Shoals Technologies Group Inc - Ordinary Shares - Class A Stock

Hi, good afternoon, everyone. My name is Christine Cho. I'm the Clean Tech Analyst here at Barclays. Next up, we have Shoals, a provider of electrical balance of Systems and power distribution solutions for solar energy, battery energy storage systems, and data centers. Here with me to discuss the company is Brandon Moss, Chief Executive Officer. Thank you for joining me.

Thank you, Christine. Good afternoon, everybody.

So you evolved from a solar EBOS company to one that's now doing BESS solutions. And I think, one of your more recent things is working inside the data center with your product called Air Link. Can we start off with how the market looks like for all 3 of these, solar, BESS, inside the data center, and how it's evolved over the last 12 months?

Sure. Yes, maybe just to start out with our strategy, we set the course now a couple years back that we were going to continue to grow our core market, obviously, solar, but also diversify into new end markets. And we're starting to see that materialize with our BESS business and now soon to be Air Link, as you mentioned. So really working through those markets one by one. The solar market today is certainly as good as I've seen it since I've been at Shoals, which is a little over three years, but probably as good as the market's ever been.

As everybody knows, there's an underlying demand for power that is extremely significant. And I think the thesis of a cliff, so to speak, happening after the tax credits rolled off, is maybe subsiding a bit, and we are believers in the market and that the market will be stronger for longer. So WoodMac and BNEF has projected things through the end of the decade and a bit beyond. I think it's probably a high 30s, low 40s market from a domestic perspective, which is a fantastic market for Shoals and our peers to operate in, quite frankly. So we're very bullish on the solar market.

As it relates to Battery Energy Storage, one of our new vectors for growth, it's a really exciting market. I think about the product that we're providing specifically to data centers. We're probably in the first quarter of the maturation of that product segment. And as AI data center architecture continues to change and evolve, we will have more and more opportunity to satisfy those particular markets. As it relates specifically to our Air Link product inside of the data center, it's fantastic for us to be able to provide power to the rack versus just power to the physical structure of the data center. And that market size is very significant.

Christine, you've done a bunch of good work on working into this product, so you understand the market landscape. We think about that market of being about a $2 billion market opportunity for us now, and then growing to about $4 billion later in the decade. And our product is primarily a substitute for traditional busway to deliver power again to rack. So exciting opportunity for us to continue to grow in that space.

Can you talk about, sort of, the competitive landscape and the profitability profile among the 3? I know that gross margins and sort of how they'll continue to evolve over time has been a hot topic.

Sure, yes. Each market is different for us. But maybe before I go there, talk a little bit about what is unique and what makes those market opportunities the same. Shoals really at its core, our core competency is the ability to build at scale a very high mix, so custom solutions at scale. So when you think across whether it be solar, whether it be BESS, whether it be data center, that value proposition really holds true. And how that translates to the customer is quality product, reliability, being able to deliver it fast the way that they want it, and our products will stand the test of time in the infrastructure that it's going into.

Each of the markets, obviously, and the margin profiles are a bit unique. In the solar landscape, we've got an IP portfolio protecting our Big Lead Assembly product or solution, which is very strong and intact, as we've seen here in recent weeks through the judgment, and our IP litigation. So with that IP and the solution that we provide, we are able to drive a price point in the marketplace that is deserving of the value that, that product delivers. There is unbelievable demand for EBOS products now, as we talked about with the robustness of the market, and I would say that pricing and margin behaviors in this market are behaving rationally with that type of demand.

As I think about our Battery Energy Storage product, similar scenario, highly engineered custom solution for our customers. When you think about our margin stack, Battery Energy Storage is at the higher side of our margin stack as we're getting essentially paid for that value in the engineering that we're delivering to the customer. As it relates specifically to our Air Link product, we've not priced that product in the market yet, but there's a tremendous amount of value there, and speed to power safety. And also the scalability of the power that we can deliver to the rack server. So I would expect that product to be sort of at the higher end of our margin stack when it comes to market.

And from a competitive landscape, the Air Link, you just said that, that competes against the more traditional busway systems. Have you gone out there in the market or have you seen if anyone's trying to do something a little more out of the box like you? And then on the BESS side, you historically have talked about some of the smaller players that are some of your competitors on the EBOS side who are too small. And then the big guys who can't be bothered to customize solutions. So is that still the competitive landscape for us?

I believe so. I mean, I think as it relates first to Air Link, I'm not aware of anybody bringing a product to market that has the capability to deliver the power that we can in a custom, configurable, modular solution that can be installed as quickly as our product will able to be installed. So it's quite an exciting product for us and we look forward to that product probably coming to market and starting to manufacture that product after the first of the year.

As it relates to Battery Energy Storage, yes, I would say that same thing applies, Christine, that there are smaller players in the marketplace that can serve smaller jobs that are willing to do the front-end engineering legwork to do the customization that's required for these data centers, but I would say a lot of those companies are unable to build at the scale that we can build at, with the production line that we've set up. So we offer, really, the best of both worlds in the market. We are custom but can build also at a pretty extreme level of scale.

If you think about a 1 gigawatt data center that's paired with a gig of battery, we're going to be delivering 500 to 700 units to that site over time. And so for us to keep up with the delivery schedule required by the customer, we've got to be able to build these products pretty rapidly. And what we've set up in our facility enables us to do that almost in an assembly line sort of production.

I'm going to have a follow-up on that. But on the solar side, before I go to the BESS stuff, you recently saw a win on the case against Voltage. How do you expect this to impact market share? Have you already seen customers come back? Or do you think more than anything it just signals to potential competitors, existing and new, that you take IP very seriously and will fight against anyone who remotely infringes?

Sure. Well, I appreciate you bringing that up. It's been -- since I've started with Shoals, we have been involved in this patent litigation. So it's exciting for the company and great for our shareholders that we've effectively brought this to close. We were not only successful in the ITC and having the product that our competitor was importing banned, but now also more recently in the last couple weeks, in our case in District Court in North Carolina, winning a $96 million judgment in willful infringement from our competitors. So it was a great win for our company and our shareholders.

But as it relates to how it impacts the market and showing the market that we'll protect our IP, I think it's a bit of both, right? I'm a firm believer in don't file a patent application if you're not willing to defend your IP, and Shoals will always defend our intellectual property as long as I'm with the company. So I think it's a signal to the market, obviously, that we've got important IP and we're willing to protect it.

As it relates to the competitive landscape, we've been experiencing that probably over the last year, 1.5 years, maybe as these proceedings have been going on. We certainly have brought in new customers into our mix, expanded wallet share with other customers that perhaps were customers of our competitors. So we have seen some of that happen over time, and I would expect we'll continue to do so.

Hypothetically, just because I don't really know what happens in this case, let's say this competitor exits the market. And the install base it has in the U.S., like, if there's any issues and the customers need replacements or servicing, like what happens there? Is that a potential opportunity for you or not?

It would be an opportunity for us if they had componentry, and we could support the customer, I think, we can certainly look at that. It will obviously be a challenge for that competitor to support any product that was found infringing, obviously. So, yes, certainly an opportunity for us.

And then moving over to Storage, the Storage revenue hit about $20 million in the last quarter. The backlog has continued to grow. You have this partnership with ON.energy. But so far, I think the bookings have been roughly in the $60 million range. ON.energy has partnered with Crusoe to deploy up to 5 gigawatts. How should we think about what this impact is for you potentially?

Yes, reminder, on this product category specifically, it's early days for us, right? We were really beginning to produce this product in the second quarter. I mean, we made a couple units in the first quarter of the year, so scaled production in the second quarter. The way to think about this arrangement with ON.energy is, I think, over the long term, it's a great opportunity for us. They will be a great partner to us, but we're again in early days on this. I would expect bookings to continue to be a little bit bumpy. And then we obviously will produce product according to the customer's delivery schedule.

I think changes will happen over time, and again, the market will expand as this architecture becomes more prevalent in the data center space. So I can see it as a growing market. '27, I think, will be better than '26. And as we attract new customers, which we are doing, we announced TerraFlow, our MOU with them, last quarter. I think you'll see our booking stabilize and our revenues stabilize, obviously, as the business matures. But we're excited to have ON.energy as a partner, we're excited to have TerraFlow as a partner. And obviously, the goal is to bring on more opportunities like that.

Okay. And then, Air Link, this is a potential growth platform beyond traditional utility solar where you've played. Can you just, for those in the audience who are not as familiar with the product, can you just talk about what customer problem you're solving? And I guess you already, kind of, quantified the opportunity as $2 billion to $4 billion.

Maybe just talk a little bit about what the product is. If you think about our BLA product today, it's a trunk bus solution that is collecting power from modules. So we have leads that come off our trunk bus solution, which ultimately connect to the modules. That power is collected and runs down the trunk bus line, which is then eventually delivered to the inverter. Air Link is really a similar product on the cable standpoint. It is very like what we do with BLA, just a different type of cable. But we're using that trunk bus solution and the leads that come off it to deliver rack power.

So again, it's very similar to the BLA, just sort of flip the way the electrons flow on the product. What this product does specifically for the customer, there's really 3 big concerns about rack power. One is speed to power. How fast can you get the product, in many cases, traditional busway. How fast can you install that product, which I think we've got a very unique solution the way that this product installs. Because it's a cable versus a traditional busway that has to be fabricated together on-site. We've got a pretty unique system in which the cable is affixed to the structure that is very unique and quick.

So, speed to power, we have a pretty distinct advantage. The other thing that data center owners are concerned about is scalability. Obviously, as chip sets continue to improve, the power consumption is much, much higher. Our product compared to traditional methods, the power density, our ability to deliver rack power is far, far greater than what is on the market today. So, as architecture transitions to 800 volt, and even higher than that, we're getting some requests if we can handle 1500 volts, which is what a solar field is today. We are well positioned with our particular product.

The last thing is really safety. Traditional busway does have some exposed conductor in it as the voltages become higher and higher on these sites. There's always a safety concern around that. There is also concerns about how that product is installed where the joints create potentially hot spots. Our product obviously does not have that because it is an insulated aluminum trunk bus. So some pretty distinct features that offer immense value to the potential customer.

YOu started off answering this last question by talking about sort of like the similarities with your solar EBOS solution. Do we think that there are supply chain synergies and is this product going to easily be manufactured in your existing facility?

Yes, it's a great question. The production equipment that we would use to manufacture the trunk bus cable is effectively what we use to manufacture BLA today. There is some ancillary equipment that goes along with that product. That will be a little bit different for Shoals, but it's very similar to -- we've got one of our value streams in our plant as the enclosure line where we make load break disconnects and combiner boxes. So it's not completely foreign to what we do in our plants today. It's very similar to our processes.

For -- because it's early stages, sort of like what are the milestones that we should look out for in order for us to get a better sense that Air Link is actually commercially viable?

Sure. Yes, I mean, I think there's really 3 things to be thinking about. One is our internal testing. So we're in the process now and when I say internal, it also involves third-party testing. So we are running the product through the paces. Literally, right now, we're working on short circuit testing. How does our product stand up to those tests? And the baseline information that we get back from those tests will be used in our certifications and filings with UL and anything that we have to do with the National Electrical Code. So that's probably number one.

Number two is our ability to win a couple beta sites. So potentially before the UL certifications, it is possible for us to get that product on a site working under power. That's obviously outside of the 4 walls of Shoals. So that's the second thing. Thirdly is the actual certification. So once we get the UL stamp and we've got clearance from the National Electrical Code Standards Board, we are good to go to commercialize that product in a meaningful way. So those are really the 3 gating items that I would be thinking about to make this product viable.

Do you have rough ballparks for timing?

Probably first quarter, I'm guessing. I mean, it's a new-to-world product, right? So it's not an extension of a UL file. It's a new UL file, a new product category. Those typically take longer than traditional products. So, I think first quarter is probably a good estimate.

For the first?

For us to have a UL file.

First -- okay, UL file. And then just moving over to the financial side, gross margins has been scrutinized for you guys. They've been pressured by the transition to the new manufacturing facility, the associated inefficiencies that have come with the move. I guess, sort of like, can you give us an update on progress that you've made since last earnings call and how we should expect it to progress through year end?

Sure. Yes, maybe even before earnings call, I mean, the margins have been impacted, obviously. There's been some external forces like the tariff landscape. Our product mix is always the largest driver of our gross margin, gross profit percentage. So those things are meaningful. As it relates to the move into our new facility, for perspective, our move really occurred in the second quarter in a meaningful way. In the month of April, we moved about probably 50% of our total floor space in the month of April.

And then second quarter, obviously a fantastic revenue month for us, still record revenues for the company. So we are making progress each and every day on productivity in the plant, how much product can we get through the equipment. We're making some progress on the efficiencies in our facility, and that will begin to have some impact on our margin profile. As we've talked about before, you can think of our gross profit percentages improving sequentially sort of quarter to quarter through the balance of the year and on.

You mentioned tha,t, like, corporate gross margins are highly driven by sort of mix of product. Historically, before you even got -- because BESS only started to make -- started to generate revenue a quarter or two ago.

Q2.

And so, if we sort of look at what you were historically when you were just a solar EBOS company, your gross margins were like low 40s, right? So I guess if we're just to do an apples-to-apples comparison, so like let's take out the EBOS and what Air Link could be. How do you -- how should we comp like what the long-term gross margins of the EBOS business is now, like, once everything is normalized?

It's a good question. I think, comparably, to call it, 2023 when I started and where margins were, limited customer mix, highly skewed to BLA, less OEM business, obviously, that business has grown substantially for us, which carries a lower gross margin profile versus today where we've got a pretty wide customer mix. We are not only selling BLA solutions, we're selling solutions that our customers are asking for that fits their particular site.

Our OEM business is, since I joined the company, is probably 3.5x the size, so it has certainly outpaced the traditional EBOS growth. And we've brought to market some new products. So our gross profit percentage and I'm not trying to dodge your question, is always going to be highly contingent upon the product mix that we have. We are very mindful of what those percentages are, but we are even more mindful of the gross profit dollars that we're dropping to the bottom line. And we're beginning to see that because we've had some outsized growth as compared to the market. So you think about last year, high teens growth. This year, from a revenue standpoint, probably somewhere in the 30% range. The market's certainly not growing like that. We are outgrowing the market. So again, we'll be mindful of gross profit percentages, always trying to increase those. But our goal is to drive gross profit and, obviously, EBITDA dollars.

Okay. One of the things that came out at the end of August was a follow-up to the FCC ban on inverters. He banned certain power equipment that impacts the grid, that contributes to the grid. The language is very vague, so curious as to whether or not you think your equipment falls into those categories, and how you think that could impac,t, sort of, market dynamics, competitive dynamics, who you compete against [indiscernible].

Well, it's difficult to say how the language will finally be before -- after following this executive order. I think that our product, whether it be EBOS or whether it be our BESS product, is domestically produced. It probably helps us on a net basis. We'll just have to see the specifics of the executive order and how long that takes for us to get that information. Could be weeks, could be months.

Okay, and then last question for me. If you had a crystal ball, I started off this fireside chat saying you started off as a solar EBOS company. So, you started off as a solar EBOS company, you've diversified into storage, inside the data center. I guess at a high level, how do you think about the product roadmap beyond that? Like what do you think you look like at the end of the decade?

Yes, I go back to sort of where I was started with our core competency. Again, I don't think of Shoals ever probably as an electrical widget manufacturer, where we have the opportunity to add value and do custom solutions, we will play. And again, leveraging our core competency of being able to manufacture at scale with a very high mix. So we want to leverage that core competency and look into other end markets like we're doing today with data centers related to BESS and then also with the Air Link product.

So the long-term goal is to make us a more durable, sustainable business, and I think you've got to have multiple markets in which you play, whether those be product end markets or geographic markets to do that. So you'll continue to see us diversify over time. I do want to be clear that that doesn't mean we're going to take our eye off the ball in the core solar space. We can continue to grow and grow profitably in that market, and we're very excited to do so. We're just looking to bring more balance to the business.

Okay, well, with that, we're at time. So, Brandon, thank you so much for your time today, and thank you, everyone in the audience, for coming.

Thanks, Christine. Thanks, everybody.

Good morning, and welcome to the Shoals Technologies Group Second Quarter 2026 Earnings Conference Call.

Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Matt Tractenberg, Vice President of Finance and Investor Relations for Shoals Technologies Group. Thank you. You may begin.

Thank you, Warren, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos.

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 and should not be considered guarantees of performance or results.

Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's second quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures.

Please note that the slides you see here are available for download from the Investor Relations section of our website at investors.shoals.com.

With that, let me turn the call over to Brandon.

Thank you, Matt, and thanks to everyone joining us on the call. Second quarter revenue was within our guided range at $163 million, up 47% over the prior year period.

Our commercial team continued their strong performance by adding approximately $207 million of new orders in the period, resulting in a solid book-to-bill of 1.3. This drove another company record backlog and awarded orders or BLAO of $801 million, an increase of 19% year-over-year.

As of quarter end, approximately $700 million of our BLAO has shipment dates in the upcoming 4 quarters through Q2 of 2027.

Second quarter adjusted gross profit percentage was also within our expected range at 30.6%. We expect to continue making progress in margin improvement driven by positive mix and productivity gains and supported by the strong underlying demand environment. SG&A, including all legal expense, was $28 million, representing 17% of revenue, a 400 basis point decline as compared to 21% last year.

Second quarter adjusted EBITDA of $31.6 million came in within our guided range and grew approximately 28% year-over-year. As you've seen, we also prevailed in our 2025 ITC case against Voltage, this was a critical outcome for our shareholders and U.S. innovation in general.

We look forward to resolving the matter of damages in our upcoming district court case. We are very optimistic in how we see the market evolving and our competitive position of strength. We continue to expand production at a measured pace to ensure we deliver products with the speed and quality customers expect from us.

Factory consolidations are never an easy task, but we've made steady progress and continue to identify opportunities for improvement. While I'm encouraged by the consistent weekly and monthly improvement as we deploy new lean manufacturing processes, we still have work to do. The operational improvements we will realize from this strategic initiative will drive value for all stakeholders in future periods.

Briefly turning to our various business lines. The second quarter was another strong period of growth within our core utility-scale solar market. Once again, our quote volume in the quarter exceeded $1 billion of unique projects, adding to our strong pipeline. I'm also encouraged by the progress we're making in key international markets like Australia as evidenced by our increased quote activity and customer engagement.

International BLAO now stands at $102 million, driving continued growth and diversification in 2027 and beyond. Our community, commercial and industrial business or CC&I business, which remains a small piece of our overall mix, continues to perform well.

Our OEM business is providing a stable and visible revenue stream, growing at 51% on a year-over-year basis. And finally, we produced approximately $20 million of BESS revenue in the quarter and secured approximately $10 million of additional orders. BESS BLAO now stands at $65 million.

As previously stated, BESS orders will be episodic and are dependent on how customers manage construction schedules. I'm also excited to announce a partnership with TerraFlow, a leading grid-scale developer of long-duration energy storage infrastructure.

Under the agreement, Shoals will support TerraFlow's growing energy storage portfolio with our Power Hub Recombiner solution for utility scale and data center applications. The MOU is intended to support TerraFlow's future deployment plan of up to 5 gigawatts annually.

Overall, the quarter played out as anticipated, and the year is tracking to our expectations. We are executing well to finish the move into our new facility and are expanding capacity and capabilities at a measured pace.

Underlying demand remains intact, and our competitive position has strengthened. We're very excited about what we see ahead of us. Dom, I'll hand it over to you for a deeper dive into our financial performance and guidance.

Thanks, Brandon, and greetings to everyone on the call. Revenue increased by approximately 47% year-over-year to $163.4 million.

The increase was largely driven by strong demand from both new and existing customers within our core U.S. utility scale solar market and our BESS business segment contributing meaningfully in the period.

Gross profit was $49.5 million compared to $41.2 million in the prior year period, an increase of 20%. Our GAAP gross profit percentage was 30.3% and adjusted gross profit percentage was 30.6% within our expectations. As Brandon stated, we believe we will continue to expand gross profit percentage as we realize the benefit of our new factory and positive product mix, all supported by a robust demand environment.

Ultimately, we are focused on driving incremental profit dollars to the P&L, a strategy which will create value for all stakeholders. Selling, general and administrative expenses, or SG&A, was $28.5 million or $5.4 million higher than the prior year period. This was driven by an additional $4.4 million in payroll and employee expenses due to increased headcount and achievement of variable compensation targets relative to the prior year.

Legal expenses declined slightly versus the prior year as our ITC and class action litigation matters came to a close. Our district court case to determine damages against Voltage is expected to be completed in the third quarter. Income from operations or operating profit was $18.7 million or 11.5% of revenue, growing at 17.0% year-over-year.

This compared to $16.0 million during the prior year period. GAAP net income was $12.1 million compared to $13.9 million during the prior year period. Please recall that we recognized a $3.1 million gain on the sale of a manufacturing facility in the prior year period. Adjusted net income was $19.7 million, an increase of 15% as compared to $17.1 million in the prior year period.

Adjusted EBITDA was $31.6 million compared to $24.7 million in the prior year period, representing 27.9% growth year-over-year. Adjusted diluted earnings per share of $0.12 was $0.02 higher than the prior year period. Operationally, we generated $6.8 million of cash in the second quarter, driven by an increase in both deferred revenue and accrued liabilities.

We ended the quarter with cash and equivalents of $15.7 million and net debt to adjusted EBITDA of 1.6x. Our net debt was $181.1 million, an increase over the prior quarter. Since we last spoke, we also temporarily expanded the capacity of our revolving credit facility by $50 million, providing us the flexibility we need to grow our business. Backlog and awarded orders ended the second quarter at a record $801.4 million, a sequential increase of $43.4 million.

Our record backlog constitutes $425.1 million of the total BLAO, providing us with the confidence that the growth projections we have for the upcoming periods can be achieved. Congratulations to the commercial team on another strong bookings quarter.

As of June 30, $699.7 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters through Q2 of 2027, with the remaining $101.7 million beyond that. Turning to guidance. For the quarter ending September 30, 2026, the company expects revenue to be in the range of $150 million to $170 million, representing 18% year-over-year growth at the midpoint and adjusted EBITDA to be in the range of $32 million to $37 million, representing 8% year-over-year growth at the midpoint.

For the full year 2026, we are reaffirming our prior guidance and continue to expect revenue to be between $600 million and $640 million, representing year-over-year growth of 30% at the midpoint and adjusted EBITDA to be in the range of $118 million to $132 million, representing year-over-year growth of 26% at the midpoint.

In addition, for the full year, we still expect cash flow from operations in the range of $65 million to $85 million, capital expenditures in the range of $20 million to $30 million and interest expense in the range of $8 million to $12 million. With that, I'll turn it back over to Brandon for closing remarks.

Thank you, Dominic. The U.S. market continues to be robust, and we are focused on improving productivity each month. The need for energy from all sources has never been as strong as it is today, and we believe Shoals is increasingly well positioned to deliver sustainable growth as our strategic and operational initiatives translate into measurable progress.

We are strengthening our core markets and reinforcing our competitive position. We have accelerated innovation to deliver more differentiated products and greater customer value. We're expanding into attractive new markets that increase our total addressable opportunity. We are diversifying our market and customer exposure to create a more resilient business. We've invested in automation and technology to drive productivity and support margin expansion over time.

And we are building the leadership depth needed to execute our transformation and deliver on our long-term objectives. We want to thank our shareholders and customers for their continued trust and our employees for their hard work and dedication. Operator, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Philip Shen with ROTH Capital Partners.

First one is on the tariff MOU signed and announced yesterday. I was wondering if you could give us some more color on the 5 gigawatts of annual storage deployments. What's the expected time line for first meaningful volume? And how does this partnership complement or differ from the ON.energy relationship?

