Q3 2023 Shoals Technologies Group Inc Earnings Call

November 7, 2023

Stated one hour for prepared remarks, and Q&A at this time I would like to turn the conference over to Megan Peds, Chief Legal officer for Shoals Technologies Group. Please go ahead.

Thank you operator, and thank you everyone for joining us today hosting the call with me are CEO, Brandon Moss and CFO Domenic Burritos 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.

Good afternoon, and welcome to shelf technologies groups third quarter 'twenty 'twenty.

This conference call today's call is being recorded.

Ed.

As you listen and consider these comments you should understand that these statements, including the guidance regarding full year 2023 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.

Prepared remarks, and Q&A at this time I would like to turn the conference over to Megan Pete's Chief Legal officer for <unk> Technologies Group. Please go ahead.

Thank you operator, and thank you everyone for joining us today hosting the call with me are CEO, Brandon Moss and CFO Domenic Brighthouse.

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, the facts or performance problems and our products are there parts, including those related to the wire insulation shrink back better than ever to accurately estimate the potential losses related to such matter.

On this call management will be making projections or other forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.

And 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.

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 and our products are there parts, including those related to the wire insulation shrink back better than ever to accurately estimate the potential losses related to such matter and failure.

Although we may indicate and believes that the assumptions underlying the forward looking statements are reasonable any of these 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.

Made as of the date of this discussion and we do not undertake any duty to update any forward looking statements.

To recover those losses from the manufacturer decreased demand for our products policy and regulatory changes to supply chain disruptions and availability and price of our components and materials.

Today's presentation also includes references to non-GAAP financial measures you should refer to the information contained in the Companys third 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 shoulder CEO Brandon Ross.

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.

Thank you very much Meghan and good afternoon, everyone I'll start today's call with some key highlights from the third quarter will follow with an overview of business conditions, our investment in production capacity and an update regarding the wire insulation insurance that warrants investigation and remediation.

We caution that any forward looking statement included in this discussion.

Made as of the date of this discussion and we do not undertake any duty to update any forward looking statements.

I'll wrap up with some of my initial takeaways one quarter into the job before I turn it over to Dominic who will provide more detail on our financial results.

That let me turn the call over to show the CEO Brendan box.

<unk> had another great quarter delivering record revenue adjusted EBITDA and adjusted net income I'd like to thank the management team and associates for their strong execution in delivering these record results compared to prior year third quarter revenue grew 48% to $134 $2 million.

Thank you very much Meghan and good afternoon, everyone I'll start today's call with some key highlights from the third quarter will follow with an overview of business conditions, our investment in production capacity and an update regarding the wire insulation shrink back warranty investigation and remediation.

Revenue was slightly impacted by lower production yields early in the quarter as we ramped up our third Tennessee facility, which has already added 15 gigawatts of new capacity through our 2022 base of 20, Gigawatts, bringing total capacity to approximately 35 gigawatts.

I'll wrap up with some of my initial takeaways one quarter of the job before I turn it over to Dominic who will provide more detail on our financial results.

I also want to thank our commercial team for delivering yet another record for backlog and awarded orders backlog and awarded orders were up 34% year over year, 16% sequentially to $633 3 million.

Revenue was slightly impacted by lower production yields early in the quarter as we ramped up our third Tennessee facility, which has already added 15 gigawatts of new capacity to our 2022 base of 20, Gigawatts, bringing total capacity to approximately 35 gigawatts.

We added over $228 million in orders during the quarter.

We're also pleased to see emerging strength of our international business, which now represents more than 10% of our backlog and awarded orders.

Moving now to the solar market landscape the domestic utility scale solar market is currently experiencing slower growth as a result of higher interest rates lingering uncertainty about the iron ore supply chain constraints and interconnection complications.

I also want to thank our commercial team for delivering yet another record for backlog and awarded orders backlog and awarded orders were up 34% year over year, 16% sequentially to $633 $3 million.

We added over $220 million in orders during the quarter.

So we expect <unk> growth rates to decline from the extremely high levels of the last few years, we believe that our domestic utility scale business will continue growing and at attractive rate.

We're also pleased to see emerging strength of our international business, which now represents more than 10% of our backlog and awarded orders.

We still see potential to partner with large upcs converting them to the <unk> solution and growing our penetration of current customers chose has historically targeted large utility scale projects that are approximately 75 megawatts enough.

We see an attractive opportunity to apply our industry, leading value proposition to smaller projects. Additionally, we're in the early stages of penetrating adjacent product markets to grow wallet share in the solar space.

Though we expect <unk> growth rate to decline from the extremely high levels of the last few years, we believe that our domestic utility scale business will continue growing at an attractive rate.

Turning now to international.

We are targeting specific higher growth markets within Europe Africa, Latin America, and Australia. These markets combined are more than double the U S market and according to industry data are growing at a 9% CAGR through 2020.

In recent quarters, we announced major project wins in Australia, Latin America, and we expect growth to continue as international Upcs understand the value proposition of our entire product suite.

Turning now to international.

As I mentioned earlier more than 10% of our backlog and awarded orders is now attributable to our international business.

And our EV charging business, we announced at the end of October that we will deploy our fueled by Shoals E mobility solution for the U S Department of the Air Force supporting an EV charging of the service pilot project to be provided by layers, a fortune 500 size and technology leader.

In recent quarters, we announced major project wins in Australia, Latin America, and we expect growth to continue as international Upcs understand the value proposition of our entire product suite.

This project will support the air Force's climate action plan to achieve 100% carbon free electricity by 2030, and net zero emissions at Air Force facilities by 2046 shows is proud to partner with the Air force as they work towards reaching the emissions targets.

As I mentioned earlier more than 10% of our backlog and awarded orders is now attributable to our international business.

And our EV charging business, we announced at the end of October that we will deploy our fueled by Shoals E mobility solution for the U S Department of the Air Force supporting an EV charging as a service pilot project to be provided by Litres, a fortune 500 size and technology leader.

Although it's early days in our E mobility business, we're excited about our innovative above ground EV charging infrastructure solution, which minimizes construction costs and accelerates EV charging deployments.

This project will support the air Force's climate action plan to achieve 100% carbon free electricity by 2030.

Turning now to an update on production capacity shows as a strong operational team that continues to execute and support our commercial growth.

Zero emissions that Air force facilities by 2046 shows is proud to partner with the Air force as they work towards reaching their emissions targets.

The team has been focused on increasing capacity in 2023 to meet our strong demand.

Since January we have installed almost 100, new machines hired over 200 operators and added 225000 square feet to our manufacturing footprint.

Although it is early days in our E mobility business, we're excited about our innovative above ground EV charging infrastructure solution, which minimizes construction cost and accelerate EV charging deployments.

As I mentioned at the start of the call. We completed the ramp up of our third Tennessee facility in Q3.

Turning now to an update on production capacity.

