Thank you for standing by. This is the conference operator. Welcome to the Shoals Technologies Group, Inc. Second Quarter 2022 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to Mehgan Peetz, General Counsel. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me are CEO, Jason Whitaker, and Interim CFO, Kevin Hubbard. On this call, management will be making projections or other forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. As you listen and consider these comments, you should understand that these statements including the guidance regarding 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 calculation, 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 second quarter press release for definitional information and reconciliations of historical non-GAAP measures to 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 providing a snapshot of our second quarter performance, followed by an update on our growth initiatives and then wrap up with our take on recent developments in the U.S. solar market. I’ll then turn it over to Kevin, who will provide an overview of our financial results. We delivered record revenue and gross profit in the second quarter, which grew 23% and 9% year-over-year, respectively, despite the significant challenges and uncertainties facing the industry. To put some perspective on that statement, this quarter represents the sixth consecutive quarter where Shoals has delivered record year-over-year quarterly revenue and gross profit. Gross margin in the quarter was 38.9%. Gross margin was lower this quarter than last year because the second quarter of 2021 benefited from an exceptionally high mix of BLA sales relative components whereas this quarter was more in line with our historical mix. We also had higher raw material and logistics costs as a percentage of sales this quarter than the prior year. Adjusted EBITDA increased sequentially but declined slightly year-over-year, reflecting our continued investment in SG&A to support our growth initiatives. We’re beginning to see a return on these investments and expect the year-over-year rate of growth in our SG&A to slow in Q4 of this year. Demand for our products remains very strong, and we ended the second quarter with record backlog and awarded orders of $327.2 million an increase of 63% year-over-year and 8% sequentially. Backlog and awarded orders have grown even further in Q3 and are expected to continue expanding through the remainder of the year. Components revenue increased 97% year-over-year, driven by increases in shipments of battery storage products as well as shipments of solar products to a significant number of new…

Thank you, Jason. For the second quarter, revenue grew 23% versus the prior year period to $73.5 million, driven by increases of 11% in System Solutions and 97% in Components. Similar to the last quarter, the strength in Components’ revenue was driven by the combination of battery storage shipments as well as the on boarding of a significant number of new customers, which can initially lead to more of a component level opportunity as we work towards converting them over to our System Solutions. Growth in System Solutions reflects strong demand for Shoal’s combine-as-you-go system. System Solutions represented 77% of revenue in the quarter versus 86% in the prior year period and 69% in the prior quarter. Gross profit increased 9% to $28.6 million compared to $26.2 million in the prior year period. Gross profit as a percentage of revenue was 38.9% compared to 43.8% in the prior year period. As Jason mentioned, the decrease in gross margin year-over-year was partially a function of Q2 2021, having a particularly high proportion of BLA sales relative to components, while Q2 2022 was more in line with our historical mix. We also had higher raw material and logistic costs as a percentage of sales this quarter than in the prior year. Second quarter general and administrative expenses were $13.3 million compared to $10 million during the same period in the prior year. This 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 second quarter was $19.8 million compared to $20.6 million for the prior year period. As we have discussed previously, we expect adjusted EBITDA to grow at a slower rate this year, reflecting the pull-forward of several investments…

Thanks, Kevin. 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 continued support. The first half of 2022 is off to a strong start, and we’ll not be facing many of the headwinds we confronted in the first and second quarters in the second half of this year. That, together with strong demand for solar and EVs, the success of our new products and sales initiatives and the tremendous strength of our core BLA products gives us optimism for what we can achieve for shareholders in the coming quarters. And with that, thank you, everyone, and I appreciate your time today. We will now open the line for questions.

Our first question comes from Brian Lee of Goldman Sachs.

I guess the first one was just -- you talked about the backlog and awarded orders growing here into 3Q and then expecting it to expand through the rest of the year. Maybe, Jason, can you give us a sense of what type of growth you’re speaking to, if there’s any way to quantify that? And then how you typically think about backlog coverage at this point in the year? We’re sitting in mid-August as you sort of start to think ahead to the growth for 2023, like where is the typical level you’d hope to be at in terms of coverage levels as you think about the potential for revenue growth in the out year? Then I have a follow-up.

So when you look at backlog and the world orders as we’ve talked about in the past, right, our goal is for that always to continue to increase quarter-over-quarter. As we’ve also discussed, if there can be some seasonality there, we’ve not experienced that in the not-so-distant past. But very excited about what we’re able to accomplish in Q2, especially considering the headwinds that we had in front of us prior to the announcement of the -- or the 2-year tariff exemption on solar panels. And what I can tell you is that since that point, our customers have indicated that was definitely a turning point when you look at customer sentiment and the fact that we have started to see our order patterns normalize as a result of that. Not to mention the recent announcement of the IRA is definitely accelerating that as well. But as of exact specifics right now, Brian, we’ve got nothing to share today on that.

