Shoals Technologies Group, Inc. (SHLS) Earnings Call Transcript & Summary

All right. Welcome, everyone. Welcome to the Shoals Technologies Group Fireside Chat. Very happy to have with us today, Dominic Bardos, who is the CFO. I'll be hosting today's conversation. This is Jon Windham. I head up Alternative Energy and Environmental Services Equity Research here at UBS. So Dominic, thank you for being here today. I hope you're having a good time at the conference. We really got involved in this conference last year. And one of the big themes I've been working on is the connection between the growth in AI data centers, specifically in technology companies and renewable energies. So it's great for you to be here. I think it's a very good combination. Maybe to get things started, I always think it's helpful if you could just do an introduction to Shoals to sort of level set and make sure everyone is familiar with the story.

I'd love to, Jon. Thank you very much for having me today. We appreciate your time and appreciate the chance to get to talk to folks. So we've got a couple of slides. I'll go ahead and flip a couple and give you a little bit of an overview of Shoals Technologies Group. We are an American company. We are headquartered in Tennessee and we are small cap. And the numbers that you'll see we have on the slide in front of you are from 2023, where we're approaching $500 million. This year, with some of the slowdowns in the marketplace that we saw, it's close to $400 million this year, but $500 million small cap company headquartered right in Portland, Tennessee. All of our manufacturing is done in the United States. So from an IRA standpoint or from a Made in America standpoint, it's really been helpful to be based in the United States. We were founded by one of the pioneers of the industry, actually started as automotive wire harnesses as an OEM provider. And then Dean Solon, the Founder, actually became -- approached to help with some solar harnessing, and that's what led us to do what we do today. We actually have been around for a number of years in solar and have done multiple solutions, about 70 gigawatts worth of solar energy production has had Shoals products involved in their electrical balance of systems. And so we have deep-seated customer relationships. We've worked with many of the leaders in the space, including signing up new EPCs all the time. This year, we announced another top 5 EPC that we signed. So we're very excited with the partnerships that we have with the engineering, procurement and construction firms that build out solar fields. And everything that we do keeps our customers in mind and we're very focused on our customers. So what is it we do? And how does this apply to technology and energy? Well, fundamentally, we are predominantly today in the solar energy space. And from a solar energy standpoint, what we do is we connect the solar modules to the inverters in a solar field. So there's 3 primary pieces of the solar field. Clearly, the panel, the modules that are manufactured either domestically or imported. And then the inverters themselves that convert the DC energy into AC current so it can be added to the grid. We typically drive a lot of our revenue from industrial utility scale size projects. And in the past, these have ranged anywhere from 75 megawatts up to nearly 1 gigawatt of size. And so our solution moves the energy from the panels themselves to the inverters. We manufacture the solutions in our factories. So the field work has been replaced. You don't have to have electricians in the field. We manufacture plug-and-play with connectors for this electrical balance of systems and have pioneered multiple solutions for that. And so that's really what we do. We're manufacturing these electrical balance of system solutions for solar fields. We're well positioned both domestically and for global. Solar energy and renewable energy has certainly been on the rise and we believe it will continue to grow, especially in light of technology and artificial intelligence and the demands being placed on the energy grid from data centers. And data centers themselves provide a fantastic opportunity for Shoals. In that, it's going to create energy demand off the grid, but perhaps also behind the meter, some community, commercial and industrial sites of applications to help augment sites. So we're well positioned there. We have export business today. Predominantly, our revenue in '24 is coming from local and domestic revenue sources, but we also have some international projects in our pipeline coming up. In our mission-critical products, I think you can see some of the things. We are -- we do have a lot of intellectual property around the methods and the process by which we build these solutions. You see on the screen some illustrations of some of the harnessing or the Big Lead Assembly solutions that connect the modules to the inverters. And we recently, in fact, defended some of our intellectual property against a Chinese company, Voltage, that was importing product that unfortunately copied our intellectual property. And so we're currently in that case pending. So Shoals Technologies Group, largely solar today, has an opportunity to branch out as the globe continues to electrify. We're excited to be a part of it and excited to be a part of this conference here today. So I think the last slide is just we do have a highly high-touch solution. It's highly engineered. We do customize the work, the electrical balances of systems that we do for the utility scale sites. We customize those to the site itself. It's a very specific solution. And so we have a very integrated sales process and it's very collaborative with the EPCs. And so from that perspective, that's one of the competitive moats that we have is those deep relationships with customers and the fact that it is an integrated solution. We often lead the industry forward. We're excited to announce this year, we announced that RE+, our 2 kV project. I would like to move solar fields in a direction that allows higher voltages on the field, which leads to less power loss, which will be better for energy production across the board. So Shoals Technologies Group is very excited to be here today. We thank you for your time and the invitation and look forward to continuing our conversations about the future. On the slide now, you can see what we've guided to at a recent Investor Day, 12% to 18% growth. And we kind of look at that based predominantly on the utility scale solar market in the United States with augmented growth coming from other markets such as our international, the battery energy storage solutions, our OEM business and things like that. And so with that, I think I'd just like to thank everyone for their time and attention and answer some questions.

