Ladies and gentlemen, apologies for the delay. Welcome to the Shoals Technologies Group's Fourth Quarter 2021 Earnings Conference Call. Today, the call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Ashish Gupta. Thank you. You may now begin.

Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me are CEO, Jason Whitaker; and CFO, Philip Garton. On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. As you listen and consider these comments, should understand that these statements, including the guidance regarding the first quarter '22 and full-year 2022 are not guarantees of performance or results. Actual results could differ materially from our forward-looking statements if any of our assumptions are incorrect or because of other factors. These factors include, among other things, the risk factors described in our filings with the Securities and Exchange Commission as well as economic and market circumstances, industry conditions, company performance and financial results, the COVID-19 pandemic. supply chain disruptions, availability and price of our components and materials, project cancellations, decreased demand for our products and policy and regulatory changes. Although we may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. We caution that any forward-looking statement included in this discussion is made as of the date of this discussion and do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's fourth quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable financial measures. With that, let me turn the call over to Jason.

Now I'll talk about current conditions in the solar market and wrap up with some commentary on how we see our margins evolving this year. Phil will then give an overview of our financial results for the fourth quarter and provide our outlook for 2022. During 2021, we continue to convert customers to BLA and the number of EPC and developers using our system has grown to 18, up more than fourfold from 12 months ago. We believe that eight of the top 10 solar EPCs use our combined as-you-go system on a majority of their projects, and we're currently in the process of transitioning an additional 15 customers to our system. Outside of BLA, we're starting to see significant traction from the new products we introduced last year. Since launching our wire management solutions in the fourth quarter, we received orders for more than 300 megawatts of solar projects and the customer feedback received thus far has been incredibly positive. We plan to ship our first IV curve benchmarking products in the coming weeks and continue to expect first shipments of high-capacity plug-and-play harnesses and BLA 2.0 to begin in the second half of this year. We're also making strides in battery storage, leveraging products and expertise from our ConnectPV acquisition. We took our first orders for dedicated storage products in the third quarter last year, generated revenue in the following quarter and have several high-profile battery projects and advance negotiations that we hope to announce in the coming quarters. We've made significant progress on our international expansion plan. Last month, we received IEC certification for our BLA, which was the last hurdle to selling our products throughout the EU. We have our sales team in place, and our products are now fully qualified. And as a result, we…

Thank you, Jason. For the fourth quarter, revenue grew 24% versus the prior-year period to $48 million, driven by increases of 29% in Systems Solutions and 15% in components. The growth in Systems Solutions revenue reflects strong demand for our combined as-you-go system. The strength in components revenue during the quarter was consistent with the expected change in mix. Sales of Systems Solutions represented 68% of total revenues versus 65% in the prior year period. Gross margin in the fourth quarter was 33.1% compared to 38.3% in the prior year period. The decline in gross margin year-over-year was due to approximately $1 million of higher material and logistics costs, largely related to one supplier who elected not to pass on to our customers. We will see approximately $3 million of additional costs in the first half of 2022, after which we expect our gross margin to normalize at levels in line with what we have achieved historically. Fourth quarter general and administrative expenses were $11 million compared to $5.6 million in the prior year period. The change was primarily a result of higher stock-based compensation, planned increased payroll due to higher headcount to support our growth and product initiatives and new public company costs. Adjusted EBITDA for the fourth quarter was $11.3 million compared to $14.1 million in the prior year period. Adjusted net income was $900,000 in the fourth quarter compared to $9 million in the prior year period. Please see the adjusted EBITDA and adjusted net income reconciliation tables for our fourth quarter press release for a bridge to our GAAP results. As of December 31, 2021, we had backlog and awarded orders of $299 million, an increase of 94% year-over-year and a 10% versus September 30, 2021. The increase in backlog and awarded orders reflects continued robust…

Thanks, Phil. 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. We're off to a strong start in 2022. And as we've talked about, I'm extremely excited about the growth we've seen in our backlog and award orders. I couldn't be more proud of our progress on our growth initiatives, and we look forward to sharing future developments in upcoming calls. And with that, I want to thank everyone for their time today and apologize for the technical difficulties, which resulted in a delayed start. We'll now open the line for questions.

Thank you. We'll now begin the question-and-answer session. . Your first question comes from Brian Lee from Goldman Sachs. Please go ahead.

Hey guys, good afternoon. Thanks for taking the questions. I had a couple here. I guess, just to start off on the gross margin, you're talking about a $3 million additional impact to the $1 million headwind you already had in 4Q. So if I do the math, total $4 million, which means you're going to be at about a 30% gross margin level in Q1. Is that the right ballpark? And if so, is that the trough here in Q1 and it improves in Q2? Or how should we just think about the cadence of margins in the first half as you move toward more of a normalized margin path in the second half?