Okay. Fair enough. And then I guess, on the margin targets here. I appreciate the additional color. It seems like the full year guidance implies that you’re going to be at like 26% or so adjusted EBITDA margin level for the second half of the year. I think in the past, you’ve talked about sort of 30% plus as being the right sort of target range for the company. So as you think about the pull forward in these investments, how quickly should we see those translate into returns? Is this something where you get back to that 30% level in the first half of ‘23? Or is this going to take longer than that maybe even into the middle part or second half of next year?

Brian, when you take a look at the margin profile, as we talked about, the growth that we saw in the backlog and awarded orders throughout the first part of this year, that’s also continued this trend is very much pointed towards our full System Solutions, specifically BLA. And as we talked about, our BLA did carry a higher-margin profile, as a matter of fact. As we mentioned in our prepared remarks, if you look at 2Q a year ago, where we generated north of 80% of our revenue from System Solutions that resulted in gross margins of almost 44%. So as we continue converting customers over to our full system BLA solution, we expect our mix to continue and ultimately to improve and drive gross margins north, which is a flow through all the way to the bottom. And as we look at the SG&A investments, as we also mentioned, we do expect to start gaining leverage on that as we move throughout the latter part of this year moving into the beginning of May. So very excited about what we’ve been able to accomplish specifically on the core system BLA solution side of things.

Our next question comes from Philip Shen of ROTH Capital.

First one is on the Inflation Reduction Act. I know you just talked about how things are accelerating. If there’s any way you can quantify how the IRA is impacting business to the upside, that would be interesting, especially on the quoting front. And then also, can you talk to what the IRA benefits might be for you guys? Unlike some other manufacturers, it seems like you don’t have necessarily a manufacturing production tax credits and maybe the key benefit is the 30% ITC benefiting your customers along with the bonus ITC adders. But I was wondering perhaps if we missed something and if there’s something else that you see that maybe in the EV business or elsewhere that ultimately benefits you guys? And if you can quantify that, it would be great.

No problem at all, Phil. So as you can imagine, I think a lot of people would share the sentiment. We’re very excited about the prospects that Inflation Reduction act creates for the industry as a whole. And I would say it’s actually arguably probably one of the most impactful pieces of legislation that the solar industry has ever received thus far. And we’ve already started having customers reach out to us talking about domestic manufacturing and the like. I think a couple of things I want to point out, Phil, is when you look at the impact from prevailing wage, that will essentially continue to increase the value of our manufacturing process and the savings that we’re able to provide versus labor in the field. Not to mention stand-alone IP food for storage is definitely a tailwind when you look at our storage offering. And on the EV side, the tax credit was reinstated. I think they actually removed the 200,000-unit cap coupled with about $3 billion being provisioned towards electrifying the USPS fleet. And obviously, that’s going to require a lot of infrastructure. When you look at -- as you mentioned, right, when you look at some of the provisions that are out there, I mean, there’s a lot of provisions for pound manufacturers, steel components, inverters and the like. But what I do want to point out is the detailed appropriations are really yet to be defined. And I think there still is an opportunity for us here. But regardless, as I said before, it is a huge positive for the industry as a whole, especially with us being a domestic manufacturer.

My second question is on the U.S. LPA detention situation. The detentions have been going on since the end of June for some companies, some key companies. If that situation sustains, do you see any downside risk for your back half revenue? Or do you think you’re fully insulated from that situation? And if anything, if that U.S. LPA situation resolves earlier than expected, there could actually be some upside to your back half numbers?

I think, Phil, as we’ve talked about before, our bottoms-up analysis gives us comfort in being able to reiterate guidance today. Look, I don’t want to discount U.S. LPA at all, but the effect of it, we’re not really seeing directly. And what I mean by that, Phil, is we still continue to support what I would call multiple EBOS designs throughout the optimization projects. And that’s something that has been increasing, but it hasn’t really come into effect as a result of U.S. LPA. It was really driven more, I think, based upon what it transpired in the past with WRO and some of the AD/CVD things. And I think the work that the industry as a whole has done has so far allowed most of the projects to move ahead without any particular delay. So not seeing any direct changes in the industry as a direct result of U.S. LPA at the moment.

Our next question comes from Maheep Mandloi of Credit Suisse.

Maheep Mandloi here from Credit Suisse. One question just on the mix of where we saw strong growth in the components in Q2. Could you talk about what drove that? And should we expect a similar mix for the second half in ‘22 for you guys?