Yes. Perfect. I think plenty to dig in there too. And then one of the interesting things about your product is the customized nature of it for a lot of the products, which puts you pretty early in the revenue cycle and planning. So in this sort of on the bigger picture, there's this look for accelerating demand. What are you seeing in early orders? So maybe help people understand where you come in, in terms of how you book revenue against projects actually coming online? And then sort of what the next 2 or 3 years look like?

Sure. So we were actually brought into a project very early on and we have visibility in our pipeline. Now we don't often disclose and talk about how big the pipeline is. I think we recently said it's approached $2 billion worth of projects. Now some of that is when we're first bidding and first become aware of a project, it can have multiple years of lead time. We could be looking at projects coming to us for 2026, 2027 and 2028 at this point in time as an initial look of when they want to go live and when the work would be done. So we're brought into a project very early and we might bid it out multiple times to multiple EPCs because the developer is still doing their process to figure out who is going to build it for them. And so from that standpoint, we might bid it multiple times, casting a wide net, putting a lot of lines in the water so that if one of our customers wins, then we can in turn win that job. So we'll be involved very early on. But when it really becomes critical is when the job is awarded to us. When an EPC is selected and they've got their notice to proceed from a developer and they start working the project, the first things to go in is any kind of land preparation and pilings and the structural balance of systems. And that's where companies like Nextracker and Array and GameChange and those that do the structural balance, those would go into a construction site first. We are somewhere in the middle to tail end of a construction site because the panels would go on to the racking systems. And our product literally hangs on the structural balance of systems. So by nature, we're not going to be the first part of a construction project and we're not at the end when they're doing all the certification and connection with the inverter before they go commercially. So we've released some information that typically now, we recognize revenue in the middle of the construction process and that's averaging about 13 months before a site actually has its commercial operation date. So revenues that we recognized in 2022 and '23 were often for projects that just went live this year. One great example we mentioned in our Investor Day was Project Gemini in Nevada. It's almost a gigawatt of DC energy, a huge site, but we built it in 2022 and it just now went live. So we're in the middle of the construction cycle. That's when we recognize revenue. We're not dependent upon it going COD. We recognize our revenue when we complete our contract and the purchase order for the electrical balance of systems in the middle.

All right. And maybe can you talk a little bit about sort of wallet share? I think we've discussed this in the past. It's sort of EBOS to a lot of people that aren't familiar with the industry, electric balance of systems is kind of a group of words that don't mean a lot, right? Can you just sort of talk about how much of the different component parts you're actively competing in? And how big an opportunity that is to grow the wallet share within EBOS?

