Shoals Technologies Group, Inc.

Good afternoon and welcome to the Shoals Technologies Group fourth quarter 2023 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 Megan Peets, Chief Legal Officer for Shoals Technologies Group. Thank you. You may begin.

Thank you, Operator, and thank you everyone for joining us today. Hosting the call with me are CEO Brandon Moss and CFO Dominic Bardos. 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 first quarter and full year 2024, 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, including economic, market, and industry conditions, defects or performance problems in our products or their parts, including those related to the wire insulation shrinkback matter, failure to accurately estimate the potential losses related to such matter, and failure to recover those losses from the manufacturer, decreased demand for our products, policy and regulatory changes, supply chain disruptions, and availability and price of our components and materials. Although we may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect. And therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. We caution that any forward-looking statement included in this discussion is made as of the date of this discussion, and 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 fourth quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Schulz's CEO, Brandon Moss.

Thank you very much, Megan, and good afternoon, everyone. I'll start today's call with some key highlights from the full year 2023 and the fourth quarter. I will follow with an overview of solar market conditions and then discuss our plan to expand and relocate operations to a new facility in Portland, Tennessee. I will then provide an update on the wire insulation shrink-back warranty investigation and remediation, and finally wrap up with a discussion of our strategic priorities before turning it over to Dominic, who will review our financial results and discuss our outlook for 2024. 2023 was another year of tremendous execution for Shoals, with revenue growing approximately 50% for the second consecutive year. In fact, Shoals has grown revenue at 41% kegger since 2020, significantly outpacing the industry's growth of 17% over the same period. Our ability to drive operational leverage as we grew revenue contributed to full year adjusted gross profit increasing 75% compared to the prior year. Adjusted EBITDA was up 86% year over year, while full year adjusted gross margin and adjusted EBITDA margin both expanded almost 700 basis points compared to the prior year. Notably, with full year 2023 adjusted EBITDA of 173.4 million, we achieved the high end of our outlook for 2023 adjusted EBITDA, which was raised when we reported third quarter earnings. And as Dominic will discuss in greater detail, cash flow from operations was $92 million, up 133% from 2022. We are pleased that Shoals has transitioned into a company with strong cash flow generation. Turning to fourth quarter highlights, Sholes had another strong quarter with revenue growing 38% year-over-year to $130.4 million. Backlog and awarded orders were $631.3 million, up 47% year-over-year, and approximately flat sequentially, reflecting continued strong demand for our products. The company added over $128 million in orders in the quarter, which was an increase of 147% year-over-year. Further, our quote volumes remain very strong, growing 154% year-over-year. In addition, the number of quotes is also growing while the size of the jobs continues to rise. Subsequent to quarter-end, we bolstered our domestic leadership position after entering into a master supply agreement with a new top solar EPC, and international markets continue to develop as a growth driver, representing more than 13% of our backlog in awarded orders. Moving now to the solar market landscape. The long-term fundamentals for solar are incredibly strong. Demand for energy is steadily rising according to the EIA. Analysts expect U.S. demand for electric power to continue growing through 2050, driven by sustained economic growth and the shift toward electrification. Solar offers the lowest levelized cost of energy because it requires zero fuel costs. we expect the price of solar will continue decreasing due to reduced cost of solar panels, battery storage, and additional scale. We believe this trend will drive solar market growth in the coming decades. In fact, U.S. solar generation capacity is expected to double by 2030 and nearly double again by 2050. In addition, according to the EIA's short-term energy outlook published in January, Solar is expected to be the leading source of new electricity generation over the next two years, with 36 gigawatts of new solar capacity across all solar segments coming online in 2024 and an additional 43 gigawatts in 2025. This incremental capacity is expected to boost the solar share of total generation to 6% in 2024 and 7% in 2025, up from the 4% in 2023. Shoals is excited to be a leader in the energy transition space with our market-leading solutions in electrical balance of systems. While the long-term solar market outlook is very strong, in our core utility scale segment, project delays have contributed to slowdowns reported by our utility scale peers in Q2 and Q3 of last year. Higher financing costs, extended equipment lead times, particularly for transformers and switchgear, and long interconnection queues are all exacerbating industry weakness. The industry slowdown is significant and will impact our results in the first half of 2024, but we expect this trend to reverse over time. When you look at the EIA data on project delays, there's been a significant increase over the course of the last two years with delayed projects increasing from 36% in the first quarter of 2022 to 62% in the fourth quarter of 2023. As Dominic will discuss, we're providing first-quarter guidance to assist analysts with modeling. While short-term hurdles exist, we remain confident in the long-term fundamentals. The undeniable ongoing shift toward renewables, driven by cost competitiveness and sustainability goals, creates a significant growth opportunity for the industry. We believe we're well positioned to capitalize on this trend through our focus on utility-scale projects and proactive approach to mitigating near-term challenges. Further, as we discussed on our last call, we see a compelling opportunity in the community-scale commercial and industrial segment. Though these projects are smaller than utility-scale, they share many of the same challenges, including high labor costs for deployment and supply chain challenges that our technology was developed to address. We believe our value proposition will remain attractive even in the context of smaller projects. To that end, we're excited about the Department of Energy's recent pledge to meet the National Community Solar Partnership target of 20 gigawatts of community solar by 2025, which is almost triple today's seven gigawatts. Though it's still early days, we think this could provide an exciting opportunity to offset the delays and