Phil, thanks for the question. We are very excited about the TerraFlow MOU. We are in the process right now of starting our engineering cycle with those guys to help develop an engineered solution for deployment.

I would probably model that revenue will begin in 2027. We will not see an impact in 2026. I think you had a question also related to ON.energy. These guys obviously are trying to build a solution that can be deployed in renewable sites and data centers.

They come at the solution with a different approach using vanadium and effectively can create a both short- and long-cycle duration battery solution with very similar goals of reducing frequency energy spikes, all the necessary things that are needed to manage the energy flow in a data center today.

So couldn't be more excited about the partnership with those guys. And it's a meaningful step for us to continue to diversify our customer base, which is very important, obviously.

Great. Shifting over to your recent bookings and additions to backlog. I was wondering if you might be able to comment on, especially given the ITC case and that positive outcome for you and what could be coming with the district court case.

Can you talk about pricing and margins of your newer orders versus what's been delivered? Meaning should we see a little bit of expansion in the margin? Or is it steady? Or is it a little bit -- the margin a little more compressed than the bookings given some of the new business that you're taking on and the product mix shift that you guys have seen recently?

Yes. Thanks, Phil. Probably won't get real specific on this. The demand environment, obviously, is very strong as evidenced by our record backlog and awarded orders and $1 billion of discrete project quotes. So I would say, in general, the pricing behavior is responding to that accordingly.

Just as a reminder, we've got a long sales cycle. So things that are happening today won't transpire for another 12 months, give or take. So we're pleased with the pricing environment. It's incorporated in our guidance. As we've communicated, we expect margins to improve throughout the year. And again, that is factored into our guide.

Your next question comes from the line of Julien Dumoulin-Smith with Jefferies LLC.

I just want to follow up on the guidance here real quickly here. Can you talk a little bit about the factors that would give you sort of momentum to raise here? I mean, obviously, reaffirming, but obviously, looking at a number of the factors here trending year-to-date. How would you think about the puts and takes here, both reaffirming today, but prospectively, what could put you in a better position here?

Yes, certainly. Good to hear from you, Julien. Just maybe a reminder and you probably recall, we raised our full year guidance on the Q1 call. So again, as you mentioned, we have affirmed our guidance for the full year today.

Our goal is to give guidance that's reasonable and achievable. We have got 30% growth factored into the midpoint of our guidance on the top line and 26% from an EBITDA standpoint.

And I think strong guidance for Q3 as well, up about 18% on the top line. Look, we're excited about the market backdrop. Again, as I mentioned on Phil's question, $1 billion in discrete projects. We have got a very strong book of business, and we look forward to executing on that through the back part of the year.

Maybe touching on just our best bookings, great production growth in Q2, where we produced $20 million. We added $10 million in the quarter, could still potentially book some business there for the remainder of the year.

And maybe most importantly, as we've talked about our bookings related to BESS, and it would be sort of chunky in the early stages of our business. We did book a handful of projects after quarter close that we're excited about.

So our focus is execution through the back end of the year, producing as much product as we can at this new mega facility and making it as efficient as possible. And if we do that, that will give us more confidence in how the full year plays out.

Got it. And maybe if I can ask more specifically within the numbers here, should we expect any IEPA refunds in third quarter? And was there anything in 2Q like some of the peers have been seeing just in terms of the tariff aspect here? And then separately, how should we think about margin inflection? I know my [ Powell ] previously here was kind of asking a similar line of question here, but how much of the margin is impacted by, say, product mix versus new facilities and other factors here? You got a number of different pieces moving into this.

Yes. Julien, it's Dominic. Yes. So with regards to IEPA, we did receive some refunds in the second quarter. Not 100% of that hit the income statement because we still had some inventory that was subject to the IEPA.

So that will play out here in the third quarter. So that was a favorable assist. In our Q, you'll see that we had some other items that kind of offset that, but it was largely within our expected range.

In terms of margin kind of pacing, we've said that the mix is always very important to us. The first half of the year had some more long-tail BLAO as an example, compared to the back half of the year.

So favorable mix of products will help us here as we kind of normalize the production -- product mix in the back half. And as Brandon mentioned, the efficiencies in the new factory are important. Anytime you move 3 facilities into 1, it's a complex move. And we're getting to learn the space and work on our efficiencies of production. And so we have the opportunity to get more leverage within our operations here, more fixed cost leverage as we push more product through. And we're very excited about that ability to keep expanding the margin through the back half, as we've said before.

Your next question comes from the line of Christine Cho with Barclays.

If I could just follow up on that margin question. The EBITDA guide for 3Q would imply a step-up in gross margin. But then assuming the midpoint of your guide, it would indicate 4Q top line is down from 3Q.

So like how should we think about -- should we think gross margins would be negatively impacted by that just due to less fixed cost absorption? Or no, like we should still assume it's sequentially up due to product mix.

Yes. So Christine, thanks for the question. Yes, the margin, and there is an implied slight reduction in Q4. Q4 always has fewer production days for us and the orders and timing of best deliveries will have an impact.

So the product mix might be slightly off a little bit different in Q4 than Q3. But at the pace that we're going, and if we're able to secure some more short-term orders, some of the best orders can be more short term in nature. We'll be in a position to have that improvement.

On the EBITDA side, keep in mind that our trial, our district court case is in the third quarter. That's going to happen very shortly in North Carolina. And so that will have a bit of a drag on the EBITDA side because that expense is fully recognized. We don't add back our voltage IP protection sorts of things.

So that will go away in Q4, so that would help us back on the EBITDA side. So yes, you're right, there's a little bit less production probably modeled right now in Q4, but we'll do what we can to maximize our efficiencies and push product right through.

Okay. And then the leverage has been sort of steadily rising over the last, let's call it, 1.5 years, 2 years. And part of it is you haven't generated free cash flow. So just curious how long we think that this should create. Can you remind us from a cash perspective, like litigation expenses, how much you're still expecting for the remainder of the year? And then can you also update us on where things stand in trying to get damages awarded with respect to the wire and the district court cases and how we should think about the range of outcomes?

Yes. So a number of things in there from a cash flow perspective. One, in the first half of the year, we invested heavily in inventory. We have a very strong book of business with record purchase orders, record backlog.

And so we acquired materials largely in advance of some of the step-up in cost as well. So the investments that we made in the inventory will provide positive cash flows here in the back half as we burn that back down to a more targeted measure. We did take very strong positions in our core wire products and cabling products. In terms of what we expect, our guidance is still to turn a significant amount of cash in the back half of the year, which would be freed up to pay down on the revolver.

We did have a step-up in the revolver in the period, but net debt stayed about flat. As we continue to improve EBITDA, clearly, the leverage ratio will improve. So at 1.6x, we have -- that's a perfectly acceptable and fine leverage ratio, and we expect that, that will improve here in the back half.

Your next question comes from the line of Chris Dendrinos with RBC Capital Markets.

I wanted to ask about cable wire management products, and there was an acquisition by one of your peers. And I know you all have kind of a wire cliffs business as well, but we don't hear a whole lot about it. So maybe just overall, how do you think about that cliffs business? Is there opportunity there? Is there IP in that business? And how do you think about it?

Yes, Chris, thanks for the question. Absolutely aware of what's going on in the market around wire management. I guess maybe the first point I would make there is Shoals continues to partner with multiple tracker solutions, multiple wire management solutions.

We think of ourselves as sort of agnostic in that case. And whatever the customer is using, whether it be tracker or wire management, we work with them to design our solution to best fit their project.

So I know the company very well. Happy for them in their ability to transact in that business. As far as our wire management business, it's a very small piece of what we offer, probably not as much of a focus for us in terms of growth vectors is other areas as we move our business into the data center space with battery energy storage and now our AirLink products.

Got it. And then maybe just as a follow-up here, and I know there's been a focus on the margin profile. I think you've got international that's ramping into next year. And so how should we think about the margin profile of that international business compared with the U.S.

Yes. The answer to that, Chris, is it depends on the particular market can have an impact on that. And then whether we are producing the product here fully and it's a domestically shipped export, call it, project.

That makes a pretty significant piece of our backlog up of roughly $100 million. It's probably 2/3 of it potentially. Those projects will look and feel very similar to a traditional U.S.-based BLAO project. Where we've got more organic opportunities in market like specifically Australia, pricing may not be as strong as those export markets. So it just depends on the product mix, the product, the geography and will vary project to project.

Your next question comes from the line of Praneeth Satish with Wells Fargo.

Switching to AirLink. So it seems like a highly differentiated product. It doesn't seem like there's many competitors doing that exact product.

I guess based on your early conversations with customers, how has reception been? Do you think there's going to be an educational period as customers become familiar with the product? And then while I know it's still early, but just generally, when we think about AirLink ASPs, do you imagine them being in line with or above or below traditional busway solutions?

Yes, Praneeth, great question. We are excited about AirLink. The customer reception to that product has been very, very significant.

Of course, there's going to be -- there will be an educational period. This is a product that is, quite frankly, a disruptor to the market and how power is delivered to the rack.

So there certainly will be a bit of a learning curve, not only for the engineers that are designing this, the installers, but even local inspectors that are qualifying these products from a national electric code standpoint. So there will be a learning curve there, but it is something that is certainly achievable given the excitement around the product.

Our goal, again, is to have a product installed live from a test perspective in 2026, and we are on track to do that. We've got IP filed and then internal testing at third-party labs underway to validate this product.

So a lot will transpire in the back part of this year for that particular product. As far as ASPs goes, we're obviously not 100% set on that. This product will deliver substantial value to the ultimate owner and also the installer. So I would expect a price premium over other available options in the marketplace.

Got it. That's helpful. And then just longer term, if we think about the portfolio of the different products that you have now, I guess, is it correct to directionally kind of rank these projects from a margin perspective, lowest to highest is OEM, long tail, battery combiner, solar, BLAO and then AirLink at the top.

And then so if AirLink does start to become a larger share of revenue, I guess, really in 2028, could we expect an uplift in consolidated gross margins, all else being equal?

Yes. I think, Praneeth, that's probably a pretty good list. I might flip the best products and the solar products, if I was forced ranking those.

But I think you're directionally correct there. And obviously, the new products that we're introducing, whether it be AirLink or BESS products, highly engineered, we expect those products to command accretive margins in relation to our total business.

So our goal is to always generate positive mix profiles with the new products that we're introducing. In some cases, you can do that. In some cases, you can as it relates to maybe a long-tail BLAO, but that's always our intention.

Your next question comes from the line of Brian Lee with Goldman Sachs & Co.

Kudos on the nice execution. I guess on that front, I'd be curious, can you talk a little bit about the state of the book and turn business with the BLAO at record levels and the sequential growth.

I just -- and the demand environment being so good, I would have expected maybe you have a more upbeat outlook for the rest of the year in terms of the top line. So just maybe any kind of puts and takes around either the state of the book and turn business? Or is this a potential production or just lead time issue? Just it seems like it translate this year. I know '27 is shaping up pretty strong.

Sure, Brian. It's Dominic here. In terms of our book and turn business, first of all, I just want to remind us all that we did raise our annual guide last quarter.

We did see a good healthy book and turn business for the year. So I think our book and turn business has been strong. We do have -- we're managing the capacity within our new facility.

Keep in mind that we've moved everything over here in the first half of the year. And now we have a chance to really maximize that efficiency. So there's interest. If we can pull projects in, there's always that interest. In terms of our booking cycle, it has lengthened a little bit.

We do have some backlog into Q1 now for the year. And some of that might be international, but there's other domestic products that are going forward in Q1 as well. So in the past, we might have said the backlog converts within a 6-month window. That's lengthening a little bit these days.

But we're very pleased with the demand environment. The underlying fundamentals are very strong. There's a preference for the Shoals products in the marketplace, and we will do what we can to maximize efficiency of this brand-new facility.

All right. That's helpful color. And then just a second question on the -- I know it came up in an early question from Phil, but the ON.energy partnership, I guess they recently announced a 5-gigawatt deal with Crusoe. I'd be curious, what's your participation in that? Are you an exclusive supplier? Is it just on the Recombiner solution? And then are you already seeing an impact on backlog awarded orders or even revenue? Or is that all '27 and beyond? Just maybe any quantification you can kind of provide and timing expectations.

Yes. Thanks, Brian. We're obviously still continue to be very excited about our partnership with ON.energy.

Those products, largely the revenue generation in Q2 or $20 million was for that particular customer. And maybe more importantly, those products are landing and being installed on the largest battery paired AI data center site in the country.

So a very exciting step for Shoals to validate our product and our solutions. As it relates specifically to the ON.energy Crusoe announcement, I can't talk specifically about projects.

But obviously, we have great visibility into their pipeline and as their business grows, I would expect that Shoals will be a big part of that solution as they're designing these systems.

As I mentioned earlier, after the quarter closed, we booked a handful of projects. And you could probably guess that a few of those handful of projects may be that one particular customer.

So unfortunately, we can't talk about specific projects or our customers' customer.

Your next question comes from the line of Colin Rusch with Oppenheimer & Co.

Now that you've got a little bit more robust portfolio of products and particularly with AirLink, can you talk about the cross-selling opportunities that you're starting to see and how your customer focus may shift here over the next year or so?

Colin, fantastic question. As we show AirLink product, there is obviously a direct connection of what we can do to that product with other electrical apparatus. That's an opportunity for us for organic growth and potential M&A activity as things transpire.

The other exciting thing that we're seeing as we interact with data center owners is the possible use cases for our BLAO product, whether that be in the broader electrical infrastructure and battery storage or even other opportunities within the data center itself. So it's exciting for us. We've got great relationships with these larger EPCs.

Those EPCs, obviously, that are working in renewables projects are also working in the data center build-out. So it's great synergy from both a product standpoint and a channel standpoint for Shoals right now, quite frankly. So great question.

And then just from an operational perspective, it looks like you guys are set up for some really significant improving incremental operating margins.

And so I just want to get a sense of what you guys are targeting in terms of those incremental operating margins here on a go-forward basis and how we should think about OpEx trending as we get into '27?

Sure. So Colin, I appreciate the questions. We're not quite ready to guide '27 yet, but our intention is to keep moving margins, all things being equal from a mix standpoint, up sequentially. We believe that we have cost leverage, fixed cost absorption that will be coming into play. We have one redundant facility that will be exiting us midyear of '27 as well.

And we do have some favorable mix and some good products coming online that will generate margins that are accretive to where we are today. So I think the longer-term outlook for us remains healthy with regards to margin expansion from where we are today.

As we've guided earlier in the year, and I'm always cautious with regards to gross margin because I think it goes down a bit of a rabbit hole. But gross margin will sequentially improve. Our expectations are that gross margins will continue to sequentially improve as we learn this new facility.

Keep in mind, we're now operating in a 14-acre facility, and it's taking us a little bit of time from the complexities of getting all the productivity right that we want to see. So we will see continued improvement, just all things being equal going forward and product mix as we have a higher mix of traditional BLAO versus long-tail BLAO in the back half will be favorable for us as well.

So we're going to do everything we can to move those margins up. As we've said this year, the low to mid-30s is right where we need to be, and we're going to keep moving that margin into that bandwidth. And we look forward to being able to share 2027 with you at a future date.

Your next question comes from the line of Maheep Mandloi with Mizuho.

I think most have been answered. But maybe just high level on the tariffs over here since someone else, like are you hearing any customers talk about that or worried about that in terms of demand from either Section 232 tariffs or other policy changes over here?

Yes, absolutely, Maheep. We're monitoring the landscape closely, whether it's Section 232, the latest news on inverters. I don't see that having near-term impact for us whatsoever and potentially some speed bumps along the way longer term, but I don't think it changes at all the underlying demand environment.

We continue to believe that this market is going to be stronger for longer, as we've said over and over again, and we're seeing that come through in our quote volume and book of business. So we're very excited about the underlying demand environment.

I think we have set ourselves up appropriately to continue to protect and grow our core business. Again, that's evidenced by our backlog. And what's really helped us there is our new product introductions in our core products, if you think about long-tail BLAO, if you think about our SuperJumper Super Harness products, we have a more diverse customer portfolio than ever before, which is very exciting for us.

I think we're -- along with the solar market, we are certainly on the right track in diversifying our business as it relates to the data center space specifically, and we are realizing wins in the battery energy storage space and very excited about our AirLink product.

So I think the markets and the way that we're executing commercially in those markets are set up for us to have continued success. And additionally, when you think about the investments we've made here in Portland, Tennessee with our Mega facility, those came at absolutely the right time for us to be able to handle this growth, whether it be in our core markets or more diverse markets like battery energy storage.

So exciting times ahead for Shoals, whether it be market-driven or our execution, but we're in a very good spot.

Great. Well, [ Lauren ], that's going to be all the time we have for questions today. I do want to note that we have a very active IR calendar through September. Those events are listed on the Investors section of our website.

So if you're attending any conferences and would like to meet with us, please do let us know. We can help you further, please reach out to [email protected] with any questions. Thanks for joining us today. Have a great day, everyone. Thanks, everyone.

Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Shoals Technologies Group's First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Matt Tractenberg, VP of Finance and Investor Relations. Matt, please go ahead.

Thank you, Christine, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos.

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 and should not be considered guarantees of performance. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings.

Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's first quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investor Relations section of our website at investors.shoals.com.

With that, let me turn the call over to Brandon.

Thank you, Matt, and thanks to everyone joining us on the call. First quarter revenue was above our guidance at $141 million, up 75% over the prior year period. Our commercial team continued their strong performance by adding approximately $151 million of new orders in the period. This resulted in another company record backlog and awarded orders, or BLAO, of $758 million, an increase of almost 18% year-over-year. As of quarter end, approximately $628 million of our BLAO has shipment dates in the upcoming 4 quarters for Q1 of 2027.

For adjusted gross profit percentage came in slightly below our expected range at 29.6%. This was driven by product mix, tariffs, increased freight costs and some temporary labor inefficiencies as we train additional employees to meet the strong demand on new business lines in our factory. We believe that this is the low point of gross margin and that it will improve as we make our way through the year.

SG&A, including all legal expense, was $31 million, representing 22% of revenue, a 500 basis point decline as compared to 27% last year and highlighting the operating leverage inherent in our business model.

First quarter adjusted EBITDA of approximately $21 million came in at the high end of our guided range and grew 56% year-over-year.

We've also seen some positive movement on our IP infringement case against Voltage. Last week, the International Trade Commission declined to review any contested issues in the ALJ's initial ruling. The commission is still expected to issue its final determination in early June, but it's encouraging news for our shareholders and U.S. manufacturers in general.

We are pleased with how the market is evolving and our competitive position of strength and as a result, are increasing both our revenue and adjusted EBITDA guidance for the year. Dominic will step through the updated guidance later in the call.

Briefly turning to our various business lines. The first quarter was another strong period of growth within our core utility-scale solar market. Our quote volume in the quarter exceeded $1 billion of unique projects, adding to our strong pipeline. I'm also encouraged by the progress we are making in key international markets like Australia, as evidenced by our increased quote activity and customer engagement. International BLAO now totals almost $100 million, driving continued growth and diversification in 2027 and beyond.

Our community, commercial and industrial, or CC&I, business, which remains a small piece of our overall mix, continues to perform well. Our OEM business continues to provide a stable and visible revenue stream, growing at 33% on a year-over-year basis.

And finally, we added approximately $9 million to BESS BLAO in the quarter, which ended the period at $75 million. You may recall that we announced a recent partnership with ON.energy in the last quarter. ON.energy is rapidly assuming market leadership in AI data center power infrastructure with its first-of-a-kind medium-voltage AI UPS. That architecture is being deployed in what will be the largest battery project of an AI data center in the U.S.

Shoals is very proud to be a partner in this project. In Q1, we celebrated the first of these units produced in our new facility, recognizing more than $1 million in revenue and paving the way for a healthy ramp through Q2. We're excited about increasing production and gaining visibility as we continue to build this business.

Overall, the quarter played out as expected, but the year appears to be stronger than we anticipated on our February call. New orders in Q1 for 2026 delivery were very strong, and we have not seen significant project delays thus far. We are executing well, finishing the move into our new facility and expanding capacity and capabilities. The underlying demand drivers remain intact, and our competitive position has strengthened. Our business is in a great place today.

Dom, I'll hand it to you for a deeper dive into our financial performance and guidance.

Thanks, Brandon, and greetings to everyone on the call.

Revenue increased by approximately 75% year-over-year to $140.6 million. The increase was largely driven by strong demand from both new and existing customers within our core U.S. utility-scale solar market.

Gross profit was $41.0 million compared to $28.1 million in the prior year period, an increase of 46%. Our GAAP gross profit percentage was 29.2% and adjusted gross profit percentage was 29.6%, slightly below our expectations and impacted by product mix, higher freight costs, tariffs and temporary labor inefficiencies as we start new lines and train new employees to meet the very strong demand we see ahead.

Product mix, freight and tariffs accounted for approximately 200 basis points of margin compression versus our anticipated outcome. As Brandon stated, we believe this quarter is the low point for gross profit percentage and that it will improve as we make our way through the year. As a reminder, our product mix plays an integral role in the gross profit percentage, and that may vary from quarter-to-quarter. The same mix that is driving higher revenue growth and contribution dollars negatively impacts the margin percentage but delivers higher profit dollars. Ultimately, we are focused on driving incremental profit dollars through the P&L as that strategy will create shareholder value.

Selling, general and administrative expenses, or SG&A, was $31.0 million or $9.3 million higher than the prior year period, driven by an additional $6.2 million of ongoing legal expenses. This breaks down to $4.1 million related to our ITC litigation, $1.2 million related to our case against Prysmian and a little under $1 million related to the shareholder class action suit. As you may have seen last week, we have announced a proposed settlement to the shareholder class action suit. The vast majority of the settlement is covered by insurance.

Income from operations or operating profit was $7.7 million or 5.5% of revenue, growing at 79% year-over-year. This compared to $4.3 million during the prior year period.

Net loss was $297,000 compared to a net loss of $282,000 during the prior year period. The net loss was driven by the class action settlement net impact of approximately $5 million.

Adjusted net income was $12.1 million, an increase of 112% as compared to $5.7 million in the prior year period.

Adjusted EBITDA was $21.1 million compared to $13.5 million in the prior year period, representing 56% growth year-over-year. Adjusted EBITDA margin was 15% compared to 16.8% a year ago, driven primarily by the impact of product mix.

Adjusted diluted earnings per share of $0.07 was $0.04 higher than the prior year period.

Operationally, we consumed $41.4 million of cash in the first quarter, driven by the higher inventory balances needed to satisfy the strong demand signals we are seeing in our markets. We have taken inventory positions to protect our customer delivery time lines for the next 2 quarters, and we intend to reduce inventory levels throughout the back half of the year. As such, we do not currently anticipate interruptions to project delivery schedules due to the conflict in the Middle East or projected trade policies.

We ended the quarter with cash and equivalents of $1.9 million and net debt to adjusted EBITDA of 1.6x. Our net debt was $179.9 million, an increase over the prior quarter, driven by an increase in inventory in both our new BESS business and our core utility scale solar market.

As we enter this period of exceptional demand, our intention is to moderately expand the capacity on our revolving credit facility. Over time, as collections normalize with production, we will resume deployment of excess cash towards reducing the outstanding balance and maintain leverage below 2x adjusted EBITDA.

Backlog and awarded orders ended the first quarter at a record $758.0 million, a sequential increase of $10.4 million. Backlog constitutes $390.3 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming periods can be achieved. The strength of our book of business supports our decision to increase both our full year revenue and adjusted EBITDA expectations. As of March 31, $627.6 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters through Q1 of 2027, with the remaining $130.4 million beyond that.