This is Phil. I can take that one, Brian. I'm not going to give you exactly since we don't provide guidance on gross margins. Gross margins will be the lowest we expect in the first quarter. After we kind of work through this business, it will grow up -- grow in the second quarter arise. And then we expect in the second half of the year to get back to approximately what our historical levels have been.

And so with the historical levels, I mean, you guys have been in the high 30s, you've been 40 plus. Can you kind of maybe narrow it down for us a little bit? Or are you planning to be back to the high 30s? Or are you going to be 40 plus in terms of kind of what you're thinking with respect to normalization on the margin path? And is it raising pricing in the second half? Is it your cost assumptions normalizing? What gets you the visibility that you get back to that normalized level as you quantify it?

Brian, which as I said before. Go ahead, Jason.

Hey, Brian, this is Jason Whitaker here.

Go ahead, Jason.

I'll take, Phil. Pleasure to speak with you again, Brian. When you look at that, as I said in my prepared remarks, we're looking to provide the on average margin profile in that 38% to 40%. And kind of going back to the drop in Q1, that's literally a direct result, as we stated, based upon an increase in price from predominantly one vendor. And that was the decision that we made to absorb that particular price, because it was a light drop almost at time of ship, and we didn't feel like it was the right thing to do to pass it on directly to our customers, because it was not directly related to copper or aluminum. So it's one of the things we consider to be definitely short-term pain for significantly long-term pain from a relationship perspective with our partners.

Okay. Fair enough. Last one for me, and I'll pass it on. Again, on the margins. If my math is right, it's -- your guidance for Q1 EBITDA margin percentage is higher than what you saw in Q4, but obviously, gross margin percentage is down in Q1 versus Q4, if you just kind of run the math on the provided guidance. So is there additional adjustments to the EBITDA in Q1? Or can you kind of help reconcile that? And then $5 million on cash balance at the end of Q4. Maybe Phil, a quick comment on liquidity. Are you tapping the revolver, sort of what's your position here? Thank you.

We tap the revolver as necessary, as you know. I mean, we're growing the business, which can consume cash. And coming out of the fourth quarter is always -- fourth quarter is a relatively low, the holiday time, relatively low production during the holidays, which means your receivables are lower coming into that. But anyway, so yes, the cash figures were a little lower, but that's kind of how they are depending on how you collect and pay the bills at the end of the year. And as we go and look at margins in Q1, Remember, I did mention the weather issues will impact us. And so we will have some weather impact in that in Q1, in addition to this cost item that's rolling through. But we expect -- and we're investing in the business. And I think what I feel looking at as the CFO, the -- as we look year-over-year, the growth is dramatic between 40% to 64% approximately annualized growth, depending on our guidance. And we look at that, we're investing not only for this year but into the future. And that's why we're investing in the SG&A which is driving down our adjusted EBITDA slightly. And -- but it's absolutely the right thing to do as far as the valuation of the business because the opportunities are so great out there that this investment is well worth it.

Got it, appreciate the color. I'll take it offline. Thank you.

Thank you. Your next question comes from Maheep Mandloi from Credit Suisse. Please go ahead.

Hey, good evening everyone. Thanks for taking the questions. First just on the backlog growth, and I just wanted to reconcile that with the 2022 revenue guidance growth. You talked about 94% backlog growth, new quote activity up 100% year-over-year. Keeping that in mind like, can you talk to like are you seeing any pressure or push outs from '22 into '23, if you could see some upside on the supply chain side for customers, which could impact the guidance on the revenues positively.

Yes, hi Maheep, Jason Whitaker here. Good to speak with you again. Regarding potential pushout from 2022 to 2023, when you look at the visibility we have, and we do have phenomenal visibility. But when you look at that 2022 to 2023, it's really difficult to say and predict what that would look like over, let's say, 12 months from now. And when you look at the guidance that we've actually provided, we're very comfortable with the guidance. As Phil had mentioned, we've seen significant growth in our backlog and awarded orders, and we've taken that into consideration when you look at the wide range of guidance that we provided based upon some of the supply chain things that we've seen both directly and indirectly.

Got you, got you. And in terms of the material costs, logistics costs, can you just talk about like how should we think about that going forward if any case there was something similar, should we expect -- are you renegotiating the contracts with the customers to pass it along? Or what would the strategy be impacting?

