SHLS - NASDAQ

Good afternoon. And welcome to Shoals Technologies Group Third Quarter 2023 Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Mehgan Peetz, Chief Legal Officer for Shoals Technologies Group. Please go ahead.

Thank you, operator. And thank you everyone for joining us today. Hosting the call with me are CEO, Brandon Moss; and 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. As you listen and consider these comments, you should understand that these statements, including the guidance regarding full year 2023, are not guarantees of performance or results. Actual results could differ materially from our forward-looking statements, if any of our assumptions are incorrect or because of other factors. These factors include, among other things, the risk factors described in our filings with the Securities and Exchange Commission, including economic, market and industry conditions, defects or performance problems in our products or their parts, including those related wire inflation shrinkback matter, failure to accurately estimate the potential losses related to such matter and failure to recover those losses from the manufacturer, decrease demand for our products, policy and regulatory changes, supply chain disruptions and availability and price of our components and materials. Although we may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. We caution that any forward-looking statement included in this discussion -- made as of the date of this discussion and we do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable financial measures. With that, let me turn the call over to Shoals CEO, Brandon Moss.

Thank you very much, Mehgan, and good afternoon, everyone. I will start today's call with some key highlights from the third quarter. I will follow with an overview of business conditions, our investment in production capacity and an update regarding the wire insulation shrinkback warranty investigation and remediation. I will wrap up with some of my initial takeaways, one quarter into the job before I turn it over to Dominic, who will provide more detail on our financial results. Shoals had another great quarter delivering record revenue, adjusted EBITDA and adjusted net income. I would like to thank the management team and associates for their strong execution in delivering these record results. Compared to prior year, third quarter revenue grew 48% to a $134.2 million. Revenue was slightly impacted by lower production yields early in the quarter as we ramped up our third Tennessee facility, which has already added 15 gigawatts of new capacity to our 2022 base of 20 gigawatts, bringing total capacity to approximately 35 gigawatts. I also want to thank our commercial team for delivering yet another record for backlog and awarded orders. Backlog and awarded orders were up 34% year-over-year and 16% sequentially to $633.3 million. We added over $228 million in orders during the quarter. We are also pleased to see emerging strength in our international business, which now represents more than 10% of our backlog and awarded orders. Moving now to the solar market landscape. The domestic utility scale solar market is currently experiencing slower growth as a result of higher interest rates, lingering uncertainty about the IRA, supply chain constraints and interconnection complications. Though we expect Shoals’ growth rate to decline from the extremely high levels of the last few years, we believe that our domestic utility scale business will continue growing in at attractive rate. We still see potential to partner with large EPCs, converting them to the Shoals solution and growing our penetration of current customers. Shoals has historically targeted large utility scale projects that are approximately 75 megawatts and up, but we see an attractive opportunity to apply our industry leading value proposition to smaller projects. Additionally, we are in the early stages penetrating adjacent product markets to grow wallet share in the solar space. Turning now to international. We are targeting specific higher growth markets within Europe, Africa, Latin America and Australia. These markets combined are more than double the US market and according to industry data are growing at a 9% CAGR through 2026. In recent quarters, we announced major project wins in Australia, Latin America, and we expect growth to continue as international EPCs understand the value proposition of our entire product suite. As I mentioned earlier, more than 10% of our backlog and awarded orders is now attributable to our international business. In our EV charging business, we announced at the end of October that we will deploy our Fuel by Shoals e-mobility solution for the U.S. Department of the Air Force, supporting an EV charging-as-a-service pilot project to be provided by Leidos, a Fortune 500 science and technology leader. This project will support the Air Force's climate action plan to achieve a 100% carbon free electricity by 2030 and net zero emissions at Air Force facilities by 2046. Shoals is proud to partner with the Air Force as they work towards reaching their emissions targets. Although it’s early days in our e-mobility business, we are excited about our innovative above ground EV charging infrastructure solution, which minimizes construction costs and accelerates EV charging deployments. Turning now to an update on production capacity. Shoals has a strong operational team that