Q4 2023 Earnings Summary
- Shoals has a strong and growing backlog and quote volume, indicating significant pent-up demand and potential for revenue acceleration when project delays ease. The backlog and awarded orders reached $631 million, up 47% year-over-year, with $128 million in new orders added during Q4. Quote volumes grew 154% year-over-year, and the funnel is as large as it has ever been.
- Despite industry-wide project delays, Shoals continues to gain market share and add key customers, demonstrating its strong competitive position and value proposition. The company recently entered into a master supply agreement with a new top solar EPC, and its solutions offer cost efficiency, higher quality, and sustainability benefits, which resonate with customers.
- Shoals is expanding into new markets like data centers and EV charging, leveraging its unique plug-and-play systems to reduce labor costs and supply chain issues, potentially opening significant growth opportunities beyond its core solar market. The company is seeing strong interest in its EV products and has a partnership with Leidos that is progressing well.
- Project delays and supply chain constraints are expected to impact Shoals' revenue in the first half of 2024, with customers experiencing procurement challenges related to transformers, switchgear, permitting, labor, and interconnection queues. These delays have extended the time from quote to purchase order, leading to revenue pushouts. There is a risk that these headwinds could persist beyond the first half, potentially affecting full-year results. , , ,
- The company is facing longer backlog conversion times, with awarded orders taking longer than the typical 9 to 13 months to turn into revenue. This extension in cycle times, including for international projects (which represented more than 13% of backlog and awarded orders), may result in delayed revenue recognition and impact financial performance. , ,
- Shoals is dealing with an ongoing warranty issue related to defective wire insulation shrinkback, planning to spend $31.1 million on remediation efforts in 2024. This significant cash outlay could impact cash flow and profitability, and there remains uncertainty regarding the total liability and outcome of litigation with the supplier.
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Revenue Outlook and Delays
Q: Do you expect revenue to pick up in the second half?
A: Yes, we anticipate an acceleration in revenue in the back half of the year, with the first quarter likely being the bottom. Historically, about 40% of our revenues occur in the first half and 60% in the second half. While we've seen project pushouts moving deliveries to later in the year due to industry-wide delays, we remain confident these jobs will close and have no reason to believe they will cancel. -
Margin Outlook and EBITDA Guidance
Q: Are higher EBITDA margins expected in the second half?
A: We expect EBITDA margins well north of 35%, possibly reaching 40% in the second half, about 500 basis points higher than 2023 levels. The improvement will come from operating leverage, gross margin expansion, and SG&A efficiency as we complete certain projects and simplify our structure. -
Backlog Growth and Revenue Acceleration
Q: Will backlog growth lead to revenue acceleration next year?
A: We believe so. Our year-end backlog and awarded orders reached $631 million, up 140% in the fourth quarter as we added $128 million in new orders. Quote volume is up 154% over last year, and while project pushouts slow current revenue recognition, they naturally increase backlog and awarded orders. -
Shrinkback Issue Impact
Q: Is the shrinkback issue under control now?
A: Yes, our remediation efforts are proceeding as planned. We've identified approximately 30 sites requiring action, and plan to spend $31.1 million this year on remediation. The results are consistent with our assumptions, so no additional charges were necessary on the income statement. -
Manufacturing Expansion and Capacity
Q: What is the status of your manufacturing capacity expansion?
A: We increased our production capacity from 20 gigawatts to approximately 35 gigawatts, with the ability to scale up to 42 gigawatts. We're investing in a new purpose-built facility to consolidate operations, improve efficiency, and accommodate future growth. -
Use of Cash Flow and Capital Allocation
Q: How will you utilize your strong cash flow?
A: We'll continue to invest in the business, pay down debt, and be ready for potential acquisitions. We've improved our leverage ratios by retiring expensive debt, including a term loan with an interest rate north of 11%. Currently, we have no plans for dividends or share repurchases but are keeping options open. -
Market Share and Competition
Q: Is competitive pricing affecting your market share?
A: No, the issues are market-driven, not market share-driven. Our value proposition remains strong, and we've added another top EPC after the first of the year, demonstrating our continued competitiveness. -
International Expansion Plans
Q: Are you planning international manufacturing operations?
A: Yes, we intend to establish manufacturing or supply chain operations overseas to reduce lead times and remain competitive. We're currently vetting where and when this will happen. -
Product Mix Outlook
Q: Will system solutions regain a higher mix in sales?
A: We aim to keep system solutions in the high 80% range but haven't guided specifically on the mix. The EPC mix influences component and system sales, and we continue to encourage customers to adopt our full solutions for maximum value. -
Opportunities in Data Centers
Q: Are data centers a growth opportunity for you?
A: Yes, the growth in data centers increases power consumption, benefiting our core business. Our plug-and-play systems can reduce labor costs and address supply chain issues, making our value proposition attractive in the data center market.