Yes, great question, Maheep. Just to remind everyone, we've talked about in prior earnings calls. When we go and we bid a project, we actually refresh that project based upon the current commodity. And with that, we've been able to pass on all of the cost that we've seen as commodities have continued to increase over time. With the one exception, which again was not specifically aluminum or copper base, it was more of a value-add increase from one vendor, of which they passed on to us at time of ship. And again, we made that decision to absorb that versus pass that on to our customers. From a logistics perspective, we've definitely seen increase in pricing from a logistics standpoint. And Phil, correct me if I'm wrong, but when you look at the revenue that we actually get from a logistics perspective compared to the revenue we generate from our products, it is single-digit percentage, like low, low, low single-digit percentage, almost not even single digits. So when you see price fluctuations like that, it actually doesn't have a meaningful impact on our product itself. And again, from a shipping perspective, I would say the only other comment that I have to add there is we have seen some shipping possibly elongate a little bit from a timing perspective but nothing significant.

Thanks. And just one last one, housekeeping from me and then jump back in the queue. So looking at the tax receivable liabilities on the balance sheet and they increased by around roughly $50 million in the year. Could you just remind us what is that related to? Thanks.

I'll handle that. Yes, TRA is really a benefit to the company in the long-term. And what it amounts to is there's -- I don't know what the current number, but I know when we did our IPO, there was about 115 companies that had done in TRA before. Anyway, what it allows to -- amounts to is there's a structure where it captures this future amortization tax deduction, so for better taxes for us, lower taxes and 85% of that goes to the previous owners, and 15% of that goes to -- stays with the company, which is the normal spread. So what you see then is you have a long-term payable and then you have deferred tax assets on the asset side that offsets, you noticed the asset is greater than the liability, which shows the positive nature of it for the company. You're just kind of getting a look at future tax payments that in reality go to the prior owner rather than going to the taxing authorities.

Got it. Yes, I'll follow up in detail later on. Thanks.

Thank you. Your next question comes from Philip Shen from ROTH Capital. Please go ahead.

Hi, everyone. Thanks for taking my questions. First one is on the '22 revenue guide. I was wondering if you might be able to break out the geographic mix of the guide. And maybe talk through the risk around revenues as it relates to module supply with your customers. And if you can also talk about what percentage of that '22 revenue might be new products as opposed to conventional or the older products? That would be great. Thanks.

Hey, Phil, Jason here. Pleasure to speak with you again. When you look at the backlog and awarded orders and as far as the new products are concerned, Phil, we're not really breaking down the exact mix from new products or international. But one of the things I do want to point out alongside of the backlog and award order growth, as you can see, and we talked about the number of customers that have continued to convert over to our full system BLA solution. Based upon that, as you would expect a meaningful portion of that backlog and awarded orders falls in line with our BLA full system solution offering. From a modular perspective, Phil, one of the things that I do want to point out, although we have seen -- continue to see some volatility with project delays, I mean, some projects have moved in, some projects have moved out. It hasn't necessarily been around complete redesign like we've seen in prior quarters. And where I'm going with that is that there are more optimization and tweaks versus complete redesign and module changeouts. And I'm not too sure -- maybe that's a direct result of, for example, WRO which has been with us for quite some time, as you well know, you've done a great job covering that. If that's been around where the industry has been able to manage around some of the issues by derisking the ultimate choices or in some cases, maybe panel manufacturers gaining a better understanding of what's required to provide a smooth transition at CBP.

Great, thanks for the color there, Jason. Today, you announced a new manufacturing facility. With what's going on in Europe and the potential tremendous growth that we could see there as a result of the continent moving away from Russian gas, what would it take to expand manufacturing capacity perhaps either to Europe or another international location? Is that on the map at all? Or is that too distant to consider at this point?

Phil, from a manufacturing perspective, as of right now, our current plans are to continue to manufacture our product in North America, which is part of the reason why we did make the decision to go ahead and invest in that additional manufacturing facility, which allows us to over double our manufacturing capacity and further optimize our footprint in our existing manufacturing locations.

Great, thanks Jason. I'll pass it on.

Thank you. Your next question comes from Colin Rusch from Oppenheimer. Please go ahead.

Thanks so much guys. If you move into Latin America and Europe, I'm just curious about how many customers or familiar customers or folks that you already have in the pool of customers that you're speaking with for that growth?

I can't go into exact details as far as international specifics, but when you look at the customers that we're working with, we're really starting out at those utility developers and owners that we've worked with in North America. So the familiarity with Shoals and the product from that perspective is extremely high. And then we navigate our way through companies such as EPCs or the like to be able to support the opportunities that we see in LATAM and even beyond.

