Q1 2022 Shoals Technologies Group Inc Earnings Call
Good afternoon, and welcome to Shoals Technologies Group first quarter 2022 earnings Conference call.
Today's call is being recorded and we've allocated one hour for prepared remarks and Q&A.
At this time I would like to turn the conference over to making Pizza General Counsel for Shoals Technologies group. Thank you you may begin.
Thank you operator, and thank you everyone for joining us today hosting the call with me are CEO , Jason would occur and interim CFO , Kevin covered in this call management will be making projections or other forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties as you listen and consider these comments.
You should understand that these statements, including the guidance regarding full year 2022 are not guarantees of performance or results.
Actual results could differ materially from our forward looking statements if any of our assumptions are incorrect or because of other factors. These factors include among other things the risk factors described in our filings with the Securities and Exchange Commission as well as economic and market circumstances industry conditions company performance and financial.
Adult the COVID-19 pandemic.
Hi chain disruption availability and price of our components and material project cancellations.
Demand for our products and policy and regulatory changes.
Although we may indicate and believes 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.
Cautioned that any forward looking statements included in this discussion is made as of the date of this discussion and do not undertake any duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures.
You should refer to the information contained in the company's first quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable financial measures.
With that let me turn the call over to Jason.
Thank you very much Meghan and good afternoon, everyone.
I'd like to start off by thanking Phil Garling, who stepped down earlier this month to pursue an opportunity with a private company.
We appreciate all the hard work and his contribution to shows, especially in our first year as a public company.
But we're still all the best in his future endeavors.
We're very pleased to have Kevin Hubbard on board as our interim CFO , while we search for Gil.
Prior to joining us Kevin was a partner at Ham Langston in Brasilia LLP since 2017, and previously worked for shows on financial reporting.
He has served in finance and accounting roles with other public companies, including our interim CFO .
Exploration Holdings incorporated.
I'll start off by providing a snapshot of our Q1 performance and progress on our key growth initiatives.
Then I'll talk about current conditions in the solar market and how they impact our outlook and after that I'll turn it over to Kevin who will provide an overview of our financial results for the first quarter.
Our results for the first quarter were in line with the outlook. We provided earlier this year, despite an increasingly challenging environment for solar.
Revenues, and gross profit or 49% and 40% versus the prior year's quarter, respectively and represented New records for the company.
More importantly, our gross margins increased more than 550 basis points sequentially to 38, 7%.
Underscoring that the lower margins, we experienced in the fourth quarter were a temporary phenomenon.
Adjusted EBITDA grew at a slower rate than our revenues and gross profit as a result of our continued investment in SG&A to support our growth initiatives.
We're investing heavily in people to expand our new product development capabilities.
Our international sales presence.
All of our EV business and support our new 219000 square foot manufacturing facility, which became operational in little over a month ago.
Components revenue increased 73% year over year, driven by a combination of battery storage shipments as well as the onboarding of a significant number of new customers, who started with component purchases before transitioning to system solutions.
And system solutions grew 40% year over year as a result of continued strong demand for BLA as well as market share gains.
The number of E. P season developers using our system grew by seven 225 total.
Which comparison just for at the time of our IPO last year.
We're currently in the process of transitioning an additional 15 customers to our system.
And not only are we converting customers to our system solutions at an accelerating rate. Our average project size is also increasing.
The seven customers we converted in Q1 represented as much as two gigawatts of demand to be delivered this year.
The new products that we introduced in late 2021 also contributed to our growth in the quarter.
Our water management solution continues to be very well received by customers and we now have orders for that product to be used on over 745 megawatts of solar projects.
Sales of our energy storage products also contributed to revenue growth in the quarter and backlog in that part of our business continues to grow.
Looking ahead the certification process is underway for BLA to point out and hard capacity plug and play harnesses.
And we continue to expect first shipments of those products to begin in the second half of this year.
The former will have a higher average selling price per megawatt than our current product and the latter will allow us to serve a new and fast growing application.
We're also making strides in our international expansion during.
During the quarter, we received orders from three new international customers, demonstrating our ability to convert customers outside of the U S to be alike.