Yes. So we look at wallet share in terms of the number of projects an EPC might do. So are we doing 100% of their projects? Are we doing half of them? Are we doing 1 out of 10? We'd like to make sure that we increase the share of wallet for the entire projects that are being done. That's one piece that we look at. But also within a site, the electrical balance of systems for us, our product line stops at the inverter. We don't do inverters, but we carry the energy to the inverter. And it goes the other way to the panel. So if you start at the panel, you work your way through, there's multiple ways to build out an electrical balance of system. There's multiple ways to carry product from one end to the other. So if an EPC really wants to build the old-fashioned way, you might run individual home run lines, we call them, home run wires between each panel to a combining box with fuses in it. It combines it all there and then transports that energy further on down the line to an inverter. Well, if we're competing in that space, we might do combining boxes. They might not understand the true value of our other solutions, the Big Lead Assembly, which extends an aluminum trunk bus solution into the field and eliminates the need for combiner boxes. So we might have a share of wallet opportunity within a site. So we sell full solutions. We've talked about a full engineered solution where we provided all that electrical balance of systems components or some individual components and we break that out. In addition, part of our business is an OEM play for First Solar. We've talked about junction boxes. They're actually physically attached to the First Solar panels themselves and we sell to them as one of their providers as well. That's in our components line of business as well. So we have the opportunity for share of wallet to convince and convert folks from older ways of doing electrical balance of system into the new ways using the Big Lead Assembly solution as an example. And we also have the opportunity to earn more of their business. And that's one of the things as we started, for example, we signed our new MSA with an EPC in the first quarter that we've talked about. We look to increase our share of wallet with that EPC over the coming years.

Great. Let's get into some of the more fun stuff, sort of -- I started covering this space back in the U.S. about 10 years ago. And if you'd told me then that in 2024, there would be the Inflation Reduction Act and then also there would be load growth in the United States, I mean, it's been a whole generation, and that load growth was primarily driven by this group of companies, tech companies that are committed to low carbon, I would have thought everything I've covered is going to be so highly valued up and to the right. But the industry has actually run into some issues, right? One of the big ones has been project delays, driving down the predictability of earnings, the inability maybe to speed up interconnection queues and get things connected. And so I'm just interested from your seeing, your conversation with customers, where do you see the ability to sort of better manage project timing by your end customers and the ability for regulators as well as the industry to maybe speed up solar installation in the U.S.?

Well, yes, this year was an unprecedented year, no doubt about it in terms of the project change and the velocity of change. I think if you asked us a year ago, what we thought our revenue was going to be for the year, it was clearly a different answer than what it turned out to be. But in terms of the project delays, I think some of the reasons that really impacted 2024 had to do with folks really understanding the true economics of starting construction loans in a high interest rate environment to build out solar sites that were taking longer to build out than ever. The lead times for inverters and switchgears still remain high. They're improving, but they still remain high. And interconnection timelines and certifications were taking longer. So I think what we saw in 2024 was a complete repositioning and rebalancing of developers' portfolios and EPCs were also impacted by it. It's not that the EPC decided to delay something. It was developers themselves trying to renegotiate power purchase agreements or renegotiate certain elements there. So in terms of where the industry was from a slowdown standpoint, this was the first year. I think 2024 was the first year that I'm aware of in Shoals' history where we're actually going to have revenue finish the year lower than the backlog and awarded orders were at the start of the year. Usually, we're adding additional book and turn business during the year as the back half of the year. We still have visibility of the projects that will be coming online in the back half. This year was not the case because awarded orders just delayed. They were taking longer, they pushed out to the right. We use data from Wood Mackenzie that utilizes Form 860 data, the Department of Energy Information, and it showed the number of gigawatts, over 30 gigawatts that had moved from 2024 into -- from a COD standpoint into later years. Now some of that was never really going to happen in '24, but that's why Wood Mackenzie uses their projections. They try to look at what capacity will come online. So from an industry standpoint, the entire market made it very difficult. And so what we've done internally is really take a deeper tie with our customers. Many of our customers now share their entire project timelines with us. They -- we actually sit with them on a weekly basis to really review project status so that we know if the timing is still right, if it's still going to land in the quarter that we expect it to land. We've also made sure that as we look at our own pipeline that we are taking a healthy bit of scrutiny about it. So what is the believability of the customers going forward? Is this development still on going forward? Has it started construction? Those are great indicators for us because we're not the only ones to talk about those delays. I'm sure the folks that are listening have heard it from Nextracker and Array as well in the space that has impacted the entire industry. Now I think what has happened is, we see favorability coming. We see interest rates are moderating and perhaps coming down a little bit from the peaks, which is great for financing and tax equity financing. We've seen -- now we know the election results. We did see a flurry of activity of awarded orders coming to us even up until the election. So we know projects are going to move forward. Under Trump's first administration, solar grew extremely well and we anticipate it will continue to grow. And so as we look at the market, we are going to continue to look at all of the things that are now positive. I think developers have really started to learn how to deal with the timelines. If inverters are still taking a long time and switchgears taking a long time, they've now learned when to engage the EPCs so that they're not sitting on construction loans too long and fronting cash, they don't have to. So I think the industry is learning how to deal with it. I don't know that all the headwinds are going to be resolved immediately. Interconnection for any new power facility is a challenge with our country. And I know that FERC and the Department of Energy are very interested in how they can streamline that process. But some of those things are just folks are learning how to deal with it now.