Yes, Maheep, Jason here. So as we’ve talked about in the past, over time, our expectation is that components will stabilize and it is to be relatively flat from an absolute dollar perspective. A couple of things to consider as we bring in new projects, they’re typically designed as homework systems. And so our relationships with new customers start off with them buying components that will increase their ability to work in that type of infrastructure. And as I pointed out before, throughout the first part of the year, as it has continued, we’ve seen very strong growth in our backlog and awarded orders that’s really driven by the BLA side of things, it does create a higher-margin profile. So that in combination with the fact that in Q2 of ‘21, we had an outsized quarter for full System Solutions compared to components this year, we do expect that with the backlog and awarded orders containing a meaningful amount of BLA itself, that will ultimately continue to grow as components start to remain relatively flat.

And just on the cash position here. You said a little big quarter with $10 million here. Can you talk about the cash -- you said the growth in the second half, how should we think about it? And new working capital issues you foresee in case the U.S. LPA issued a contract down the line?

Yes, this is Kevin. Working capital, I mean, certainly, we built some cash during the quarter, and we used it to pay down debt. As we really start to look at third quarter and fourth quarter, we see our inventory starting to flatten out a little bit as we come out of Q3 and into Q4. And then working capital needs should stabilize a little bit. But keep in mind, as we continue to accelerate growth, we’re going to be a user and use cash during some quarters and borrow cash some quarters. So we’re going to see some variability in that.

And then just a follow-up, can you remind us of the liquidity you have on hand right now?

Well, as of June 30, we had $10 million in cash. And we had, I think, about $75 million on the revolver available.

Our next question comes from Colin Rusch of Oppenheimer.

Can you talk a little bit about the competitive environment and any sort of new entrants or evolution of that backdrop that you’re seeing here just in the last few weeks?

Yes. So when you look at the competitive landscape in general, right, it really remains very similar to what we’ve talked about in the past. Still not seeing any meaningful competition coming in the form of our EV System Solutions. And the competitive landscape still really remains the same on the solar side. So I’ve not seen any changes in that in the past or even as the most recent since the announcement of the IRA.

Excellent. And then when you look at your backlog, are you able to break out how much of it is coming from the EV side? Or is that 100% solar?

So it’s definitely not 100% solar. At this point, we’re not breaking out backlog specifics, whether it be new products or new segments like EV or even international. But what I can say is we’re very, very excited about what we’ve been able to accomplish on the e-mobility side of things. And when you consider we just literally released out that product offering, definitely ahead of plan based upon the sales team going after the electrification of fleets as well as the school bus incentives that are out there. So again, e-mobility continues to increase as well as we talked about not only new products in the form of wire management that’s already been released out as well as the storage side of things.

Our next question comes from Joseph Osha of Guggenheim Partners.

So this is actually Hilary on for Joe. And most of my questions have been answered. So just one thing I kind of wanted to touch on, and that was the international markets, particularly as you continue to gain traction. You had the Honduras project announced this quarter, but I was just hoping you could give us some color on when we might start to see the international markets start to account for a larger share of the business? And any color you could share there would be great.

Absolutely. So as you mentioned, right, and we touched back on our prepared remarks, just recently awarded a BLA opportunity in Honduras, which just further solidifies the value that our product brings when you look at not only the labor side of things, but also quality, reliability, O&M over the life of the asset. From your perspective, our products, as we’ve talked about in the past, are fully qualified, and our sales team’s focus today is really continuing to build up that pipeline and we focus on converting that pipeline over to backlog, which the group is doing as well. And we’re also seeing, I want to mention further traction in the international markets as a direct result of the Biden administration support of export import bank financing. And as you do, look, although we’re not working out exact specifics right now but as we continue to gain further traction on expanding our international side of things and other growth initiatives, we do expect our business to become more diversified geographically speaking over time.

Our next question comes from Kasope Harrison of Piper Sandler.

Maybe just a follow-up on Maheep’s question. As you move beyond 2022 and you think about just this business structurally ‘23 and beyond, how do you think about just the cash? What’s like a good cash conversion cycle for Shoals on a consolidated basis?

Yes. When we think about -- just looking forward and where we’re at on our free cash flow, right, certainly, we consider a couple of things. We look at our -- PP&E purchase is really the other thing that we’re obligated to is our distribution for the noncontrolling interest. So from that perspective, the cash cycle really moves forward, and we expect to gain leverage on that and we really see a debt paydown from it as we go through the third quarter and the fourth quarter.

Okay. And just maybe not necessarily just with the second half of the year, but as you move beyond the second half, what do you think that number looks like? Is it 100, 70? Just any ballpark would be helpful.