This facility increases our capacity by 15, gigawatts or 75% year over year. This brings <unk> total capacity to 35 gigawatts with the ability to scale to <unk> 42, Gigawatts with this added capacity. We estimate shows can serve growing demand well into 2025 further enhanced production efficiencies.

<unk> has a strong operational team that continues to execute and support our commercial growth.

<unk> has been focused on increasing capacity in 2023 to meet our strong demand.

Since January we have installed almost 100, new machines hired over 200 operators and added 225000 square feet to our manufacturing footprint.

<unk> and maintain our attractive margins.

I'd like to take some time now to discuss where we stand on our investigation and remediation of the wire insulation shrink back warranty issue.

As I mentioned at the start of the call. We completed the ramp up of our third Tennessee facility in Q3.

This facility increases our capacity by 15, gigawatts or 75% year over year. This brings <unk> total capacity to 35 gigawatts with the ability to scale to 42 Gigawatts with this added capacity. We estimate shows can serve growing demand well into 2025 further enhanced production efficiencies.

On October 31, we filed a complaint to recover for damages caused by the effective wire that prisma and cable systems USA LLC sold the shoals between 2020 and approximately 2022.

<unk> has already extended millions of dollars and identification repair and replacement of the effective wire and are seeking full recovery from prison Ian.

<unk> and maintain our attractive margins.

I'd like to take some time now to discuss where we stand on our investigation and remediation of the wire insulation shrink back warranty issue.

For those as well as future expenses related to the issue.

Because of the pending litigation, we're limited to what we can discuss publicly based on our continuing analysis of information available as of today. The updated estimated range for potential loss related to wire exhibiting installation shrink back is $59 $7 million at the low end and 100.

On October 31, we filed a complaint to recover for damages caused by the effect of wire that Prisma and cable systems USA LLC sold the shoals between 2020 and approximately 2022.

Jos has already expanded millions of dollars and identification repair and replacement of the effect of wire.

Third $84 $9 million at the high end.

Looking for recovery from Brisbane for those as well as future expenses related to the issue.

Dominic will provide more granularity on the breakdown when he reviews our financial results.

Based on our own investigation and third party testing, we determined that unacceptable amounts of installation shrink back were occurring on Prisma and wire purchased from 2020 through 2022.

The range of damages, we are seeking reflects potential cost of remedial measures, including wire and labor at the approximately 300 sites that include at least one harvest made with effective prisma and wire sold during this period.

$84 9 million at the higher end.

Dominic will provide more granularity on the breakdown when he reviews our financial results.

This represents about 30% of the total amount of shoulder harnesses manufactured in the same timeframe.

Based on our own investigation and third party testing, we determined that unacceptable amounts of installation shrink back were occurring on Prisma and wire purchased from 2020 through 2022.

<unk> is committed to quality.

Based on the information we have gathered to date. It is apparent that this installation shrink back issue is unique to the defective prism in water and not from any other wire suppliers as.

The range of damages, we are seeking reflects potential cost of remedial measures, including wire and labor at the approximately 300 sites.

As we worked to remedy the prisoner and effective wire issue. Our top priority is taking care of our customers, which we are doing by leveraging our strongest assets our people and our technology.

<unk> at least one harvest made with defective presuming wire sold during this period.

This represents about 30% of the total amount of shoulder harnesses manufactured in the same timeframe.

Identifying the effective wire is time consuming because of the size of solar fields, which can be as largest four square miles we're focused on working as efficiently as possible. 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.

<unk> is committed to quality.

Based on the information we have gathered to date. It is apparent that this installation shrink back issue is unique to the effective premium water and not from any other wire suppliers as we worked to remedy the prisoner and effective wire issue. Our top priority is taking care of our customers, which we are doing by leveraging our strongest.

Now I'll take a moment to provide a brief update on the patent infringement complaints filed by shows what the ITC in may of this year.

Assets, our people and our technology.

Evidentiary hearings are scheduled for March of 2024, and as we've emphasized in prior quarters, we will continue to vigorously defend and protect our intellectual property.

<unk> the effect of wires time consuming because of the size of solar fields, which can be as largest four square miles we're focused on working as efficiently as possible. 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.

I'll now wrap by highlighting some of my initial takeaways and why I'm. So excited about shoals in the first quarter of my tenure as CEO I am focused on refining our company strategy continuing to build our organizational capacity and implementing a more robust operating model to sustain our strong execution.

Now I'll take a moment to provide a brief update on the patent infringement complaints followed by shows what the ITC in May of this year. The evidentiary hearing is scheduled for March of 2024, and as we've emphasized in prior quarters, we will continue to vigorously defend and protect our intellectual property.

<unk> solutions continue to have an industry, leading value proposition, particularly in the current environment, where there's a shortage of licensed electricians.

A recent third party study stated that utility scale solar installation workforce decreased by 18% from 2021% to 2022.

Conventional ebor systems are expensive and time consuming to install and most of the work must be done by license of electricians, who continue to be in short supply.

Our system reduces both material and labor costs. Additionally, our products are constructed in a quality controlled manufacturing environment and are built to last providing value to owners power providers versus traditional methods that have a high failure rate such as field assembly and the use of devices like <unk>.

Joel solutions continue to have an industry, leading value proposition, particularly in the current environment, where there's a shortage of licensed electricians.

A recent third party study stated that utility scale solar installation workforce decreased by 18% from 2021% to 2022.

Conventional ebor systems are expensive and time consuming to install and most of the work must be done by license of electricians, who continue to be in short supply.

Halation piercing connectors.

We believe we have ample room to grow in our core domestic solar market with large EPC partners and with a new focus on smaller projects.

I'm also confident in our ability to accelerate growth in adjacent product markets and internationally.

Shows as an innovation leader with strong product development capability.

We have been successful in growing share due to our ability to innovate better solutions and with our domestic manufacturing footprint in the U S. We are well positioned to capitalize in the U S. Federal legislation that provides tax and other incentives for onshore manufacturing.

Installation piercing connectors.

We believe we have ample room to grow in our core domestic solar market with large EPC partners and with a new focus on smaller projects.

Shows will focus on markets that support global electrification that are impacted by skilled labor needs and supply chain constraints are core competency of engineering quality pre fabricated plug and play solutions at scale aligns well with market needs.

I'm also confident in our ability to accelerate growth in adjacent product markets and internationally.

Shoulder as an innovation leader with strong product development capability.

We've been successful in growing share due to our ability to innovate better solutions and with our domestic manufacturing footprint in the U S. We are well positioned to capitalize in the U S. Federal legislation that provides tax and other incentives for onshore manufacturing.

By delivering these prefabricated solutions, we expect to continue to generate strong margins and we are moving up our gross margin target, which Dominic will cover in greater detail.

I'll now turn it over to Dominic <unk>, who will discuss third quarter 2023 financial results.

Thanks, Brandon and good afternoon to everyone on the call.

Third quarter revenues grew 48% to $134 2 million.

Driven by higher production volumes as a result of increased domestic demand for solar he boss.

<unk> to generate strong margins and we are moving up our gross margin target, which Dominic will cover in greater detail.