Turning to guidance. For the quarter ending June 30, 2026, the company expects revenue to be in the range of $150 million to $170 million, representing 44% year-over-year growth at the midpoint. And adjusted EBITDA to be in the range of $28 million to $33 million, representing 25% year-over-year growth at the midpoint.

For the full year 2026, we now expect revenue to be between $600 million and $640 million, representing year-over-year growth of 30% at the midpoint. And adjusted EBITDA to be in the range of $118 million to $132 million, representing year-over-year growth of 26% at the midpoint. In addition, for the full year, we still expect cash flow from operations in the range of $65 million to $85 million, capital expenditures in the range of $20 million to $30 million and interest expense in the range of $8 million to $12 million.

With that, I'll turn it back over to Brandon for closing remarks.

Thank you, Dominic. The U.S. market appears to be extremely resilient, and our capacity expansion could not have come at a better time in our history. We are preparing Shoals to be ready and agile in our production capabilities in a growing demand environment. We are in an exceptional position today from both a commercial and operational perspective. The strategic plan that we constructed and the process improvements we've implemented have begun to yield tangible results. We want to thank our shareholders and our customers for their continued trust in our employees for their hard work and dedication.

Operator, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Philip Shen with ROTH Capital Partners.

Congrats on the strong result. I wanted to talk through the tax equity pause that we've read a fair amount about. I was wondering if you guys are seeing that flow through any of your business or any of your conversations and then maybe talk through with the healthy bookings from this quarter, do you expect that booking strength and greater than 1 book-to-bill to sustain in the quarters ahead?

Phil, thanks for the question. Related to the tax equity piece, well aware of what's going on in the market with some of the larger banks financing projects. I would say that we have not seen that trickle down into our order book. I think there is available financing for projects that still exist in the marketplace, and we are not seeing an impact to that as evidenced by a really strong quote log again in Q1 of over $1 billion, and that's been really consistent with the quoting strength we've seen for the last few quarters, honestly.

As it relates to future book-to-bill and booking strength, it is always our goal to have a positive book-to-bill. We see a lot of strength in the marketplace. The market is accelerating and not slowing. We have fortunately strung together a number of quarters now with positive book-to-bill, and that's always our intention to do so.

Great. And coming back to margins for a bit here. Q1 was a little bit lower. I know you guys talked about that being the low point in the year. I was wondering if you could share what like Q2 and Q3 might be heading towards with your guidance raise, the EBITDA margin for Q1 was 15%, but full year is 20%, suggesting you really have to drive that much higher later in the quarters or later this year. And while maintaining the EBITDA guide, you also kept cash flow from operations unchanged. So I was wondering if you might be able to address kind of some of the situation there.

Yes. Thanks. So multipart question there. I'll tackle the front end and maybe turn it to Dominic.

As it relates to gross margin, again, we commented we had about a 200 basis point impact in the quarter versus our expectations. The biggest driver of that for us is always product mix. And then obviously, we had -- as we're moving our facility from our former 3 sites into our new factory, we've got some disruption related to that move, a little bit more so that is anticipated. We moved about 250 pieces of equipment or slightly more over a 60-day period in the quarter. And obviously, that led to some level of disruption.

Dom, maybe pass it to you to expand upon that.

Yes. So I think, Phil, one of the things you asked was also a little bit of the pacing of what we might see from margins. And we do expect that the first half as we're still moving into the facility. So Q2 will still have lower margins. We just don't believe it's the low point that we saw in Q1 as we've been communicating. And then there will be a ramp in the back half as we move into the -- we're going to be completely move into the facility, and we will also have the ability to start realizing some of the efficiencies of being in one vehicle new facility. So the pacing will still be a little bit lower on the margins in Q2 and then improving, but everything should be sequential improvement quarter-over-quarter.

And with regards to the cash flows from operations, our working capital, we took very specific inventory positions to make sure that we can meet the demand that we see in the coming quarters. But we will have the ability to reduce that. So I would characterize that as a timing issue. We do see very strong business. We see very positive cash flows this year and our ability to drive that cash is heightened this year because we're not doing some of those large things like the warranty remediation, which is largely in our rearview mirror at this point. So I would characterize that as a timing issue. We're very confident in the year and very excited at the book of business that we have in front of us.

Our next question comes from the line of Julien Dumoulin-Smith with Jefferies.

Look, maybe just to kick things off, I would love to hear a little bit more about the battery BESS adoption trends as well as any other end market adoption here. Again, I know the Street is very fixated to hear on your quarterly BESS trend. Obviously, stronger start to the year here overall. But I'm curious on how you would suggest cadence and adoption is going given what we're seeing in that end market.

Julien, I appreciate the question. We are very excited about our BESS business. As we indicated in the prepared remarks, we started our BESS line in Q1 and recognized about $1 million of revenue. Those specific units, again, are going to the data center market, which we're very bullish about, and we will be on the largest battery paired AI data center site in the country, which is very exciting for us here at Shoals.

What is also exciting for us in the first quarter is we added $9 million to our book of business related to BESS. Maybe to peel that back a little bit, as you may recall, we've got 3 specific end market use cases for our recombiner products, one being data centers, 2 being grid firming and 3 being your common solar and storage paired applications on our traditional solar sites.

About 2/3 or more of our bookings in the quarter came from grid firming and solar plus storage applications, which is exciting for us as we are seeing penetration across all 3 markets. As we've talked about in the past, we see the data center AI space as being probably the strongest and largest driver of the product line, but it's also great for us to show strength in the other markets as well.

Got it. And then not to needle too much on this margin backdrop, but you lowered the margin guide here slightly here. What's driving that here? Can you comment on the logistics side of things, the tariff angle? I know you commented a little bit here, but I just want to make sure I'm hearing that right, especially given the ramp that my peer who was talking about a second ago. Can you just comment about what you're seeing on that margin guide? I think people are very fixated here on the cadence of the year and ensuring that you see that overall recovery materialize.

Yes. There's a few things that I want to point out, Julien. And first is that we're still moving into the facility, and we did have some disruptions and inefficiencies in Q1. They were a little bit worse than we anticipated with the disruption of all the movement. But we're completing that move in Q2. And also with the unrest in the Middle East or the conflict, we are seeing pressure on oil prices and the derivative products from oil. Freight charges are certainly higher, and some of our cost of goods are certainly going to have the potential to be impacted.

And some of the pricing has already been set. Some of those things -- it's kind of like when things change in a rapid fashion, once we've already agreed to a price, we might have some times when we can't quite recover the full cost of goods increases. So we want to just be cautious and give a prudent guide with margins. We do see improvement every quarter, as we mentioned, sequentially, and we're very optimistic that the product mix will be favorable for us for the balance of the year.

Our next question comes from the line of Praneeth Satish with Wells Fargo.

Maybe not to belabor the margin question too much, but I guess, so you mentioned 200 basis points in Q1 from product mix, tariff and freight. And then you also had this impact from moving equipment to the new facility. Maybe if you could just kind of isolate how much of the margin was weighed down because of that transition to the new facility? And then also on product mix, is that -- of the 200 basis points, how much is product mix? And kind of what's the outlook there? Because I assume the tariff and freight, those will kind of persist potentially for a few more quarters, but just kind of trying to isolate the variable pieces.

Yes. So Praneeth, that's a pretty packed question there. So let me break it down a little bit. So of the 200 basis points that we saw, we kind of bucketed into about 1/3, 1/3, 1/3 of some of the major drivers. We definitely had some tariff impact that was still a carryover, but the IEEPA reduction is certainly going to help us. The 232 tariff environment, we've now actually encompassed that into our pricing. So that shouldn't be as big of a drag going forward. We do still have some inventory that has capitalized tariffs in it. We do still have to burn through that in the second quarter. Once again, that informed our second quarter margin guide.

With regards to the freight, we did have some air freight and the cost of fuel for freight has gone up. So we had some surcharges there. But fundamentally, these things are largely transitory or at the point where we can now factor all that into the pricing. As I mentioned with Julien's question, sometimes when things change rapidly, we may already have guaranteed pricing or contract pricing, and we can't quite go back and recover all of that. So the margin issue aside, we're very pleased to be raising our EBITDA guide for the year. We're going to continue to get the leverage on our OpEx, and we're very excited about our book of business.

Got you. That's very helpful. And then maybe just switching gears, your other kind of product in development here, the data center BLA product. Has anything changed there in terms of timing for UL certification? And I know we're not going to see sales this year, probably next year. But I guess, when should we anticipate potentially seeing some bookings? Do you think it's possible we could see something towards the end of this year? Just trying to get an update on that.

Yes, Praneeth, great question. We did a market launch of that product at Data Center World a few weeks ago, which we are very excited about. We have filed our patent portfolio for that particular product, which is also very exciting for us. There's a lot of interest in the product right now. As you mentioned, we do not expect to recognize revenue in calendar year '26. Our goal this year is to have proof of concept operating live in a facility, and we are working towards that.

So bookings in '26, potentially, we're talking to a variety of developers about including that product in their portfolio of projects, but nothing on the books as of yet. I would probably say in '26, bookings would be minimal for that product line as we begin to ramp it in 2027. But exciting product and really strong market feedback thus far.

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

Could you give us an update on sales traction outside of the U.S. on both US solar and BESS? And then if there's anything in particular that you guys see you can optimize from an OpEx perspective, I'd love to get a little bit more detail on that side.

Yes. Thanks, Colin. We are excited about our prospects internationally. Our backlog and awarded orders continues to rise. We reached $100 million now to date after actually deploying 3 projects last year. So we are continuing to generate bookings to offset not only shipments, but grow that order book, which is exciting for us. Our prospects in Australia seem like a fantastic opportunity for us. The pipeline is very strong, and that's where some of the additions to the order book have come from. So that has been a key priority for us to diversify end markets, not only product, and we're pleased with the progress thus far.

Your other question was around operating expenses, I believe. Dom specifically, what are you looking for...

Yes. So we're seeing a number of folks able to optimize using some AI for just cleaner, more efficient OpEx. And just wondering if there's some of that, that you're going to be able to start flowing to the organization over the next year or 2.

Yes. It's a great question. So we absolutely are engaged with some trials of artificial intelligence and what we're trying to do to improve some of our systems and operations. Our focus initially is actually with manufacturing and commercial as our process flow. We have some opportunities there that we're working with. We are in discussions with our Board all the time about how the next -- where we can improve our processes, which are largely manual as a small company is growing. So we are looking to that.

I would suggest that our SG&A is relatively lean. We don't have a tremendous number of salaried headcount. As you see in our filings, it's less than 200 people that are salaried in this business. So I'm not looking to AI to truly rip out SG&A expense as much as I am to enable growth going forward. We see significant growth going forward for this company. We want to make sure that we're positioned to scale, and that's truly where we're going to focus our AI efforts, at least initially.

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

I think on the last call, you talked about there were some -- I believe they were BESS projects that you weren't sure if they were going to hit in late 4Q or maybe early 2027. Has that timing now firmed up? And is that part of the guidance raise here? Or should we think about that as a potential catalyst for further upside if that does firm up as we go along here?

Mark, I appreciate the call. Yes, we do have project visibility in '26 and '27 that is incorporated in our current backlog and awarded orders. As mentioned earlier, the significant driver for our growth in that business is going to be around the data center AI landscape. And obviously, we've got visibility to a quote funnel and are confident in our ability to add to our order book in that particular use case. So we are very excited about the future of battery energy storage products here at Shoals. We have built a manufacturing line to handle and provide a significant amount of capacity for us. So more growth to come in that space for us in the future.

And Mark, I may just add that as we gave the guide last quarter, we did talk about there are some projects in Q4 that still have to be firmed up. But what I would characterize our raise on the revenue side is really due to book and turn business in the core solar markets. We've seen some incredible strength in demand, and that's truly what's driving that. And that's -- I just want to position that one because it's a fantastic market for us. We do still have some potential for projects to hit in Q4 from the BESS side, but that wasn't a preliminary driver of the raise.

Okay. Very helpful. And then you've had several questions already about kind of the margin trajectory this year. Dom, I just want to give you the opportunity to kind of talk about beyond this year. Are you still viewing 2026 as the trough here?

Yes. Well, certainly, it is because of all the move disruptions and starting the BESS line from scratch and training all the new employees. I mean those are some transitory headwinds that will get done in this year. We think we're a very attractive business, driving gross margins in the 30s like we are. It's a fantastic business. We're going to continue to get OpEx leverage. We'll see EBITDA margin expansion and much higher cash flow contributions next year. So I'm very excited about next year. While we're not fully guiding to that, we do believe this is a trough year on the gross margin side, but really looking forward to expanding operating profit margins and EBITDA margins in 2027 and beyond.

Our next question comes from the line of Sean Milligan with Needham & Company.

So to start off, I was curious, Brandon, if you could provide some more context around like your BESS quoting pipeline in terms of sizing of projects, specifically on the AI data center side. I guess you've been in the market now for a few quarters there. And I was curious if there's any change to what you're seeing in terms of the size of projects you're quoting.

Yes. Thanks, Sean. I think we've communicated in the past that, I guess, first, bookings for this particular product line will be a bit lumpy because of the size of the projects, right? I don't think our assumptions have changed at all, where we look to use our 4000 amp recombiner product line and data center AI applications. That market is probably about $50 million to $60 million per gigawatt. We've got great visibility to pipeline and also future projects. And again, very bullish about our prospects to penetrate that market and very excited about our partnership with ON.energy, who we believe has taken market leadership in pairing battery storage with these large-scale AI centers. So couldn't be more excited about the prospects of that business.

Okay. And just a follow-up on revenue contribution in the quarter. With C&I, international BESS, you kind of gave the BESS number, but I'm curious like how much revenue is now coming from kind of outside the core BLA business?

Yes. So we have -- the OEM business was second to our domestic utility-scale solar projects in the quarter. BESS, we were very pleased to have started the line early. As you recall from last year, we were guiding that we didn't expect to have revenue in Q1 at all because of our time line. So we're very pleased to have gotten that line stood up and operational as quickly as we did. But largely, the Q1 revenue stream was utility scale solar that's domestic, followed by our OEM business, which had 33% growth, I believe, year-over-year. So other than that, we did not have a lot of international revenue and the CC&I still remains a relatively small portion, but we do have CC&I sales every quarter.

Dom, maybe to add to that, just the focus on our domestic solar markets. Just to reiterate, we believe we are operating in an unbelievably strong market environment. And I think our market leadership position as a preferred solution continues to be proven by our record backlog and awarded order growth. A lot of our growth, I know there's a tremendous amount of focus on battery energy storage. But as we've communicated in the past, our goal is to diversify both products and markets, and we're doing that.

What is very exciting for us in 2026 is about 1/5 of our revenue will come from new products. BESS is obviously included in that number, but many of the new products are in our traditional solar space. So we've put a big focus on accelerating innovation here at Shoals. And that is playing out with increased bookings and obviously, revenue recognition for 2026. So again, a lot of focus on BESS, always a lot of questions about BESS. I want to reiterate the strength of our domestic utility scale solar business.

[Operator Instructions] Our next question comes from the line of Vikram Bagri with Citi.

I have sort of like a 2-part question. I think last quarter, you mentioned spooling had a meaningful impact on margins. I was wondering if you can share what the run rate impact of spooling was on this quarter's margin? And what percentage of customers have requested spooling?

And related to that, obviously, tariff, logistics and commodity prices have changed a lot since last quarter. Our understanding was that tariffs baked into the previous guidance were conservative. I was wondering if you can also identify where you see some puts and takes in this ever-changing environment in terms of tariff, logistics and commodity prices, if the current environment is fully baked in? Or do you see some level of sort of like downside or upside from these 3 factors?

Vik, great question. We have talked about spooling in the past, probably more generally just packaging in general. There are different packaging requirements for some of our newer customers and also product mix related to those specific to our long-tail BLA product. That is adding significant revenue potential for us in the future and is being recognized still in 2026. It adds $0.005 to $0.008 a watt to our projects, which is exciting for us to be able to expand our wallet share. So we do have some packaging costs that are baked into the guidance for the year. I'll let maybe Dominic expand on that.

But before I do, just I'll comment on your question about tariffs. Obviously, the tariff landscape has changed dramatically in the last, I don't know, 18 months now. And for us to try to predict what that's going to look like in the future, we would be fools to try to do so. Having said that, the change with IEEPA and Section 232, we view as a net neutral to positive change for us. And that is being baked into our thoughts about margin and guidance for the rest of the year.

Dom, maybe I'll turn it to you for specifics around packaging and margin.

Yes. As Brandon mentioned, Vik, it's largely -- when I talk about product mix, that's where it's coming from. Not all of our products require spooling, but the longer-run products do. And things like the long-tail BLA is incorporated in the margin. And so when I talk about product mix and a large percentage of customers now preferring the long-tail solution to centralize their low-grad disconnects by the inverters, that is something that increases our share of wallet, but it carries a lower margin percentage.

The spooling cost, the packaging, the handling of all that is incorporated into that, but that's why the product mix is so important to the margin percentage. It is driving increased flow-through dollars, which is fantastic. We're going to keep doing that business. We're responding to the changing environment of our customers, what they're looking for, and we now have a full suite of products to really meet those needs. Things like our SuperJumper, which may have been originally developed for international markets are really showing some popularity here in the United States as well. But once again, you have much longer run. So we've factored all that in. It's part of our product mix, and that's why I always caution folks when we talk about a percentage of margin, we need to kind of consider where the mix is going as well.

Brian Lee with Goldman Sachs. This will be our last question.

Sorry, I dialed in a little bit late, so not sure if you covered some of these things. Maybe just on the guidance, kudos on the strong execution here to start the year and for the revenue and margin uplift. But adjusted EBITDA guide is up a bit less than revenue guide at the midpoint for 2026 in the new outlook. Is that conservatism? Or are you seeing more mix shift issues or incremental tariffs than originally expected? Just curious, maybe this is nitpicking, but the EBITDA uptick in the guidance is a little bit more tempered than the revenue outlook. So any color there would be appreciated.

Sure, Brian. Yes, we've covered a little bit of this. So -- but I'll repeat a few of the things that are driving that. First and foremost, product mix is certainly driving that. We are seeing popularity of some of the new products which do have a lower margin percentage and flow-through. So while revenue is going to be increased, the margin percentage is not going to be quite as high. We are seeing a little bit of disruption in our move into the new facility here. It was a little bit more than we anticipated and allowed for as folks are moving -- as we moved over -- I don't remember, Brandon, 200 machines.

250-plus machines in 60 days.

Yes. And we're still moving into the facility this quarter. So a little bit of disruption there, and we are expecting to see with our mix anticipation for the rest of the year, some uptick in gross margin as well. But there were some reasons why we did that. We also have 2 trials set for later this summer in August. With legal expenses, I've learned to be a little bit cautious on the estimations. We want to make sure we represent the shareholders properly in our cases. And if that means experts and additional legal expense, we're going to cover that. And one of those cases is not adjusted out. It's our IP case as part of our earnings. So we just want to make sure that we give a good cautious number that allows us to meet our expectations for.

Yes. Fair enough. Makes sense. And then I'm sure you covered a little bit in this and maybe you covered all of it. Just with respect to tariffs, can you level set us as to what tariffs you are specifically subject to starting the year off 232 copper, steel, aluminum, et cetera? And then does the April 3 ruling on kind of the changing thresholds impact you? And again, maybe level set us as to are you importing copper from foreign sources and what percent of the [ indiscernible ]? And is that impacting your margin outlook for this year? Or are you contemplating any mitigation efforts this year or into next year? Just trying to get a level set on the copper exposure here, if you could speak to that a bit.

Sure. Sure, Brian. I'll jump in on that one. There's a few questions in there, so let me unpack it. Yes, for the first couple of months of the year, we still had IEEPA. And those, of course, were stopped collected at the end of February, around the 24th or so of February. And so that right now is going to be a favorable tariff environment.

With regards to 232, yes, there was a couple of things. We do have a very wide book of suppliers, approved vendors and some of which are international in nature and are subject to 232 import tariffs, both on the aluminum and copper side. We do work with customers on some things. If they have a preference, we can certainly go for certain domestic suppliers. If they have a preference for international, we can do that as well. So we are subject to 232.

Now as the rules change and the tariff rate went down, it's also now on the full purchase price. But net-net, it should be slightly favorable for us in terms of how these tariffs are calculated. So it is a very dynamic situation. We certainly appreciate your question. It makes it very difficult to truly know how to operate that.

And Brandon, is there anything else you want to add?

Yes. Just maybe something to point out. As it relates to the tariff landscape, those tariffs impact even our domestic supply base, right? Like us, most suppliers have a very diversified and international supply base themselves. And so those tariffs may be getting -- may be impacting our raw material inputs even on domestic supply sources. So obviously, as you guys know, it's been a challenging, again, 18 months or so with the tariff landscape. I think we're navigating it quite well. And I think what is probably most important is with the repeal of the IEEPA tariffs and now the change to Section 232, we do see that as a net neutral to positive impact for Shoals in the back half of the year. Obviously, caveating that with unless something else changes. So I think we're navigating it well, Brian, and I appreciate the question.

Thanks, Brian. Christine, I think that that's going to be the last question that we take today.

Absolutely. We have reached the end of the Q&A session. I will now turn the call back to Matt for closing remarks.

Yes. Thank you, Christine. So I want to note to our audience that we have a very active IR calendar through June. Those events are listed on our Investors section of our website. So if you're attending conferences, you want to meet with us, please let us know. We're happy to. If we can help further, let just reach out to [email protected] with any questions. Thanks for joining us today, everybody. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, everyone. Thank you for joining us today for this webinar on Battery Energy Storage Solutions with Shoals Technologies. My name is Christine Cho, and I'm the clean tech analyst here at Barclays.

We have a great discussion prepared for today. We're going to start with a little bit of why storage has increasingly become important in today's backdrop, the type of storage needed for data centers, the difference in architectures, the value proposition of Shoals and the size of the opportunity.

I'm going to turn it over to Matt Tractenberg, VP of Investor Relations and Finance, who will introduce the Shoals team and give some introductory remarks. We will have some slides during the discussion and also have a Q&A session at the end. So if you have a question, please e-mail [email protected], and we will try to get through it all. Matt?

Thanks, Christine. Good morning, everyone. Again, my name is Matt Trachtenberg. I'm with the Shoals' IR team. And before we give it back to Christine to sort of drive through some of the questions, I wanted to just introduce our 2 speakers, add a little bit of context for today's event.

So as you see here on the slide, Jeff Tolnar is our President, and he's responsible for our commercial efforts at Shoals. And Kishan Ponnadurai is a product engineer specializing in our BESS solution. The subject of BESS has been top of mind for most investors since last fall when it really started to pick up steam here.

We get a lot of questions about what we sell, who do we sell it to, why Shoals and the specific application that it fits into. So this call is designed to be educational in nature. It's not intended to provide financial updates or forecasts. Those would be provided on any of our quarterly earnings calls.

So Christine has been doing a lot of work in this space, and you're kind enough to host us today. We have reached out to a number of shareholders in advance to ensure that we're addressing the most relevant questions. But again, as she pointed out, if there's something that the audience wants to hit, you can e-mail your questions to her e-mail address that you see under her picture as we move through the hour.

I think we have a great discussion today for everybody. So Christine, I will give it back to you.

Great. Thanks, Matt. So good morning, gentlemen. I wanted to start off with -- I think it's really important to understand the events of the past to bring us to where we are today. So can you provide a brief history of the evolution of batteries in recent years?