Yes. Some of it is also investors learning about it, which is relatively new, meaning any large construction projects, project delays are going to happen to some projects. And any time you're dealing with a regulated utility or an interconnection system like within an ISO, there's going to be some delays. I'm interested in talking a little bit more about how Shoals specifically deals with it, because there's 2 ways to think about it. One, a lot of hardware providers in the industry are 15%, 20% gross margin business, right? You sell a customized product that's 40%, 45% gross margin. So there's good and bad, but it's customized, right? So your ability to maybe modules can kind of get swapped in and out or maybe you're, tell me if I'm wrong, particularly more exposed to individual projects and having your revenue booked to that. So just how you think about insulating the company, planning around it, messaging to investors about the nature of your sort of product?

No, you're absolutely right. In that, 90% of our revenue, I believe it's around 90%, was from those utility scale projects I was talking about this year. The rest is the OEM business, things like that. But fundamentally, we do look at it on a project-by-project basis and it is a highly collaborative sales effort. Our engineering team, it's a sunk cost for us. We don't -- we'll spend a lot of time with our customers and the EPCs developing and designing the solar field sites. And then if they have a change, like you say, if they swap out a panel type, that may fundamentally change the needs of the electrical balance of systems. It will certainly change our bill of materials in terms of where the connectors are coming from and things like that. In some cases, they may want a wholesale change of a style of electrical balance of system and that would require re-engineering work. So it is highly collaborative. And that is a sunk cost for us in terms of our integration engineering team. The good news is that we're not really impacted from a commodities risk standpoint if a project shifts and delays, but we are subject to waiting now until they're ready to receive our product that the revenue is going to delay out. And that's what happened this year as projects shifted from 2024 out to the right. And we talked about that in several earnings calls about the number of projects that delayed. They're not canceled projects, they're still moving forward. No one has built the EBOS yet because we have the job. It's just not moved to that point yet. So Shoals, we work very closely on the -- looking at the timelines and knowing that our integration team is often the first to know if a project is going to be ready to go. They know the feedback from the customer. They know how ready they are from a design standpoint, if they're achieving that 70%, 80%, 90% or hey, we're done. We have an agreed-upon design. But everything is custom. It is a bespoke solution and that allows us to have some of the competitive moat that we talked about a little bit about our product. It's really designed and our deep customer relationships really help carry the day and carry it forward. So when the EPC is going to go forward with the project, when the developer is going forward, we will go forward. It just might shift us out to the right.