Our European sales team is building backlog in the region now that our products are fully qualified in the EU.
Outside of the EU, our recently appointed head of Latam, starting to meet with customers in the region and build awareness for our products.
We believe the sales opportunity in that region could be significant.
Turning to our EV business, we're beginning to ramp up production following our successful product launch in Q4 'twenty one.
We generated revenue from EV charging products in Q1, and our backlog and awarded orders in this area are growing rapidly.
The ease of installation and portability of our solution is attracting customers to our EV charging products, who are pursuing school bus electrification projects.
We see a big near term opportunity in this area. After the announcement of the E. P. A 5 billion clean School bus program earlier this month, which.
Which is expected to significantly accelerate school bus electrification in the U S.
We're also seeing good traction for our recently announced strategic partnerships with Ernst and young and illuminate Brookfield, which are already resulting in sales opportunities.
We're pursuing additional partnerships to expand our reach in the market and we expect to announce new relationships in the near term.
Now I'll take a moment to talk about current conditions in the solar market.
The U S Department of Commerce's investigation of an 80 CVD claim on solar cell and panel supply from certain southeast Asian countries has caused some customers to pause their projects as they await the outcome.
We speak with our customers regularly about their projects and in most cases, we know who they are getting their modules from because that is an input to the E. Boston.
We have determined that the vast majority of our backlog is not at risk customers either did not procure their panels from any of the countries in question or they are already in possession of their panels and have decided to move forward with their projects regardless of the outcome of the investigation.
As a result of that analysis, we feel confident in our revenue outlook.
Importantly, however, we expect many new projects will be delayed until the investigation is resolved.
Which could impact our backlog growth in future quarters.
We believe our current book of business is more than sufficient to meet our plan until the tariff situation is resolved.
To wrap up we did a lot of work last year to set ourselves up for continued growth in 2022, despite a challenging environment.
And that work is reflected in our first quarter results as well as our backlog and awarded orders, which were up 67% year over year.
I'll now turn it over to Kevin who will discuss our first quarter 2022 financial results.
Kevin.
Thank you Jason.
We're excited to be here today to be helping the show's team during this transition while they search for a permanent CFO .
For the first quarter revenue grew 49% versus the prior period.
68 billion.
Driven by increases of 40% and system solutions.
73% and components.
As Jason mentioned the strength in components revenue was driven by the combination of battery storage shipments as well as the onboarding of a significant number of new customers, which can initially lead to more of a component level opportunity as we work towards converting them, but where there are system solutions.
Growth in system solutions reflects strong demand for shows combined as you go system.
System solutions represented 69% of revenue in the quarter versus 73% in the prior period.
Gross profit increased 40% to $26 3 million compared to $18 8 million in the prior year period.
Gross profit as a percentage of revenues was 38, 7% compared to 41, 2% in the prior year period.
Due to a higher mix of component sales in the quarter, which carry a lower margin system solutions as well as higher raw material and logistics costs.
First quarter general and administrative expenses were $13 9 million.
Third to $6 8 million during the same period in the prior year.
This change was primarily a result of higher stock based compensation plan.
Planned increased payroll due to higher head count to support our growth and product initiatives and new public company cost.
Adjusted EBITDA for the first quarter increased 17% to $16 5 million compared to $14 1 million for the prior year period.
Adjusted net income was $9 million in the first quarter compared to $8 8 million in the prior year period.
Please see the adjusted EBITDA and adjusted net income reconciliation tables in our first quarter press release for a bridge to our GAAP results.
As of March 31, 2022 we had record backlog in our water orders of $302 3 million.
An increase of 67% year over year.
The increase in backlog and awarded orders reflects continued robust customer demand for shoulder products.
Turning to our full year outlook based on current marketing conditions and input from our customers and team. We are reaffirming the low end of our revenue outlook. Despite industry challenges. We expect 2022 revenues to be in the range of 300 million to 325 million up 41% to 52.
2% year over year.
We expect adjusted EBITDA to be in the range of 77 million to 86 million.
<unk> net income to be in the range of 45 million to 53 million.
Further we expect 2022 capital expenditures to be in the range of 7 million to $8 million.