continues to execute and support our commercial growth. The team has been focused on increasing capacity in 2023 to meet our strong demand. Since January, we have installed almost a 100 new machines, hired over 200 operators and added 225,000 square feet to our manufacturing footprint. As I mentioned at the start of the call, we completed the ramp up of third Tennessee facility in Q3. This facility increases our capacity by 15 gigawatts or 75% year-over-year. This brings Shoals total capacity to 35 gigawatts with the ability to scale to 42 gigawatts. With this added capacity, we estimate Shoals conserve growing demand well into 2025, further enhanced production efficiency and maintain our attractive margins. I would like to take some time now to discuss where we stand on our investigation and remediation of the wire insulation shrinkback warranty issue. On October 31st, we filed a complaint to recover for damages caused by defective wire that Prysmian Cables and Systems USA, LLC sold to Shoals between 2020 and approximately 2022. Shoals has already expended millions of dollars in identification, repair and replacement of defective wire and is seeking full recovery from Prysmian for those, as well as future expenses related to the issue. Because of the pending litigation, we're limited to what we can discuss publicly. Based on our continuing analysis of information available as of today, the updated estimated range for potential loss related to wire exhibiting insulation shrinkback is $59.7 million at the low end and $184.9 million at the high end. Dominic will provide more granularity on the breakdown when he reviews our financial results. Based on our own investigation and third party testing, we determined that unacceptable amounts of insulation shrinkback were occurring on Prysmian wire purchased from 2020 through 2022. The range of damages we are seeking reflects potential costs of remedial measures, including wire and labor at the approximately 300 sites that include at least one harness made with defective Prysmian wire sold during this period. This represents about 30% of the total amount of Shoals harnesses manufactured in the same timeframe. Shoals is committed to quality. Based on the information we have gathered to date, it is apparent that this installation shrinkback issue is unique to the defective Prysmian wire and not from any other wire suppliers. As we work to remedy the Prysmian defective wire issue, our top priority is taking care of our customers, which we are doing by leveraging our strongest assets, our people and our technology. Identifying the effective wire is time consuming because of the size of solar fields, which can be as large as four square miles but we're focused on working as efficiently as possible. We want to emphasize that our underlying business remains very strong and we expect it to continue to flourish through the resolution of this issue. Now I'll take a moment to provide a brief update on the patent infringement complaints filed by Shoals with the ITC in May of this year. The evidentiary hearing is scheduled for March of 2024. And as we've emphasized in prior quarters, we'll continue to vigorously defend and protect our intellectual property. I'll now wrap by highlighting some of my initial takeaways and why I'm so excited about Shoals. In the first quarter of my tenure as CEO, I'm focused on refining our company strategy, continuing to build our organizational capacity and implementing a more robust operating model to sustain our strong execution. Shoals solutions continue to have an industry leading value proposition, particularly in the current environment where there's a shortage of licensed electricians. A recent third party study stated that utility scale solar installation workforce decreased by 18% from 2021 to 2022. Conventional EBOS systems are expensive and time consuming to install, and most of the work must be done by licensed electricians who continue to be in short supply. Our system reduces both material and labor costs. Additionally, our products are constructed in a quality controlled manufacturing environment and are built to last, providing value to owners and power providers versus traditional methods that have a high failure rate, such as field assembly and the use of devices like insulation piercing connectors. We believe we have ample room to grow in our core domestic solar market with large EPC partners and with a new focus on smaller projects. I'm also confident in our ability to accelerate growth in adjacent product markets and internationally. Shoals is an innovation leader with strong product development capability. We have been successful in growing share due to our ability to innovate better solutions and with our domestic manufacturing footprint in the US, we are well positioned to capitalize in the US federal legislation that provides tax and other incentives for onshore manufacturing. Shoals will focus on markets that support global electrification that are impacted by skilled labor needs and supply chain constraints. Our core competency of engineering quality prefabricated plug and play solutions at scale aligns well with market needs. By delivering these prefabricated solutions, we expect to continue to generate strong margins and we are moving up our gross margin target, which Dominic will cover in greater detail. I'll now turn it over to Dominic, who will discuss third quarter 2023 financial results.