Got it. And then before we get into sort of more fun topics like the election and politics and the Trump administration, I remember when Shoals came public and talking about -- we get a lot of questions about how their market share is going to be sort of took off. And I start to tell people, they just came up with a better mousetrap. Pre-fabricated wires is a much better way in general to do a utility scale solar system. It's also maybe a better way to do some other systems. Can you talk about those tangential markets you might be able to move into over time?

Yes. So we've tried a number of things because we do have the better mousetrap from electrical balance of systems. And there's going to be caps of how much -- some customers will never want to give you 100%. They don't want to be sole sourced. There's going to be some caps and natural limits on what we can do. But we have a very strong position. We're definitely the leading position for electrical balance of systems in this country. But the technology is really interesting because it can lend itself to other markets. Now we did try at the time of the IPO, electrical vehicle charging fleets were really migrating to electrical vehicles. And we thought, well, hey, we have an above-ground solution with this fantastic technology of our big lead assembly. It doesn't have to just collect energy, it can disperse it to a fleet of chargers. And we had some customers, early adopters and it showed great traction and then folks started pulling back on electrical vehicle fleets. They said, well, wait a minute, maybe these aren't quite as beneficial as we thought or maybe the trucks weren't available at the same speed. And so that market wasn't there. But data centers themselves is another fantastic market. Right now, energy in data centers is often distributed through copper busbars that is very expensive, very rigid. And our solution is an opportunity there that we're exploring. Now in our guidance that we've talked about, we didn't include revenue from data centers, but we believe that our product offering can really have a fit in these other markets such as distributing power to the server racks instead of just collecting power and moving the energy back. So it's very exciting. We have over 45 patents issued. We're a very innovative company. We're trying to take the solar generation to the next level by going to 2 kV. So we're always pushing the envelope and we want to consider where we can add value for the customers, because that's or to your point, that's where the margins are. When we can add engineered value and truly drive value for the customers, they're willing to pay for that because we end up saving them more than what they're paying for us in the premium.

And maybe as we get a little bit closer to the end, let's get into the politics of it all, which for 10 years covering this space, the question is always, what happens if the ITC expires? Are the ITCs going to expire? And it's just been that constant question, right? And certainly, with the Trump administration coming in, it's almost like people have forgotten he was President once already and the ITC was actually extended under his last -- his 2016 to 2020 term. But maybe we can just sort of maybe level set because -- and then talk a little bit through how Shoals is and isn't exposed to some of these tax credits, meaning you're not a direct beneficiary of the investment tax credit. You also don't get 45X. [indiscernible] 40%, 45% gross margins without the domestic manufacturing…

That's good news and bad news, because EBOS as a category, when the time the IRA was written and the ITCs were generated for solar, EBOS as a category wasn't considered as a manufactured product set like the way modules and inverters are. So there's no safe harbor table that covers EBOS. So as a result, it's also not in the 45X tax credits. So we don't get a direct benefit at all from the IRA. We don't have any 45X tax credits. Now it does benefit customers and we want our customers to have domestic content. We've worked with many customers that have asked about the domestic content percentages for us and what our products are. We can maximize that content by buying domestic wire. We have multiple sources. We can import wire, we can purchase wire domestically. So we can help customers achieve those credits, but it's not a direct benefit. It's indirect. In terms of the politics of it, like I said, the solar industry did very well under Trump's first term and many red states have benefit -- direct benefit from the IRA and from the solar industry in total. Many things like panel manufacturers are based in Republican states. We're based in Tennessee. It's a traditionally Republican state. Georgia is there, Alabama. There's a lot of states that get this benefit. And there's hundreds of thousands of jobs in the solar industry, and this country is hungry for energy. Artificial intelligence, data center growth, the demand of even Bitcoin mining, everything is causing demand to go up. And this is -- like you said, it's the first time in a decade or longer that you're starting to see that energy go back up again because I think all of us probably have LED light bulbs in our house by now. So you're going to see more energy need. But in terms of the politics of it, there might be some things that get some more scrutiny than others. If 45X credits are deemed to be too generous, maybe they want to pair some of those things back. That's one thing. But we don't think there's going to be any wholesale elimination by the Republican administration for the next couple of years. What is interesting, I think what does cause some folks a little bit of concern might be more of the trade. Are there going to be significantly increased tariffs for things? That can have an impact if someone was depending upon imported panels that might have an 8% rate on it now, if it's going to go to 25% or 50%, that fundamentally changes the economics of their solar field and their development. They may have to renegotiate a power purchase agreement. They might delay the project. They might try to find alternative sources for modules, but that's not likely to happen in the near-term either. So we are looking at it very closely. We want to -- we have -- our folks that are involved with government relations are keeping us apprised. We've had good support from senators and support things like our International Trade Commission ruling against Voltage, our initial win. That we've had senators on support of it -- in support of that as well. So we're going to -- we think energy and energy demand crosses all party lines. We believe renewable energy crosses all party lines. And so we just want to maximize our ability to leverage the great position that we're in already.