The change in our adjusted net income outlook from what we previously provided is larger than the change in our adjusted EBITDA outlook.
This is a result of our updated expectations regarding her book tax rate as well as interest expense for the remainder of 2022 to support our growth and working capital requirements.
As discussed last quarter, we pulled forward several investments, including the addition of our new facility and a significant increase to engineering sales and HR head count to support our multi year growth outlook and growth initiatives over the next several years.
While we saw modest sequential increase in adjusted EBITDA margin in the first quarter.
We are confident this is the substantial growth we are experiencing will support expansion in our adjusted EBITDA margin as we get leverage on SG&A exiting this year.
Before I turn it back over to Jason I want to briefly mentioned that earlier. This month, we increased our existing credit facility by $50 million to $150 million.
Well, we have not drawn on the added liquidity the larger revolver gives us the flexibility to invest in working capital as our business continues to grow rapidly.
Now back to Jason for closing remarks.
Thanks, Kevin.
I'd like to close by thanking all of our customers for their commitment to shows our employees for their contributions to our company's success and our shareholders for their continued support.
We are off to a strong start in 2022.
Despite challenging macro conditions, we're delivering good results for our shareholders and making steady progress on our growth initiatives.
And with that thank you everyone. I appreciate your time today, we'll now open the line for questions.
Thank you we will now begin the question answer session.
To join the question queue you May Press Star then one on your telephone keypad.
Hear a tone acknowledging your request.
If you were using a speakerphone please pick up your handset before pressing any keys.
To withdraw your question. Please press Star then two we will pause for a moment as callers join the queue.
The first question comes from Philip Shen with Roth Capital Partners.
Please go ahead.
Hey, guys. Thanks for taking my questions. It looks like you booked a 71 million in Q1.
Versus 76 in Q4 and 130.
Dollars of bookings in Q3 can you ballpark, how much of the $71 million million was for the EV business versus solar and can you quantify them.
In some way a what your significant growth was in the EV order book. Thanks.
Hey, Bill Jason here, a pleasure to speak with you again, so you know as at this point and John feel a we're not breaking out exact specifics from a revenue perspective.
As it correlates to a revenue opportunity perspective, as it correlates to our backlog and award orders in the EV space are very excited about the opportunity, especially considering the fact that we just recently launched that.
But again no further details on that at the moment.
Okay. Thanks, Jason as it relates to.
2020.
Three I know you don't have official guidance.
And a great job on maintaining the vast majority of your outlook for this year and you highlighted that the modules.
Either are not impacted by the anti circumvention case or had been secured when you think about twenty-three Ah I can imagine you have good exposure to that first solar and so that that gives you some security, but when you look at the bookings and.
The potential for <unk>.
23 is there can you talk about what risks there might be for a flattish year for 'twenty three in terms of revenue growth or you know what.
The impacts might be from project managers are slowing down their activity given the anti circumvention.
Thanks.
Yeah, no problem. So I think the first things first just kind of give a little bit of idea of how we came to that the 2022 outlook. We just provided today. So essentially we took a bottoms up approach on a per project basis, you have to go through the entire backlog and all of the orders to assess many different things, including things like you know panel manufacturer.
Origin as you mentioned you know obviously, whether customers had those panels in possession and then once that analysis was complete what we did is we actually applaud you know an incremental rigor to that information to make sure that we had you know some coverage for additional macro uncertainty.
And you know the result of that is ultimately what led us to what we just discussed which is you know slightly bringing down our high end of outlook, but being very comfortable with the low end, which is why we reiterated that today.
But you know as far as specifics from a 'twenty 'twenty three three perspective, Phil Yeah, we're not guiding out to 2023, and it's really hard to say.
Okay, all right I appreciate that Jason. Thank you one last quick one is there any way you can quantify how much revenue from storage you had in Q1, you know maybe even if it's like a high single digit type number.
Qualification just for modeling purposes might be useful thanks.
Understood I appreciate that Phil.
What I can say is is that you know revenue opportunities continue to grow as well as.
You know our backlog and awarded orders, but you know at this point, we're not breaking down any specifics for new products, including our storage side Phil.
The next question comes from Brian Lee with Goldman Sachs.
Please go ahead.