Gross profit was $14 2 million compared to $36.0 million in the prior year period.

Gross profit as a percentage of net revenue decreased to 10, 5% from 39, 7% in the prior year period, driven by $52 million of wire installation shrink back warranty expense recorded in the period.

I'll now turn it over to Dominic you will discuss third quarter 2023 financial results.

Thanks, Brandon and good afternoon to everyone on the call.

Third quarter revenues grew 48% to $134 $2 million driven by higher production volumes as a result of increased domestic demand for solar he boss <unk>.

The significant warranty expense was partially offset by improved pricing slightly lower raw materials input costs.

Profit was $14 2 million compared to $36.0 million in the prior year period.

Decreased leverage on fixed costs and efficiencies gained in operations.

We have not booked any offsetting recovery from Brisbane.

Gross profit as a percentage of net revenue decreased to 10, 5% from 39, 7% in the prior year period, driven by $52 million of wire installation shrink back warranty expense recorded in the period.

Liability and related expenses for addressing prisons effective wire is based on our continued analysis of information available as of today.

Based on this analysis as Brandon noted earlier, we have an update the range of the potential loss related to the defective prism and wire, which is $59 $7 million at the low end represented in our financial statements through September 30 of 2023 and $184 $9 million at the high end.

The significant warranty expense was partially offset by improved pricing slightly lower raw materials input costs decreased leverage on fixed costs and efficiencies gained in operations.

We have not booked any offsetting recovery from Brisbane.

As no amount within the range of loss is more likely than any other as of September 32023, our liability balance broken down between current and long term liabilities on the face of our balance sheet.

The liability and related expenses for addressing price means defective wire is based on our continued analysis of information available as of today.

<unk> $56 6 million.

As Brandon noted the range of potential loss reflects cost of remediation, including shows manufacturing expenses and field installation labor.

Because the complaint was filed on October 31, before our third quarter 10-Q.

We use the amount of damages that had been accrued and was publically available at the time of the filing of the amount of damages being sought as management as well as our board continue assessing and refining the updated range of losses to be accrued for the third quarter.

That accrued amounts as of our second quarter was not less than $9 $3 million.

As Brandon noted the range of potential loss reflects cost of remediation, including Shoals manufacturing expenses and field installation labor.

The amount of damages. We are seeking may be amended from time to time as the litigation proceeds and additional or different information becomes known.

Because the complaint was filed on October 31, before our third quarter 10-Q.

In the ordinary course of litigation, we will be required to make initial disclosures and which we will include the most current higher estimate of damages to provide additional insight into our recurring gross margin performance. We have introduced additional non-GAAP metrics this quarter adjusted.

We use the amount of damages that had been accrued and was publically available at the time of the filing of the amount of damage is being sought as management as well as our board continue assessing and refining the updated range of losses to be accrued for the third quarter.

That accrued amounts as of our second quarter was not less than $9 3 million.

Adjusted gross profit and adjusted gross profit percentage, our non-GAAP metrics that removed the wire insulation shrink back expenses from our GAAP cost of goods sold rec.

The amount of damages. We are seeking may be amended from time to time as the litigation proceeds and additional or different information becomes known.

Reconciliations of adjusted gross profit and adjusted gross profit percentage are provided in our press release and 10-Q filings.

Our adjusted gross profit for the quarter was $64 4 million, reflecting a 48.0% adjusted gross profit percentage.

Year to date, our adjusted gross profit percentage of 48, 7% excludes the cost of our expenses of remediation a presumed effective wire in both the second and third quarter.

Adjusted gross profit and adjusted gross profit percentage, our non-GAAP metrics that removed the wire insulation shrink back expenses from our GAAP cost of goods sold.

Reconciliations of adjusted gross profit and adjusted gross profit percentage are provided in our press release and 10-Q filings.

For clarity our normal non-GAAP metrics of adjusted EBITDA and adjusted net income also add back the wire installations shrink back expenses from our cost of goods sold as well as the wire insulation shrink back litigation expenses from the SG&A section of the income statement.

Our adjusted gross profit for the quarter was $64 4 million, reflecting a 48.0% adjusted gross profit percentage.

Once again reconciliations may be found in our press release and 10-Q filings.

Year to date, our adjusted gross profit percentage of 48, 7% excludes the cost of expenses for mitigation of presidents effective wire in both the second and third quarter.

Yeah.

Third quarter General and administrative expenses were $22 6 million compared to $13 9 million during the same period in the prior year.

For clarity our normal non-GAAP metrics of adjusted EBITDA and adjusted net income also add back to wire insulation shrink back expenses from our cost of goods sold as well as the wire insulation shrink back litigation expenses from the SG&A section of the income statement.

The year over year increase in general and administrative expenses was primarily related to higher noncash stock based compensation.

Legal fees related to the patent infringement and presumed effective wire complaints and planned increases in payroll expense due to higher head count supporting growth.

Once again reconciliations may be found in our press release and 10-Q filings.

Net loss was $9 8 million in the third quarter compared to net income of $12 8 million in the prior year period.

Third quarter General and administrative expenses were $22 6 million compared to $13 $9 million during the same period in the prior year.

Adjusted EBITDA increased 81% to $48 zero million comp.

The year over year increase in general and administrative expenses was primarily related to higher noncash stock based compensation.

Compared to $26 6 million in the prior year period.

Adjusted EBITDA margin decreased 649 basis points year over year to 35, 8%, reflecting the impact of higher adjusted gross profit achieved this quarter.

Fees related to the patent infringement and presumed effective wire complaints and planned increases in payroll expense due to higher head count supporting growth.

Net loss was $9 $8 million in the third quarter compared to net income of $12 8 million in the prior year period.

Adjusted net income grew 101% to $33 4 million in the third quarter compared to $16 6 million in the prior year period.

Adjusted EBITDA increased 81% to 48.0 million comp.

Once again, both adjusted EBITDA and adjusted net income add back the defective wire warranty expenses.

Compared to $26 6 million in the prior year period.

Adjusted EBITDA margin increased 649 basis points year over year to 35, 8%, reflecting the impact of higher adjusted gross profit achieved this quarter.

During the quarter, we generated cash from operations of $27 7 million in the quarter, we used excess cash to fully pay down the revolver.

As I have stated on multiple calls we will continue to prioritize investments in the business and driving shareholder value.

Adjusted net income grew 101% to $33 4 million in the third quarter compared to $16 6 million in the prior year period.

As of September 32023, we had $633 $3 million in backlog and awarded orders an increase of 34% year over year as the company added over $220 million of orders in the period.

Once again, both adjusted EBITDA and adjusted net income add back the defective wired warranty expenses.

During the quarter, we generated cash from operations of $27 7 million in the quarter, we used excess cash to fully pay down the revolver.

It is important to note that some international orders have longer lead times than domestic orders and we are booking jobs that extend beyond our historical revenue cycle of 9% to 13 months to realize revenue from awarded orders.

