Good afternoon, and welcome to Shoals Technologies Group Second Quarter 2021 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Mehgan Peetz, General Counsel for Shoal Technologies Group. Thank you. You may begin your presentation.

Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me are CEO, Jason Whittaker; CFO, Philip Garton; and SVP of EV Solutions, Jeff Toner. On this call, management will be making statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of other factors discussed in today's press news release regarding second quarter earnings and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.shoal.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's second 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, Mehgan, and good afternoon, everyone. I'll start off by giving an overview of the current solar market landscape and the opportunity that it's creating for Shoals. I'll then discuss the progress Shoals is making on 3 of its core growth initiatives: Converting the industry to BLA; growing wallet share with new complementary products; and entering the EV charging equipment market. As most of you know, 2020 was a record year for Shoals, both in terms of revenues and profits. That momentum continued in Q1 and now again in Q2. Revenues and adjusted EBITDA for Q2 were up 38% and 34%, respectively. Our second quarter results were driven by continued growth in our System Solutions business. That growth was a result of sustained strong demand for utility scale solar, as well as market share gains. Increasingly, customers are seeing the value that our combined ecosystem provides, and we are converting customers to BLA in a much shorter period of time that it took us in the past. In our core U.S. Solar business, we're seeing increasing levels of demand as the build-out of new projects accelerate. The acceleration is being driven by continued declines in the LCOE of solar, which makes it more competitive with other sources of generation. the growing corporate and utility commitments to source energy from renewable resources, the 2-year extension of the solar ITC that was packed in December of 2020, the IRS expansion of the continuity safe harbor to 2025 in June and the normalization of permitting processes as states reopen from the pandemic. According to many industry analysts, the effect of all that has been to increase the size of the addressable market over the next 3 years by 30%. That's a huge increase in the size of the market and…

Thank you, Jason. For the second quarter, revenues increased 38% versus the prior year period to $59.7 million, driven by a 62% year-over-year increase in our System Solutions revenues, which was partially offset by an expected decline in Components revenues. The growth in System Solution revenue reflects strong demand for our combined as-you-go system. The declining component revenue was consistent with the expected change in certain customers' order timing relative to last year and the conversion of our other customers from components to system solutions. The sale of system solutions represented 86% of revenue versus 73% in the prior year period. Prices across our product lines during the second quarter were comparable to the prior year. Gross margin in the second quarter increased by over 500 basis points versus the prior year period to 43.8% as a result of higher portion of our revenue coming from combine-as-you-go system solutions, purchasing efficiencies from increased volumes, improved materials planning, which reduced logistics costs enhancements to product design and lower manufacturing costs and other manufacturing efficiencies resulting from higher production volumes. Second quarter general and administrative expenses were $10 million compared to $9.3 million in the prior year period. This was driven by a planned increase in payroll expense due to higher headcount to support our growth and product initiatives, new public company costs and public offering expenses, partially offset by a decrease in equity-based compensation. Adjusted EBITDA for the second quarter was $20.6 million, up 34% from $15.4 million in the prior year period, with adjusted EBITDA margin decreasing approximately 90 basis points year-over-year to 34.5%. Adjusted net income was $14.7 million in the second quarter compared to $13.1 million during the same period in the prior year, increasing 12%, primarily due to increased system solutions revenue partially offset by an increase…

I'd like to close by thanking all of our customers for their commitment to Shoals, our employees for their contributions to our company's success and our shareholders for their continuous support. And with that, thank you, everyone, and I really appreciate your time today. I would now like to ask the operator to open the line for questions.

Our first question comes from line of Maheep Mandloi with Credit Suisse.

Thanks for the clarifications or updates on product delays and supply challenges, really helpful. Maybe just a question on Q3 margins. If you could talk about what's driving that weakness, is it just mix shift? And how should we think about that in Q4 or next year?

Jason here. So I think the easiest way to cover that is walking back to the updated investor deck that's out on our website, where we really talk about our BLA and how it's gaining share. So kind of looking at that, when you look at those new prospects that we're moving into -- in transition, sometimes when we're working with those clients as we're moving them over to our full system BLA solution, the opportunity presents itself to offer that more component-based offering while we're moving towards that. And when that happens, we're obviously going to capitalize on that. So it's really just a function of a mix shift between the full system solution and more of that component based offering in this particular quarter. So as we continue to go forward, we expect our margin profile to continue to decline -- or to increase, I'm sorry, but you're going to have some ebbs and flows along the way, depending upon the mix shift, whether it's more of a component-based mix or that full system solution.