We'll do. And thanks, Christine. Matt, if you can pull up the slide for that. I won't hit all these bullet points, but I'll hit the main areas. So starting left to right, one of the -- in the early stage, batteries were relatively small. They were AC coupled, typically a 1:1 ratio of the battery stack and an inverter. That was about 10 years ago.

And then going to the bottom, you look at about 8 years ago, began scaling and then largely driven by EV battery innovation, the batteries started to become more bankable and they began to grow to multiple megawatts. And then a few more years go by were about 5 years ago, once the spike in lithium came back down to normal range, the battery blocks continue to grow in size.

I think one of the most telling points is that the energy duration increased. So you started seeing more and more of multiple hours of capability, megawatt hours of capability as opposed to just minutes of ride through. And then the continued improvement in economics driven largely by scale. And then if we look at now, there's quite a few things that have happened and a lot of today will be diving in more deeply.

The first is that there's alternate technologies that have been introduced other than lithium ion, some of the long-duration energy storage systems that have been announced recently are very compelling. They can provide tens, if not 100 hours of long-duration storage and the new innovations around BESS as a firming mechanism and a UPS infrastructure for data centers. So that's a really exciting part that we're going to dive more deeply into today, I think.

Great. On our webinar last year or maybe it was at our conference, you mentioned that the product, your specific product is needed for projects that are DC coupled. Can you talk through why?

Yes, Jeff, I'll take this one. I think it's important to categorize the 3 major components of why our product is useful in DC-coupled installations. It really boils down to augmentation planning, protection and cost. I mean those are the 3 biggest factors. I think a lot of DC-coupled applications or infrastructure, what they kind of go through is they're planned from the very beginning, and it's hard to retrofit. It's hard to build on top without adding more and more product. And what we offer is a method to plan for augmentation from the very beginning. And so that's one big value proposition that our recombiner has in the market.

We also have an extremely high short circuit protection. And I think that's more -- it's more important as we continue to involve the battery technology. Short circuits are getting higher, batteries are getting bigger. So it's important to have that over current protection.

And of course, cost is a very big one. I think our value proposition of being able to aggregate a bunch of DC blocks to lower your -- potentially lower your -- the amount of inverters that you're putting on your site is very attractive for a lot of our customers. And that's simply due to the fact that we can simplify your storage charge solar -- sorry, solar charge storage and help with that augmentation planning.

And just for those who aren't as familiar with these terms, can you just give a little one-on-one on what you mean by augmentation?

Yes. Augmentation is basically the idea of expansion. So as you're building a site, your project -- your demand changes, you need to kind of move with that demand. And augmentation is simply just growing your site to meet that demand.

Okay. Do you have any statistics as to how many storage projects are AC versus DC.

Yes, it's a great question. I think you have to look at with where batteries are going right now, I think it's hard to look at all storage projects as AC coupled, DC coupled. What I will say is that when you look at any sort of interconnection site, so any solar plus storage site that's supporting the grid or any stand-alone storage site that's supporting the grid, you can -- it's pretty easy to look at what is AC-coupled versus DC coupled.

When you get into some of the other types of applications for batteries, it becomes a little bit more blurred. So when you're talking about those interconnected sites, the solar plus storage and stand-alone storage supporting the grid, typically, what we're seeing in the market is about 80% AC coupled and 20% DC coupled.

Okay. And then what are the puts and takes for each as to why a project developer would want one over the other with respect to AC versus DC?

Yes. So another great question. And it's a question that we're asked a lot of. So we'll start with DC coupled. I think the biggest puts for DC coupled is truly a cheaper upfront capital expense. If you're able to lower your -- the number of inverters you have, potentially use a recombiner to help you do that, that's a pretty big put.

The other thing is a compact footprint. So instead of having a 1:1 battery-to-inverter ratio or -- and a solar-to-inverter ratio, I think one of the big things is if you're able to reduce your footprint and increase your power density in a smaller scale, I think that it's a very attractive option for developers to go with.

And the last one -- the last big one that I think captures the biggest puts is the solar energy capture. And what I mean by this is typically, in a DC-coupled infrastructure, you're using a common bus that is fed DC energy. So your solar is DC coming out of the solar panels, your battery is DC coming out of the batteries. And what you're doing is you're aggregating these DC inputs on a single bus and allowing solar DC energy to charge a DC battery as opposed to on the AC-coupled side, converting your solar energy into AC and then converting your battery into AC and then going into an inverter.

And so I think what I'm trying to say here to simplify things is that you have lower conversion loss when you're looking at a DC-coupled infrastructure.

So the earlier statistic where you said 80% was AC. Can you just sort of maybe help us walk through if there's all these benefits with DC, why is the majority AC?

Yes. What it really comes down to is operational flexibility and revenue. And so what I mean by operational flexibility is I've mentioned augmentation earlier. It is much easier to augment an AC-coupled infrastructure. So it's easier to grow an AC coupled infrastructure to meet your demand simply due to the fact that there is a 1:1 inverter ratio.

This is important because what you'll realize in an AC-coupled infrastructure is that the solar and battery operate independently of one another, and they're not connected to a DC bus. Why is this important? It really comes down to how you're using your energy, how you're gaining revenue from your energy, things of that nature. So because in a DC-coupled application, you're tied to a common bus, you can't operate solar and energy storage at the same time. With AC-coupled, you can.

So I'll give you an example. Let's say your price for energy is high and you want to sell some of your stored energy from your battery storage while your solar is still producing energy. In an AC-coupled application, that's possible. In a DC-coupled application, you run into the risks of curtailment. You'll have to stop one of your operations in order to have -- in order to operate the other. So that's probably one of the biggest reasons why AC-coupled is seen as a more prominent infrastructure in today's society. It is driven by revenue and operational flexibility.

And specifically for data centers, are you seeing it skew one way or another with respect to AC versus DC?

Yes. It's a great question. Data centers operate a little differently, and we'll get into why that is in later down the presentation. But I'll simply say that in today's world with new infrastructures evolving, it's hard to just simply say that one installation is DC-coupled or AC coupled. And we'll get into exactly why that is.

Okay. Great. When you guys kind of initially teased out this product, you had mentioned that it was initially for front of the meter, but it's just that you got a reaction from the behind-the-meter market when the product was released. So curious on how the market is evolving. Is it -- are your customers primarily BTM? Or are you seeing FTM interest? And if you could provide a split?

Yes, I'll take that one, Kish. I guess when I look at it, it's front of the meter is really grid-facing. So I look at the 2 use cases that Kishan just had up on the projection. If I have solar plus storage and providing energy to the grid, that's going to be grid-facing. If I have storage as a resource for the grid, that will be also front of the meter.

I think what's emerging more and more is with the large load growth driven by data centers and AI training data centers is there's a mix. And Kishan alluded to that a little bit. And without diving too deep technically, what I would say is that what we should focus on is what's the predominance of where the energy is going. So we're seeing with the data center use case, that the energy is predominantly being provided to feed the data center, but that energy can also be used if the data center were to drop in power, it can be used as a buffering resource back to the grid. So it really could look like a combination of the 2.

So I think a hardline view of is it front or back of the meter, I think it's blurring right now. And I do think -- and you didn't really -- you didn't ask this question specifically, Christine, but I think it's important to note that I really do believe that I get questions about is the grid going to be bypassed and is it going to be purely microgrids.

I guess in my point of view, the grid will be connected in the vast majority of the cases. There will be fringe cases where a microgrid could feed a data center. But grid energy is sustainable. It's been there a long time. It's highly protected. It's redundant, and that's something that's difficult to replicate in a pure microgrid. So I do think that, that blur of front of and behind the meter will continue. And it is, in my mind, all about which direction the energy is going and what it's feeding.

At the risk of getting too technical, just because you gave these -- and I know we're going to talk about it a little more later, but you gave 2 examples of like the batteries are used for buffering, but they -- the data centers can also be pulling from the batteries. In those 2 separate use cases, is the battery placement separate, like different?

It's not. The batteries are an energy source, and it really comes down to is in the initial engineering design, are the batteries contemplated as just outage ride through. So again, it gets back to the use case of the data center. Do they just want to ride through an outage in which case the batteries are there to provide minutes or hours of support if the grid were to fail? Or has the design been put into place where the batteries can actually be used as a buffer back to the grid because we're hearing more and more from electric utilities and IOUs that -- or the independent system operators, the ISOs that they're concerned about data center impact to the grid itself.

Things like GPU ripple and voltage stability are potentially causing issues in neighborhoods and with other adjacent C&I facilities. So in that case, if the design is done upfront, then the batteries can be used as a firming resource back to the grid. So it goes back to initial design and intent of what use case the data centers are trying to achieve.

Okay. And I know we're going to go into the use cases a little more, so I'll just leave it there. But -- and you kind of touched upon this, but let's just dig a little deeper. What has changed about data centers in the last year or so that is warranting so much interest in battery energy storage?

I think we've got -- a slide will help in this one. It goes back to the prior question, which is where -- what's the primary purpose of the energy that's being provided. So in the upper right-hand portion of this slide, you see the substation. That's grid connected. It could also be natural gas turbines that are behind the meter that are connected. They then go to a transformer that steps down the voltage to the point where an inverter can take that power in. It then goes through a -- we're hoping in every case, a Shoals recombiner, which then goes to a battery stack battery container charges the batteries.

The batteries then are used to discharge through an inverter that steps it down to a voltage that the data center can use and then it feeds into the data center as AC. So you think of that power flow coming from the grid or natural gas turbines. This use case is very new. The diagram that you're seeing is publicly available. It's indicative of the way that many are looking at it.

And I see it as quite interesting because if the design is considered upfront, you can see that the power could be used to firm the grid, just like the use case that Kishan showed of batteries facing the grid or the batteries can be used to feed and make the voltage and continuous power more available to the data center. So that a design like this enables the best of both worlds for grid firming and then also for data center operation.

So we have -- at the risk of oversimplifying, we generally have heard that the use case for batteries comes down to 3 things: one, power quality; two, speed to interconnection; and three, backup needs. Is your product necessary for all 3 scenarios? And how does the demand differ for each of the scenarios and the relative sizing for each?

Yes, Kish, do you want to take this one?

Yes, I'll take this one, Jeff. Yes, our product is -- our product plays across all 3 scenarios. And in many cases, it's hard to say that each of these scenarios are independent of one another. I think there is a lot of meaningful overlap between them. However, it's up to our customers to prioritize which one of these 3 that they want to go with.

So when we're working with our customers that really want to prioritize power quality, it turns into, okay, what exactly are your product requirements? What are the needs that your site actually needs for this specific location, this specific area and these specific power electronics. And that becomes a very custom tailored product that we build for those customers.

And typically, we do see that as more of a CC&I opportunity, although we do work with utilities in that regard as well. But when it comes to power quality, cost efficiency and flexibility in how we design the product is truly the name of the game. So it becomes a very, very tailored product.

When you're talking about prioritizing speed to interconnection, once again, power quality is obviously very important at all stages. But if speed to interconnection is a priority here, and typically, what we're doing is building a larger system and a standardized system that they can use for repeatability. We want to be that bankable partner for that customer that's trying to scale their business and quickly get developments up and running.

And so when you look at a standard product, scalable DC architectures are what's needed. And those are something that we can support as well as those flexible power quality-focused products.

When you go into backup, it's funny because it's almost like we want everything when it comes to backup because the fact of the matter is power quality is very important when it comes to these backups, especially with data centers. But also with all the demand that we're seeing for data centers, speed to interconnection is also extremely, extremely important, mainly because these data centers, what we're seeing, they can't exist without a sort of interconnection.

Right now, there's a big push to make sure data centers have power packages alongside with their overall development. And so what you're seeing is that power quality and speed to connection, speed to interconnection are both extremely important in that regard. So you'll often see a combination of the product we build for a customer that's specified -- that is prioritizing power quality and a customer that's prioritizing speed to interconnection.

So we are building extremely custom solutions for these backup these UPS solutions that are able to be scaled at very, very high volumes. And so that's one of the big focuses that Shoals has taken in recent times is how can we standardize on maybe a skeleton, but allow for flexibility on the internals of our product, so we can meet those customer needs and scale with the increasing demand.

I think it's important to kind of talk about our -- where we're going with our business. So one of the big things is that when we're looking at these custom products, our biggest goal is to make sure that we can repeat even the custom product. And so that's why we focus on building that skeleton framework and then focus on designing the internals very specifically.

So you went through power quality and speed to interconnection in more detail. Would it be fair to say that backup is kind of on the back burner for now?

I would say backup as a -- if you're talking about backup as a solution for data centers, it's at the forefront. If we're talking about backup as an energy plant, an interconnected solar plus storage, stand-alone storage site, I would say speed to interconnection and power quality do take priority over backup.

And then for the bookings that you do have so far, do you know which case they are using it for?

Yes. For our current bookings, we're seeing the strongest pull from backup data center-specific backup and high-power applications. And that's primarily driven by the AI infrastructure that's being built up today. And so we're able to handle that high current scale DC distribution and support very, very tight reliability requirements at a large volume.

Power quality alone and speed to interconnection, those use cases are still very much apparent, but they're typically a smaller portion of our demand right now. And they do tend to be more cost driven.

Okay. What is the decision cycle of a data center and the difference in architectures that are being evaluated?

Let's go back to the 3 use cases. The decision cycle for BESS added to a storage site is pretty much the same as solar as the solar -- utility scale solar sites. So we're seeing 9 to 18 months as the typical range for solar plus storage. And I would also say that most solar sites these days do have some amount of BESS associated with them and attached with them.

The grid firming use case, those are typically through electric utilities, and we're seeing a longer sales cycle for those. And I think a part of -- the reason is twofold. One is that electric utilities are a little more conservative and they want to see a trial and then before they go to moderate scale and then to large scale.

The second reason would be long-duration energy storage is at the forefront for the grid firming use case. And those are relatively immature in the market and are just emerging now. So the sales cycle has been longer on the grid firming side. I'd say, upwards of 12 to 24 months. And we've been in on some of those for quite a while.

And then the third use case that we've talked about is the data center where BESS is a firming resource for the data center, a UPS and also a firming resource for the grid. That one ranges in the 9 to 18 months. So it really varies by use case. But I don't see a quick turn 30-, 60-day sales cycle in any of them. They're typically going to be 9 months to up to 2 years for some of the fringe cases.

Okay. And the stuff in your backlog, I think you guys have said that like half of that would turn this year and then the rest is sort of next year. Is that what we should think? -- extend beyond that. Okay.

No, that's exactly right. That sales cycle started about 9 months ago. And by the time it turns into revenue, it's going to be about a year.

Okay. What is happening right now that is creating this specific opportunity for you guys?

Yes. I think we talked about some of it already. And I want to tie back to some of those comments. BESS as a ride-through technology. So if the grid were to fail, and we had some issues in Texas a few years ago, we had issues in other parts of the country where the grid would fail and you needed energy to be provided to, in this case, a data center.

So the batteries were in place for ride-through capability and outage -- basically outage ride through. What's changing now is with data centers and AI and when a data center is in training mode or whether it is in inference mode where it's in standard normal operation, when an AI data center is in training, is a training data center, you have something called GPU ripple. And basically, those are high voltage fluctuations in the signal that cause problems on the grid itself when that occurs because the loads are so massive out of a data center that it causes cascading issues within the grid.

So GPU ripple is a new challenge that the industry has had to face. The second is tied to it, which is voltage stability. Because the power fluctuations are severe and they happen so fast, you can see a swing in voltage on the grid itself.

And then providing continuous power is a third. If the data center were to drop its operating load substantially, the grid would see that and might not be able to react as quickly. So the grid might have a continuous power issue in that area.

Conversely, if the grid isn't able to provide power, the data center that the data center needs, it may have an issue. So those 3, I would say, use cases within the data center segment are relatively new last couple of years and the solutions that we're seeing on the market are addressing those. So it's using BESS as a UPS resource as opposed to the more standard low-voltage UPS resources that were deployed over many, many decades.

So let's talk about your specific product in your process. What do you exactly sell? What does it do? Why do people buy it from you? Who buys it from you? And then if we can get maybe an idea of product road map, what's next for this product?

Yes, sounds good. You want to go on Slide 5. You can jump in.

Yes, you do the what I'll do the who.

Sounds good. So what do we sell? So it's a good question. I want to bring your attention to the left 2 boxes, the green boxes. What we sell right now is a product that allows you to aggregate multiple DC circuits. We have combiners that can be wall mounted, and we have recombiners that are freestanding. And the main thing is we obviously play in the DC-coupled market because we are consolidating and aggregating DC inputs.

But we offer a method for developers to consolidate and reduce the number of inverters on their site and in doing so, reduce the footprint of their site as well, maintaining their power density. We go into a range of amperages. The highest one and the most common one we typically see for battery storage products is that 4,000 amp recombiner, where we can take up to about 16 fused inputs into a cabinet.

Now that does require a larger cabinet profile. But the fact of the matter is we can take up to 16 in that 4,000 amp recombiner. And I think the biggest thing that we've started to see more and more of is as batteries continue to evolve, as batteries continue to get bigger, as duration starts to get longer, as footprint starts to get smaller, the fault current becomes more and more of a risk. And so what we're seeing is that the fault current no longer is just 100 to 150 kIC. Now we're going up to the 200, 250, 250-plus kIC.

And right now, we're designing our product to take on that high of a fault current. So that's kind of what we do with the combiners and recombiners. But we have an attachment that I think offers a lot of control to our developers, which is the multi-load break disconnect. And basically, what this is, is all those inputs that you put into your combiner or recombiner, if you want individual control of each one of those inputs, then you can attach a multi-load break disconnect to that unit. Why is this important? Well, when it comes to doing service or any sort of maintenance, if the developer wants to maybe not shut off their entire operation, they can have that individual control on their inputs and really isolate what needs to be shut off and what doesn't need to be shut off.

And so we offer that as an attachment if the developer does want that. So what's next? I think the -- where we see the market going is definitely in reducing footprint while maintaining power density. And the best way to do this is to really consolidate your components onto a skid. And so where we're looking at right now to take Shoals to the next level is looking at skidded power electronics for our next launch.

Yes. Christine, as far as the -- why do people buy from us, I think I'd look 2 different directions. If I look at this portfolio, all of the variables that are in there make it a high mix solution. So every -- we found that every data center, every solar field is a little bit different.

We have differentiated ourselves over the years in solar by providing high mix at a high volume. That same approach is resonating with and in the best market. The cabinets themselves range in size. What goes into the cabinet is designed for that site. The configuration is designed for the site. The fault current rating is designed for a specific site.

If I look to the large multinationals that I'm sure all of you know, we compete against them because we are very good at and very willing to do custom solutions on a site-by-site basis. That's what we've cut our teeth on over the years. And we've got a scaled production line set up to do just that. So our ability to compete against the multinationals is tied to this high mix, high-volume capability that Shoals has had.

On the opposite facing realm are the smaller, I'll call them the small panel shops that can create and do quite well at creating 5, 10 of these similar cabinets per month, but a data center is looking at hundreds of cabinets in the scope of their project. Plus you look at the bankability of those companies, the smaller panel shops that may or may not be profitable and have their own cash flow issues, whereas with Shoals, we're a $0.5 billion-ish company. We're cash flow positive. We are bankable public company.

So our customers view us as steady and bankable and able to take on these large multiple hundreds of units of project -- products within a project. So I think we're at the sweet spot of the market of willingness to customize, but also able to -- and also able to scale and able to differentiate ourselves through the volume and size that we are as a company.

Now the who buys the question is it's going to tie back to the use case. If I look at the solar plus storage use case, those are typically procured by the EPCs. So the engineering procurement construction companies. The grid firming use case, those would be an EPC, but could also be an electric utility or an IPP, a public power operator.

And then the data center operator, it's varying right now. It could be an EPC, it could be an OEM. It could be an energy and engineering firm that is coupling solutions together. So we're seeing a broader variance. And I think that's a testament to that the ecosystem hasn't quite settled yet on the data center space. So our customers are a little bit more varied there.

Okay. You touched upon all other things that I would like to go a little deeper into. But before we do, when I just think about your solar EBOS product, which was your flagship entry into the market, the value proposition here has always been labor savings. The higher CapEx more than offsets the labor.

And so it's like very easy for investors to understand why someone would take this product. What about for this BESS product? What exactly -- can you just talk through what is your product "replacing" or maybe just talk through the value proposition of why you versus someone else or something else?

Yes. So I think it's back to the use case. Solar plus storage we enable DC coupled. Kishian talked about some of the advantages earlier of a DC-coupled solution. We have -- we are DC experts. It's what we've been in for the duration of our company's history. So a DC-based product at high voltage, so up to 1,500 volts, 4,000 amps, so incredibly high-power DC systems. are our specialty, and we get quite a few opportunities to come in just by our -- being in the DC side of the equation for grid firming and solar plus storage. They're used to doing business with Shoals on the solar EBOS side. They will continue to work with us on the best recombiner side. And then it gets down to the difference of would they rather buy from a large multinational that may not be willing to customize, I'll buy a SKU off the shelf.

What we've heard more than once is our customers said, well, they've asked in the market and the response is, well, I've got this box, this box and this box. and they kind of fit your need. And with Shoals, we're able to say, no, we'll make a system that fits your need for that site. So it's that flexibility that helps us compete in regardless of use case, but primarily in solar plus storage and grid firming.

And then the other alternative would be the panel shops. And what we've seen of most of the panel shops is that they are AC experts. So they're making large AC panels. They're making AC switchboards, but they haven't really gone into the DC area as yet, they might. But we've got quite a lot of, I'd say, a decade plus of experience on them in that regard. So I think that sets us apart for quite a while.

And then also, we're continuing to evolve our thinking of it's not just a cabinet. Now it's a cabinet plus a power system on a unified skidded solution that will reduce labor from the field. So eventually, we're going to get back to our cut and dry. We're going to take X amount of labor out of the field, put it into the factory. That's when we start to introduce skidded solutions.

In the past, you've talked about 3 sales channels, leveraging existing customers, selling directly to data centers and then co-engineering with integrators. It's been about 7 months since you started talking about this product in more detail. Can you update us on what you have seen since then? -- which sales channel is getting the most traction and which one has the biggest tail?

Yes. I think the quick answer to that is the one that we're talking the most about, and that's the BESS as a resource for data centers. If we look at the other 2 use cases, I think what we released at Investor Day is we're thinking that the solar plus storage is about $360 million TAM. Okay, interesting, but not massive.

And then grid firming, we're seeing that emerge more and more with long-duration energy storage. So we think that TAM could be about the same, maybe larger. But then when we look at the data center opportunity, and there's a graphic that I would like to show that ties some numbers into what we talked about earlier.

So I'm going to give a couple of examples and some ranges. What I can't do today is provide you a TAM, and I'll explain why in a minute. But I'll give you some tools that can help you get to that point. So one -- and again, this is a energy flow diagram that is publicly available. And if we equate it to a 1 gigawatt data center, depending upon the size of the battery stacks, you'll need some number of Shoals recombiners, 400 to 600 would be a range that we would be comfortable with based on the size of the batteries.

If I have much larger batteries, I would need fewer recombiners. If I had a smaller battery, I would need more recombiners. The ASP for the recombiner varies pretty broadly, whether I need 1 cabinet or 3 cabinets, the number of interconnections that Kishan talked about earlier, do I have 8 feeds coming in, 16 feeds coming in? How many fuses do I need per recombiner? What does the disconnect structure look like? So it's a fairly broad ASP.

And then if I do some math, and the math won't be obvious, I'm going to take you through it. If I look at the lower end ASP, that would be a smaller recombiner. But if I have a smaller recombiner, I'm probably going to have more of them. So if I look at the lower end of a range, it would probably be the 70,000 ASP times 600, that gets us to about $42 million per data center.