Yes. And I think I'd love to hear your opinion on it, but I always get that sense that investors tend to oversimplify the Democrats like renewables, Republicans don't. That's not really the case, right? But for the Republican party, it's jobs. So maybe you can talk about the factory expansion that you've done, right, the north of Nashville and whether you think that's getting sort of noticed and recognized and getting a dialogue with the right policy?

It is because it's all about economics, right? It's all about what the country needs. And right now, the country needs energy and solar remains one of the lowest cost of levelized energy that you can produce. I mean, new generation from solar is cheaper than new generation from a new gas plant or a new nuclear plant, which, yes, there's a place on the grid for nukes, but that's going to take years before that stuff can materialize. So yes, it's about the economics. And the solar industry grew under Trump's first administration. It grows. It does very well in Republican states. We received some benefits from our Republican state for creating the jobs in north of Nashville, Tennessee because we're expanding into a 638,000 square foot facility. We're going to consolidate some operations. But it's about jobs. It's about economy. It's about driving things forward. And we are made in America. We don't manufacture anywhere else. So from our perspective, we're not as worried about partisan, oh my gosh, it's not woke to want energy. It's -- we need energy. So from our perspective, it's going to survive. There's some great tailwinds behind us. Yes, there's short-term headwinds. And yes, depending on who you're listening to, the energy demand alone, if it could be filled by solar, it would certainly grow faster than the rates that we've projected with Wood Mackenzie. But we believe it's going to be a team effort. All types of energy creation are going to be needed to satisfy the demand.

Yes. It's one of the most common things we hear from people is the -- this is -- maybe in 2016 coming in as an administration, you could maybe favor one form of electricity capacity generation over another if it met other goals. But now coming into office in 2024, it's all of the above. Yes, more renewables; yes, more natural gas. Let's start working on nukes because you have a really big problem in 2035 in this country if we're going to continue to decarbonize because even with solar adds going up, you now have to replace nukes, got to replace solar.

We agree entirely. We believe that there gets a lot of noise. It's not a partisan thing. This country needs the energy. And I think you see headlines and people overreact sometimes to headlines, but you do see the need for energy when they're talking about restarting a reactor at 3-mile Island. I mean, I'm old enough to remember 3-mile Island and say, well, if we need energy that badly, that's certainly a viable option. Who's got $1 billion to spend on that to get to about the same amount of output as one solar field in Nevada. Let's really think through this thing. And I think solar will have a very long-term play. We're excited about the electrification of the globe. We think that it's an important part and Shoals can play an important part in that for long-term, and that's the game that we intend to play.

With that, perfect ending point. So Dominic, thank you so much for being here, and thank you for attending the UBS Technology Conference.

Jon, thank you so much. It's been my pleasure, and we appreciate the invitation. Take care.

Awesome. Thank you.