Thanks, Brandon. And good afternoon to everyone on the call. Third quarter revenues grew 48% to $134.2 million, driven by higher production volumes as a result of increased domestic demand for solar EBOS. Gross profit was $14.2 million compared to $36 million in the prior year period. Gross profit as a percentage of net revenue decreased to 10.5% from 39.7% in the prior year period, driven by $50.2 million of wire insulation shrinkback warranty expense recorded in the period. The significant warranty expense was partially offset by improved pricing, slightly lower raw materials input costs, increased leverage on fixed costs and efficiencies gained in operations. We have not booked any offsetting recovery from Prysmian. The liability and related expenses for addressing Prysmian’s defective wire is based on our continued analysis of information available as of today. Based on this analysis, as Brandon noted earlier, we have an updated range of the potential loss related to the defective Prysmian wire, which is $59.7 million at the low end represented in our financial statements through September 30, 2023 and $184.9 million at the high end. As no amount within the range of loss is more likely than any other, as of September 30, 2023. Our liability balance, broken down between current and long term liabilities on the face of our balance sheet, remains $56.6 million. As Brandon noted, the range of potential loss reflects cost of remediation, including Shoals manufacturing expenses and field installation labor. Because the complaint was filed on October 31st before our third quarter 10-Q, we used the amount of damages that had been accrued and was publicly available at the time of the filing of the amount of damages being sought as management, as well as our Board continued assessing and refining the updated range of losses to be accrued for the third quarter. That accrued amount as of our second quarter was not less than $9.3 million. The amount of damages we are seeking may be amended from time to time as the litigation proceeds and additional or different information becomes known. In the ordinary course of litigation, we will be required to make initial disclosures in which we will include the most current higher estimate of damages. To provide additional insight into our recurring gross margin performance, we have introduced additional non-GAAP metrics this quarter. Adjusted gross profit and adjusted gross profit percentage are non-GAAP metrics that remove the wire insulation shrinkback expenses from our GAAP cost of goods sold. Reconciliations of adjusted gross profit, and adjusted gross profit percentage are provided in our press release and 10-Q filing. Our adjusted gross profit for the quarter was $64.4 million, reflecting a 48% adjusted gross profit percentage. Year-to-date, our adjusted gross profit percentage 48.7% excludes the cost of expenses of remediation of Prysmian's defective wire in both the second and third quarter. For clarity, our normal non-GAAP metrics of adjusted EBITDA and adjusted net income also add back the wire insulation shrinkback expenses from our cost of goods sold, as well as the wire insulation shrinkback litigation expenses from the SG&A section of the income statement. Once again, reconciliations may be found in our press release and 10-Q filing. Third quarter general and administrative expenses were $22.6 million compared to $13.9 million during the same period in the prior year. The year-over-year increase in general and administrative expenses was primarily related to higher non-cash stock based compensation, legal fees related to the patent infringement and Prysmian defective wire complaints and planned increases in payroll expense due to higher headcount supporting growth. Net loss was $9.8 million in the third quarter compared to net income of $12.8 million in the prior year period. Adjusted EBITDA increased 81% to $48 million compared to $26.6 million in the prior period. Adjusted EBITDA margin increased 649 basis points year-over-year to 35.8%, reflecting the impact of higher adjusted gross profit achieved this quarter. Adjusted net income grew 101% to $33.4 million in the third quarter compared to $16.6 million in the prior year period. Once again, both adjusted EBITDA and adjusted net income add back the defective wire warranty expenses. During the quarter, we generated cash from operations of $27.7 million. In the quarter, we used excess cash to fully pay down the revolver. As I have stated on multiple calls, we will continue to prioritize investment in the business and driving shareholder value. As of September 30, 2023, we had $633.3 million in backlog and awarded orders, an increase of 34% year-over-year as the company added over $220 million of orders in the period. It's important to note that some international orders have longer lead times than domestic orders and we are booking jobs that extend beyond our historical revenue cycle of nine to 13 months to realize revenue from awarded orders. Approximately 15% of our backlog and awarded orders have delivery dates beyond 2024. Turning now to our full year outlook. Based on current market conditions and visibility into anticipated fourth quarter production, we are narrowing our outlook for revenue and raising our outlook for adjusted EBITDA and adjusted net income. Our outlook for interest expense and capital expenditures remain unchanged. For the year ending December 31, 2023, we expect revenues to be in a range of $485 million to $495 million, adjusted EBITDA to be in a range of a $165 million to $175 million, adjusted net income to be in the range of $110 million to $120 million, interest expense to be in the range of $22 million to $26 million and capital expenditures for the full year in the range of $8 million to $12 million. Before I turn it back over to Brandon for closing remarks, I want to note that our long term target for adjusted gross profit percentage is in the range of 40% to 45%, which we believe we can sustain going forward by managing price, operational efficiencies and operating leverage. With that, I'll now turn it back over to Brandon for closing remarks.

