500 million annual target that you set by 23 during deal launch. Any sort of status there as we think about these incremental revenue recognitions?
spk04: So, you know, at this point, Tom, you know, we're not including that, you know, in our guidance or our guidance going forward, Sharf. You know, from a rip and replace perspective, I can tell you that the conversations are not going there. They're being further increased. You know, but at this point in time, again, we've not included that in our guidance because it's really hard to predict, you know, exactly when that opportunity may fall into our lap. And, you know, based upon that, we've excluded that for, you know, potential upside as that transpires.
spk03: And then lastly for me, I know you guys, you know, slide 11 on sort of the new product introductions and the timing is super helpful.
spk04: And you've talked about, you know, in the past about these kind of complementary products, you know, sort of increasing, right? And when you think about eBoss being about five and a half cents for a 50-megawatt project, you already do two cents of it. Where are you sort of as far as hitting your target? target for that incremental one, thinking about the wallet share gains from where you are today and incorporating slide 11, meeting that 3.5 cent goal from a market share perspective, wallet share. Yeah, so, you know, how I would think about that, you know, when you look at the products, you know, specifically on slide 11, first of all, I mean, that's not all the products that we have, you know, currently in development, but just a few that we have. and you take those into full consideration, those cover a large majority of that conversion, with more specifically the high-capacity plug-and-play harness and the BLA 2.0 having a higher weighted effect after that transition. Okay, got it. But I guess I'm kind of curious, where are you as far as the wallet share gains versus where you are today from an EVOS perspective? as it correlates to the new product introduction, Char? I want to make sure I understand your question. Right, versus the five and a half cents total EBOS, you know, wall of share that's out there. Yeah, sorry. So, you know, when you look at the new products, we just touched based on, you know, from wire management, IV curve, you know, high capacity, your VLA. So those are market based upon the timeline that we depicted on slide 11. And, you know, that timeline would correlate with a significant portion of that conversion of that additional wallet share as we roll these products out.
spk03: Okay, perfect. That's what I was trying to get at. Thank you so much. Appreciate it.
spk02: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Colin Roche. You with Open Hummer. You may proceed with your question.
spk04: Thanks so much. Guys, can you talk a little bit about the pipeline in Europe? I know it's kind of early days, but I want to get a sense of how much progress you're making at this point. Yeah, hey, Colin. Jason here. Good to talk to you again. So, you know, as we've talked about before, you know, we have our VP of EMEA in place. And he's absolutely hitting the ground running. I'm very excited about the number of customers that we've already reached out to and communicated with, and even the fact that our product offering has been very well received in those conversations. And I think the best thing to really correlate back to is the chart that really shows where we are in our BLA conversion. And more specifically, when you look at, you know, the prospects that we have and the customers that are in transition, two of the customers that are in transition reside in the international market. And more specifically, six of the customers that are in the prospect are in the international market as well. So that's how I would kind of think about that. Again, very excited about what we've been able to accomplish. But at this point, I can't provide any further details as far as the exact specifics on international. Awesome. That's actually super helpful. And then as you look at the domestic customers and the sell-through, we're hearing various commentary around broken projects or delays in construction schedules. Can you just give us a sense of how close you're tracking that with your customers and any shifts and some of the delivery timeframes that you had expected and how that works, just given that you lock in pricing on both commodities and the final product early in the process? Yeah, no, that's a good question. So, you know, I guess first of all, you know, we're in constant communication, you know, with our customers and whether they be direct or indirect, being an EPC or direct developer or indirect. And, you know, as of right now, I mean, we're not seeing any significant change in the timing of projects. You know, the reality is, as we all know, you know, projects do move from time to time, but we're seeing nothing that would, you know, that would force us to change our current outlook. All right. Thanks so much, guys.
spk02: Our next question comes from the line of Philip Shen with Roth Capital Partners. You may proceed with your question. Philip, you may proceed with your question. Philip, are you on mute? Okay, our next question comes to the line of Michael Weinstein with Credit Suisse. We proceed with your question.
spk03: Hi, guys. Thanks for the question. There's six new international prospects out there. I'm wondering if you're planning to expand at all on manufacturing international markets as well. Is there anything you can say along those lines?
spk04: Yeah, hey, Michael, Jason here. Good to talk to you again. It's So when you look at the growth that we have right now, based upon our initial target markets that we've identified, we're going to serve those markets out of our current North American facilities. And how I would really think about that going forward is when we look at our next phase of growth internationally, you know, one of the areas that may force us to look into expanding our manufacturing, you know, footprint internationally would be an area that would allow us to access certain markets that would require local content.
spk03: Gotcha. And along the same lines, any strategic partnership plans or M&A-type discussions you can talk about? I mean, you never really had much competition out there. I was just wondering if there's any anybody out there worth taking a look at in terms of strategic partnerships requisitions?
spk04: I think, you know, Michael, there's really nothing to discuss at this time. I mean, we're always looking for potential M&A, you know, especially if it would accelerate our growth plans, but, you know, nothing to talk about as of now.
spk05: And it's Brad.
spk04: I wanted just a little more color on the lack of need in the here and the now for international factories. So,
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