If I look at the higher end of a range, that would be a multi-cabinet recombiner. And if I'm putting a high end together, I would use the high-end ASP times the high-end number, and that gives us a range of 42 to 72, again, just pure math. We've been saying for a while now that our range is $50 million to $60 million per gigawatt. That's about right, and that's where those numbers get derived from are these ranges.

And I would say that we haven't seen enough volume to know what the predominance is within that range. So I'd say let us sink our teeth into it a bit more and see whether it skews to the high or low end, but that's a good range for you to use. And then if we look at the data center market, and we've looked at it a lot of different ways. We use WoodMac as a company. A lot of companies use BNEF. We've done a math calculation to roll up the number of NVIDIA chips and the power consumption of NVIDIA chips bottoms up.

They all round out to about a 10 to 15 gigawatt per year U.S. data center market. Now here's the difficulty in getting to a SAM or a Shoals addressable market is -- we don't -- this is so new, this BESS as a UPS or as a firming resource is so new. We don't know of that 10 to 15 gigawatts, how many will have a BESS system. We also don't know the power consumption that will be required from that BESS system.

So it's too early for us to say that some percentage of that 10 to 15 is going to have BESS versus not. And then within that number that will have BESS, how many are going to be this configuration versus the use case, which is just outage ride through. So I think there's too many variables right now, and I'd have to give you a wild range that would make no sense. So -- but I think we would -- as a company, we would stand firm behind these 2 numbers. And what we're trying to do is figure out where they land from an overall addressable market perspective. Is that a fair way to hedge it?

You're asking me?

Yes.

I guess my -- maybe my follow-up would be because -- and I totally understand what you said about why it's difficult to sort of put a tighter range. And -- but also just sort of since you first started talking about this topic, there have been new products, new ways to sort of maybe solve for the same thing.

And so I guess I'm curious -- and maybe this is an unfair question, but if you just kind of had to compare what you thought or what the range of outcomes of what TAM could be was 7 months ago when it was very early stages versus today because you do have more information today, would you say it's up, down or about the same?

I would say it is significantly up. Because if you would have asked me, and I think you did ask a few months back, and it was really the first 2 use cases. It was solar plus storage and grid firming. And I would say this opportunity is substantially larger than those 2, and it's moving faster. What we don't know is where it's moving to and at the pace and what the adoption curve is going to look like. So it definitely is larger. It is a larger overall market opportunity for us. And I think we play well in all 3 use cases.

Okay. What about -- earlier, you talked about shrinking footprints and increasing energy density. So what about the move to 800-volt DC? Does this move impact the need for this product at all?

Yes, love the question. And we see the white space of the data center. So within the data center itself as a different product category. A DC recombiner could be advantaged by a data center going to DC. But I don't know what that could look like. But I also know that we've got a product that we're -- that we unveiled a little bit at Investor Day, and we've continued to work on within that white space, a cabling system concept that is moving along quite well within the data center.

Now think of this, Christine, if you've got DC that is feeding the racks and the rows or the rows and the racks there's still going to be AC power needed within a data center. You're still going to have to feed lights. You'll still have to feed standard HVAC systems that are AC powered. So there's going to be a combination of AC and DC that goes into a data center. But what I would say is our DC focus is advantaged by the move in the industry to go to DC.

And I see that it makes total and logical sense for the data center operators to do that. They're looking at ways to reduce power consumption and heat dissipation is one of the primaries. So if I go to a higher voltage, I go to 800 volts DC or even eventually to 1,500 volts DC, I can get the same power with lower current, which means less heat dissipation.

So I do think the DC architecture advantages us for the best product that we've been talking about. That's a little bit separated because you're still going to need some type of inverter in the middle and power conversion in the middle. But I would say our product that's within the white space of the data center definitely is a great fit for 800 volts DC or if they continue to work down the AC path.

Okay. So just to make sure to clarify, that's a separate product.

Separate product.

Yes, one that I'll be bugging you about later on.

Please do.

I'm going to -- I have one last question. Just as a reminder for everyone on the call. If you do have a question that you would like asked, please e-mail [email protected]. The e-mail is right below my video. So the Shoals BESS recombiner box is usually discussed synonymously with data centers. Is there a need for this product with other customers?

Yes. Jeff, I'll take this one, if you don't mind. It's important to consider the birth of this recombiner. It actually was initiated by your typical solar plus storage, stand-alone storage sites. And I think what we've seen in those sites in our ability to consolidate inputs and simplify those inputs to a singular output. I think that value proposition has been realized in this battery storage UPS system because what you're seeing is kind of a reverse recombiner. You are consolidating 2 inverters and going to a singular battery.

And I think the theme that you're seeing here is that there is a need for consolidation and there's a need for simplification. And I think customers are always looking for simplification. And when you look at our recombiner, we offer a custom way to offer that simplification based on the customer's specific needs.

And so I think it's important to make that distinction that this product did start with your interconnection sites, solar storage, stand-alone storage and that value proposition of simplification and has been realized in this data center world that we're in right now. And so I think what we're looking to do is continuously improve that value proposition, continuously improve the product to add to that value proposition and grow.

Okay. Well, thank you, gentlemen. We have, let's call it, roughly 5 minutes. So I did get a number of questions that I'll try to move through. It seems like a lot of them has to actually do with competition from what I can tell. How does your DC to DC recombiner box differ from those offered by Schneider Siemens? Also, what is the typical solar to storage ratio? Is it 1:1, 1:0.5?

Yes. Kish, I'll take first half, maybe you take second half.

Sounds good.

I think it goes back to, Christine, the question we talked about earlier, we compete against Eaton, Schneider, Siemens. And our ability to customize is what differentiates us. I would say we see them less than we see some panel shops when the customers are looking at because I think customization is top of mind right now. And what we're hearing about the multinationals is that they have standard SKUs on the shelf and they're trying to sell the standard SKUs and whereas we're willing to customize, but can also scale. So that's where we're winning today.

Where a customer could buy a standard SKU and they're very comfortable and maybe they've got a bulk order in for substation gear from one of the big multinationals, they may just couple in the best cabinets there. But I would say that our customization and scaled line capacity is what sets us apart, and that also sets us apart from some of the -- from the primary panel shops. Kish, can you take the ratio question?

Yes. So I just wanted to add on to that. One other thing we did touch on this earlier on is that when you look at an off-the-shelf cabinet, you're typically looking at a lower short circuit current rating for those cabinets. When we design our cabinets, we understand the increasing need to handle a much higher short circuit. And so that goes into our design as well.

So -- it's not just that we're able to scale and we're able to be custom, it's that we're able to work with our customers and become a sort of partner with them as we're designing the product that works for their site that needs to work for their site. So that's just one piece that I wanted to add.

As far as ratios go, it's an interesting question. Christine, was that about ratios of solar to recombiners? Is that what we were going with? Or what was the question, that second one?

I thought it was solar to storage.

Solar storage, yes. So typically, what we're seeing on our side is we would see about, I would say, 6 inputs going into the recombiner to 6 solar inputs going into the recombiner to 2 to 3 battery inputs going into the recombiner. So to answer your question, I mean, it's about a 2:1 ratio, solar to battery.

Yes. If we would say megawatts, a 500-megawatt solar site is going to see about 250 megawatts of battery.

Yes.

Okay. Great. And then I got a question asking if you can comment on the margin profile of the BESS system by use case. So I understand if you don't maybe want to give explicit numbers, but maybe if you could talk relatively if there is a difference between the different use cases that you've given.

Yes. I would say that the margin profile is consistent across the 3 use cases and that it is accretive to the solar margins.

Okay. And then I think this is going to be the last one, but I figured it would maybe be a great way to sort of provide a segue for your next product. But I did get a question of can they talk a little bit about the inside data center product that you guys alluded to just a little while ago?

Sure. Yes. And Kishan, I'll defer to you at some point. I'll stay high level. Data center rows and racks are fed today primarily using 2 technologies. One is busway systems that are large copper bus bars that run along the row and then you have a tap-off unit that feeds power down to the rack.

The other technology that's used are called WIPs. So basically, home run wires from the rack back to a power unit that provides the power to the WIPs. We're -- and we announced this at Investor Day, so I'm not disclosing any material nonpublic information, but I'm refreshing it. We're introducing a product that we feel fits very nicely in between the 2. So we're using our BLA, our big lead assembly that's been in solar fields for over a decade.

We have -- are testing it to the AC environments that you see within a data center and basically envision now where the busway would go above the row of racks. Now envision BLAs to have a cable management configuration that runs along the row of racks and then the drops that would normally go to a solar string. Those drops then feed into a tap-off box, which then goes down into the rack.

And we believe that the system we're developing will substantially save on labor, but then also can be turned around very quickly for a specific site. So no more long lead times for busway.

Yes. I'll just add one more thing to that. The other thing that we kind of mitigate is short circuit risk with using these BLA cables. If you have cables in a bus, potential for positive to ground, negative to ground, I'm not going to say it's super high, but it's higher than using the BLA cable. So that's just another point. Jeff did a great job bringing that to life.

I'm sure I'll be asking you for a webinar when you make more progress there. So I look forward to that. Well, gentlemen, thank you so much for the time. And for everyone who tuned in for the last hour, thank you for joining, and I hope everyone has a great rest of the day.

Thanks all.

Thanks, everyone.

Good morning, and welcome to the Shoals Technologies Group Fourth Quarter 2025 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Matt Tractenberg, Vice President of Finance and Investor Relations for Shoals Technologies Group. Thank you. You may begin.

Thank you, Carina, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos. 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 and should not be considered guarantees of performance or results. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings.

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 nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investor Relations section of our website at investors.shoals.com. With that, let me turn the call over to Brandon.

Thank you, Matt, and thanks to everyone joining us on the call. I'll begin by sharing key results from the fourth quarter and our full year key wins and milestones. We'll then discuss the current demand environment and review progress on our strategic growth initiatives. Dominic will dive deeper into the fourth quarter results and provide our first quarter and full year 2026 outlook. We'll finish the call with questions from our analysts.

Fourth quarter revenue was in line with our expectations at approximately $148 million, up 38.6% over the prior year period. Our commercial team also drove significant growth in our book of business, adding approximately $175 million in new orders in the period. This resulted in a company record backlog and awarded orders or BLAO, of approximately $748 million, an 18% year-over-year increase.

We delivered a seasonally strong book-to-bill of 1.2 this quarter, which continues to support the growth we see in 2026. As of year-end, approximately $603 million of our BLAO has shipment dates in the upcoming 4 quarters or full year 2026. We are set up very well for another successful year of growth.

Commercially, we are achieving our objectives of growth and diversification. Profitability, however, was softer than anticipated in the fourth quarter. Our fourth quarter adjusted EBITDA of approximately $30 million grew by 15% year-over-year, representing 20.4% of revenue. This was largely driven by higher legal expenses, the ongoing impact of tariffs, product mix and high labor and shipping costs in the period.

As we discussed with you last year, we see very strong underlying demand drivers across the markets we serve. This, when paired with the incremental capacity we will have at our new facility, warrants a more flexible and agile approach to how we determine which projects and which customers to engage with.

Opening the lens with which we look at the opportunity set to drive higher revenue in 2026 and beyond, while remaining within a reasonable margin range will ultimately result in higher profit dollars and free cash flow, which will be reinvested back into the business. This approach removes self-imposed constraints, enabling us to make the right decisions for the long-term health of the business.

Again, I'm very proud of our performance in 2025. It was a busy but exciting year for us. After a challenging 2024, we came back strong and grew top line revenue by 19%, exceeding our initial expectations and the long-term range shared with you at our 2024 Investor Day. Our U.S. utility scale solar business grew by almost 11% for the full year, accelerating in the back half of the year and growing 30% when compared to the second half of 2024. International revenue expanded from less than $1 million in 2024 to approximately $13 million in 2025. Our CC&I and OEM businesses exceeded expectations, and we've laid the foundation for our BESS business that is poised for rapid growth in 2026.

Engaging with our customers, we introduced multiple new products in 2025, effectively expanding our addressable market and capturing additional share. We continue to diversify our customer list to include several new EPCs. For example, in 2023, we had 3 customers that accounted for less than $6 million of revenue. Today, those same customers account for almost $140 million of our BLAO. And we've made big, meaningful operational changes as well, including our ongoing move into a consolidated state-of-the-art manufacturing facility. This will enable critical improvements to productivity and scalability as we continue to grow and diversify our business.

Given the industry growth we see, it couldn't happen at a better time. During the year, we also completed remediation for all reported instances of the defective Prysmian wire. This effort was funded through our own cash flow and reinforced our commitment to customers that we stand behind our products and services. So in summary of the full year, we're pleased with our performance. We've come a long way in the last few years. Our strategy of protecting and growing our core business while diversifying our offering and exposure to end markets is yielding results. Our focus on improving our operating capabilities while maintaining the commercial momentum you've seen is how we intend on driving attractive returns for our shareholders.

Turning to our various business lines. I'd like to provide some context to our performance in the fourth quarter. The fourth quarter was another strong period of growth within our core utility scale solar market, our quote volume in the quarter exceeded $700 million of unique projects, adding to our strong pipeline. Note that these are projects that would generate revenue in 2027 and beyond, further supporting our long-term growth trajectory.

And also related to the core U.S. utility scale solar market, in early 2025, Shoals brought a second patent infringement case against Voltage before the U.S. International Trade Commission, utilizing our new and expanded patent portfolio. While the legal process will likely continue for another quarter or two, we're very pleased that the court recently issued its initial determination in our favor. It's a great first step, and we'll remain patient for the commission's final ruling in early June.

I'm also encouraged by the progress we are making in international markets as evidenced by our increased quote activity and customer engagement. The products introduced in 2024 are generating interest with key decision-makers while our experience and reputation for quality is winning projects. We recognized approximately $13 million of revenue in 2025 from international projects and have a record $90 million of international BLAO, which will drive continued growth in 2026 and beyond.

Our community, commercial and industrial or CC&I business is performing well. We are engaged with large, well-respected electrical distributors that are driving meaningful quote volume increases. Our OEM business is tracking ahead of expectations, growing at 47% for the full year as our partner continues to see strong demand for their panels. We expect to continue in 2026 with another year of attractive growth.

We began disclosing our BESS backlog and awarded orders last quarter, which at the end of Q3 stood at $18 million. That information was designed to provide a starting point that you can use to track our progress against a rapidly evolving market opportunity. I'm excited to share with you that as of year-end, we have $67 million in BLAO, a testament to the upfront engineering competencies and future manufacturing capabilities Shoals offers. We would expect more than half of this amount to be recognized as revenue in 2026.

We continue to invest in scalable production capabilities for BESS. We expect our first new production line to be operational within the coming weeks. And I'm pleased to announce a partnership with ON.energy, a leading developer of advanced power systems for grid-safe data centers. Together, we will address a fast emerging constraint for AI-driven infrastructure, securing resilient backup power at scale while enabling data centers to operate as grid interactive and firming assets.

Our partnership brings together 2 U.S. innovators with complementary strengths in power architecture and execution. ON.energy will pair its medium voltage uninterrupted power supply systems with Shoals' advanced DC recombiners to deliver a solution for AI data centers that accelerates deployment time lines, safeguards operational continuity and future-proofs energy infrastructure.

2025 saw a return to growth at Shoals. Our markets have been resilient and our competitive position continues to improve. We've entered new markets with new products, made meaningful progress on our legal actions and began our move to our new consolidated facility. While the regulatory landscape has been distracting to many, we remain focused on executing our strategy. With that, I'll now turn it over to Dominic, who will discuss our fourth quarter financial results in more detail and our outlook for the first quarter and full year 2026. Dom?

Thanks, Brandon, and greetings to everyone on the call. Turning to our fourth quarter financial results. Revenue increased by 38.6% year-over-year to $148.3 million. The increase in revenue was primarily driven by higher domestic project volume from both new and existing customers. In addition, as Brandon mentioned earlier, our strategic growth channels of international, CC&I and OEM contributed to year-over-year revenue growth in the quarter. Gross profit was $46.9 million compared to $40.2 million in the prior year period, an increase of 16.7%. Our GAAP gross profit percentage was 31.6% compared to 37.6% in the prior year period and lower than we anticipated.

We estimate that fourth quarter gross profit dollars were impacted by $2.1 million of incremental tariffs and logistics costs, $2.5 million of additional labor to support new products, packaging and delivery requirements and $0.5 million of additional plant overhead expenses, partially offset by higher volumes. These items negatively impacted our fourth quarter gross profit percentage by approximately 350 basis points versus our expectations.

While you've heard us consistently communicate our long-term aspirational goal of 40-plus gross profit percentage, we were very clear in 2025 regarding our expectations of gross margin percentage to be in the mid- to high 30s. In the long run, we continue to believe that a company like Shoals, who delivers highly customized and engineered-to-order solutions deserves an attractive return profile, but we must also balance those aspirations with the real market opportunities we have in front of us today.

Part of the transformation you see at Shoals includes a renewed focus on innovation, flexibility, productivity and the maximization of cash flow. The top line strength we drove in 2025 and expect to continue in 2026 is in part attributable to a larger opportunity funnel consisting of both traditional and newly introduced products and a more flexible and customized approach to how we package and ship our solutions.

Our strategy of driving incremental operating profit and finding balance between growing the business and driving profitability is one of the most important decisions we can make, and I believe we're doing the right thing. In the long run, the scale and leverage we will get on those incremental projects will allow us to continue to invest, diversify and grow.

The flexibility to make these important trade-offs to maximize profitable growth and ultimately create shareholder value cannot be done with a focus on a single profit percentage metric. For these reasons, for the foreseeable future, a gross margin percentage of low to mid-30s will provide us with the flexibility to win new customers, deliver new products, enter new markets and continue the transformational journey we're on today.

Moving on to selling, general and administrative expenses. SG&A was $27.3 million, which is $5.8 million higher than the prior year period, driven by increased legal expenses, partially offset by a reduction in stock-based compensation. Please note that in 2025, we spent a combined $30 million of legal professional services, an increase of 100% over the prior year. Recall that $18.3 million of 2025 legal expense related to the case against Prysmian is identified and backed out of adjusted EBITDA. While these elevated legal costs impacted our results in 2025 and will continue in 2026, they will not occur in perpetuity, and we expect them to decline in 2027.

Income from operations or operating profit was $17.4 million compared to $16.5 million during the prior year period. Operating profit margin was 11.7% compared to 15.4% a year ago. Net income was $8.1 million compared to net income of $7.8 million during the prior year period. Adjusted net income was $17.5 million compared to $14.1 million in the prior year period. Adjusted EBITDA was $30.3 million compared to $26.4 million in the prior year period, representing 14.7% growth. Adjusted EBITDA margin was 20.4% compared to 24.7% a year ago, driven primarily by lower gross margin flow-through. Adjusted diluted earnings per share of $0.10 was 22% higher than the prior year period.

I now want to provide more color on what's driving the shift in profit percentages going forward, so you can understand the gives and takes, what we can influence and what are more macro in nature. Let's start with tariffs. While our intent was to broadly pass them on to our customers, in several cases, it does not appear to be possible at this time. We estimate tariffs had a $3.7 million impact to COGS in 2025 or an 80 basis point impact on consolidated full year gross margin percentage, heavily weighted in the second half of the year. While this issue is uncertain and rapidly evolving, at this time, our guidance incorporates a similar tariff impact in 2026.

We also began our move into our new consolidated factory in late 2025. While this is a huge undertaking, the full economic benefits will not be felt for some time. There are redundancies, additional training, setup and processes that need to be redesigned and implemented. These initial inefficiencies are incorporated into our 2026 guidance and will be reversed over time as we increase throughput and drive lean process improvement through our manufacturing organization. This was the right strategic decision that will provide the capacity we'll need for years to come. As we've stated in recent quarters, our plan is to be fully operational in the new facility by the middle of this year.

You're likely familiar with the 3 legal actions currently in play at Shoals, litigation against Prysmian for defective wire, the related shareholder class action and derivative lawsuits and the ITC case and subsequent district court case against Voltage. The cost for the defective wire case, both in terms of legal expenses and product replacement work we've done since 2023 is shown in our filings and adjusted out of our non-GAAP EBITDA results. However, the legal expense for the 2 remaining actions has not been called out specifically, and so investors may not appreciate the impact or timing of them.

As a result of the expected elevated legal costs in 2026 related to these actions, we will provide investors with additional visibility. In 2026, we will also adjust EBITDA for the spend on the shareholder class action and derivative lawsuits.

Our communicated strategy of defending share within our core markets and expanding our reach through new innovative products that solve customer problems has yielded tangible results. It has enabled revenue growth of 19% in 2025 and an acceleration in 2026. While they have been well received by many new and existing customers, not all are accretive to gross margin percentage. Some expand our total addressable market, which opens opportunities by increasing the value to developers and EPCs. Evolving from offering a narrow product set to a diversified portfolio that resonates with a broader customer set will take time and patience, but it's the right thing to do for our customers and shareholders alike.

Operationally, we consumed $4.1 million of cash in the fourth quarter, driven by higher accounts receivable and inventory balances at year-end and partially offset by higher accounts payable and higher deferred revenue. On a year-to-date basis, we have generated $17.1 million in operating cash flow. Free cash flow was negative $11.3 million in the fourth quarter, reflecting both the $7 million impact of remediation costs and elevated capital expenditures related to our new facility. These 2 items impacted free cash flow by a total of $14.2 million in the quarter.

Our balance sheet remains high quality, and we ended the quarter with cash and equivalents of $7.3 million and net debt to adjusted EBITDA of 1.3x. Our net debt was $129.4 million, a slight increase over the prior quarter. Backlog and awarded orders ended the fourth quarter at a record $747.6 million, a sequential increase of $26.7 million. Backlog constitutes $326.2 million of the total BL&AO, providing us with confidence that the growth projections we have for the upcoming periods can be achieved.

As of December 31, $603.4 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters, with the remaining $144.2 million beyond that.

So turning now to the outlook. For the quarter ending March 31, 2026, the company expects revenue to be in the range of $125 million to $135 million, representing 62% year-over-year growth at the midpoint and adjusted EBITDA to be in the range of $16 million to $21 million, representing 44% year-over-year growth at the midpoint.

Turning to the full year. As we enter the year with $603 million of backlog and awarded orders currently expected to ship in 2026, we remain mindful of the elements beyond our direct control. Similar to last year, we estimate the volume of projects that might be delayed out of the year as well as the volume of projects that we can still add to the calendar year.

For this year, we need to also incorporate our new BESS customers and product delivery schedules that are dependent upon totally different factors than our historical utility-scale solar projects. As a result, our expectations for revenue is a range slightly below the $603 million backlog and awarded orders on the books at year-end. We believe this range to be reasonable and achievable. Therefore, for the full year 2026, we expect revenue between $560 million to $600 million, representing year-over-year growth of 22% at the midpoint and adjusted EBITDA in the range of $110 million to $130 million, representing year-over-year growth of 21% at the midpoint.

In addition, for the full year, we expect cash flow from operations in the range of $65 million to $85 million, capital expenditures in the range of $20 million to $30 million and interest expense in the range of $8 million to $12 million. With that, I'll turn it back over to Brandon for closing remarks.

Thank you, Dominic. As we enter the new year, I reflect on where we've come from and look ahead to where we're going. The broader U.S. market appears to be extremely resilient. Our customers are busy moving projects forward, and we remain committed to meeting their needs. As we have discussed, the need for new energy supply is real. The massive investment cycle in AI and data centers, combined with the continued industrialization and onshoring of manufacturing will drive load growth far in excess of what we've seen in recent decades.