As I have stated on multiple calls we will continue to prioritize investments in the business and driving shareholder value.

Approximately 15% of our backlog and awarded orders have delivery dates beyond 2024.

As of September 32023, we had $633 $3 million in backlog and awarded orders an increase of 34% year over year as the <unk>.

Turning now to our full year outlook.

Based on current market conditions and visibility into anticipated fourth quarter production, we are narrowing our outlook for revenue and raising our outlook for adjusted EBITDA and adjusted net income.

<unk> added over $220 million of orders in the period.

Our outlook for interest expense and capital expenditures remain unchanged.

For the year ending December 31, 2023, we expect revenues to be in the range of 485 million to $495 million.

Approximately 15% of our backlog and awarded orders have delivery dates beyond 2024.

Adjusted EBITDA to be the range of $165 million to $175 million.

Turning now to our full year outlook.

Adjusted net income to be in the range of $110 million to $120 million.

Interest expense to be in the range of 22 million to $26 million.

Our outlook for interest expense and capital expenditures remain unchanged.

And capital expenditures for the full year in the range of 8 million to $12 million.

For the year ending December 31, 2023, we expect revenues to be in the range of 485 million to $495 million.

Before I turn it back over to Brandon for closing remarks, I want to note that our long term target for adjusted gross profit percentage is in the range of 40% to 45%, which we believe we can sustain going forward by managing price operational efficiencies and operating leverage.

Adjusted EBITDA to be the range of $165 million to $175 million.

Adjusted net income to be in the range of $110 million to $120 million.

With that I'll now turn it back over to Brandon for closing remarks.

Interest expense to be in the range of 22 million to $26 million and.

Thanks, Dominic I would like to close by thanking all of our customers for their confidence and shows our employees for enabling us to effectively serve our customers and our shareholders for their continuous support.

Capital expenditures for the full year in the range of 8 million to $12 million.

I am incredibly excited about the opportunities Shoals has ahead shows continues to have an industry leading value proposition in the EMR space with great opportunity for continued growth in the domestic solar market.

Our strategic focus on international expansion positions us to capitalize on higher growth international markets that will enable sustained growth in the coming years. Additionally.

With that I'll now turn it back over to Brandon for closing remarks.

Additionally, our world class team with its strong product development capability will allow shows to keep building on its leading position by developing innovative products in both core and adjacent markets with our asset light business model that has industry, leading margins and significant cash flow generation I am incredibly optimistic.

I am incredibly excited about the opportunities Shoals has ahead shoals continues to have an industry leading value proposition in the EMR space with great opportunity for continued growth in the domestic solar market.

Our strategic focus on international expansion positions us to capitalize on higher growth international markets that will enable sustained growth in the coming years.

About what we can achieve in the coming quarters and it cannot be more excited about the opportunity ahead.

And with that thank you everyone. I appreciate your time today, and we will now open the line for questions.

Thank you, ladies and gentlemen, if you would like to ask a question. Please press the star followed by the one on your Touchtone phone disconnect to withdraw your question. Please press star followed by the two issues.

Using a speaker phone. Please proceed handset before pressing any keys.

About what we can achieve in the coming quarters and it cannot be more excited about the opportunity ahead.

Norman Please for your first question.

Your first question comes from Brian Lee from Goldman Sachs. Please go ahead.

And with that thank you everyone. I appreciate your time today, and we will now open the line for questions.

Hey, guys. Good afternoon. Thanks for.

Pertaining the question. Thanks for some of the additional disclosure here on some of the hot topics as well.

Thank you, ladies and gentlemen, if you would like to ask a question. Please press the star followed by the one on your Touchtone phone just would like to withdraw. Your question. Please press star followed by the Q, if you're using a speaker phone. Please proceed handset before pressing any keys one moment. Please for your first question.

Had a couple of questions I guess regarding that.

Maybe first off on the warranty if I look at the cash flow statement. It looks like all of these close to $60 million.

Unrepresented are noncash as of today.

Your first question comes from Brian Lee from Goldman Sachs. Please go ahead.

Can you give us a sense of.

How that.

Hey, guys. Good afternoon, thanks for taking the questions. Thanks for some of the additional disclosure here on some of the hot topics as well.

Centrally it turns into more of a cash impact as you continuously have a immediate.

How many quarters it might show up over and then whether it's opex or Cogs, just any sense of.

Had a couple of questions I guess regarding that.

Maybe first off on the warranty.

I know you are booking the liability, but sort of what is the ultimate potential cash impact you're anticipating and over what timeframe based on the fact that youre already kind of into the remediation process. Maybe you have an early look into that and then I have a follow up.

The cash flow statement it looks like all of these Neil close to $60 million.

Represented our noncash as of today.

Can you give us a sense of.

How that potentially it turns into more of a cash impact as you continue to see remediation.

Sure Brian Hey, this is dominic thanks for the questions.

Yes, let me start by saying on the face of our balance sheet in our liabilities and stockholders' equity section. We've tried our breakdown and estimated the warranty liability between current portion which would be within the next 12 months and the long term portion of the warranty expense, which would be greater than 12 months out.

How many quarters it might show up over and then whether it's opex or Cogs, just any sense of.

I know youre bookings as a liability, but sort of what is the ultimate potential cash impact you're anticipating and over what timeframe based on the fact that youre already kind of into the remediation process. Maybe you have an early look into that and then I'll have a follow up.

We do believe.

The remediation will take multiple quarters and therefore, we just tried to estimate that so in our balance sheet. We've currently got $17 million of current liability expense. As you noted most of it was a noncash charge this quarter.

Sure Brian Hey, this is dominic thanks for the questions.

Yes, let me start by saying on the face of our balance sheet in our liabilities and stockholders' equity section.

17 million that we have on the balance sheet is the current portion with 39 million as the long term portion of the of the warranty expense.

Tried our breakdown and estimated the warranty liability between current portion which would be within the next 12 months and the long term portion of the warranty expense, which would be greater than 12 months out we do believe.

And as you can imagine the vast majority of that expense is going to be related to Cogs.

Really the manufacturing, it's the remediation to labor to install these things in the field, so that's where the warranty expenses manifest.

And there will be some expenses associated with litigation.

That clearly would happen during this timeframe as well.

17 million that we have on the balance sheet is the current portion with 39 million as the long term portion of the of the warranty expense.

But I can't that's the clarification I can provide it on the face of the balance sheet is in our press release and our Q as well.

Okay fair enough that's helpful.

And as you can imagine the vast majority of that expense is going to be related to Cogs.

And then I guess on the demand backdrop.

You guys noted there is a little bit of a slowdown youre seeing U S. Domestic if I heard you correctly, but this $220 million plus of bookings.

Really the manufacturing, it's the remediation to labor to install these things in the field, so thats, where the warranty expenses manifest.

And there will be some expenses associated with litigation.

You printed in the quarter to one of your best quarterly bookings metrics.

That clearly would happen during this timeframe as well.

Metrics, you've posted so just trying to reconcile your commentary with kind of the results here is there sort of.