Hey, guys. Good afternoon, thanks for taking the questions I know, it's a challenging backdrop. So kudos on the execution, maybe just to follow up on Phil's question I know you can't give us any.
On 2023 necessarily but Jason Yeah, you did comment that I'm back.
Backlog and awarded order trends may be a bit challenged in the near to medium term given the project push outs I had two questions. One is yeah. This is the first time in a while we've seen sort of a flattish sequential trajectory should we kind of be bracing for a flattish to down trajectory in in.
Backlog and awarded orders over the next couple of quarters, just based on what you're hearing and seeing from customer activity and and you know our actions and then secondly has there been anything beyond just project timing push outs have you seen anything actually fall out of the backlog that you know maybe you hope to.
Recapture but as of right now you're taking it out or are you kind of consider to be a cancel.
Yeah, No hey, Brian our pleasure to speak with you. So you know a couple of things I want to point out you know as we talked about in our prepared remarks I'm absolutely.
Really excited about you know the record revenues, we're able to stand up for this quarter than we had in one other thing I want to point out as well is that you know our quoting activity in Q1 was 160% or up 162% year over year.
So a lot of different demand a lot of exciting opportunity out there and then you know even in despite you know standing up record revenue for Q1, we were still able to grow our backlog.
Which we do continue to trend over time, but you know one thing that we did want to say is until 80 CVD is resolved.
There is a possibility that we may see slower growth in backlog and awards and orders in the future, but that that's a moment in time, it's hard to say right now and I think that if something like that does transpire. Once the industry moves past you know a D. C V. D. I would expect that any of that pent up demand would ultimately come back to benefit the industry of the the other thing that you asked was have we seen any.
Particular projects cancel.
Any particular projects cancel Brian when you look at the opportunities that we have in our backlog and orders.
Okay. That's great to hear and then just a second question for me on margins then I'll pass it on you know the 38% plus gross margin this quarter.
You know quite impressive given all the supply chain issues as well as you know it sounds like mix was an ideal you know high Thirty's I think we had anticipated based on the color you gave on margin trajectory last quarter that maybe you know that's where you'd be later this year. So you know given the mix and given what's your.
Seeing in terms of our supply chain D. Do you think where you know headed back to like a 40% gross margin here in the next quarter or are you going to kind of hold serve at the C O, 38% plus or minus level for a few more quarters before we see any meaningful expansion on the gross margin line.
Yeah, I think you know a couple of things number one as I said before you know, we we expect that our gross margins will be somewhere in that 38% to 40% range. You know as we go throughout the year I mean, obviously you know there could be blips, along the way that it related to mix you know that we have.
Seen in any particular quarter, but again, 38% to 40% is where we are where we expect to remain throughout this year.
The next question comes from Mohit <unk> with credit Suisse.
Please go ahead.
Hey, good evening, thanks for taking our questions.
Just a question is just on the working capital had saw some usage in the quarter can you just talk about how should we think about working capital needs in Q2 in the second half and wells that require drawing down that our revolver upsides to this quarter. Thanks.
I mean, our pleasure to speak with you again, Oh, Kevin do you want to take that question.
Sure. Thanks, Jason.
I think when we look at our working capital requirements are just going through the next two quarters, we see ourself as a.
You know our use of working capital really going through Q2 and early in Q3 and as we start to exit Q3 and into Q4.
We're starting to see those working capital needs to come down so.
As we look out there there may be a short draw and the end of Q2 early Q3, but certainly coming out of that.
Q4.
Thanks, and then could you just maybe elaborate on that is that just in terms of accounts receivables as you ship these as a ah projects or.
Just on inventory or or something else on a on that.
Yeah. It really is specifically related to the growth in some of the initiatives. We've got going on so as we ramp up some a R Q2, it starts to bleed back out in Q3 so.
Got it and just one last one from me on visibility kind of talked about.
Some of the backlog visibility for later this year, but could you talk about how much of visibility do have today on 23 and I just wanted to understand like.
But if the 80 CVD is not announce say till March 'twenty 'twenty three does that put some of that visibility into question or Oh, I'd, rather not say.
At at risk or do.