Solar is still best positioned to meet these rising energy needs today and through the balance of the decade. While industry growth forecasts vary greatly, in our view, sustained solar capacity additions are the most likely outcome. We are preparing Shoals to be agile in our production capabilities in a stable or growing demand environment.

In 2026, Shoals celebrates its 30th year of doing business. It also marks 5 years since becoming a public company. Since our IPO, our annual revenue has more than doubled from $213 million to $475 million. We've generated more than $220 million of cash flow from operations that has been reinvested in the business, and we've maintained market leadership by a wide margin.

We've built a company with a strong foundation on innovation and quality and to fully achieve what we know we're capable of, transforming the company from a narrow product offering in a single market and geography to a more diverse and durable business, meaningful change will continue to occur. And today, we are in an exceptional position from both a commercial and operational perspective.

The strategic plan we constructed and process improvements we've implemented have begun to yield tangible results. We've protected and grown our core markets. We've reignited the innovation engine. We are building new businesses and new markets that expand our total addressable market while aggressively diversifying our market and customer exposure. We've invested in the right physical assets, including automation and technology that will drive productivity for years to come, and we've assembled an experienced team of business leaders that will enable us to continue the transformation of Shoals.

These changes are both critical and deliberate and come at a time where the world is struggling to keep up with energy needs, both here and abroad. The long-term secular tailwinds are intact and strengthening. We're very excited about the trajectory of our business and the markets we participate in. We want to thank our shareholders and customers for their continued trust and our employees for their hard work and dedication. Operator, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Julien Dumoulin-Smith with Jefferies.

Can you guys hear me okay?

Yes, sir. Sure, can, Julien, loud and clear.

So just a couple of questions here to hit it off. First off, just in terms of book and bill in the year, just when you think about setting that benchmark here for top line revenue for '26, how are you thinking about how much you could actually book in this new environment? You guys made some comments on that in the prepared remarks.

And then related here, can you comment a little bit about seasonality? What else is going on when you think about this new set of customers that you're alluding to here? Just -- it seems like a very conservative benchmark given what you're coming into the year with and where you're setting your full year revenue numbers at. And I've got -- I'll throw you a quick follow-up on that just in terms of BESS, what is the right order rate when you think about the trajectory of continued to add backlog, pretty impressive Q3 -- Q4 over Q3.

Thanks, Julien. Great questions. So I'll start with the first when we think about our book and turn business. Historically, last year and even the prior year in 2024, I mean, it's reasonable to think that $50 million to $70 million in book and turn business is probably a pretty reasonable number to think about. And what we've got to keep in mind this year is we're still in an environment where there was some level of uncertainty, but we didn't see that level of uncertainty materialize in 2025. It still exists in our current landscape. So we wanted to be prudent about our guidance.

Additionally, as we have taken on new customers, they've got different expectations, different project delivery schedules than we've experienced in the past. So we wanted to incorporate that in our guidance. And additionally, as we diversify our business into new products and markets, and those products have yet to deliver yet, we want to make sure that we have given ourselves some room there as well in our guidance.

So as it relates to the order book specifically to BESS, as we've mentioned in the past, the bookings for this particular business could be lumpy. They're large projects in nature, and we are very excited about the $67 million of backlog and awarded orders. We've effectively 4x'ed our bookings number from last quarter. But we think that the bookings there could continue to be lumpy, while revenue recognition once we get going with our new production line here in the coming weeks, will probably be more stable.

So this is really just -- what is it about the business backdrop that you would -- if you could just elaborate quickly that gives you that pause on the translation of revenue this year. Is there anything about the environment in particular you want to stress? Or it's just truly the nature of new customers here?

Yes. I think it's just the nature of the new customers in our traditional solar business. We want to be mindful that they may have different project patterns than our historical customers. And just give ourselves room, Julien, to make sure that, that book and turn business either supersedes any project delays or potentially overcomes project delays. If the year materializes as planned and projects go off as scheduled, I would look for us to be at the upper end of our revenue range.

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

I wanted to check in with you guys on the margin outlook. Dominic, you talked about this new range of low to mid-30s due to a number of reasons, new customers and delivered new products, et cetera. And so I was wondering if you could give a little more color there. How long should we expect this level or this new range to be in place? So beyond '26, do you think we should kind of think about this as the range also for '27 and '28? And then can you talk about pricing? To what degree have you guys lowered pricing? And is that a big driver of this new margin range?

Sure, Phil. So let me start with the 2026 outlook on margin, where we've said it's the low to mid-30s. I think it's very important for us to really focus on some of the more transitory things and then also what might be -- take a little more time to evolve. As we said in the prepared remarks, we do include some tariff impact that is expected to be absorbed by Shoals. As we saw on Friday, this is a very fluid situation, but we do have inventory that has capitalized tariff expense that will still be with us for the first half of the year.

Another thing that we've been talking about is the move into our new mega facility. We expect to be moved in, in the first half -- by the middle of this year, first half of the year, we're moving in. But in the meantime, we do have some inefficiencies created by still operating now in 3 facilities during this transitional period. So that is something that is certainly factored into our guide with a lower gross margin percentage.

As we talk about gaining efficiencies over time, we absolutely will have cost-out initiatives and margin improvement initiatives going into '27 and beyond. But I do believe with our product mix, the third component that we have talked about introductions of new products, capturing new share and new customers that don't use the BLA product system, and those have a margin percentage dilutive issue, an example being a long-tail BLA product as an example. And we've talked about the fact that product mix is important.

So I would characterize this year's margin guide as one that should see the lowest margin percentage of the year in the first quarter. And then we'll start to see a gain back as we start getting some synergies and get some cost out as we move into the new facility and we get the scale that we've been talking about to leverage those new fixed costs. So for the short term, I think this is the right margin percentage. And I expect that 2027's margin would be higher, but we're taking off the table any discussion of 40% return in the near term. I just want to be very clear about that.

Thanks Dominic. That's very helpful. And then -- shifting over to the comments that you guys had in your Q1 guide. I think you guys talk about certain customers changing order patterns. Can you talk about what that is? And then also what the seasonality of the -- or what the kind of cadence of revenue might look like by quarter for the year as well?

Yes, Phil, I mean, just -- I guess, first and foremost, we believe the market is very, very strong. I don't want this to get misinterpreted as we've got -- we don't have confidence in the market. We certainly do. There's very strong near-term indicators, whether it's crew counts on the ground, installing solar products, tracker installations, which we follow are very strong. And as we all know, the long-term fundamentals for energy consumption is certainly there, and that's evidenced by a really strong quarter of quoting for us at $700 million.

As you know, probably as good as anybody, fourth quarter is usually a softer month as it relates to quoting and installation, and we saw a very strong quarter. I think as important as anything, we continue to believe there's a strong preference for our solutions that we're providing and executing in the field. And as we mentioned in the prepared remarks, our core business accelerated about 30% in the back half of last year, and that gives us a lot of confidence.

We're optimistic about our sustained bookings growth. We've had great bookings growth all year. If you think about 2025 specifically, Q1, we did a 1.1 book-to-bill, Q2, we did a 1.2, we reached record revenue in Q3 and still did a 1.4 book-to-bill, and then we surpassed that revenue record in Q4 and still did a 1.2 book-to-bill. So similar to last year, we see probably the cadence of our revenue recognition is probably being somewhere in the neighborhood of 45% in the first half of the year, moving to 55% in the second half of the year. But we feel very, very good about our book of business right now.

Your next question comes from the line of Colin -- sorry, my apologies, Brian Lee with Goldman Sachs.

Maybe just focusing on the top line guidance here for a moment. There's a lot of moving pieces here. If I back out the kind of $35 million or 6 points of growth you're implying for BESS shipping in 2026, there's still a good 15% growth being implied for the core business. So can you kind of walk us through the pieces, kind of how much is coming from new markets like CC&I and how much is international? And then how much of this is just pure market share gain in an environment where I don't think most people are expecting double-digit utility scale volume growth in the U.S. in 2026. So you guys do seem to be out punching your weight here a little bit. So if you could walk us through a couple of the pieces beyond the bets that you already quantified.

Yes, Brian, great question. Great to hear from you. Maybe I'd turn your attention back to -- if you think about our Investor Day in 2024, we identified about 30% of the market that we did not think we are attacking -- we were attacking at that point. We believe that we have addressed about 2/3 of that piece of the market. And I think that's really evidenced. We had 3 specific customers where we did less than $1 million with that now have about $140 million of our backlog and awarded orders.

So again, as I mentioned to Phil's questions, we do think that there is a strong preference for our product. And I do think we have the ability to continue to outpace the general market growth in the solar landscape. We have seen specific to the different business units, we grew our solar business about 11% last year. We did see a record year in our international business. driving 3 projects, about $13 million. And I think what is maybe even more exciting than that, we replaced that backlog and reached record backlog and awarded orders in the international space of about $90 million.

Our C&I business continues to grow rapidly. The numbers are got quite frankly, it's a small piece of the business, but we continue to see really nice growth in our C&I business. And our OEM business last year, which is our J-Box business, grew 47%. I don't know that we'd anticipate another 47% growth here, but we do expect that business to be very, very strong. So I guess, net-net, when you look across all of our business units, outside of our battery energy storage business, all are performing quite well, and we expect continued growth in 2026.

And then maybe just a follow-up on the margin question. I might have missed the number, but Dominic, I think you mentioned something like 3 percentage points, maybe a little over 3 percentage points of tariff impact in 2025 and expecting a similar level in '26. Obviously, that's fluid. But how much of the tariff impact is related to IEEPA?

And then if the recent sort of changes stay as advertised in the second half of the year, it sounds like you'll be working through the inventory that has the higher cost and paid the tariffs. Do you get all of that back? Or what's sort of the rough net math on kind of what margin recapture you could see if tariffs do relax here as we move through the year?

Sure, Brian. So the tariff question is a bit complicated for us because there are instances where we very specifically are passing through tariff costs to customers. So any reduction in tariffs would also then reduce what we're passing through. It's just a pass-through impact. There are some components where we are structurally holding on to the tariff cost as part of our cost of goods sold. And for that piece, then we would have a benefit if the tariffs are reduced in the back half. For aluminum, we still have 232. There's still some relatively high tariffs on aluminum, but we would get the benefit of a reduced reciprocal tariff environment there.

So I don't want to get too wrapped up over with the timing of when tariffs will play through. It's going to be something that as we get more information, as we get guidance, we'll be able to share more information in the coming weeks and quarters. But I think right now, we don't know if we're going to get a windfall repayment of tariffs. That would clearly be a lift. I wouldn't bet the bank on that one, but it's certainly an option for this year. Brandon, do you...

Yes. Maybe just to provide some more color on tariffs. And as Dominic said, it's fluid environment to say the least. IEEPA tariffs are no longer to be collected, I believe, as of today. There has been no decision on refunds, and I agree with Dominic that we have not baked refunds into our plan, and that's probably prudent not to do that. The new Section 122 tariffs are expected to begin being collected and are assessed at 15%. It's notable that those tariffs effectively are in addition to the 232 tariffs.

So just so everybody understands, we would pay the 232 tariff on the metals content, aluminum specifically, and then the 122 tariffs would be assessed on top of the nonaluminum components. So while the change does not benefit our current inventory as those tariffs have been capitalized, it does provide some positive opportunity for future imports, assuming there are no changes to what we know as of 07:43 AM Central Time today. So we're going to continue to be as nimble as we can in this tariff environment and focus on delivering as much value as we can to our customers.

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

I wanted to go back to the ON.energy partnership. Just to confirm, is there anything embedded in the guide from that partnership this year? Do you have firm orders yet? And just kind of a reasonable time frame of when you might expect to see orders and associated revenue? I know kind of the conversion of that backlog to revenue is a bit up in the air, but anything you can provide would be great.

Sure. Yes. We've alluded to excitement over the course of the last year around this opportunity in the battery energy storage space, there is a portion of our backlog and awarded orders that is attributed to ON.energy, and we are very excited about that potential partnership with them. I mean they are a leader in building and operating hyperscale systems that specifically is serving the AI data center landscape and other mission-critical facilities. And I think what we offer in this space to them and other customers is scale and really bankability. We are -- we have built a production line that is positioned to drive ample capacity in the coming years, and we're very excited about that.

As it relates to the order patterns, again, like other customers, it will continue to be lumpy. And like all of our customers, whether it be in the solar space or battery energy storage, we've got delivery schedules when we take the purchase orders and we adhere to those delivery schedules. So once we get production started, again, as it relates to ON or other customers here in the coming weeks on our new line, you will see more consistent revenue recognition on into the year.

And then just, Dominic, a real quick follow-up. Just to clarify what you said earlier about still operating multiple buildings. When is that complete? When do you fully move into the new building?

Our current projections are for the end of second quarter. We're fully in this building operationally. We are manufacturing already in the building. We have all our big lead assembly lines are all being produced here in our new 1,500 Shoals Way facility. Right now, on the floor, our harness lines are going in, but they're not operational yet. Our new best line is getting the final touches on for its grand opening here in the next few weeks. So by the middle of this year, we will be in. As we've talked about, we still have a redundant facility that would be rendered redundant this year in Plant 4. That lease does not expire until 2027. But we will start realizing operational savings and synergies in the back half of this year.

Your next question comes from the line of Praneeth Satish with Wells Fargo.

Maybe switching gears a little bit here. So you've talked -- you're seeing good success on the BESS side. Maybe on the data center BLA product that you're working on, I guess, kind of moving from prototype beta testing, and I think the latest is kind of waiting on UL certification. So yes, maybe just if we could get an update on that. Are you still on track to potentially launch a commercial product this year? And then is the expectation to get some meaningful sales in 2027? And just any remaining technical or customer gating items to note.

Praneeth, thanks for the question. Yes, we still are on track with our data center product. Again, we've talked about revenue recognition coming probably more so in 2027 than 2026. Still getting very strong voice of customer feedback for that particular product and working towards certification. So I would say the product is tracking quite well. But again, will not materially impact our financials in 2026.

Got you. And then you mentioned the new BESS production line is going to come online shortly. I guess when this is up and running, how much manufacturing headroom do you have today to kind of support growth beyond the $67 million of orders that you booked already? Do you see the need for additional kind of investments in the coming years on the BESS side? Or this kind of gets you set for the balance of the next few years? And then as a follow-up to that, can we -- can you help us understand whether you'd need to spend incremental capital to support the data center BLA product as we get into 2027 and how we should think about CapEx in '27 at a high level?

Sure. As far as the BESS line goes, nothing would give me more pleasure than to invest more capital to build a second production line for that particular product. We probably do not need to do that in the near term. We've commented in the past that, that production line is capable of producing hundreds of millions of dollars of product and is set up for scale.

We do have room when you see our new facility to put a second production line in effectively next to that line, which can produce the same product or variation of a similar product. So we have contemplated that in the design of our new building. As it relates to the CapEx around the data center product, that product can be run and it effectively leverages our BLA patent portfolio. So you would think of the production setup as being similar to BLA.

As that product ramps, might we need to invest some capital to add additional BLA production lines, potentially so. That is not an overly significant investment should we have to do that. So we're pretty comfortable with us being able to scale that business in the future. As it relates to overall capital spend, we look at our CapEx spending to decline somewhat this year. I think the midpoint of our CapEx guidance was about $25 million. We spent over $30 million last year. We are still putting the finishing touches on this particular plant. And as we've mentioned before, there's some additional investment in IT and systems architecture for '26 and probably into '27, but we will continue to normalize our CapEx spend in the coming years.

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

Can you talk a little bit about project timing and design related to FEOC provisions? They're still a little bit fuzzy, but I wanted to get a sense of any sort of project delays that you're seeing given uncertainty around some of the supply sourcing that folks may be managing right now?

Yes. Thanks, Colin. I would not say that we're seeing a tremendous amount of volatility in projects related to FEOC. There are some late point changes maybe in modules, which require us to do some redesigns and slow down releases of the projects to our manufacturing floor. That happens. I wouldn't say it's overly predominant. As it relates to FEOC specific to our product set, as you know, those -- the FEOC guidance that came out was fairly limited and still is pointing everything back to the domestic content tables, which eBOS is not a part of at this point in time. We continue to try to make it a part of those tables, but have not seen success in getting that completed at the time -- at this point in time. So not a tremendous amount of volatility there related to FEOC.

And then just on the energy storage product, as we start to see some evolution around some of the configurations and voltage considerations for folks, I'm curious about how quickly you guys can adjust to some of those adjustments and how much of that is built into this ON contract as you look at the evolution of the market moving towards 800 volt, it seems like there's going to be a significant number of new opportunities and want to just get a sense of the dexterity of the product to meet some of those needs.

Yes. We have standardized our recombiner line around specific averages to handle the configurations that we see in the marketplace today. We've got a 1,200 amp recombiner product, 2,000 amp and 4,000 amp. That 4,000 amp recombiner is probably the preferred product in larger AI data centers. We engineer those products specific to our customer base. And those products are capable and/or handling effectively 800 volts of power at 4,000 amps and are doing somewhere probably north of 3.3 megawatts. So I think we've got the right product at the right time for these particular solutions that are going into larger data centers.

Your next question comes from the line of Chris Dendrinos with RBC Capital Markets.

I just wanted to ask about the backlog and the composition of it. I think you mentioned $67 million related to BESS, but what is the composition of maybe the CC&I products and that long-tail BLA solution? I'm just trying to get a sense for how much that's kind of evolved and changed over the past year or so.

Yes. The CC&I product is a really -- that particular market, you almost think of as book and current. So very little of our backlog and awarded orders would be related to the C&I business. It's a very small number. As it relates to long-tail BLA, probably more so than the CC&I business. I don't know an exact number. We would have to look at project to project, but the adoption of that particular product has been strong in the marketplace and is driving some of the new customers that we've got in our backlog and awarded orders, that prefer that solution. I don't know the exact number of that off the top of my head.

Yes, I don't either. Of the $140 million of the customers -- the new customer BLAO, I don't know how much of that was long tail, but I do know that some customers have a very strong preference for that solution to centralize their load break disconnects. So we haven't broken down our domestic utility-scale solar BLAO beyond that.

About -- just to give some maybe additional context, a lot of focus on new products, whether it is long-tail BLA, our super harness, SuperJumper products, mini BLA, about 6% of our 2025 revenue was related to new products in the solar core business, not related to BESS. And we expect that number to continue to grow as we're partnering with our customers.

Your last question comes from the line of David Arcaro with Morgan Stanley.

You mentioned a couple of discrete margin factors as we look into 2026. But I was wondering if you could just maybe comment on the competitive environment and what you're seeing there more broadly? Is there kind of increased pressure from a pricing perspective or new entrants? Or are you seeing more products pop up the market that you're competing against here?

Dom, do you want to take the margin piece, and then I'll take the competitive landscape?

Sure. So some of the margin items that we called out and are going to continue in our guide for this year are a little bit more transitory in nature. I think from a competitive pricing standpoint, we have already recognized revenue in 2025 to win new customers over. So the pricing incentives that we offered for folks to change to Shoals is not really considered an ongoing item for us. That's pretty much behind us at this point.

From a competitive product set standpoint, our big lead assembly product does face competition and has faced competition from Voltage. As you know about the findings from the administrative law judge, we have to be patient and work through that. And the IPC market, which other competitors have been competing with and will fight for scraps over that share of the business, we believe developers are more and more inclined to avoid IPCs, but that's still playing out in the marketplace. But I think from a margin standpoint, the pricing pressures, every job that we do is a negotiation. Every opportunity that we have to look at the competitive set and the quality of Shoals's products, we will take advantage of that and emphasize our product quality and delivery.

And then the last thing I would say on the margin side is, as we build back some of the margins and have the opportunity to convert people to big lead assembly away from homerun solutions or other types of harness solutions, I think what that does for us is it gives us a chance to push people to a better value-driving product for themselves and also gives us a better margin. But we need the flexibility in margins to do what we need to do to drive operating profit. And that's really where we're focusing, driving cash flow, taking business if we have capacity. Is there a reason I shouldn't take a 30% margin job? Absolutely not. I should take it. It's the right thing for the shareholders.

Yes, I think just important to reiterate, I still believe there is a strong preference for our solutions and our quality product, and that's evidenced in the increase in our book of business and our outgrowth of the overall solar market. I think the commercial team is performing quite well and the new solutions that our product team is bringing to market are being adopted by our customers. So we are very confident in our book of business and continue to be confident to grow that book of business.

Great. Thank you, guys. To our audience, that's all the time that we have for questions today. I want to note that we have a very active IR calendar through March. Those events are listed on the Investor Relations section of our website. So if you're attending any conferences, you'd like to meet with us, please let us know. We -- if we can help you further, please reach out to [email protected] with any questions. Thanks for joining us today. Have a great day, everyone.

Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to the Shoals Technologies Group Third Quarter 2025 Earnings Conference Call. Today's call is being recorded, and we've allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Matt Tractenberg, Vice President of Finance and Investor Relations for Shoals Technologies Group. Thank you. You may begin.

Thank you, Charlie, and thank you, everyone, for joining us today. Hosting the call with me is our CEO, Brandon Moss; and our CFO, Dominic Bardos.

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 and should not be considered guarantees of performance or results. Actual results could differ materially. Those risks and uncertainties are listed for investors in our most recent SEC filings.

Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the nearest comparable GAAP financial measures. Please note that the slides you see here are available for download from the Investors section of our website at investors.shoals.com. With that, let me turn the call over to Brandon.

Thank you, Matt, and thanks to everyone joining us on the call. I'll begin by sharing key results from the third quarter. I'll then discuss the current demand environment in the U.S. And finally, I will review the progress on our strategic growth initiatives. Dominic will dive deeper into the third quarter results and provide our outlook on the fourth quarter 2025. We'll then finish the call with questions from our analysts.

I'm very pleased with our execution during the third quarter. We delivered record revenue of $135.8 million, slightly above the high end of our expected range. Revenue grew 32.9% over the prior year period and was up 22.5% sequentially over second quarter results. Our commercial team continues to drive significant growth in our book of business. We added approximately $185.4 million in new orders in the period, helping to achieve a company record for backlog and awarded orders or BLAO, of $720.9 million, a 21% year-over-year increase. This resulted in a very strong book-to-bill of 1.4 this quarter and supports the continued growth we see as we look ahead toward 2026.

As of September 30, 2025, approximately $575 million of our BLAO has shipment dates in the upcoming 4 quarters running through the third quarter of 2026. Next year is shaping up to be another year of strong growth for Shoals. As you are aware, 2025 brought with it some volatility, largely a function of an uncertain and rapidly shifting political environment. However, as you've seen in our results thus far, our business has been resilient. The actions we've taken to attract and retain customers over the past 2 years are paying off. We've improved our relationships with EPCs and developers and signed new MSAs that reflect our shared objectives.

Our focus on providing innovative solutions to meet customers' needs has led to new product development and additional opportunities for growth. We continue to improve our operating model to drive out inefficiencies and increase capacity. And we've maintained excellent liquidity and positive free cash flow despite increased capital expenditures and warranty remediation needs over the past year. As a result of our strong Q3 results and the current demand environment, we have slightly increased the range of anticipated revenue for the full year 2025, now representing between 17% and 20% year-over-year growth and above the range presented at our September 2024 Investor Day. Adjusted gross profit percentage remained in the expected range for the quarter, landing at 37%. Gross profit was $50.3 million, the highest quarterly amount since 2023. Dominic will provide more insight into the impact of both product mix and tariffs on our margins in a few moments.