Thanks Dominic. I would like to close by thanking all of our customers for the confidence in Shoals, our employees for enabling us to effectively serve our customers and our shareholders for their continuous support. I'm incredibly excited about the opportunities Shoals has ahead. Shoals continue to have an industry leading value proposition in the EBOS space with great opportunity for continued growth in the domestic solar market. Our strategic focus on international expansion positions us to capitalize on higher growth international markets that will enable sustained growth in the coming years. Additionally, our world-class team with its strong product development capability will allow Shoals to keep building on its leading position by developing innovative products in both core and adjacent markets. With our asset light business model that has industry leading margins and significant cash flow generation, I'm incredibly optimistic about what we can achieve in the coming quarters and could not be more excited about the opportunity ahead. And with that, thank you everyone. I appreciate your time today, and we will now open the line for questions.

[Operator Instructions] Your first question comes from Brian Lee from Goldman Sachs.

Thanks for some of the additional disclosure here on some of the hot topics as well. I had a couple questions I guess regarding that, maybe first off on the warranty. If I look at the cash flow statement, it looks like all of these close to $60 million you've represented are non-cash as of today. Can you give us a sense of how that potentially turns into more of a cash impact as you continuously remediate how many quarters it might show up over and then whether it's OpEx or COGS? Just any sense of -- I know you're booking this as a liability, but sort of what is the ultimate potential cash impact you're anticipating and over what timeframe based on the fact that you're already kind of into the remediation process? Maybe have an early look into that and then I have a follow-up.

Let me start by saying on the face of our balance sheet, in our liabilities and stockholders equity section, we've tried our breakdown and estimated the warranty liability between current portion, which would be within the next 12 months and the long term portion of the warranty expense, which would be greater than 12 months out. We do believe the remediation will take multiple quarters and therefore we've tried to estimate that. So in our balance sheet, we've currently got 17 million of current liability expense. As you noted, most of it was a non-cash charge this quarter. $17 million that we have on the balance sheet is the current portion with $39 million as the long term portion of the warranty expense. And as you can imagine, the vast majority of that expense is going to be related to COGS. It's really the manufacturing, it's the remediation, it's the labor to install these things in the field. So that's where the warranty expenses manifest. And there will be some expenses associated with litigation that clearly would happen during this timeframe as well. But I can't -- that's the clarification I can provide, it's on the face of the balance sheet, it's in my press release and our Q as well.

And then I guess on the demand backdrop, you guys noted there's a little bit of a slowdown you're seeing US domestic, if I heard you correctly. But this $220 million plus of bookings, you printed in the quarter it's one of your best quarterly bookings metrics you've posted. So just trying to reconcile your commentary with kind of the results here. Is there sort of a precursor to bookings starting to slow as we move into year end Q4? Or are you just kind of throwing caution to the wind but you're offsetting some of that through either market share gain or international and non-solar expansion or both? Just trying to understand kind of where Shoals fits into that dynamic of the high level commentary around US domestic maybe [selling] a bit. Thank you, guys.

I'll jump in on that one, I appreciate the question. Look, you pointed it out. First and foremost, we're excited about the quarter in terms of the booking we've seen. Our quote volume is up 69% and as you noted $220 million of bookings in the quarter gave us a record at 633.3 of total backlog and awarded orders. I think really the thing to point out 10% of our backlog and awarded orders is international business. Some of that international business is pushed out into 2025. Our total backlog and awarded orders that is for 2025 delivery is about 15%. So look, we're seeing the same choppiness that everybody's seeing in the marketplace that I indicated in my prepared remarks. There's some fear about interest rates, obviously, interconnections, complexities, still some lingering supply chain issues. We are not seeing overwhelmingly big changes and product push outs. I mean, in this business, things move quarter-to-quarter. But there's nothing we're really seeing of significance there. I think that the major thing is the forward-looking bookings into 2025. And then look this business has executed great the last couple years, we've grown at a 50% plus CAGR since IPO. It's impossible for a company to do that on into perpetuity. We continue to feel very good about the marketplace and our ability to compete. And our goal is to outpace the market growth and we'll continue to do that as a company. So it's a great question. Thank you.