Do you have visibility into late 'twenty train three as well thanks.
Yeah, I think you know me he'd gone back in and looking at visibility you know one of the things that we're doing and we do work internally with with our customers out there from a backlog and award owners' perspective.
Generally covers you know over the next nine months, but based upon where we are sitting now today in 'twenty 'twenty. Two I'm you know, it's hard to say exactly what 'twenty 'twenty three will look like you know, especially considering the fact that a D. C V D. A.
A headwind that we're dealing with right now.
The next question comes from Mark Strouse with JP Morgan.
Please go ahead.
Yeah. Good afternoon. Thank you very much for taking our questions.
It's giving you were certified to begin selling in Europe back in February I believe and then.
The the build outs that you're making in your sales team in Latam just curious your comments about the backlog potentially coming down or at least slowing in the U S. Do you think those international markets are enough to essentially offset that a U S kind of hiatus near term.
And when you look at the opportunity we have in front of US you know one of the things that we had mentioned is that we actually stood up seven new customers from a conversion perspective with our be alike.
And you know those seven customers had a combined opportunity of about two gigawatts over calendar year 'twenty two.
And with those seven customers Mark three of those specifically were outside of the U S, which is very exciting and.
And just a just a recap of our sales team is in place as we talked about you know our products are fully qualified one other thing I think is important to mention is that we just recently hired a new head of Latam, which is something we've been talking about for a while and very excited about the opportunities ahead.
Due to that bringing on that new team member and as we gain further traction on expanding our international business and our other growth initiatives, including E. Mobility, we do expect our visits and become more diversified over time.
Got it okay I'll take the rest offline. Thank you.
Thanks Mark.
The next question comes from Colin Rusch with Oppenheimer and co.
Please go ahead. Thank you so much.
Thanks, so much guys.
Can you talk a little bit about the geographic diversity and mix on the quotation activity just trying to get a sense of how broad the growth is going to be from a geographic perspective.
Yeah, we haven't released anything specific collyn as far as geographic location as it correlates to quotes at the moment.
Alright.
Yeah on assignments, and then with the easy build out and.
In our in the U S and an infrastructure that's infrastructure bill spending that cash starting to slow likely in September October . This year can you talk a little bit about some of the timelines that you are looking at with your E D.
Infrastructure customers and.
What they're telling you right now in terms of expectation around inflection points for us in that part of the business.
Yeah, Yeah. When you look at the I guess, you could say that the funding that is being you know induced into the EV side of things.
One of the things that's really a topic of conversation among many other exciting areas in the E. Mobility is the two and a half a billion of funding that's dedicated specifically to school bus charging I think it's roughly about $500 million a year.
And we're seeing a lot of opportunity a lot of conversations around that it's a very exciting program because essentially it allows for grants and rebates up to 100% of the cost of a replacement buses you know in certain areas.
And I think one of the very exciting things you know as you mentioned is that based upon that that funding you'll expectation does that start to play a fairly significant role and the incremental opportunity in that area as we go towards the latter part of the year.
And one thing that has been very well received is our solution specifically for many different reasons because of the significant reduction in labor and time on site, but also the permanent about portable aspect that we bring a because it's a perfect fit because many of these school bus opportunities or a lot so on leased property.
The next question comes from Donovan Schafer with Northland capital markets. Please.
Please go ahead Sir.
Hi, guys.
Yeah, I want to follow up on the school bus stuff I was up there a C. T Expo earlier I guess it was last week and Yeah School buses were everywhere I think there are five or six full sized school buses.
Inside the physical conference space.
Hum.
So you know clearly a huge amount of interest there I'm curious you know you you just sort of touched on some of the benefits for our school fleet, obviously like you say that the flexibility of having some things that are skid mounted so you can rearrange.
The charging but yeah. There's also we talk about solar developers being a very risk averse audience. So I could see on the one hand, you know school school boards or whoever's, making these purchase decisions being you know wanting to go with a company that's.
It has you know the under mode over mold very highly tested product from a safety standpoint.
Although at the same time I also know you know historically from some checks there are times when labor unions and if these were to have to go to labor contract Union labor contractors for instance.