The sequential increase in SG&A this quarter was largely a function of increased legal expenses. The ITC hearing during the third quarter was one driver, but we also had elevated legal expenses related to the pending shrinkback litigation as we work through fact discovery, depositions and expert analysis. Our third quarter adjusted EBITDA was within our expected range at $32 million or 23.5% of revenue. And finally, the remediation work for known shrinkback issues progressed as expected. The probability that some additional work may be required in the coming quarters still remains, so we are not changing our estimated range of expense this quarter. However, we are pleased with our ability to respond to all customers that express concerns thus far and resolve those issues requiring remediation. Congratulations to our customer support team, and thank you to our customers for their continued trust and patience.

Turning to the broader U.S. market. While current headlines remain distracting and somewhat disconnected from the underlying demand for solar energy, our customers remain as busy as ever. Developers have safe harbor projects for several years with many projects confirmed through 2030. While we do not expect a significant number of projects to be pulled forward, it is reassuring to know that the industry is healthy and growing. As we have discussed, the need for new energy supply is real. The massive investment cycle in AI and data centers, combined with the potential industrialization and onshoring of manufacturing will result in low growth far in excess of what we've seen in recent decades. Solar is best positioned to meet these rising energy needs today and through the balance of the decade. The U.S. Department of Energy acknowledged that solar will play a notable role meeting the growing demand given its speed of deployment and favorable cost structure. Following the passage of HR 1 in July and the treasury guidance issued in August, we believe developers will successfully navigate the tax incentive landscape and as a result, have not seen material changes to project calendars. Less uncertainty and the unrelenting focus on bridging the power supply gap is driving continued investment.

Turning to our business units. Third quarter was another strong period of growth within our core utility scale solar market. Customer project calendars remain tight with little excess capacity to move things around. Labor availability is a focus for the industry and will likely remain so for the foreseeable future. That said, our quote volume exceeded $900 million in the third quarter, a sequential increase of more than 20%. These are projects that would generate revenue in late 2026 and 2027, further supporting our long-term growth trajectory.

Our core utility scale market is resilient, and our commercial strategy continues to drive growth. I'd like to now discuss progress we are making in other strategic areas of our business. Shoal's additional growth opportunities include international, CC&I, OEM and BESS. Our progress in each of these is meeting or exceeding our expectations. The opportunity set across international markets continues to expand. Our pipeline exceeds 20 gigawatts and includes projects in Latin America, EMEA and Asia Pacific. We've hired an experienced commercial leader in Australia, where the government mandate has been expanded to target 40 gigawatts of new capacity, including 14 gigawatts of clean energy capacity by 2027. This is expected to stimulate approximately $73 billion in overall electricity sector investment. It's a very attractive market and one we're aggressively pursuing.

We recognized more than $6 million of revenue in Q3 from 2 ongoing projects in LatAm and in Australia. We expect to complete all 3 of these international projects in the fourth quarter. Our team anticipates continued acceleration and diversification across our focus markets through 2026. In addition, our relationships with large global developers with ties to the U.S. Export-Import Bank are opening doors and growing our pipeline in developing markets outside our targets of Australia, Latin America and Europe.

Our community, commercial and industrial or CC&I business is performing well. We are engaged with large, well-respected electrical distributors that are driving meaningful quote volume increases. While this market remains small as compared to our core utility scale opportunity, it is one that provides us a path to create lasting relationships and future growth with new customers. Our OEM business is tracking ahead of expectations as our partner continues to see strong demand for their panels. Our deep engineering and manufacturing relationship with the largest domestic module provider is a strategic advantage for Shoals and one we're committed to maintain and expand.

The opportunity we've received the most questions about this year is our battery energy storage solutions or BESS offering. So I'd like to provide a little bit more detail today. Last year, we introduced a BESS solution targeting the solar plus storage market, specifically when new solar plants are built with attached storage systems. That opportunity remains exciting for us today since it builds upon our relationships with existing customers and developers. In addition to that opportunity, there are also 2 additional use cases that we are now pursuing, grid firming and data centers.

Let's start with grid firming solutions. Utilities are very interested in providing more reliable and consistent power to their customers. One method is to add grid scale battery storage solutions to their existing grids in order to provide real-time balance between supply and demand. Shoals' product offerings can play a part in providing solutions to system integrators in this area, and we are actively quoting opportunities in this space.

In addition to grid firming, there are emerging use cases with data centers. Once again, consistent and dependable energy is critical to operations. Battery storage solutions can provide uninterrupted power as well as to help regulate power demand spikes and troughs created by artificial intelligence processing. This is an area that has significant market potential in the coming years, and we are actively engaged with system integrators in this market as well. This is an exciting time in a relatively young market, but one we are investing heavily in. I'm pleased to share with you today that we have already signed 2 MSAs to deliver products in these emerging BESS markets and are in conversation with several others about providing Shoals systems and their unique solutions. At the end of Q3, we had approximately $18 million of BESS in our backlog and awarded orders.

In summary, our domestic utility scale market is healthy and growing. We are executing our strategic framework of market diversification as anticipated, and we are leveraging our expertise, engineering and manufacturing capabilities to pursue new opportunities with speed and purpose. It is an exciting time to be at Shoals. With that, I'll now turn it over to Dominic, who will discuss our third quarter financial results in more detail and our outlook for the fourth quarter. Dominic?

Thanks, Brandon, and greetings to everyone on the call. Turning to our third quarter financial results. Revenue increased by 32.9% year-over-year to $135.8 million. The increase in revenue was primarily driven by higher domestic project volume from both new and existing customers. In addition, as Brandon mentioned earlier, our strategic growth channels of international, CC&I and OEM contributed to year-over-year revenue growth in the quarter.

Gross profit increased to $50.3 million compared to $25.4 million in the prior year period. Our GAAP gross profit percentage was 37.0% compared to 24.8% in the prior year period within our expected percentage range of mid- to upper 30s. There are a few dynamics worth mentioning with regards to gross profit percentage. First, I'd like to discuss product mix. Certain EBOS solutions drive more value for customers than others. As such, those custom and engineered solutions typically carry higher margins than other product lines.

Some new products such as long-tail BLA drive incremental revenue in our share of wallet, but do not carry the same gross profit percentage as our traditional BLA solution. Long-tail BLA does, however, provide incremental gross profit dollars and has allowed us to capture additional share while meeting customer needs.

Second, I'd like to provide some color regarding tariffs. Our supply chain team is constantly working to drive material costs out of our products. Months of work to test new raw materials, negotiate terms and onboard new suppliers can be undone in a moment as trade policies change without notice. Unfortunately, like many others, Shoals has been impacted by these policy shifts this year. And as a result, some margin-enhancing savings could not be realized as expected.

Moving on to general and administrative expenses. G&A was $29.4 million, which is $10.7 million higher than the prior year period. Our legal expenses, which accounted for approximately $5.7 million of the increase, remain elevated while we make our way through ongoing litigation matters. Approximately $6.8 million of legal expense was specifically related to the ongoing wire insulation shrinkback litigation.

Income from operations or operating profit was $18.7 million compared to $4.5 million during the prior year period. Operating profit margin was 13.7% compared to 4.4% a year ago. Net income was $11.9 million compared to a net loss of $300,000 during the prior year period. Adjusted net income was $21.0 million compared to $13.9 million in the prior year period. Adjusted EBITDA was $32.0 million compared to $24.5 million in the prior year period, representing 30% growth. Adjusted EBITDA margin was 23.5% compared to 24.0% a year ago, driven primarily by lower gross margin flow-through. Adjusted diluted earnings per share of $0.12 was approximately 50% higher than the prior year period.

During the third quarter, we spent $11.9 million on wire insulation shrinkback remediation and had a remaining warranty liability on our balance sheet of $7.2 million as of September 30. The current portion of the remaining liability related to shrinkback is now $4.2 million. Operationally, we generated $19.4 million of cash in the third quarter, driven by higher net income, an increase in accounts payable and higher accrued expenses. These increases were partially offset by a higher accounts receivable balance, driven by strong sales volumes and increased spend on warranty remediation.

On a year-to-date basis, we have generated $21.2 million in operating cash flow. Free cash flow was $9.0 million in the third quarter, reflecting both the $11.9 million impact of remediation costs and elevated capital expenditures related to our new facility. These 2 items impacted free cash flow by a total of $22.4 million in the quarter. We received our certificate of occupancy for our new facility in Portland, Tennessee, and we began moving into the new facility in September. We expect to begin consolidating operations from our 3 existing facilities in the fourth quarter and expect to complete the entire consolidation by mid-2026.

Our balance sheet remains high quality, and we ended the quarter with cash and equivalents of $8.6 million and net debt to adjusted EBITDA of 1.2x. Our net debt was $118.2 million, a slight decrease over the prior quarter. We paid an additional $5.0 million down on our revolver during the period, which had an outstanding balance of $126.8 million at the end of the quarter. With regards to capital allocation, given the number of competing priorities for our cash this year, including shrinkback remediation and factory consolidation, we did not purchase any shares in the third quarter under our share repurchase program. Backlog and awarded orders ended the third quarter at a record $721 million, a sequential increase of $50 million. Backlog constitutes $298 million of the total BLAO, providing us with confidence that the growth projections we have for the upcoming period can be achieved. As of September 30, $575 million of our backlog and awarded orders have planned delivery dates in the coming 4 quarters with the remaining $146 million beyond that.

Turning now to the outlook. Quarterly pacing within the year has continued to follow the strong back half we've been communicating since February. For the quarter ending December 31, 2025, the company expects revenue now to be in the range of $140 million to $150 million, representing 36% year-over-year growth at the midpoint and adjusted EBITDA to be in the range of $35 million to $40 million. This will result in full year 2025 revenue between $467 million to $477 million and adjusted EBITDA in the range of $105 million to $110 million.

In addition, for the full year, we expect cash flow from operations to remain in the range of $15 million to $25 million, capital expenditures to remain in the range of $30 million to $40 million and interest expense to remain in the range of $8 million to $12. With that, I'll turn it back over to Brandon for closing remarks.

Thank you, Dominic. The demand environment over the last few years has been volatile, driven not only by the macroeconomic and political backdrop, but also labor availability, supply chain disruptions and permitting. That said, 2025 appears to be playing out slightly better than we had anticipated when we provided guidance in February. The changes we've implemented, which span both commercial and operational process improvements and shifts in strategic direction and focus are enabling exciting and visible improvements across the company. The transformation from a company with a narrow customer mix, product offering and geographic footprint to a diversified multinational energy solutions provider is beginning to take shape. These changes do not occur overnight, but through the deployment of repeatable processes that improve productivity, visibility and scale, through the hiring of seasoned business leaders who can execute with consistency, through the focus on developing new innovative product solutions for customers facing real-world problems and through an unyielding focus on improving the customer experience from start to finish.

We are building the next version of Shoals, one that will deliver attractive returns for our shareholders through profitable growth and strong cash flow generation. I'm very encouraged about the progress we've made and how well we're set to continue the journey in 2026 and beyond. We want to thank our shareholders and customers for their continued trust and our employees for their hard work and dedication.

Operator, we are now ready for questions.

[Operator Instructions] Our first question comes from Christine Cho of Barclays.

I just wanted to start with the data center opportunity. Brandon, I think in your prepared remarks, you talked about conversations with system integrators. Is that how you expect the data center opportunity to materialize through integrators? And if that's the case, how should we expect the opportunity will show up in your bookings? Should we think something like this $18 million that you guys talked about this quarter, like more consistently every quarter? Or could we see a lumpy large booking?

Also, if you could provide some more information on the MSAs, maybe size, type of counterparty, how we should expect orders from these MSAs to make it into backlog?

Thanks, Christine. As you mentioned, we are excited about the 2 new MSAs. We're excited about the $18 million of backlog and awarded orders. Specifically, our channel to market, the question around system integrators, we could be partnering with system integrators directly. We could be partnering with EPCs directly on the projects, and we've talked about in past quarters, even a sale to a hyperscaler. So it's a new market and how we partner for a particular project may change from project to project.

I think the important thing for us is that we are engaged in some way, shape or form with these projects and are helping customers engineer solutions. Many of these solutions at data centers, and I know you asked specifically about who the MSAs are with and the size, as you know, this one, the data centers, typically, there's a level of confidentiality about where they are and who they are. And specifically with our MSAs, our partners may be deploying some proprietary system architecture. So we're limited about what we can share for those specific opportunities.

As we've talked about in the past, this business for us because of the newness of it and even the size and scale of some of these projects, our backlog and awarded orders may at times be lumpy. So I wouldn't specifically count on, hey, we've booked $18 million, and we're going to continue to book that quarter after quarter. We can have some lumpy bookings. That said, as we begin recognizing revenue on this, the revenue should be somewhat stable as customers take deliveries. On this specific -- or these specific opportunities in our backlog and awarded orders, I would anticipate revenue beginning to materialize in the beginning of second quarter. So very young and evolving market, new product set for us. We're very excited about it. And as we've commented in the past, we're dedicating about 15% of our floor space, our operating floor space here in our new facility to our BESS product offering, and that build-out is underway. So things are progressing ahead of plans.

Okay. Great. And then just moving on to gross margins. They were soft this quarter despite system solutions being a bigger part of the business than it has been for a while. Can you just help us parse out how much of this is due to tariffs? Is it lower pricing to get back some share? You talked about the lower margin BLA. Is there a margin drag from the expansion of the new manufacturing? Just kind of help us parse it out and if you can give us some idea of how we should expect it to trend over the next year?

Sure, Christine, it's Dominic here. Yes. So the margins have been stable this year and right within the range that we've expected, the 35 -- the mid-30s to upper 30s percent. So coming in at 37% was right within our expectations. In my prepared remarks, I did talk about a couple of things because the new long-tail BLA, as an example, is one where the margins will fall on a percentage basis. There's a large section of that, that expands our share of wallet into the solar field for the feeder cable, and that is just not the same amount of value engineering on that section of revenue. So we've talked about that, and that is part of what's going on as expected.

Now the tariff thing is also an interesting one for us because while we're largely protected and mitigated from an increase when we're quoting jobs, we can pass those along as we do the final purchase order. There are some things that we're doing behind the scenes to drive cost out of the system. And that's what I was referring to on the prepared remarks that all the work of our supply chain team to onboard with our engineers to test the new products and to really get new raw materials ready to go, it was actually undone for us. So we did not realize the margin lift that we were expecting. It was still within the range. I would quite honestly hope to have a more pleasant surprise on the upside there, but we were not able to achieve that due to the tariffs that changed in the middle of that process for us.

So on the tariffs alone, on that savings, we actually had forecast about a 100 to 200 basis point improvement in margin, and that was undone for us this year. So while we still have very stable margins, keep in mind that the projects that we've done thus far in 2025 were priced in 2024, they still have some of the new incentives that we provided, new customers to come back to Shoals. And I do believe that our stability in the gross profit margin is fine. As I mentioned, we are shifting and have been trying to focus on cash generation, our strong cash flows and operating profit, and we will continue to do so going forward as well.

Charlie, next question, please.

Our next question comes from Julien Dumoulin-Smith of Jefferies.

I'm going to try this from a slightly different perspective. You alluded here in your prepared remarks that you're doing slightly better than planned for 2025. But I'd love to hear how you're doing against the longer-term metrics you articulated from September '24's Analyst Day, right? You've got this 20% plus year-over-year increase in backlog, the $900 million quoted here in the quarter. How are you looking at the beyond '25 period at this point versus the targets and ranges that you implied at the time here?

Sure. So I'll start and ask Brandon to join in because as he said in his prepared remarks, all of these areas are exceeding our expectations that we laid out at Analyst Day. Of the metrics that we've talked about, I certainly want to focus a little bit on the revenue growth. As we've also said, it's exceeded the expectations and the range that we laid out a year ago. And keeping in mind that a year ago, we also thought that we were victorious in our voltage case with the ITC. So as we look ahead, we're not guiding to 2026 and '27. We certainly are very encouraged at the growth in our book of business. I couldn't be more positive about our backlog and awarded orders. And on our end, I think there was a bit of a glitch when I was talking about the $298 million of backlog, which is approaching records again.

So I believe that the metrics that we've laid out remain very strong. Of those the metrics that we talked about in terms of the various strategic pillars, the BESS opportunity is the one that we believe has the opportunity to significantly exceed what we laid out a year ago. And so I will pause on that because Brandon will talk more about that.

Yes. Julien, it's a great question. Let me maybe give a big picture view and then step through some of the growth pillars. I think holistically, revenue -- the revenue generation is exceeding plan and what we laid out in our Investor Day, effectively almost a year ahead of what we've said at Investor Day. So we are very excited about that. Our core focus here has been to protect and grow our core market, return that to growth. The utility scale solar business, as Dominic mentioned, is operating at record levels. Our backlog and awarded orders fantastic at $720 million. I'm really excited when we can have a record revenue quarter and have a book-to-bill of 1.4x. That is fantastic execution by our commercial team. So I feel really good about our core business.

As it relates to our pillars of growth and our diversification strategy, I think all are performing at or above our expected ranges. Our CC&I business, if you think about that alone, we're up 36% year-over-year. So that is performing at very solid rates of growth. Our OEM business, expanding substantially. As you guys are aware, we have a core customer in that product portfolio that is also expanding, and we are partnering and growing with them, and we're excited about that.

Our international business, shipping 3 projects in a quarter is great for us. That probably has not happened in the existence of Shoals. We're excited about the 2 projects in LatAm and one in Australia. Our pipeline is very strong there, and we are building a team out to really focus on that Australian market so -- and New Zealand. So great things to come there. As Dominic mentioned, couldn't be more excited about our battery energy storage program. The 2 MSAs for us in the quarter are big. As well as starting to really see some proof points in that business in those MSAs driving data center and grid scale opportunities. So we are very excited about that.

Our team, commercial team with operations, driving a substantial amount of new product development this year. And quite honestly, that's what is -- what's driven some of the international growth. The 3 international projects that we've started shipping this past quarter all have new products as part of those projects, which is very exciting. And really finally, from an operations standpoint, our consolidation is underway. We are excited. We are actually sitting in our new facility today. Our SG&A team, our salaried staff, this is probably the first time in the history of the company since maybe it's beginnings that we have all been in one building. And so we're excited to build that sense of community and culture within the organization. From an operations, a true operations standpoint, just to commend the ops team. We started our planned consolidation in Q3. We actually moved out of one of our facilities. As we previously disclosed, we sold a building in Q2, I believe it would have been, and we moved out of that building.

For perspective, our team moved 540 truckloads of material out of that facility and still met record production levels in Q3. So a fantastic job by them and obviously a confidence boost for us as we complete this consolidation as we can make moves in buildings and produce at record levels at the same time. So I'm excited about how the company is executing for the future.

Julien, did you have a follow-up?

It's excellent to hear. Can you quantify any of these? Yes. Can you just quantify real quickly just within the backlog addition, some of these MSAs? And/or any of the BESS or data center wins with system integrators?

Yes. So in our awarded orders for the quarter, we had $18 million. A vast majority of that is driven by the MSAs. I can say probably since quarter close, we have moved a significant portion of that $18 million to backlog and have signed purchase orders. I would think of it maybe in the range of 3/4 of that $18 million. So we do have now signed purchase orders, which we're excited about. And again, we'll begin production in Q2.

And perhaps I could help just on the MSAs themselves. Unlike the MSAs where we've announced specific targets for volume, these MSAs do not give a specific target for volume. It's the partnership. It has all the terms and conditions so that we can move with haste when purchase orders are ready to go. So I don't want -- there is no additional backlog and awarded orders beyond where we actually have those orders, as Brandon mentioned. So nothing else from the MSAs would impact our record BLAO.

Thank you, Julien. Charlie?

Of course, our next question comes from Philip Shen of ROTH Capital Partners.

I wanted to dig into the margin topic a little bit more. Can you give us a little more color on the tariffs? Were they the Section 232 inclusion for aluminum on electric cabling that adversely impacted you? I think that came out in August. And as a result, would you expect that to be relieved? Or would you expect to be able to pass that along? Because that was a very sudden kind of inclusion, right, of electric cabling. And so do you think that tariff can be passed along in the near term to your customers? And then as a result, that 100 to 200 basis point operational improvement that, Dominic, you highlighted can then be realized perhaps partially in Q4? Or is it more in first half of next year? So I wanted to see if you could map out how that might play out.

So Phil, that's a great question. Section 232 aluminum tariffs obviously have impacted us and others in the marketplace. Think about that specifically, almost in equal parts with the country-specific tariffs. We've got a pretty diverse supply chain. And the way those tariffs are calculated for wire specifically is interesting. You can sort of parse out the aluminum piece of that on 232, you can also parse out the country-specific tariffs there. So I won't get into the granular detail of that specifically on the call here today. But what I would say -- and as Dominic mentioned, we have the ability to pass on tariffs to many of our customers that requires tariff documentation, things like that. And we are doing so, and we'll continue to do so into the future.

What Dominic specifically mentioned around the 100 to 200 basis points was part of our material cost-out savings initiatives that we put together in our annual operating plan. And material cost is very important to us. It drives the profitability of our company, quite frankly. And we had great cost-out savings projects identified. And as Dominic mentioned, you switch a supplier and then that supplier is potentially impacted by a tariff that eliminates any potential savings we may have baked into our business plan. So if the tariff landscape change or if these tariffs are ruled unlawful and we would potentially get reimbursed for tariffs paid, you

[Audio Gap]

through our income statement and impact us positively.

Yes. And the point, Phil, about are they passed along? If it's something that comes along and there was an unexpected tariff, we do work with the customers. But we typically look at our market-based pricing for the products as we're quoting going forward. And if we know that something is going to be tariff, it is going to be baked into the prices that we're quoting. So ultimately, our material costs will drive our profitability there, and that's why the material cost out savings are so important to us. It's probably 70% of our cost of goods sold. So it is a very important initiative for the team. We'll continue to focus on that.

Got it. So looking ahead, can we expect an improvement in the first half of next year on margins? And then can you share what the margins in your recent bookings might be as a comparison to the Q3 levels?

Yes. So Phil, if you want to come to a staff meeting here, that would be great. We'll talk about those internally. I can't obviously discuss that. We do have -- it's too early to guide for 2026. As I've said before, our margins are -- have been consistent and within the range that we've been talking about, about mid- to upper 30s. We are -- I think Christine asked the question, are we incurring new facilities expense? And yes, we did incur rent in September, the last month of the quarter for our new facility and the depreciation all starts impacting us. And we're not fully operational yet. We haven't received the cost-out savings there from a labor standpoint. So we will guide to 2026 margins if that's really where we need to focus. My preference would be to talk about the growth of our business segments, our excitement around our new growth opportunities, our strategic pillars and continuing to drive our operating cash. And that's what we're really after. But we'll guide next quarter.

Thank you, Phil. Charlie, next question, please.

Our next question comes from Brian Lee of Goldman Sachs.

I guess just on the BESS opportunity again, you guys obviously are sounding more bullish, have said that of all the different growth verticals here, that's probably the one that's tracking ahead of expectation more so than others. So can you guys maybe provide a bit of an updated TAM for us in terms of the BESS opportunity with the products that you have? And then how much of that is data center tied? Are you able to kind of quantify for every 100-megawatt data center opportunity amounts to x dollars worth of revenue potential for Shoals given the product set? And then maybe any thoughts around margin implications as well? And I had a follow-up.

Sure, Ron. I'll take that. I think when we when we initially launched the BESS opportunity at Investor Day last year, we had approximately $360 million as an available market to us in the solar plus storage space. We've since added data centers and grid firming as 2 market opportunities. We have internal estimates. These markets are changing rapidly, as you can imagine, particularly driven by the data center AI space. And the applications of our products within some of these system architectures is proprietary. And so a 100-megawatt data center in a specific situation may result in one use of our product, which drives significantly higher ASPs up to maybe $100,000 a unit. And in other architectures, we may use a smaller product, a 1,200 amp product that may carry a $25,000 ASP. So it's going to vary architecture to architecture.