Your next question comes from Philip Shen from ROTH MKM.

I wanted to follow up on some of the warranty questions. Specifically, how confident are you that the $185 million could be the high end of the range, is there potential that it could go beyond that. Are you still buying the Prysmian wire? And then from -- I think, you were alluding to most of this would be a cash expense over time, it's on cash now. But over time, does become more cash and then maybe the what the mix of cash is there? And ultimately how do you expect to pay for it? My guess is it comes out of your cash flow in the coming quarters. Just curious if you could give a little bit more color in terms of the source of how you pay for it as well. Thanks.

So the first questions that I can answer are that we are no longer buying the Prysmian wire, that is in our complaint that has been filed. So feel free to check there for some additional details. And then as far as the further financial questions, I will hand it over to Dominic.

Phil, there is a few things that we just have to be cautious. As Brandon mentioned, this is active litigation, we do need to be careful about what we say. But in terms of how this plays out, as I mentioned earlier and with Brian's question, we do believe that there will be -- this will take multiple quarters to resolve. We hope to be very forthcoming as solutions come forward from Prysmian. If there is something that comes forward there, as I mentioned -- as we mentioned before, that there was no offsetting recovery booked in our financials at this point in time. So in terms of how we pay for it, we have cash from operations. I have got the full revolver. As we noted, we paid down the revolver in full. There is a $150 million of liquidity available to us there. We continue to generate strong cash flows. And so from what we show on our balance sheet from a current portion of the liability, we feel confident in our ability to handle all that through operations.

Shifting over to capacity. I think this is maybe the first time you talked about capacity in megawatts, sorry if I missed that earlier. But it seems like you are going from 20 gigawatts to call it 35. And I was wondering what you thought the utilization on that 35 might be through 2024. Do you expect to be at a high utilization rate and what might dictate and be the catalyst to expand beyond the 35 to the overall 42? Thanks.

We won't guide on '24 specifically. We are excited that we have added 15 gigawatts in 2023. And as I mentioned in the prepared remarks, we can scale that up to 42 in our current footprint. What is probably most exciting for me is because we are not only adding capacity we are becoming more efficient. The conference room I am sitting in right now, I am looking out on a plant floor and each and every day we are getting more efficient in our ability to produce, our harnesses, our BLA product, and the facility is getting safer and safer each day. So I am excited about how the operations team is executing. We continue to invest in this business. We will continue to do that in years to come. But we are set for capacity probably through 2025, as I noted in my remarks.

Your next question comes from Jordan Levy from Truist Securities.

This is actually [indiscernible] on for Jordan. Thanks for taking my questions. So could you please maybe talk about the initial reception to your Snapshot product offering? And what this means for future product extensions into your gateway family products? And I’ve a follow-up.

Look, Snapshot, it’s very early days for that product, really launched at [Indiscernible] this year. The feedback that we got at [Indiscernible] for that particular product was amazing. And we have been out since [Indiscernible] taking that product to investors and owners and the feedback that we've got from them has been very, very strong. Again, it is early days, it is a new product for us, it gets us into the monitoring space. I think most exciting about the product is it opens up market opportunity for us to sell something into a solar plant that has already been constructed and we've never had a product like that before. So this opens some windows for us, it opens windows to the monitoring world. And I think we can continue to expand off of that as a product suite. So early days again, but very excited.

So second question real quick. So on your capital allocation, I mean, you paid down your revolver this quarter. So now how are you thinking about your M&A strategy in the current market? And are there any like natural extensions to EBOS getaway products that makes sense like conceptually? Thanks.

Yes, as we've said before, we are very interested in driving growth organically as well as looking at inorganic growth. With the cash flow characteristics that we have as an organization in the base business, we very feel very confident in our ability to continue to drive strong cash flow margins. In terms of how we look at that, strategically, we are always evaluating opportunities. When we're ready to make those announcements for you, we absolutely will. But at this point in time, we're focusing on within, focusing on our organic growth as we've kind of laid out. And think in the first quarter when Brandon's ready to talk about strategy update and then Analyst Day sort of thing, then that's when we'll start talking about what might be out on the horizon. But thank you for that.