Got it. And then maybe if you can just talk about the backlog here, good indicator of your growth later this year or next year. But if you could talk about how much of that backlog is for 2021 versus '22 or later years? And what are the different buckets of whether the components or BLA or maybe other new products in that backlog today?

Yes, great question, Maheep. So we're not providing any type of guidance on the specific products as far as components versus system solutions. And when you look at the backlog itself, going back to the same investor deck where we talk about the timing and the visibility that we have. So we have excellent visibility over that 12- to 18-month period with a large portion of that backlog, obviously, taking place over the next 6 to 12 months. But we've not provided any exact breakdown between 2021 and 2022.

Got you. And just 1 last 1 for me and I'll just jump back in the queue here. For that EV charger market, you had a lot of details in the slide deck around the market opportunity. But maybe 1 thing if you could highlight is just who's the buyer here or who is the target customer? I know you've been talking about the EPC companies in the past, but has anything changed recently? Or what are you seeing in the -- on the buyer side for EV chargers.

And maybe I'll turn that 1 over to Jeff.

Yes, I'm sorry, your question broke up a bit for me. Can you restate, please?

Jeff. Just want to understand who is the incremental customer here for those EV charger products for you here? And I think you said kind of expect new orders sometime next year, right?

Yes, that's right. We spent a large part of Q2 on customer outreach, and that continues to go extremely well. We do -- we're having multiple on-site visits starting in August and continuing throughout the duration of the year. We do expect those to materialize into first orders in the fourth quarter, as stated. We're continuing to work with our cornerstone customers in the EV space, much like we did when we deployed our BLA solution in solar. And in the presentation posted on the IR side, we updated the assumptions for EV charging around the benefits of the infrastructure plan. We do expect the infrastructure plan to help us with customer outreach and growth.

Our next question comes from the line of Philip Shen with ROTH Capital Partners.

The first one is on margins, just as a follow-up to Maheep's question there in Q4. Can you give us a sense for what the cadence of what that might be Q4 and maybe even Q1 of '22? Do you think we see some improvement there? Or perhaps it kind of stabilizes at the Q3 level and go sideways. So sorry to harp on this a little bit more, but just curious if you might be able to comment on that. I know you're not providing official guidance.

Phil, I can take that. This is Phil. I'm battling a cold, so I apologize. But as we've stated before, we expect our margins to continue to increase, our gross margins, as we go forward, but there's going to be bounces up and down, but the trend will be positive. So we do not think -- by that comment, we do not think that the Q3 balance is a permanent number at all. But rather, we will continue to see the improvement as we -- one, as more people switch to BLA, and as we roll out the new products, which we all have hurdles, which match our current margin profile.

Great. And then as it relates to your domestic versus international mix, I was wondering if you could comment on what you think that mix might be for maybe Q4 of this year or maybe full year '21? And then by the end of '22, what do you think that mix can shift to?

Phil, this is Jason. Good to speak with you again. So I guess the easiest way to really address that is kind of pointing back to the BLA share gains that we talked about. And I think when you look at the time that we went public, we had 11 particular customers that were prospects. And when you look at that number now, that number significantly increased to north of 30%. But what's more important is we now have 11 customers in the international market in that exact same state. So I'm very excited about the outreach and the effort that the sales team is putting forward. But at this time, we're not providing any exact specifics on what the breakout is between North America and International.

Our next question comes from the line of Brian Lee with Goldman Sachs.

Maybe first off, just on the demand environment heading through the second half. And I know you're reiterating guidance here, it sounds like the backlog is -- and awarded orders are up a ton. So things are trending in a very positive direction. But can you maybe give a bit more color around kind of what you're seeing real time in the demand environment where let's say, lead times are for your products? How does that compare to historical or what you consider average lead time? Just in general, wondering if you've seen any push outs or project timing issues related to inflationary pressures that some of your customers may be seeing across parts of the solar supply chain.

Brian, this is Jason here. I'll take those. So looking at the backlog, 1 of the things that really drives that would be your inputs, right? So we constantly monitor inputs based on the market dynamics on a daily basis. And if there were any type of significant shift that would affect operations, we're very comfortable being able to flex that from 1 particular vendor to another. And then going specifically about projects themselves, as we've talked about before, we can see some project movement on a quarter-to-quarter. But as we've discussed in reiterating guidance, we're not really seeing any material changes overall. And more importantly, we didn't have to see any particular projects cancel.