So, but I can't that's the clarification I can provide it on the face of the balance sheet is in our press release and our Q as well.

Precursor to bookings starting to slow as we move into year end Q4 or are you just.

Okay Fair enough, yes, that's helpful.

And then I guess on the demand backdrop.

You guys noted there is a little bit of a slowdown youre seeing U S. Domestic if I heard you correctly, but this $220 million plus of bookings.

Kind of throwing caution to the wind, but youre offsetting some of that through market share gain or international and non solar expansion or both just trying to understand kind of where <unk> fits into that.

You printed in the quarter and so one of your best quarterly bookings.

NAMIC of the high level commentary around U S domestic maybe slowing a bit thank you guys.

<unk> posted so just trying to reconcile your commentary with kind of the results here is there sort of.

Hey, Brian It's Brian I'll jump in on that one I appreciate the question.

Precursor to bookings starting to slow as we move into year end Q4 or are.

Yeah look you pointed it out first and foremost we're excited about the quarter.

In terms of the bookings we've seen our quote volume is up 69%.

Or are you just.

And as you know the $220 million of bookings in the quarter.

Give us a record at $633 three of total backlog and awarded orders.

Nick.

The high level commentary around U S domestic maybe slowing a bit thank you guys.

I think really the thing to point out.

10% of our backlog and awarded orders is international business.

Hey, Brian It's Brian I'll jump in on that one I appreciate the question.

Yes look you pointed it out first and foremost we're excited about the quarter.

Of that international business is pushed out into 2025 total backlog and awarded orders.

Terms of the bookings we've seen our quote volume is up 69%.

That is for 2025 delivery is about 15%.

And as you know to $220 million of bookings in the quarter.

So look we're seeing the same choppiness, what everybody is seeing in the marketplace that I indicated in my prepared remarks.

Give us a record at $633 three of total backlog and awarded orders.

There is some fear.

Interest rates, obviously and the connections complexities.

I think really the thing to point out.

10% of our backlog and awarded orders as international business. Some of that international business is pushed out into 2025, our total backlog and awarded orders.

Still some lingering supply chain issues.

We're not seeing overwhelmingly.

Big changes and product push outs I mean, as you know in this business things move quarter to quarter, but there is nothing we're really.

That is for 2025 delivery is about 15%.

We're seeing a significance there I think the major thing is the forward looking bookings into 2025, and then look this business has executed a great. The last couple of years, we've grown at a 50 plus percent CAGR since the IPO.

So look we're seeing the same choppiness that everybody is seeing in the marketplace that I indicated in my prepared remarks. There is there is some fear.

Interest rates, obviously and the connections complexities.

Still some lingering supply chain issues.

It's impossible for a company to do that on into perpetuity, we continue to feel.

We're not seeing overwhelmingly.

Big changes in <unk>.

Feel very good about the marketplace and our ability to compete and our goal is to is to outpace the market growth and we will continue to do that as a company. So it's a great question. Thank you.

Product push outs I mean, as you know in this business things move quarter to quarter, but there's nothing we're really.

We're seeing a significance there I think the major thing is forward looking bookings into 2025, and then look this business is executed great. The last couple of years, we've grown at a 50 plus percent CAGR since the IPO.

Alright, Thanks, guys I'll pass it on I appreciate it.

Your next question comes from Philip Shen from Roth.

Please go ahead.

Everyone. Thanks for the questions.

It's impossible for a company to do that on into perpetuity, we continue to.

Wanted to follow up on some of the warranty questions.

Feel very good about the marketplace and our ability to compete and our goal is to is to outpace the market growth and we will continue to do that as a company. So it's a great question. Thank you.

Specifically, how confident are you that one.

$185 million could be the high end of the range.

Is there a potential that it could go beyond that.

Alright, Thanks, guys I'll pass it on I appreciate it.

Are you still buying the prisma and wire.

And then.

Your next question comes from Philip Shen from Roth.

From I think you were alluding to most of this would be cash expense overtime.

Please go ahead.

Noncash now but over time.

Hi, everyone. Thanks for the questions.

Does it become more cash and then maybe what the mix of cash is there and ultimately how do you expect to pay for it.

Wanted to follow up on some of the warranty questions.

Specifically, how confident are you that.

My guess is it.

$185 million could be the high end of the range is there a potential that it could go beyond that.

It comes out of your cash flow.

Quarters, just curious if you could give a little bit more color in terms of.

Are you still buying the prisma and wire.

The source of how you pay for it.

And then.

From I think you were alluding to most of this would be a cash expense overtime noncash.

Please go ahead.

And back to you on that.

The first question is that I can answer either.

Noncash now but over time, yes.

There are no longer in that particular area that is a component that had been filed.

Does it become more cash and then maybe.

So feel free to check there for some additional details.

The mix of cashes, there and ultimately how do you expect to pay for it.

And then as far as.

Further financial question I'll hand, it over to Dominic.

My guess is it.

It comes out of your cash flow.

Yes, Phil Theres, a few things that we just have to be cautious as Brendan mentioned, new this is active litigation, we do need to be careful about what we say, but in terms of how this plays out as I mentioned earlier on with Brian's question. We do believe that there will be this will take multiple quarters to resolve.

Quarters, just curious if you could give a little bit more color in terms of.

The source of how you pay for it as well.

Please go ahead.

The first question is that I can answer that.

No longer buying that quickly.

That is a component that had been filed.

We hope to be very.

So feel free to check there for some additional detail.

Very forthcoming as solutions come forward from presume if there's something that comes forward there as I mentioned.

And then as far as that.

Further financial question I'll hand, it over to Dominic.

As we mentioned before that there was no offsetting recovery booked in our financials at this point in time. So in terms of how we pay for it we have cash from operations I've got the full revolver as you as we noted we paid down the revolver in full there is a $150 million of liquidity available to US there we continue to generate strong cash flows.

Yes, Phil Theres, a few things that we just have to be cautious as Brandon mentioned, new this is active litigation, we do need to be careful about what we say, but in terms of how this plays out as I mentioned earlier on with Brian's question. We do believe that there will be this will take multiple quarters to resolve.

And so from what we show on our balance sheet from a current portion of the liability.

We hope to be very.

Very forthcoming as solutions come forward from premium if there's something that comes forward there as.

We feel confident in our ability to handle all of that with your operations.

Great. Thanks, guys.

I mentioned.

We mentioned before that there was no offsetting recovery booked in our financials at this point in time. So in terms of how we pay for it we have cash from operations I've got the full revolver as you as we noted we paid down the revolver in full there is a $150 million of liquidity available to US there we continue to generate strong cash flows and.

Shifting over to capacity I think this is.

Maybe the first time, you talked about capacity megawatts, sorry, if I missed that earlier.

Yes.

It seems like Youre going from 20 Gigawatts.

Call It 35.

And was wondering what your thoughts there.

So from what we show on our balance sheet from a current portion of the liability.

The utilization on that 35 might be.