And your next question comes [indiscernible] from [BNP]. Please go ahead.

Just following-up on the backlog questions, rising quite nicely, there's that international portion. Any ability to share book to bill for US EBOS specifically? And is there any material EV charging bookings in there?

We haven't broken down, the exact book to bill between domestic and international. That's something that, as we said, 10% of the backlog and awarded orders is currently at that point. I imagine that percentage will climb if the lead times of those international projects are longer. And that's why I alluded to in my prepared remarks, because I wanted everyone to understand that the kind of the revenue cycle that we've talked about historically may be lengthening and shifting as we continue to build that international business. But as Brandon mentioned, I echo the enthusiasm for the strong strength of our pipeline, the quoting activity, both domestic and international. And I'm glad to see international taking a larger piece. We just haven't broken it down specifically but we'll keep that in mind for next year.

And any [Technical Difficulty] where market share is today on BLA sort of a metric that was quoted in the past, just curious if you have a view.

As far as BLA goes, we have had fantastic penetration of that product. I mean, since IPO, we've 10x our share of EPCs that are using that solution. And at this time, we're not going to speak specifically to market share or market share of a particular product. But we are excited about that product. And I think there's still room for it to grow, there's still new EPCs that we can target and there's also deeper penetration within the current EPCs that we're doing business with. As far as market share goes, as we've talked about in the past, there's historical volatility in those market share estimates that's caused by really some definitional issues across industry data providers. So not going to speak to market share specifically at this time. But again, reiterate that our plan is to grow faster than the marketplace.

And I guess just one more quickly on the manufacturing capacity of 35 gigawatts. Just to clarify, is that to produce BLA plus or is that a blend across BLA in the traditional home run?

That would be our ability to produce both products. So that is across our product suite.

And your next question comes from Colin Rusch from Oppenheimer.

Can you talk a little bit about your ability to move some of the stationary storage and charging projects through the queue in your pipeline? And give us a sense of kind of an order of magnitude of in the backlog how much of that backlog is not solar?

We haven't broken that down. I appreciate that question. But we are not providing that level of detail. The backlog and ordered orders does include all product types, but we haven't reached that. What we did want to show was the strength of the international, because that hit a level of significance for us this time around that we felt that was appropriate that you have that for your models, that you see that the strength of the quoting activity and the awarded orders in the international space is now 10% of our backlog and awarded orders combined. But that's more important to us at this point in time that you see that, the rest we haven't broken down.

Okay, I'll take it offline with the rest of that. And then on working capital, you guys have done a nice job of shrinking the working capital consumption here, and inventories are actually getting [Indiscernible]. Can you talk about how we should be thinking about that trending through the balance of this year and in the next year as you grow and start working on multiple continents presumably? How should we be thinking about that, those inventory levels growing and overall working capital usage?

So as I've said, and I think now this is probably four or five earnings calls in a row where I've said this, that I believe there's still more room for inventory optimization. We intend to be as efficient as possible. That said, there are some growth pillars that we're examining from our strategic plan that might cause investments in inventory, but we'll be able to signal that. So I do think inventory, we still have some more room to optimize. And then it'll get to a point where it will just naturally have to grow with our growing business volumes. Our receivables are higher than I want them to be right now. If you look at our balance sheet, the receivables, it's a factor of growth, absolutely. But there are things that we can always do to be more efficient in our invoicing process and make sure that we hit cutoffs and work with our suppliers to -- our customers to get those payments in a more timely fashion. So that's going to be an area of focus for me. But you did see the improvement in the accounts payables and inventories you've noted. So yes, working capital is as important to me as driving the cash and the efficiencies out for everybody as anything on the income statement. So I appreciate that line of questioning.

[Operator Instructions] Your next question comes from Mark Strouse from JP Morgan.

This is Michael on from Mark. I just have one question. I was wondering if you guys could talk about the new focus on smaller projects, and just how you're looking to attack that market and how small those project sizes could get? Thank you.