All right. That's great to hear. And then maybe one, just kind of on the model for Phil and not to get too bogged down in the minutia. But if I just take the midpoint of guidance for revenue, EBITDA and the adjusted net income for the year, it seems like second half versus first half revenue and EBITDA are pretty similar, sort of in that 20%, 25% up half-on-half range. But then the adjusted net income is a little bit lower than that, sort of in the low teens. Is there anything with respect to 3Q, 4Q, that would be flowing through differently below the line and impacting your net income growth in the second half relative to EBITDA growth?

Well, the big issue there -- I'm trying to think exactly what you're saying. But our driver there as we mentioned, adjusted net income and adjusted EBITDA, will probably -- adjusted net income and adjusted EBITDA will probably be slightly lower this year. Because as we're ramping up expenses, the overhead expenses for from all these growth initiatives that we've got, there will be that slight step down. But then there'll be a positive as we go forward, we'll be able to lever those as we go into next year. As we said, as Jeff mentioned, seeing the revenue from these initiatives in both EV, International, all of those, the new products. So that was kind of that step down, which was -- has been mentioned throughout the year as we looked in our forecast for the year. But we should see the overall margin continue to improve, as we stated before, as well as adjusted EBITDA and adjusted net income in the longer run.

All right. Fair enough. Maybe it's a tax or interest item, I can take that offline.

Our next question comes from the line of Colin Rusch with Oppenheimer.

With the new bookings that you had during the quarter, can you break out how much of that was from new customers? And how much of that was repeat customers that you've got in the portfolio already?

Yes. Colin, Jason here. Good to speak with you again. So we've not provided any particular specifics on the exact breakout of that outside of just pointing out the fact that the number of customers that we were able to convert in such a short period from being in prospects directly to in transition within that 90-day period in this particular quarter and roughly over the first 6 months since we went public.

Okay. May press into that a little bit offline. But the second question is really about pricing. If you guys think about pricing of the product and rising labor rates and the efficiency that you offer your customers, how are you thinking about offering up pricing here and potentially raising pricing capturing a little bit more margin as you go forward.

Well, I think, Colin, really we're in what I would consider to be the growth sector, more specifically company as a whole, but more specifically with the BLA and combine as you go product line. So we price that product on par with what I would consider to be more of the digital solutions that are out there, and that's the methodology that we utilize.

Our next question comes from the line of Mark Strouse with JPMorgan.

So you've obviously seen some quite impressive acceleration in your business since the IPO. Just curious if you can touch on the competitive environment if the IPO and your results have actually invited new competitors potentially?

Mark, Jason here. Good speaking with you again. Yes, from a competitive landscape perspective, we obviously keep a very healthy paranoia and keep your eyes and ears on the ground and monitoring what's going on. But really from a competitive landscape perspective, I would say, it's very similar to what we saw at the time of going public.

Okay. And then just maybe -- not right out of the gate with the EV charging stations, but just over time, how do you think about your pricing power and your margins in that business, just given that the installation cost is higher than it is for the core solar business?

Yes, from a margin profile -- go ahead, Jeff, please.

Sorry go ahead. Yes. I was going to say, we price very similar to lead to how we do with solar next best alternative pricing. So as our solutions and as the NBA and expense alternative increases over time, we're going to have flexibility from that regard. We're always looking to optimize margin and it feels very adamant about that, and we'll continue to do that. So as our solutions become more broadly deployed in the market, we expect that our NBA comparatives will yield very solid margins comparable to what we see in solar.

Our next question comes from the line of Joseph Osha with Guggenheim Securities.

Just 1 question for me. You refer in the updated slide deck again to this incremental $0.03 per watt for storage attached systems. I'm just wondering if you can comment on how the mix is evolving in terms of storage versus not in your business?

Joseph, Jason speaking. When you look at storage, I'm happy to say that the attach rate of storage projects is increasing drastically, which is very exciting. And you look at that, that $0.03 of incremental spend, that really -- it changes somewhat depending upon whether you're talking about an AC coupled or a DC-coupled solution, which there's both out in a particular marketplace. But when you look at that tax rate, again, pointing back to that very exciting and especially when you consider the fact that as we continue to bring in new customers, we grow our core solar business, it's a natural progression to be able to support our partners in the market. that are moving into that storage or are supporting storage on top of solar.

Can you -- I wasn't going to ask a follow up, but now I am. Can you comment a bit on the difference between your value for AC coupled and DC coupled?

Yes, it really depends upon where are the product itself. It's a very similar product. It just really depends upon where the product is located, whether it'd be located specifically like inter container outer container, but it's a very similar product offering.

Our next question comes from the line of Kashy Harrison with Piper Sandler.