Through 2024, do you expect to be at a high utilization rates.

We feel confident in our ability to handle all of that with your operations.

Great. Thanks, guys shifting over to capacity.

And.

What might dictate and be the catalyst to expand beyond the 35 to the overall of 42.

I think this is.

Maybe the first time, you talked about capacity megawatts, sorry, if I missed that earlier, but.

It seems like Youre going from 20 Gigawatts.

Bill, It's Brandon I'll take that and Great question, We won't guide on 'twenty four specifically, we're excited that we've added 15 gigawatts.

Call It 35.

And was wondering what you thought.

The utilization on that 35 might be.

Through 2024, do you expect to be at a high utilization rates.

2023, and as I mentioned in the prepared remarks, we can scale that up to <unk> 42 on our current footprint.

And.

What might dictate and be the catalyst.

What is probably most exciting for me is we're not only adding capacity, we're becoming more efficient.

Beyond the 35 to the overall of 42.

The conference room, I'm sitting in right now I'm looking out on a plant floor.

Bill, it's Brian and I'll take that.

And each and every day, we're getting more efficient and our ability to produce.

Great question, we won't guide on 'twenty four specifically, we're excited that we've added 15 gigawatts.

Our harnesses or BLA product.

And the facilities getting safer and safer each day. So I'm excited about how the operations team is executing well continue to invest in this business and we'll continue to do that.

In 2023.

As I mentioned in the prepared remarks, we can scale that up to <unk> 42 on our current footprint.

What is probably most exciting for me is we're not only adding capacity, we're becoming more efficient.

In years to come but we are we are set for capacity.

Probably through 2025 as I noted.

The conference room, I'm sitting in right now I'm looking out on a plant floor and in.

In my remarks.

And each and every day, we're getting more efficient and our ability to produce.

Thanks, Bill great. Thank.

Thanks, Brandon I'll pass it on.

Our harnesses.

Your next question comes from Jordan Levy from <unk> Securities. Please go ahead.

La product.

The facilities getting safer and safer each day, so I am excited about how the operations team is executing we continue to invest in this business will continue to do that.

Hey, Thanks. This is actually on for Jordan. Thanks for taking my questions. So could you just maybe talk about the initial reception to the snapshot product offline.

In years to come but we are we are set for capacity.

What this means in a call feature product potentials through your gateway family of products and as a follow up.

Probably through 2025 as I noted.

Yeah.

In my remarks.

Sure I'll take that.

Thanks, Bill great. Thanks.

Looks snapshot, it's very early days for that product.

Thanks, Brandon So I'll pass it on.

Your next question comes from Jordan Levy from <unk> Securities. Please go ahead.

We launched it already plus this year.

The feedback that we got it already plus for that particular product was amazing.

Hey, Thanks. This is actually on for Jordan. Thanks for taking my questions. So could you just maybe talk about the initial reception to the snapshot product offline.

And we have been out since already plus taking that product to investors and owners and the feedback that we've gotten from them.

What this means in a core feature product potentials through your gateway family of products and as a follow up.

Been very very strong again.

It is early days as a new product for us it gives us some of the monitoring space I think most exciting about the product as it opens up market opportunity for us to sell something into a into a solar plant that has already been constructed we've ever had a product like that before so this open some windows for us it opens windows to the modern world and I think we can.

Yes.

Sure I'll take that.

Looks snapshot, it's very early days for that product.

Really launched it already plus this year.

The feedback that we got it already plus for that particular product was amazing.

You need to expand.

And we have been out since our a plus taking that product to investors and owners and the feedback that we've gotten from them.

Off of that as a product suite. So early days again, but very excited.

Been very very strong again.

It is early days as a new product for us it gets us into the monitoring space I think most exciting about the product as it opens up market opportunity for us to sell something into a into a solar plant that has already been constructed we've ever had a product like that before so this is <unk>.

Great. Thanks.

So second question real quick capital allocation I mean, you pay down the revolver. This quarter. So now how are you thinking about your M&A strategy of the current market and are there any like matrix cancel certain baas gateway products.

That makes sense conceptually.

Open some windows for us it opens windows to the modern world and I think we can continue to expand.

Yes.

Sure Great question. This is Dominic here.

All of that is a product suite. So early days again, but very excited.

Yes, as we've said before we are very interested in driving growth.

Organically as well as looking at inorganic growth.

Great. Thanks.

With the cash flow characteristics that we have as an organization in the base business, we feel very confident our ability to continue to drive strong cash flow margins in terms of how we look at that strategically we are always evaluating opportunities.

So second question real quick on capital allocation I mean, you pay down the revolver this quarter. So.

How are you thinking about your M&A strategy in the current market are there any like matrix.

Your boss Gateway products.

When we are ready to make those announcements for you we absolutely will but at this point in time, we're focusing on within focusing on our organic growth as we've kind of laid out and then I think in the first quarter. When Brandon is ready to talk about strategy update in an analyst day sort of thing then that's when we'll start talking about what might be out on the horizon, but thank you for that.

That makes sense conceptually.

Yes.

Sure Great question, it's Dominic here.

Yes, as we've said before we are very interested in driving growth.

<unk> as well as looking at inorganic growth.

Thank you so much.

And your next question comes.

This Susan from BNP. Please go ahead.

Hi, Thanks for taking my question.

Just following up on the backlog question rising quite quite nicely that international portion any ability to share book to Bill for U S. E box, specifically and is there any material EV charging bookings in there.

Yes, we haven't broken down the exact book to bill between domestic and international.

That's something that as we said 10% of the backlog and awarded orders is currently is at that point I imagine that percentage will climb if the lead times of those international projects are longer and that's why I alluded to in my prepared remarks, because I wanted everyone to understand that the kind of the revenue cycle that we've talked about historically, maybe lengthening shifting as we continue to build that.

International business.

But as Brandon mentioned I echo the enthusiasm for the strong strength of our pipeline that quoting activity, both domestic and international and I'm glad to see international taking a larger piece, we just haven't broken it down specifically, but we'll keep that in mind for next year.

Great.

And where market share is today on BLA sort of a metric that was quoted in the past I'm. Just curious if you have a view.

Yeah.

As far as BLA goes.

We have had fantastic penetration of that product I mean since IPO, we've tenex our share of EPC that are using that solution.

At this time, we're not going to speak specifically to market share or market share of a particular product.

But we are excited.

About that product and I think there's still room for it to grow there's still new EPC that we can target and there is also a deeper penetration with.

Within the current EPC is that we're doing doing business with.

As far as market share goes as we've talked about in the past.

Historical volatility in those market share estimates.

That's caused by really some some definitely definitional issues across industry data providers. So so not going to speak to market share specifically at this time, but again reiterate that our plan is to grow faster than the marketplace.

Very helpful and I guess, just one more quickly on the manufacturing capacity of 35, Gigawatts just to clarify that that produce BLA plus or is that a blend across BLA in the traditional homerun.

That would be that would be our ability to produce both products.

So that is across our product suite.