Yes, Brandon's going to handle that one. I just want to give you one bit of notice on that. When we look at data as many of you probably do as well for like Wood McKenzie, many of those smaller projects are included in utility scale solar. So in the total utility scale space, those smaller projects have always been included. As we have mentioned before, our focus has predominantly been the 75 megawatts and up. And I will hand it over to Brandon.

Look, the smaller projects, I think, that our product suite is applicable to those. The same value proposition we have on larger products, many of those can be applied to smaller projects. The way that we think about this market opportunity is about a 10% growth to our total available market. So that will be the focus for us. Specifically going into 2024, we will gear up commercially around that and begin focusing on those smaller markets that we may have ignored in the past. We have got capacity to attack those markets now. And I think with our production efficiencies, we can be very competitive in that space.

And your next question comes from Andrew Percoco from Morgan Stanley.

Maybe just to come back to the wire shrinkback issue. Can you maybe just discuss any customer impacts, had there been any projects that have tripped offline from this or has this been kind of a proactive warranty campaign? It feels like that that could be a pretty important kind of swing factor in terms of the remediation timeline and cash impacts of this warranty issue.

Mehgan, maybe I will kick that to you, and then I can talk specifically about the customers.

I think our top priority is always our customers. So those relationships are important to us and we will continue to take care of them through this process. So as we started to investigate the matter, we did notify our customers and we had a process for doing that. And we have been working with them to identify, remediate and if necessary, replace any issues that they have had.

Just add to that. As Mehgan said, we are proactively reaching out to our customers. We have not seen any project movement specific to the warranty issue. I think the customers understand that this is a supplier issue. And as Mehgan said, taking care of them is our is our top priority. So I think everybody is appreciative of how we are communicating and working in the marketplace around this issue.

And maybe just as a follow-up on the macro environment and the growth outlook for utility scale solar. Are there any specific ISOs or geographies where you are seeing more of an outsized impact from project delays, whether it’d be permitting, financing, IRA uncertainty? Just wondering if there is specific geographies that we should be focusing in on in terms of where the delays are occurring. Thank you.

Nothing specific. I don't think that we could point out in terms of geographies. And again, the movement that that we are seeing quarter-to-quarter, month-to-month in terms of project delays, it’s been quite typical of what we see, I think, we have seen historically in the business. Look, we manage our funnel very closely. We understand where project is falling almost on a daily basis. And again, no significant movement due to the things that you are reading about these days. So we are pretty pleased with where the business sits today. And again, no significant push outs.

Your next question comes from Christine Cho from Barclays.

I just wanted to -- I appreciate the color about the longer lead times for international projects. But would it be fair to say that a big chunk of the international bookings we're seeing this quarter? And I just also wanted to confirm that the bulk of that is actually solar. And then would it be correct to think that similar to the US, the customers start off using some of the components both for upgrading and going to systems?

I guess, one piece at a time here. I would say that yes, the international bookings that we are seeing are solar projects. I don't think that they specifically came in this quarter. I think it's been probably a build over the last couple quarters. We've got a big focus on growing our international business since I've joined. We continue to refine our strategy. We're adding resources to help build that strategy and it'll be a big focus for investment for us going into 2024. So pleased with the direction of the international business. And again, I think it's going to be a great spot for growth for us in the future. I think I hit all the -- have I answered all or did you have one more [Multiple Speakers] the component piece. Look, I think, great opportunity for Shoals, whether it’d be domestic or international to bring somebody into our solution. We typically look at our components business as components and don't call them solutions. But as you know virtually everything that we make here at Shoals is an engineered to order product. It is a specific product for a specific site or customer. And so for us to get somebody in the door and working with us on components business and then our sales people and marketing folks do what they're supposed to do and convert them to a BLA system is exactly how it's supposed to work. So I would see us approaching the international market just as we have the domestic market.

And then my follow-up, I'm sorry if I missed this in the prepared remarks. But could you talk about like what specifically drove the revenue being narrowed towards the lower end of the range? Are your customers seeing delays? And then also systems, like over the past several quarters was a larger percentage of total revenue, it was pretty strong, but I saw that it kind of declined this quarter. So just curious as to what drove that.