Okay, and then I guess you maybe addressed this earlier, but given what's happening with labor rates and labor availability, at what point do you start rethinking your pricing strategy and thinking about potentially rising prices more than just the commodity pass-through?

Yes, that's a great question. And when you look at what we're focusing on right now is we're focusing on providing value and making -- and allowing that value to grow the company significantly, what you've seen in backlog and award orders being up almost 100%, average quoting activity being up well over 100%. So the key thing here is to continue to support that growth initiative. But you are correct. When you have an environment like what we're experiencing today, with labor, the way it currently stands, that does allow us to provide even an additional level of value to our customers, specifically considering the fact that we are providing that solution that full plug-and-play manner.

Great, I'll hop back into queue. Thanks guys.

Thank you. Your next question comes from Joseph Osha from Guggenheim Partners. Please go ahead.

That's an interesting interpretation of Guggenheim. Hello folks.

Joseph.

Very well. Thank you. Just to amplify an earlier question, as you think about this backlog that you're reporting, how have you approached dealing with material pass-throughs? Do you have formal agreements in place that provide for any additional upside on copper or aluminum to be passed through to customers? Have you just gone out and hedged all that? How are you thinking about handling your material pricing puts going forward? And then I have one follow-up.

Yes. No problem at all. So when you look at that, I mean, generally, we don't hedge copper or aluminum. And how we handle that is much like much the same that we've handled it for, I would say, the better part of eight to 10 years based upon lessons learned many years ago. So we'll go through, we'll quote the project to the customer. And ultimately, as that project becomes more mature and get more advanced and get to the point of execution, each time that quote is cycled. We go back and we referenced the current commodity pricing. And that particular quote itself is good for seven days. So when we exercised that last revision before the PO is cut, we go through and we update the copper and aluminum -- and we passed that information over to our customer with a correlating price, either increase or reduction depending upon where the commodities are at that point in time. And then assuming that, that PO is exercised within a seven day period, we've effectively locked our risk from a commodity perspective, because that copper and aluminum is locked over that exact same seven day duration. And if for some reason, the PO is delayed, we'll go through another quote cycle to make sure that we're matching out commodities from the last quote to the time that the PO is executed.

Right. So if I look at your current backlog, clearly you've got projects in there that you're not going to deliver on for a couple of quarters at least. But your customers are comfortable with this kind of series of rolling quotes and whatever that implies in terms of additional potential upside that they might have to pay to you as if copper prices go further?

Yes. When you look at the backlog, when those particular projects are executed effectively, we are able to lock in whether that project is delivered in, for a sake of conversation, two days or two months. We, in turn, make that commitment to our partners, AKA vendors at that same level that our partners' customers made a commitment to us.

Okay. Great. Thank you. And then just more of a housekeeping question here, just as we kind of dial in our EBITDA. Wondering if you can let us know for 2022, roughly how we should think about D&A and stock comp? And that's it for me.

Well, depreciation and amortization will be about what it was this year, the uptick based upon the capital expenditures we made the prior year, but won't be a major change. Even though we invested heavier than historically last year, it was still below -- it's still relatively low for a business. We're not very capital intensive for D&A. As far as the other question, I believe, was stock-based comp?

Yes.

Jason, do you want to handle that? Or do you want me to?

Go ahead Phil.

Okay. I mean we're looking upon that there will be relatively consistent year-over-year. One thing we are seeing is that, of course, we're growing the number of people we have. The number of employees in the organization. So that will tend to drive it up, but we'll also run more of a normalized since we're now a normal a more mature public company of more cash-based incentive comp rather than stock-based.

And I think one of the thing I want to add?

. Sorry, go ahead.

No, go ahead. Go ahead, please.

Yes. No. So I see about $11 million in stock comp and about $10 million depreciation for calendar '21. I can think of those as kind of being moderate increases off of those numbers for 2022.

We don't give details in those. But yes, I would think, in general, yes.

Okay. Thank you very much.

And one other thing I want to clarify since obviously, it's a slowdown in the EBITDA from a question earlier that it brought it at. He had asked about gross margins being at 30%. We are not going to be at anywhere near that particular level from a gross margin perspective.

Thank you. Your next question comes from Mark Strouse from JPMorgan. Please go ahead.

Yes, good evening. Thanks for taking our questions. I think most of them have been asked. I did want to come back and ask a slightly different way of approaching Phil's question. When I look at the backlog, are you able to say kind of the materiality threshold, at least of what the EV charging portion of that is? And as we get throughout the year, and hopefully, that business becomes bigger as we expect, what are your plans as far as starting to break that out and changing your disclosures a bit?