pushouts in utility scale with projects that have a faster turnaround. We are currently building out focused teams to take advantage of this opportunity. Moving to international, the landscape is evolving. Following COP28, there's been a fresh push for renewables as nations have realized they are not on target to meet emissions goals. This has resulted in some nations tripling their commitments by 2030. While the outlook for global growth in 2024 is more muted, primarily due to China's expected slowdown, in a stabilizing European market post-energy crisis, we see bright spots. Specifically, Middle East and Africa are showcasing significant growth potential. We're actively exploring opportunities in these emerging markets, confident that our expertise translates well to new geographies. As we have discussed, international markets have the potential to be a major growth driver. In fact, as of year end, international represented more than 13% of our backlog in awarded orders. We remain largely focused on specific higher growth markets within Europe, Africa, Latin America, and Australia, which combined are more than double the size of the U.S. market and growing at a 9% CAGR through 2026. We are pleased to report our sales team is making significant progress recently securing projects in Angola, Colombia, Nigeria, Peru, and Serbia. We expect growth to accelerate as international EPCs begin to appreciate the value proposition of our entire product suite. Looking ahead, we will continue strategically growing our international team and investing to support growth and further customer traction. Turning now to our recent announcement to invest in a new facility in Portland, Tennessee. Over the next five years, Shoals is committed to invest a total of $80 million to expand and centralize our existing manufacturing and distribution operations into a new 638,000 square foot state-of-the-art facility near our existing facilities. Since the beginning of last year, we have been focused on increasing production capacity and enhancing operational efficiencies to meet the growing demand for our products. We believe that the new plant will allow us to achieve these objectives and marks a critical milestone in our journey. We are confident that it will pave the way for the company's continued long-term growth. We're also thrilled to be investing in our workforce, becoming an employer of choice in the region and further contributing to the thriving economic landscape of Tennessee. We are grateful for the support of Governor Lee and the Tennessee Department of Economic and Community Development and look forward to a strong partnership in the years ahead. It's important to note that while this is our most significant capital investment, once complete, we expect the new plant will ultimately drive operational efficiencies. In addition, we are committed to keeping Shoals asset light. I will now provide an update on where we stand with our investigation and remediation of the wire insulation shrink-back warranty issue. As disclosed in our third quarter earnings call, we filed a complaint to recover damages caused by defective wire that Prismian Cables and Systems USA LLC sold to Shoals between 2020 and approximately 2022. Through December 31, 2023, Scholz had already expended $4.7 million of cash in the identification, repair, and replacement of defective wire and is seeking full recovery from Prismian for those as well as future expenses related to the issue. Because of the pending litigation, we are limited to what we can discuss publicly. However, there are some important updates we can provide. Initial wire insulation shrinkback issues were found on at least 20 sites of the approximately 300 sites that have had the defective prismian red wire. In addition, after we filed our complaint and customer service notices were issued to those approximately 300 sites, we were informed that approximately 10 incremental sites experienced shrinkback. Second, of those approximately 30 sites, Four sites did not display insulation shrink back upon inspection. In situations where there was shrink back, we are working to remediate the issue as quickly as possible. Finally, as we continue to analyze all of the incoming information and remediation projections, we have determined that the range of expense we communicated last quarter is still appropriate. Dominic will cover in further detail. Sholes is committed to quality. As we work to remedy the Prismian defective wire issue, our top priority is taking care of our customers. We are working to remedy the issue as efficiently as possible and seek to accelerate remediation where we can. As highlighted by our new top EPC engagement, we want to emphasize that our underlying business remains very strong and we expect it to continue to flourish through the resolution of this issue. Moving to the patent infringement complaints filed by Shoals with the ITC in May of 2023. The evidentiary hearing is scheduled in March with a final ruling expected in November. Our district court cases would resume after that time. As previously stated, we remain committed to vigorously defending and protecting our intellectual property rights. I'll now wrap up by highlighting our strategic priorities for 2024. We will continue to pursue markets that support global electrification and are impacted by skilled labor needs and supply chain constraints. Our core competency of engineering prefabricated plug-and-play solutions at scale align well with market needs. By delivering these high-value prefabricated solutions, we can protect our margins while providing a much higher quality product. SOLS will continue to protect and grow our core utility-scale solar business. This includes growing share within our domestic solar base and accelerating growth in international markets. We also expect to accelerate our diversification into new markets that support electrification. This includes leveraging our very strong balance sheet and cash flows by investing for both organic and inorganic growth. In fact, despite accelerating remediation efforts for the defective prismian wire for which we plan to spend $31.1 million in 2024, we still expect to increase our cash from operations by 20%. As we make these investments, we will continue to drive operational excellence and build our organizational capacity to maintain our leadership position in domestic utility-scale solar and grow to a leadership position in newer market segments. Growth in new markets will require some reinvestment of profits from our core business, which we will do prudently as we strive to generate an attractive return on our investments for our shareholders. Shoals is an innovation leader with strong product development capability. While the industry is going through a period of transition, our long-term future is bright with record-quoting activity and strong orders. As market conditions improve, we expect Shoals will continue to take share and outgrow the market for many years to come. I'll now turn it over to Dominic, who will discuss fourth quarter 2023 financial results.