Yes. I think when we think about that, just moving forward in 2023, I don’t think we’ve looked that far, but we’d have to get back to you on that question.

Fair enough. And then just a follow-up on the EV product. Congrats on the launch. Just wondering when you expect to see a meaningful pickup in orders to the point that maybe you might consider disclosing the proportion of your backlog that’s associated with that new business? Just when do you expect to gain significant momentum in the EV business.

Yes. I mean, again, very happy and excited about what we’ve been able to accomplish in the short term. Again, we’re well ahead of plan based on our product offering. And I think it just solidifies the opportunity ahead when you look at the amount of infrastructure has to be put in place. And you look at the significant amount of savings that we’re able to offer while increasing reliability at the time of install. As with anything else, when you look into the benchmark, once we gain additional traction and a little more stability, it’s something that we’re definitely considering breaking out. But as of right now, we’re not doing that today.

Fair enough. And just a quick housekeeping question. How should we think about the mix of systems to components for the second half of the year?

We’ve not released out a number. But again, what I can say is that a meaningful portion of the backlog and awarded orders that were booked at the beginning of this year comes in the form of our full System Solutions, specifically BLA. And that trend literally continues to grow as we speak. So we would expect the BLA side of things to become a more outsized contributor as we move throughout Q3 and Q4 and even in the start of beginning of next year.

Our next question comes from Jeff Osborne of Cowen and Co.

Jason, I had 2 quick questions following up on Phil’s question on the U.S. LPA. I was just curious with any of the new orders that you’ve received in recent weeks since the June 6 announcement from President Biden? Are anyone delaying orders or dictating that the orders are contingent upon clearing customs. So I’m just trying to understand sort of the mechanics with the potential uncertainty there? Is that leading to a little bit of a role or no?

Great question, Jeff. From a U.S. LPA perspective or just in general, we’re not seeing any orders that are delayed as a result of that, not standing solar orders that cancel as a result of that. So as I kind of mentioned before, we’re not really seeing any, what I would call, direct impacts that you can attribute specifically to U.S. LPA today.

Got it. And then what are lead times? You mentioned 100 additional staff with the expansion that’s running out of time. Can you remind us like what lead times were when you were constrained in the past and what those are now or what you anticipate they’ll be for BLA and...

I mean, lead times do vary depending upon exactly where that project is at. I mean we’ve not released out any exact lead-time value because it does vary so much project to project. I mean, for example, Jeff, I mean you look at things as simple as one of the subcomponents as an entry to BLA side of things, maybe a connector, right, which is a meaningless portion from a COGS perspective. But when you have a panel manufacturer itself that has mated itself to a specific connector, we have to consume that mating portion of that connector, which can drive lead time. So it really does vary quite a bit. But again, you are pointing back to the additional team members that we’re able to add. Very, very, very happy to have them on board, and that continues to grow as we continue on throughout the year, I’m very excited about the plan that the company as a whole set forth to be able to accomplish bringing those team members on and look forward to what we’re able to accomplish in subsequent quarters.

Good to hear. And just very quickly, is there any transition from your customers with the 2.0 version coming out? Like any trainings or getting up to speed with that, that might be something to watch in the coming months?

Yes. So we are having some initial conversations, but we haven’t released yet a full product launch. But yes, I definitely would stay tuned as to how that progresses in the coming month, yes.

Our next question comes from Brett Castelli of Morningstar.

Maybe just staying on the BLA 2.0. Just I think you mentioned in the prepared remarks that, that would maybe have a higher average selling price on a $1 per megawatt. Was wondering if you could maybe quantify that anymore?

We haven’t given any exact figures out as of yet regarding BLA 2.0. But again, when you stand back and you see that the product that we’re bringing to market is -- it does incorporate additional features into the product itself. So with those features itself are going to come additional increase and ultimately allow us to have a higher potential revenue per instance, which ultimately equates $2 per megawatt. So in doing that, that also provides additional value that we’re going to be able to treat back to our customer in the form of effect when they deploy our product itself, coming with that feature self -- coming with the features that we’re building into the BLA 2.0 will also allow them to catch an additional savings of labor in the field simultaneously.

Okay. And then on the EV charging side, can you remind me, is your product there focused more on the Level 2 or AC market or on more the fast-charge DC market?

Much like all of our different product lines that are out there, whether you’re talking about solar, storage or EV, we’re really agnostic technology. When you look at the sites that we continue to work on and we serve and are in production on, they’re really a combination of both Level 2 and Level 3 or DC fast chargers. So it really depends on the site specifics and we can work with all the configurations.

This concludes the question-and-answer session and today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.