And my first question is on just the market commentary. As you indicated, you're closer to the construction side of the equation, which is why your 2021 guidance is unchanged. But a lot of projects for 2022 have not yet started construction. And so I was just curious, what are your customers indicating to you in terms of the potential for delays into 2023? Has that ended the discussion at all? Or does it seem as if even the 2022 projects will remain on track

Yes, Jason, speaking. I've not had any intimate conversation regarding 2023 outside of just very strong demand for the particular product itself, kind of pointing back to our growth in our backlog and awarded orders and the number of projects that we have. I think it's really just an exercise and optimization based upon all of the items that are out there, just waiting on the dust to settle. When you talk about the Biden infrastructure plan, the potential further extension of the ITC, possibly even increase in rate. as well as the potential removal of the tariffs for panels coming in North America. Those are really the key things that everybody is kind of watching, and seeing again how that falls just to make sure that they have done their proper diligence and optimization for each 1 of these projects.

And then my follow-up is maybe a quick question for Phil on just the modeling question. So Q1 and Q2 looks like working capital represented a use of cash. I was just wondering if you could help us think through working capital entering the second half of the year. Would you expect the full year working capital to be relatively flat? Or would you expect working capital for 2021 to represent a use of cash?

Well, from a dollar standpoint, it will obviously use cash. From a days standpoint, we think we can do better or the same. The issue is 1 of the things we're doing, and I think it's very prudent is that as the market has seen a lot of these supply chain issues in that. And what we're constantly doing it is work on its second suppliers and those type of things, and we've got them. We're very, very comfortable with it. But things like that might be a little bit -- you might give longer days or something or shorter days, I guess, the payables. But receivables' the same thing as you get new customers for that first order. But no, we expect days working capital to be very consistent or improved.

Our next question comes from the line of Moses Sutton with Barclays.

I may have missed it. Can you provide how much International revenue is in 2021 guidance, maybe roughly, how much is in backlog? And which countries are you finding greater traction?

Moses, this is Jason speaking. So we're not providing any specific breakdown when you look at the international versus the domestic market. But again, very excited about where things are, what the teams accomplished. The EU is obviously an important region. That's part of the reason why we actually utilized that area is our first movement and where our team itself is staffed. And then that's outside of Australia and then, of course, LatAm that we have. And when you look at the backlog and awarded orders, obviously, we're building up our pipeline as we're moving into other areas and continuing to have conversations with customers that we've served already in North America and happy about where we are when we look at the pipeline as well as the backlog and award orders that we've achieved.

That's very helpful. And any thoughts on potential M&A internationally, some small companies that can sort of jump start your presence in certain markets?

Yes. I mean, from an M&A perspective, in general, obviously, we'll take a look at anything that we feel like adds real value. When you look at M&A, there's nothing really noteworthy to speak of internationally. May be something that we take a very hard look at on down the road as we elect -- further expand our manufacturing and see if there's an area that's more conducive than one reason or another that may give us some local content requirements, but nothing worth mentioning right now, Moses.

Our next question comes from the line of Jeff Osborne with Cowen & Company.

I wanted to go back to your analogy of the skyscrapers and windows analogy and being a cycle in the construction process. I think 1 of your slides in your Investor deck talks about as you become more strategic with your EPC vendors, giving preliminary engineering drawings and designs and doing a design layout in conjunction with the pricing. So can you talk about what you're seeing at the front of the sales funnel that is well before the preconstruction process?

Yes. So when you look at the sales funnel or the sales pipeline, Jeff, sales pipeline remains very strong, continues to grow and accelerate. And again, very excited about what we've seen. And it just further supports that backlog and award orders that we have and the growth that the sales team has been able to go out and generate in our market.

Got it. My second question was just, I think with this quarter's results, I believe you're probably in the history of publicly traded solar, if not the highest, 1 of the highest reported gross margins. Just given the broad 10% inflation that you're seeing on utility scale solar with the price of steel as well as panels and labor rates that you alluded to, do you have any concerns that your EPC vendors or developers will flag that as, "hey, I'm taking pain in this other area of cost, maybe you should as well?"

So when you look at the gross margin perspective, Jeff, from that standpoint, obviously, we go through and we optimize that particular site. So when you compare that specifically that full system BLA solution, which has the higher margin profile that we've talked about, an alternative of going back to that, like a conventional home-run solution would be more costly than that particular product itself. So from that standpoint, I mean, obviously, every time you talk to someone regardless of what markets you're in, you always talk about price. But we've not seen any additional pressure from that perspective, given the market conditions that you just mentioned.

Ladies and gentlemen, this concludes today's question-and-answer session. This also concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.