And your next question comes from Colin Rusch from Oppenheimer. Please go ahead.

Thanks, So much guys can you talk a little bit about your ability to move some of the stationary storage and.

Charging projects through the queue and your pipeline.

Sense of kind of an order of magnitude of in the backlog how much of that backlog is in October.

Yes, we haven't broken that down I appreciate that question, but we are not providing that level of detail the backlog and awarded orders does include all product types, but we havent reached that what we did want to show was the strength of the international.

Because that his level of significance for us because this time round that we felt it was appropriate that you have that for your models that you see that the strength of the quoting activity and the awarded orders in the international space is now 10% of our backlog and awarded orders combined.

But that's more important to us at this point in time that you see that.

First we haven't broken down.

Okay.

Take it offline with the rest of that and then on working capital you guys have done a nice job.

Ms shrunk in the working capital consumption here and limited inventories are actually getting appeal and can you talk about how we should be thinking about that trending through the balance of this year and next year.

As you grow and start.

Working on multiple continents, presumably.

How should we be thinking about that those inventory levels on an overall working capital.

Alright.

Yes, so so as I've said and I think now this is probably four or five earnings calls on our railroad said this debt.

I believe there is still more room for inventory optimization.

We intend to be as efficient as possible.

Said there are some growth pillars that we're examining from a strategic plan that might cause investments in inventory, but we'll be able to signal that so I do think inventory, we still have some more room to optimize and then we'll get to a point, where it will just naturally have to grow with our growing business volumes.

Our receivables are higher than I want them to be right. Now if you look at our balance sheet on the receivables is a factor of growth absolutely, but there are things that we can always do to be more efficient in our invoicing process and make sure that we had cutoffs and work with our suppliers to our customers to get those payments in a more timely fashion, so thats going to be an area of focus.

For me, but.

But you did see the improvement in the accounts payables and inventories you've noted so yes working capital is as important to me is driving the cash efficiencies out for everybody is anything on the income statement. So I appreciate that line of questioning.

Thanks, so much guys.

Ladies and gentlemen, as a reminder, please limit yourself to one question and one follow up question.

Your next question comes from Mark Strouse from JP Morgan. Please go ahead.

Hi, This is Michael on for Mark.

Just have one question I was wondering if you guys could talk about the new focus on smaller projects and Jeff how are you looking to attack that market and how small those project sizes could get thank you.

Yes, Brian this is going to handle that one this is Dominic I just wanted to give you one bit of notice on that when we look at data as many of you probably do as well for like Wood Mackenzie. Many of those smaller projects are included in utility scale solar so in the total.

Ladies and gentlemen, as a reminder, please limit yourself to one question and one follow up question.

Utility scale space those smaller projects have always been included.

As we've mentioned before our focus is predominantly been the 75 megawatts enough and I'll hand, it over to Brandon.

Yes, thanks Dominic.

Yes look this smaller.

A smaller product smaller projects.

That our products suite is as applicable to those right. The same value proposition, we have a module products.

Many of those can be applied to smaller projects the way that we think about.

This market opportunity.

Is about a 10% growth to our total available market. So.

That will be the focus for us.

Specifically going into 2024, we will gear up commercially around that and begin focusing on those smaller markets that we may have have ignored in the past we've got capacity to attack those markets now and I think with our production efficiencies that can be very competitive in that space.

And your next question comes from Andrew <unk> from Morgan Stanley. Please go ahead.

And evening, thanks, so much for taking the questions.

Maybe just to come back to the wire shrink back issue can you maybe just discuss.

Any customer impact have there been any projects that are tripped offline for next or has this been kind of a proactive warranty campaign.

It feels like that could be a pretty important swing factor in terms of remediation timeline and cash impact of this.

Warranty issue.

Maybe I'll kick that to you and then I can talk specifically about the customers.

Yeah, absolutely thanks, Andrew for asking I think.

Our top priority with our customers and those relationships are important to us and we're continuing to see kind of going through that process.

We started to investigate the matter.

We did notify our customers when we had a process for doing that and we have been working with them to identify remediate and as necessary replace any assets.

Okay, and then maybe just just yeah, just just to add to that.

We as Meghan said, we're proactively reaching out to our customers. We have not seen any project movement specific to the warranty issue I think the customers understand that this is a supplier issue in and as Meghan said.

Taking care of them as our as our top priority. So I think everybody is appreciative of how we're communicating and working in the marketplace around this issue.

Understood. Thank you for that color.

And maybe just as a follow up on on the macro environment and the growth outlook for utility scale solar.

Are there any specific ISO as there are geographies, where youre seeing more of an outsized impact from project delays, whether it be permitting financing.

Iran, Turkey IRA just wondering if there is any.

I think that you should be focusing in on in terms of where the delays are great. Thank you.

Yeah.

Nothing specific I don't think that we could point out in terms of geographies and again the movement that we're seeing quarter to quarter month to month in terms of project delays has been quite typical of what we see.

I think we've seen historically in the business.

Look we manage our funnel very closely we understand.

Where projects are falling almost on a daily basis, and again that was significant.

Movement.

Due to the things that you are reading about these days so.

So we're pretty pleased with where the business sits today and again no significant push outs.

Great. Thanks, so much.

Your next question comes from Christine Cho from Barclays. Please go ahead.

Thank you for taking my question.

Wanted to I appreciate the color about the longer lead times for international projects.

But would it be fair to say that.

A big chunk of the international bookings, we're seeing this quarter and I just also wanted to confirm that.

The bulk of that is actually solar.

And then would it be correct to think that similar to the U S customer started off using some of the components before upgrading ongoing to systems.

So that's a great question I guess.

One piece at a time here.

I would say that yes, the international bookings that we're seeing are solar projects.

I don't think that they specifically came in this quarter I think it's been probably a build over the last couple of quarters. We've got a we've got a big focus on growing our international business.

Since I have joined we continue to refine our strategy, we're adding resources to help build that strategy and it'll be a big big focus for investment for us going into 2024. So.

Pleased with the direction of the international business and again, I think it's going to be a great spot for growth for us in the future.

I think I hit all the things that if I answered all of them or did you have one more kind of a component.

Thanks, Yeah, Yeah, Yeah, Great question look I think.

Great maybe for shoals, whether it be domestic or international.

Two two.

To bring somebody into our solution, we typically look at our components business as components and don't call them solutions, but.

Virtually everything that we make here.

It shows and it is an engineered to order product that has a specific product for a specific site or customer and so.

For us to get somebody in the door and working with us on the components business and then.

Our salespeople and marketing folks to do what they're supposed to do and convert them to a BLA system is exactly how it's supposed to work. So I would see us approaching the international market just as we have the domestic carpet.

Okay, and then my follow up I'm, sorry, if I missed this in the prepared remarks, but could you talk about like what specifically drove the revenue being narrowed towards the lower end of the range.

Are your customers seeing delays and then also systems.

Over the past several quarters with a larger percentage of total revenue that's pretty strong, but I saw that it kind of decline this quarter. So just curious as to what drove that.