Hey, Mark, Jason here. So when you look at it from an EV perspective, again, as we stated before, we're not breaking that down specifically right now. As we start to get a good cadence that's predictive. So that we can provide that level of information that something that we'll definitely take into consideration. But when you look at where we are, I mean, we're obviously taking orders, shipping orders. The pipeline and quoting volumes are growing at a very rapid pace. The reality is that we're still at the early stages of product introduction. So it's one of the key focuses, along with our other growth initiatives that we're focusing on. Very excited about what we've been able to accomplish and absolutely elated in the feedback that we've received from our customers in the market.

Yes, I'll take the rest offline. Thank you.

Thank you. Your next question comes from Kashy Harrison from Piper Sandler. Please go ahead.

Good evening. And thanks for taking the questions. So first one for me, I was wondering if you could maybe just give us an update on the competitive landscape. Wondering if you're seeing any new entrants entering the EBOS space?

Yes. From a competitive landscape perspective, as far as competitors are out there, it's pretty much the same as what we've seen. We've talked about in the past, I mean, essentially back to the time that we actually initially went public.

Got it. And then just one follow-up on the guidance. Can you give us a sense of how you're thinking about the mix of systems to components during 2022 on the revenue side? Thank you.

I can't give an exact breakdown, but just kind of pointing back to the BLA taking market share, which is one of those slides that we continue to update, it's going to be updated on the investor deck that we have posted on our website. We've seen significant increase just in the last 12 months of over 4x the number of customers that we converted and an additional 15 that are currently in that prospect in conversion state. So very side from that perspective. That's one of the key initiatives that we're focusing on. And what I can tell you is that the hard work and dedication of our organization, including sales team is put forth to generate that type of demand, a meaningful portion of that does come in the form of our full system solutions as you would expect with those customers that we're working with.

Got it. Thank you.

Thank you. Your next question comes from Jeff Osborne from Cowen & Company. Please go ahead.

Yes, good evening. I had two questions on my side. I was wondering, Jason, if you had any comments on the 8-K that you filed with Dean's departure. I was just curious how you're going to keep the culture of the company intact with his departure?

Yes, I mean from a culture perspective, as you can imagine, a lot of the members that we have on our team have been here for a very long time, which I think really -- for the culture that we have within our organization. And when you look at deal exiting, I feel like he felt like the company was in a great place. The company actually had a great team. He's been working for well over 40-plus years. He built this company from the ground up and he essentially just wanted to take a step back and focus on other things in life at this point.

Got it. And then my second question was just on the -- can you remind us of the current capacity that you have? What utilization that is? And then as we think about the new capacity that you're being built. If you could just articulate how much that will cost to build out? And then also, when it will be online, that would be helpful.

Yes. We haven't provided any exact specifics on the current capacity that we have, Jeff. And when you look at when this particular facility will be online, we're definitely moving very fast. When you say online, it's kind of difficult to quantify exactly what that is because the reality is we're already occupying that facility in some magnitude. So obviously, as we continue to go through and optimize our other facilities and expand this out, we're going to continue to build in the capacity that's needed to support the significant demand that we're seeing in the market today.

Got it. I thought you had made comments in the past that you could double your revenue without adding capacity. So that's what I was trying to get at, but maybe I'm mistaken.

Yes. We've not released out any updated information from that regard, Jeff. But I guess just to remind everybody what we did say is that when we closed out calendar year 2020, we had about 1.8x the available capacity that was required to support that year's system solution products.

Thank you.

Thank you. . Your next question comes from Brett Castelli from Morningstar. Please go ahead.

Yes, hi. Thanks for taking my questions. I guess the first one, just on the BLA products. I think you guys have seen good traction with the EPC customer community. Just curious if you can update us on discussions with the developers?

Yes, absolutely. And those conversations with developers and owners and utilities alike are key and instrumental, because when you look at that full system BLA solution, it does provide a significant amount of day one value in the labor and material savings that you can see, but it also provides significant value over the life of that asset in the form of increased reliability and reduction in O&M. So working with those owners and developers has been one of the key goals that we've been focusing on. And part of the reason why we've seen the success that we've seen in the growth that we've experienced as they started to realize that value proposition of that full system solution.

Okay. I'll leave it there. Thanks Jason.

Thank you. There are no questions in the queue at this time. And that does conclude our conference for today. Once again, we do apologize for the technical difficulties. Thank you for participating. Have a pleasant day.