What is exciting for us is specifically our engineering team is engaged with customers to design specific products for their architecture, and we are building prototype products, shipping prototype products to be vetted by these customers. So we are excited about the potential opportunity. As everybody knows, if you watch the news or read a newspaper, the size and scale of these data centers is changing almost on a daily basis as is our total available market. So more to come in coming quarters about the actual size of the market.

Okay. Fair enough. We'll look forward to hearing more. Maybe just a follow-up on that. You mentioned the $18 million of BESS bookings this quarter and then starting to monetize that in Q2 of '26. It's about 3% of backlog today. Is that sort of the sales cycle and sort of the rev rec cycle we should be thinking about on these projects? And if that's the case, are we talking sort of like a mid-single-digit type of revenue mix from this opportunity next year? Because presumably, all the MSAs aren't going to ship in Q2. They just start to ship in Q2. So assuming more bookings coming in, maybe you get to like mid-single-digit percent of mix next year and then it grows beyond that? Just trying to understand where we should be budgeting expectations on this.

Well, sure. So while we haven't specifically guided to 2026, and it is early for us to try to do that, you're right in that we're ramping up. This is an emerging -- these use cases are emerging. Now keep in mind that we have had battery energy storage solutions sold all year long. It hasn't been to the magnitude of what these 2 new use cases are bringing to us. And so that's why we're excited to share with you the $18 million and the fact that those were driven by the MSAs that have been signed with the alternative use cases. So we haven't guided yet, but clearly there will be some cabinetry and recombiners sold all year long just in our traditional channels. And then we will ramp up these others as the year goes. We will try to provide more color going forward next year. We actually are in discussions about how much we can share, but our expectation is that this is an area of interest, and we want to be as transparent as we can.

Brian, maybe just some color around the sales cycle. We can speak to that a bit. As Dominic mentioned, we've had -- while not significant, we have recognized some revenue on BESS all year. A C&I solar and storage job would have a pretty quick sales cycle. I mean, we may book and turn on order inside of 6 months, whereas a larger grid firming or data center project, they probably follow more of a traditional sales cycle that would look at like a utility scale solar site. So we could be engaged a year, 18 months before we're shipping unit 1 to those individuals for inspection and validation. So longer, probably obvious, smaller sites, shorter sales cycle, larger opportunities, longer sales cycle.

And once we've gotten the actual designs firmed up for certain customers, the sales cycle will shorten. We've been working on these projects for the vast majority of the year. And we're just excited now here sitting in November to share with you that we've got purchase orders and revenue will start coming next year. But once we've actually landed that, if we continue -- if they continue to win business and award more business to us, those designs have now been approved and vetted and tested out. So then the sales cycle would shorten.

Thank you, Brian. Charlie?

Our next question comes from Jon Windham of UBS.

You made some comments earlier about LatAm and Australia. I was wondering if you could just give a little bit more color on how the international business is progressing in terms of specific products being sold, margins, long-term growth? Just any color you have on that. Appreciate your time today.

Thanks, John. We're excited about the international business. We've carried roughly 13% of our backlog and awarded orders has been tied to our international business. I think we're probably 10%, 11% now of our BLA [indiscernible] is tied. So excited to be shipping these first 3 projects. I think of our international business really in 2 buckets, an organic growth bucket in our specific targeted regions, which 2 of the 3 projects are entering in LatAm and Australia. And then I think of our -- the rest of the business in an export bucket. And so the margin profiles for those 2 buckets will look slightly different.

Our organically developed markets where we're playing in region, we may be building products outside of the United States, which we actually did on these 3 projects. The margin profile will be slightly lower than our norms. That being said, our export business, which constitutes the greatest portion of our backlog and awarded orders, and we expect projects to begin releasing in next year, and we've got a very strong backlog there. Those projects, for the most part, are funded by the U.S. EXIM Bank, and they need to be manufactured in the United States. And the margin profiles of those jobs will look, by and large, like a domestic utility-scale solar job, maybe minus some shipping costs here and there, but largely the same.

So we are excited about the growth of the international business. As I mentioned maybe in the prepared remarks, we're focusing heavily on Australia. There's been a mandate there to add 40 gigawatts new solar in this decade, which we're very excited about. So we've hired an experienced leader, and we're building out a team in Australia to capitalize on that. Australia is also a very, very strong BESS market, arguably probably stronger than the United States at this point. And we believe there's some opportunity for us from an international perspective on our BESS product line. So they're tracking as planned and excited that some of these export projects will finally begin to materialize in 2026 and also excited about the growing pipeline there.

Charlie?

Our next question comes from Dimple Gosai of Bank of America.

As electrical balance of system players and inverter OEMs kind of push into this BESS opportunity, can you talk a little bit more about what differentiates Shoals' architecture and go-to-market model? Like where is your moat as the market scales? And separately, who are you having conversations with mostly today? Is it more of the alternative chemistry players and so forth given the [indiscernible] overhang?

Yes. Dimple, that's a great question. So I guess there are inverter companies that are highly engaged in data center architectures. I would say, in conjunction with the products that we sell, to create potentially some alternative architectures that work more efficiently for data center, specifically AI architecture to try to maybe balance and smooth power frequencies in those larger data centers. So we don't think of them -- we don't think of the inverter companies maybe as competitors. We think of them as partners in the system architecture. So I think that probably answers the first question. Dominic, can you…

Yes. I was just going to say that in some of these cases, Dimple, what we're doing is we're actually engineering the solutions in partnership with these innovations out there. So part of that is something that some of the larger electrical companies are not going to be interested in doing. So when we're working with these integrators, it's very important that our engineers can go work back and forth and come up with custom solutions. So being first in and driving that value for them is very important to us.

And the chemistry, we are agnostic to the chemistry. So yes, if lithium is challenging and someone uses alternative long-form battery discharge power, that's fine because we're agnostic to that. We are still focusing on the DC coupled side of things with our solutions.

Yes, that's great add on, Dominic. And to be more specific about your questions, are we talking to folks that use alternative chemistry technologies? Yes. I mean, we certainly are. So we've got a wide opportunity and quote funnel for this particular end market, and we are very excited about the growth potential.

Charlie, next question.

Our next question comes from Praneeth Satish of Wells Fargo.

Maybe just sticking on the data center BESS opportunity, just kind of 3 quick ones here. First, maybe if you could help us understand how the sizing is trending on some of the quotes that you're looking at? Is it kind of in that 50 to 100-megawatt range? Or are you seeing potential for some larger installations? You did mention hyperscaler as well. So I assume that's kind of in the gigawatt range.

And then maybe as a follow-up to that, are there meaningful differences in terms of the competitive landscape at each of those different size tiers? And is there kind of a sweet spot for you where there's less competition? And then finally, the third one here is in addition to kind of the TAM for data center, new data centers, is there an opportunity maybe to displace some of the diesel generators and drive kind of an expanded TAM from that perspective as well?

Absolutely, and a great line of questions. I think the simple answer to probably those 3 questions are yes, yes and yes. So there is a difference. I think you're talking about float size, what are we seeing? Do we see 50, 100-megawatt scale opportunities? We do. Do we see significantly larger opportunities in that? We do. So we've got a product set, one that is standard and configurable that lends well to maybe the smaller data center opportunities that, as I mentioned, I think it was Brian's question, you think of that as more quick turn C&I business. And then the larger opportunities where we're partnering and designing a specific product for their proprietary architecture is also an opportunity for us. So the competitive landscape varies.

As Dominic mentioned, we've got experience here with DC power. I think that plays well. We've got experience in really building engineered-to-order highly configurable solutions at scale. That is probably our core competency if you really boil down what Shoals does well, we are able to build engineered-to-order products at scale. That's what we do every single day in the solar market, and that lends well into this BESS data center opportunity. So we can provide both product sets.

As it relates to can these architectures potentially at some point eliminate or reduce diesel backup, yes, potentially. I think there's probably a lot of information out there, white papers, for instance, that talk about different data center architectures, and that's certainly something we've got our eye on.

So Charlie, I believe that's the last question that we have time for today. But Brandon, you had some final comments before we close out, and I'll finish this off.

Yes, absolutely, Matt. I think, look, at the end of the year and even the end of the quarter, it's always important to reflect a bit, and I'm very proud of what this company has delivered and the transformation it is making over the past couple of years. Big picture, we have navigated a complex warranty issue. And during that warranty issue, we've maintained customer relationships along the way, potentially strengthen customer relationships throughout that. During that period, we have self-funded that $70 million remediation project, self-funded that project and the legal costs associated with the ongoing Prysmian litigation. And while that's a great accomplishment on its own, we've also invested heavily in our business during that time.

If you think about this year alone, we'll invest probably 3x on a normal CapEx rate. And while, hey, it's great to spend that money, we also have to implement that CapEx. And so we are creating a sustainable operations platform for the future, and I'm very, very proud of what we're building. Additionally, during the period, a $25 million share repurchase, and we've paid down $50 million of our debt. So I believe this company is very well positioned for the future. We've got a leading market position with a blue-chip customer base. We've got a very strong balance sheet and the ability to generate strong free cash flow. Our diversification strategy, as we mentioned on this call, is meeting or exceeding plans, and we're excited about the new end markets we're entering. We've built a fantastic, fantastic management team here that's going to guide this company into the future. And very exciting for both our salaried and hourly staff. We've got one heck of a nice new facility to support our growth for the future. So it's a fantastic time to be with this organization. I'm excited about the market backdrop we have. We look forward to fantastic results in the future. So I want to thank everybody that has joined our call today and supports this company. Thank you.

And I just want to remind our audience that before we let them go, that we have a very active IR calendar throughout the end of the year. We announced those events a few weeks back via press release. They're listed on the Investors section of our website. So if you're attending any conferences through November and December and you'd like to meet with us, please let us know. We'd love to speak with you. If we can help you further, please reach out to [email protected] with any questions. Have a good day, everyone.

Thanks all.

Thank you.

Thank you all for joining today's call. You may now disconnect your lines.

Okay. I think we'll get started here. Thank you, everyone, for joining this fireside chat with Shoals Technologies Group. My name is Christine Cho. I am the clean tech analyst here at Barclays. And with me today, I have Brandon Moss, CEO of Shoals.

Thank you, Christine. Good morning, everybody. Happy Labor Day.

Well, I thought -- our conference is pretty timely with all the changes that have gone on over the last several weeks. So I thought we would start with now that the final treasury guide is out, which eliminated the 5% rule for utility solar. Can you just give us an update on what the current demand environment is like? And if you can give us maybe some sort of comparisons, if applicable, about how the customer conversations are different pre-OBBB versus post?

Yes. I think, Christine, to start, maybe just what's driving the demand environment, bill or no bill has not changed, right? I mean there is an unbelievable need for load growth. And in the near term, still solar is probably, by and large, the best opportunity to fill that near-term need.

So the demand environment before and after has been strong, and I would say, consistent the whole year. It's been very robust. And so look, if there's any change in anything related post bill, I think it's certainty further out into the decade about a continued strong demand environment.

Our customers who are EPCs for the most part, we're dealing directly with EPCs, they have had packed construction calendars from the beginning of the year and even exiting last year. So not much has changed. We've got a great order book for the remainder of this year going into '26 as do our customers.

Do you expect sort of any changes to how the utility scale market is going to operate or procure business or how they've been doing things as a result of the bill?

Look, there's been a lot of people talking about a pull forward of business. And again, from where we sit, we're later stage in the construction cycle. I think that the larger EPCs that we deal with directly are tremendously busy. Construction calendars are full.

If there is a rush to do more business sooner, your bottleneck is going to continue to be around labor. And I think that's ultimately a beneficial thing for companies like Shoals that offer labor saving and productivity enhancements. So I think the only change in business from EPCs will be how do we deploy faster, how do we cut time lines.

More recently, you've been talking about the four pillars of growth. If you can just go through those four briefly and maybe talk about the one or two that excite you the most.

Sure. Yes. Starting back when I joined the company now two years ago, we relaunched a corporate strategy and the thrust of that was around diversification, not only to diversify end markets and products, but also in our core business to continue diversification around the customer set that we were doing business with. And that has materialized over the last 24 months.

So one of the things that we did when I joined the company is we exited the EV business. I don't know if you remember, we had an EV business at one time and put a big focus on four growth pillars. And these growth pillars are near to our core. They're not a total diversification play yet. We believe that they were achievable with the talent and resources that we had at the time. And those are starting to take shape for us.

So those four pillars for us, the first is our OEM business, which is actually the business that Shoals really was founded on, making junction boxes for solar modules. That business is doing quite well, as you can imagine, as module manufacturers are reshoring their capacity. So that business is, from a velocity standpoint, has outgrown our other businesses over the course of the last 12 to 18 months.

We also stood up a commercial and industrial business. Shoals historically had turned down projects that were smaller than 75 megawatts. We use the same engineering competency, the same production equipment on smaller jobs and larger jobs, and so we focused and got a group that is focused on that commercial and industrial segment, and that business is growing quite well.

Our international business is a big focus for us. Shoals had been successful in some areas internationally, but we really refined our strategy to focus on specific geographies. So exciting developments there for the company. U.S. where I'm most excited. We have launched a battery energy storage business segment that is focused really on combining electrical sources.

We make a product suite of combiners and recombiners and that business I think, has the most potential to change our company. If I think about five years in the future, what would I like Shoals to look like as an organization, it's a company that's enabling electrification. It is not wholly solar focused like we have historically been. And this battery energy storage segment has the ability to get us there.

Specifically in that business, we're focused not only on our traditional EPCs that we work with every day, but IPPs related to battery energy storage. We're now dealing directly with hyperscalers. A large segment of that business is data center focused and has the ability to really scale for us in the near future.

Can you actually go into that segment a little in more detail? Just sort of what are the -- you mentioned hyperscaler data centers, but are they the only ones who are inquiring about this offering? And how should we expect time line of when we could expect further updates, i.e., shows up in backlog?

Yes, sure. We are in the early stages of this business, and I think it's important to understand the sales cycle and how the -- how this product development will flow. Hyperscalers, IPPs are not the only folks that are interested in this product. We're dealing with DG EPCs. Those products and that sales cycle might be quick return business. And they're -- there is revenue being generated and there are items in our backlog for smaller customers like those. So that is happening today and projects are flowing.

That said, for the IPPs and the larger battery integrators where we have a more traditional OEM approach where we're selling a component to them, those sales cycles are longer. The engineering that we're doing with these individuals is jointly done. So they're coming to us with requirements. We're engineering, trying to meet those requirements and passing things back and forth.

Those particular opportunities for us will require typically us to send an initial trial unit. That unit is evaluated with their system. And then after that agreements are signed, forecasts are made and we would go to a more traditional build-out and release. So early days still. Signs are very good. We've got a lot of interest, and we are actually starting to ship some of these first units to be inspected by the larger IPPs and OEM opportunities that we have. So more to come probably in the next quarter or two.

The business will be lumpy at first, like most immature businesses are. So I would expect maybe some quarters with larger bookings followed by some quarters with smaller bookings. The one thing to point out is the revenue for these larger opportunities is likely to be balanced and released over time.

It will be some book -- booking spikiness to start with. But we're very excited about the opportunity and the ability to get a product. Our traditional core products are influenced by the energy needs of data centers, right? These products actually have the opportunity to live on site at a data center.

Can you talk about the competitive environment specifically in this space? What are you offering? And who are you actually competing with?

Yes, it's a great question. Our -- if you think about the Shoals' core competency at its core, we have built a business around manufacturing complexity and customization at scale, and so I think about this opportunity related to battery energy storage, it's simply that.

We are able to custom design and engineer solutions for companies at scale, and I think we fit a sweet spot in the marketplace. We are not an enormous electrical conglomerate that may be uninterested in some of the volumes that we see and having to do some of the customization that we have to do.

And we're also not a smaller organization that these IPPs or larger battery integrators may be uncomfortable doing business with. So we can compete on flexibility, customization and speed, and I think we found a nice little niche in the marketplace.

Okay. Maybe just to touch upon international for a second. What are your growth opportunities here? What kind of demand are you seeing here? And when I think about Shoals, like in the U.S. market, the value proposition has always been you're replacing the need for high-cost labor, right? Is that also the value proposition that you're offering outside the U.S.? Or is it because there is no skilled labor, just sort of how you think about strategy?

Yes, it's probably the latter as it relates to labor, but I think as far as our international business goes, I think thinking about strategy, it's -- a lot of times, it's maybe more important to figure out what you're not going to do than what you are going to do.

And I think historically, Shoals had an international business, but it was not focused around geographic markets specifically where the value proposition would resonate the most, and so we've narrowed our focus down around international in the last year, 1.5 years, and so for us, finding markets where a solution makes sense, and those are markets that are maybe less price sensitive.

There are also markets that use centralized inverters versus string inverters because a larger BLA system does not pair well with string inverters. So that really leads us to focus on geographies like Australia, like South America, obviously, two different markets in terms of labor costs, one being high-cost labor and maybe one being less so skilled labor, and we are seeing our solutions really resonate in those two particular markets.

Australia is an interesting one for us. Currently, the political climate has changed in Australia here in the last 6 months or so. 80-plus percent of their power generation is slated to be renewable energy by 2030. So you're going to see a lot of solar growth, continued solar growth in that particular region.

Australia is also fairly advanced in the battery energy storage market, maybe ahead of where we are in the States. So I think it represents a great opportunity for us there as well. The other thing specific to Australia is the mining industry. The mining industry is looking to change their generation sources, and so there's some pretty large behind-the-meter opportunities. We've done some work there in the past.

So you'll see us focus a lot on that particular region. We just hired a new country leader, a region leader for the Asia Pacific market, and we expect to do some big things in Australia.

Okay. That's new. Just -- I know we talked about the competitive landscape for BESS. But if we can talk about the competitive landscape for EBOS in the U.S. we've got [ TIOC ] we've got this tariff environment that makes it hard for your Chinese competition. We've also seen some of your competition get acquired. Does this belong -- does an EBOS business belong inside someone bigger? Just sort of how you're navigating and thinking about the competitive environment, not just now but going forward?

Yes. I think Shoals is in as good of a position from a competitive standpoint as ever before. We have really focused the last couple of years on -- almost a maniacal focus on the customer. We have got product innovation back in a spot probably as good as it's ever been within the company, and we're seeing that now pay off with the diversification of our order book and the engagement with EPCs that we have not either done business with or hadn't done business with in years.

So I love where we sit today, and I love the engagement that we have with our customers through our engineering prowess, our customer care aspect and obviously, our product delivery. We have built a fantastic new factory that we are in the process of moving into, that's got ample capacity now to really enable us to capitalize on the market we're seeing today, and I think will be a competitive weapon for us in the future.

Whether an EBOS business belongs with another business, maybe not. I think we're comfortable with where we sit today. I think there's opportunity for us in the near to midterm to look at M&A potential as well, and we've evaluated some things there, but I'm happy with where we sit.

Fair enough. Moving towards to your customer concentration. In the last year or so, there was a high level of concentration, but it seems like that has been coming down in recent quarters. Can you talk about what is driving this? And should we expect it to continue to come down? Just sort of talking about the diversity of your order book going forward?

Yes. The diversity of the order book is fantastic now. As I mentioned, as we started, we needed to diversify our core business as well, our domestic EPC solar business, and we've done that, it's not something that was done overnight. I think the journey we've been on as a company the last couple of years, we don't maybe talk enough about.

I mean we have stood up virtually an entirely new sales team. We've stood up a marketing department. We did not necessarily have one of those when I joined the company. I just touched on the product innovation, but we have -- our product and engineering team virtually in the last two years, we have done a complete overhaul on that and stood up a really good customer care team.

We did that somewhat out of necessity around our warranty shrink back remediation issues. But we've been able to take that function and really turn a negative situation into a positive, and we are engaged with customers like never before, and you'll see us continue that diversity of our order book.

I mentioned in a meeting earlier today, looking back at some of our revenue statistics and customer profiles, we had six EPC customers that would be, call them, top 15 EPCs that in 2023, we did just under $50 million of revenue. So roughly 10% of our total business with those six customers.

Today, if you looked at our order book, our backlog and awarded orders, we've got over $250 million that are in either backlog or awarded orders from those customers. So I'm excited about, again, our competitiveness in the marketplace, I think, is as strong as ever, and the results are starting to show in the order book.

Okay. Maybe moving over to the financial outlook for a second. You guys were very well known for your 40-plus percent gross margins, which is an anomaly in the utility scale space. It's come down, still very nice at, let's call it, the mid- to high 30% range, but can you talk about what drove that? And how you sort of balance that against top line growth and then, let's call it, EBITDA margins?

Sure. Yes. I think maybe most importantly is our gross margin percentage, and you saved that question for later in the discussion. So thank you. That's been a question recently for us. Gross margin percentage is a metric. It is not our most important metric. It's not something that I wake up every morning and I'm thinking about.

I am more concerned with growing this business profitably and diversifying the business and generating really strong cash flow for the business, which historically we've been able to do, and so while our gross margin percentage has come off of that 40% mark and maybe to remind everybody, our margins are not impacted by 45x or any other tax benefit. Those are -- those margins are free and clear essentially.

We will continue to have and drive really strong margins. I think the strong demand environment will certainly help that in the coming years. Our new products and product mix will help that in coming years. So where 40% can be a bit of a North Star for us or an aspirational goal. I think in the near term, we'll continue to operate in that 35% to higher 30s number.

We have got a big focus on operational efficiency. This new facility as we move into it in this year and into '26, I think will pay dividends for us there. So we're not taking our eye off the ball off of that 40%. It's just not the most important metric we're concerned with right now.

And then last question for me. As we sort of think about free cash flow, you have been free cash flow positive for years. But in recent years, some of that has gotten eaten up by warranty issues, right? You're building out new manufacturing.

The manufacturing, I think, comes to an end over the next couple of quarters, right? So the manufacturing build-out. So are there any other things that we should think about that might potentially eat into your free cash? And if not, you talked about M&A. Just sort of can you give us priorities on capital allocation?

Sure. Yes. I think changes to cash flow in the coming years, I mean, there's been really three things that have impacted our cash flow this year and last year. Warranty has been one of those, probably this year and then last year, somewhere around the $30 million a year probably number has been consumed by warranty expense.

We've had elevated legal costs as a result of the warranty issue and other issues that I would assume will peel off in the coming years, and you mentioned the new facility. We are probably in 2026, 2.5x our typical CapEx spend, and that will taper off next year. So you will see cash flow swing positive in 2026. We will have some working capital needs as the business scales, obviously, and that's a good thing, but you will see us swing back to positive cash flow in '26 in a pretty big way.

I look forward to all of these developments. It sounds like you guys are at an interesting point, crossroads, let's call it, with different -- new different lines of businesses, free cash flow increasing.

Yes. I think, look, we've done a lot of hard work on the strategy side of things. We have done a lot of hard work on recruiting and retaining top talent. My team looks very different. My direct reports, if you think about our VP and Director level subset of the organization, probably 50% of that talent is new since I've joined the company. So we've got the right team in place.

I think we've got a really strong strategy, and we are executing that now, and you're starting to see the results of that. So I think a couple of years down the road, the Shoals that probably all of you knew and we're used to is not going to be the Shoals that you see in the future. It's going to be a different organization. We're going to be playing in new markets with new products, and I'm very excited about that.

Brandon, thank you so much for your time today. Thank you, everyone, for joining us.

Thanks all.

Great.

Thank you.