Yes, Christine so first of all yeah Im very pleased that we're able to peg the revenue range at the beginning of the year and come in right and refine that as you noted. So that's really we're really pleased to be able to do that.

Yes, I think Theres a couple of things we talked about the capacity that actually slowed down our Q3, so I wouldn't characterize the Q4 issue is why we narrowed it where we did.

I think internally, we probably would have liked to have had a little bit more we have the capacity to do more revenue. We've narrowed the range based on the visibility what we have there is nothing abnormal about project given take within a quarter moving from period to period.

Sometimes the mix is a little bit different I think if you look in our Q youll see that.

Yes, it's in the queue.

See our components business was a slightly higher percentage at this time and so there is just a little bit of a different difference in product mix, but we called the revenue shocked at the beginning of the year, we're very pleased to come in that range.

And your next question comes from Vikram <unk> from Citi. Please go ahead.

Hi, there its Ted on for Vic.

I wanted to touch on.

<unk> gross margin implied by the guide it still looks pretty healthy I'm. Just curious is there anything to call out in terms of product mix on the project side.

And just trying to think about how to square that with the with new 40% to 45% gross margin target that you laid out just curious if you can kind of give us directionally any indication.

On what.

Where we should expect gross margins to be.

Yes, so one of the things we did raise we've always said that we had a 40% kind of target for gross margin and we actually we believe that 40% to 45% is still very attainable.

There are some investments that we still anticipate making in the gross margin area as we look.

Two our capacity looking to the facilities, how can we drive even greater efficiencies down the road product mix as I just mentioned.

Some of the inroads that we're making with some EPC does happen to be in the components space as we've talked about and so the mix. This time was actually a lower percentage of system solutions as opposed to what we've had in the past couple of quarters. So in the guide you see a kind of a general pullback I would say from from the record.

High gross margin that we've been achieving but theres only so much margin that we can take you know being a public company. We are constantly looking over the shoulder of competition and making sure that we're providing that competitive value for our customers. So I think over time.

Bringing that gross margin back down into the 40% to 45% range as desirable for all parties and that's going to be our longer term target.

Alright. Thanks, Thank you and I have just one follow up.

On the capital allocation side, you paid down the revolver this quarter.

Just curious if you have any thoughts around potential pay down of the term loan I think the prepayment penalty expires. This year. So just curious on your thoughts there.

Excellent memory, that's a fantastic yes, the prepayment expires this month the penalty does go away.

Our exploring alternatives for that all the time, even if we look at just playing interest rate arbitrage. The revolver does carry a smaller or I would say lesser interest rate charged on the term loan does so we are looking at that we're talking to lenders all the time and until we announce we won't but yes, yes. So I appreciate the question.

Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by demand.

Next question comes from Donovan Schafer from Northland Capital markets. Please go ahead.

Hey, guys. Thanks for taking the question I want to.

Talk about the international market. So it looks like you guys you guys said some good details there.

Nice to see.

That is kind of part of the backlog.

I am curious talking too.

Developers and if you see it seems like there is still like maybe a bias the tendency.

Lot of international market.

Stick with.

Just to stick with trenching cables underground.

Hey, there.

Would limit some of the value add in the BLA.

And so my question is is that true in your experience.

Then just a matter of kind of AD agitation to overcome that so that they you can convince and show them. They can run something like that of above ground or is there like a regulatory or code driven thing or it would take a while or you'd have to.

Push from a regulatory angle or or something like that.

John Good to hear from you and thanks for the question look.

Part of our part of we're working right now sort of refine that international strategy and.

Find specific markets.

Where our value proposition probably most resumes.

Some situations that may be areas that are more.

Open to above ground applications than trenching.

And as you mentioned in other scenarios.

And education process right.

Shows shows had to had to teach the domestic industry, a better way to handle electrical balance of systems and there's probably some areas, where we're going to have to do that internationally. So.

Big Big focus on that for US right now specifically understanding what markets make most sense for us to play in and really where to put some chips on the table. So.

More to come on the international.

Just no.

It's a big area of focus for us at the moment.

Okay, and then for my follow up.

One of the things and talking to customers, they really really value all the kind of.

Stable.

I think in some cases.

Oliver.

Having any of that overhead altogether.

One internal that can review the wiring designs and so forth.

Yes, that's a big that's been a significant advantage for you guys.

And execution reliability or some other things so.

Side of the technology piece.

Working on any other are there any initiatives you're working on to help keep the lead and that kind of the core service versus competitors.

Starting to to try and do more of this kind of engine.

And then also the role of that internationally do you need more folks in.

Design engineering support teams to help do some of that work for international projects.

Yes Dominick.

Sorry Donovan.

You're cutting in and out a little bit there, but I think I got the gist of the question look what one of our competitive advantages is our ability.

Call it institutional knowledge of designing.

Utility scale solar field so.

I think we continue to get better and better in that function that people do understand the value of that I think we've got the ability to.

The lower their total cost of ownership.

You know that.

That is a competitive advantage.

For Shoals, along with our with our.

Yes.

Projected products. So so both are very important to us as it relates to international.

Fantastic point I think as we grow internationally, we will have to put that engineering capability on the ground in region wherever we operate.

So we can get closer to the customer we're operating on the same times time zones, so forth and so on additionally, as we've mentioned on prior calls.

We are going to invest likely in manufacturing and supply chain in those regions, where we operate so.

I would think of our international footprint and the future state as being more of a.

Of a full business offering similar to what you would see here in the United States.

Okay, I think I answered your question.

Thanks Donald.

And your next question comes from Derek Soderberg from Cantor Fitzgerald. Please go ahead.

Yes, hi, thanks for taking.

Just have one one line of questioning here just around international growth I'm curious what specific criteria for inorganic growth opportunities are you targeting.

Is it really to pursue.

Local manufacturing to get scale as it takes and into new products.

It's pretty significant Tam there I'm, just curious what sort of the best way to go about accelerating that growth internationally.

Yes Fantastic question look, we're evaluating international markets and a pretty comprehensive way I mean, obviously, we want to pick an area that has fantastic scale and forward looking market growth. We are also looking for areas that are.

Maybe easier to operate in that other area, so political and economic climate, obviously plays a part into that and then again, how well our value proposition may or may not resonate in that market. So.

Look as I mentioned, we're working hard to refine that strategy now.

Maybe maybe get more granular than we have in the past quite honestly.

So I think organic growth on the table potentially inorganic growth on the table and we're specifically in that market looking at solar applications right now so it would not be.

An area outside of our solar at the moment, we want to stick to that solar space and where we can drive our brand and value proposition. The good news for US is a lot of these larger EPC or global EPC as they learn about the shoals name.

And domestically and they take they take us to other areas around the globe. So we think.

We think we've got a fantastic opportunity and we will continue to invest in that space.

And there are no further question for today, ladies and gentlemen. This concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.

Q3 2023 Shoals Technologies Group Inc Earnings Call

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