They prefer just sort of doing things the old fashioned way that but frankly, it doesn't make a lot of sense, but so I'm curious if there's if things kind of net out one direction or another from you know the risk aversion the safety and as you think of what's the schools as a unique customer versus maybe some of the the union things.
Just any unique attributes or considerations there.
Yeah, Hey, Donovan a good to speak with you again I'm glad to see you're out of the Act Expo sorry, I missed you out there Oh here. It was a very exciting a very exciting show. So those those are all great questions and I think you know the reality is is that you know at our core.
We really focus on quality reliability and safety and been able to create that end to end solution and that plug and play fashion in our particular environment and shift that out in order to significantly reduce the amount of time on side I think you've seen us real value you know in this particular market regardless of the labor type.
You know that you're consuming in that geographic location.
I'm very excited about that you know about that opportunity and again you know you look at the flexibility that we're able to bring in to these different areas I think really gives us a leg up in that space.
Okay. That's great. Thank you and I also wanted to ask a question just about the international business.
With the three international E P C U E.
Sort of converted I, just wanted to confirm that and if it's and in these cases that that means you know are committed sale for some kind of a solution.
Specific other countries. They have a particular project some 100 megawatts or whatever it is you know in.
Brazil or in another country.
And that's all sort of been signed and agreed upon just kind of confirming that and then the other thing would be I'm sure. You don't want to give specific E. P. CS specific customer names and may not wanted to get a specific country names in case that gives any went away, but I am curious if you could speak to sort of you know are there common atrophy.
It's among the countries or you know are these do these tend to be.
No more high wage labor markets or do they have similarities in terms of.
Maybe hi.
Standards and requirements for O for electricians to do wiring and so having that in place means that there's a huge gain to be had by being able to get around some of those requirements are their patterns and commonalities among these geographies.
Yeah. So you know I think touching base on the first question that you asked all of them I don't think this is where you were going to many essentially the three opportunities that we talked about where customers in the international market and we are serving an international project.
They werent specific customers in the international market that.
We're serving a project in North America. So they were for an international customer in an international market.
Which is very exciting.
And also are you know when you look at that.
The case.
Use case and the international market you know obviously the higher the labor are the higher the value proposition, but the reality is even outside of that there's a lot of opportunities we're seeing places.
Have a very low or relatively low labor rates are that we're seeing success with as well. So there's more than just the labor aspect. When you look at the quality and the reliability of our product offering that's out there.
The next question comes from Kashi Harrison with Piper Sandler.
Please go ahead.
Good afternoon, and thank you for taking the questions.
So first one from me Jason are you you mentioned in your prepared remarks, and I think in the press release that DLA to is still on track to be released by the end of this year.
Is that a can you give us more specifics around the timing is that a Q3 Q4 or Q4 and then.
How long do you think it's going to take to fully transition your customer base towards a BLA to point out.
Hey, gassy, yeah, So first and foremost when you look at or BLA to point out we are on track for that to be released out towards the second half of the year.
The expectation right now is that it would be towards the latter part of the second half of the year and as we've talked about in the past you know when you look at the the value proposition that we're bringing bought you bring additional value when you deploy that particular product.
<unk>.
I would assume that it would it would actually deploy relatively quickly over the top of our current generation BLA.
Personally with customers that have already understand the BLA and how that would be only deploys.
Given them additional value over the top of that you know it was really a no brainer.
Got it and then and then maybe just a that was helpful. And then maybe just a follow up question on international can you I know you're not breaking up your backlog, but can you just help us with 2022 revenues that split between U S and rest of the world any thoughts on how much of that.
Be international versus domestic.
So when you look at the you know the areas that we are as we've talked about in the past. We we we have presence in Australia.
We recently just a couple of months ago, you know finalize our certification you ought to be able to support you know Europe and alike.
And then just added our new team members to be able to support Latam. So obviously, that's a growing you always see a lot of opportunity now, but you know as we play out you know calendar year 'twenty 'twenty. Two you know a meaningful portion of that revenue is still going to come in the form of our north American opportunity.
Ladies and gentlemen. This concludes the question answer session and today's conference call.
You may disconnect your lines.
Thank you for participating and have a pleasant day.
Okay.
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