So first of all, I'm very pleased that we're able to peg the revenue range at the beginning of the year and come in right and refine that as you noted. So that's really we're really pleased to be able to do that. I think there's a couple things. We talked about the capacity that actually slowed down our Q3. So I wouldn't characterize the Q4 issue as why we narrowed it where we did. I think internally we probably would've liked to have had a little bit more. We have the capacity to do more revenue. We've narrowed the range based on the visibility of what we have. There's nothing abnormal about project give and take within a quarter moving from period-to-period. Sometimes the mix is a little bit different. I think if you look in our Q, you'll see that, or in the -- yes, it's in the queue. You see our components business was a slightly higher percentage this time. And so there's just a little bit of a difference in product mix. But we called the revenue shot at the beginning of the year and we're very pleased to come in that range.

And your next question comes from Vikram Bagri from Citi.

It's Ted on Vik. I wanted to touch on 4Q gross margin implied by the guide, it still looks pretty healthy. And I'm just curious, is there anything to call out in terms of product mix or on the project side there? And I'm just trying to think about how to square that with the new 40% to 45% gross margin target that you laid out. Just curious if you can kind of give us directionally any indication on where we should expect gross margins to be?

So one of the things, we did raise -- we've always said that we had a 40% kind of target for gross margin, and we've actually we believe that 40% to 45% is still very attainable. There were some investments that we'd still anticipate making in the gross margin area as we look to our capacity, looking to the facilities, how can we drive even greater efficiencies down the road. Product mix, as I just mentioned, some of the inroads that we're making with some EPCs does happen to be in the component space as we've talked about. And so the mix this time is actually a lower percentage of system solutions as opposed to what we've had in the past couple of quarters. So in the guide, you see a kind of a general pullback, I would say, from the record high gross margin that we've been achieving. But there's only so much margin that we can take. Being a public company, we are constantly looking over the shoulder at competition and making sure that we're providing that competitive value for our customers. So I think over time bringing that gross margin back down into the 40% to 45% range is desirable for all parties and that's going to be our longer term target.

And I have just one follow up. On the capital allocation side, you paid down the revolver this quarter. Just curious if you have any thoughts around potential paid on of the term loan? I think the prepayment penalty expires this year. So just curious in your thoughts there.

Yes, the prepayment expires this month. The penalty does go away. We are exploring alternatives for that all the time. Even if we look at just playing interest rate arbitrage, the revolver does carry a smaller or I would say lesser interest rate charge than the term loan does. So we are looking at that. We're talking to lenders all the time, and until we announce we won't. But yes. I appreciate the question.

[Operator Instructions] Your next question comes from Donovan Schafer from Northland Capital Markets.

I want to talk about the international market. So it looks like you guys shared some good details there, and it's nice to see that is kind of part of the backlog. I am curious, talking to developers and EGCs, it seems like there's still like maybe a bias or a tendency in a lot of international markets to stick with to stick with trenching cables underground in a way that would limit some of the value adds in the BLA. And so my question is, is that true in your experience? And then is it just a matter of kind of education to overcome that so that you can convince and show them, they can run something like that above ground? Or is it like a regulatory or code driven thing where it would take a while or you'd have to push from a regulatory angle or something like that?

Look, part of what we're working right now is to find that international strategy, and find specific markets where our value proposition probably most resonates. In some situations that may be areas that are more open to above ground applications than trenching. And as you mentioned in other scenarios, I think it is an education process. Shoals had to teach the domestic industry a better way to handle electrical balancing systems and there is probably some areas where we are going to have to do that internationally. So big focus on that for us right now, specifically understanding what markets make most sense for us to play in and really where to put some chips on the table. So more to come on the international piece, just know it’s a big area of focus for us at the moment.

And then for my follow-up, one of the things in talking to customers, they really, really value all the kind of [Technical Difficulty] and I think in some cases, for developers [Technical Difficulty] having any of that overhead altogether, someone internal that can review the wiring designs and so forth. So that's been a significant advantage for you guys and execution, reliability and some other things. So just outside of the technology piece, are you guys working on any other initiatives you are working on to help keep the lead and that kind of support or service versus competitors? I do know some [Technical Difficulty] starting to try and do more of this kind of [Technical Difficulty] and then also the role of that internationally? Do you need more folks in design engineering support teams to help do some of that work for international projects?

You are cutting in and out a little bit there, but I think I got the gist of the question. Look, one of our competitive advantages is our ability in our, call it, institutional knowledge of designing utility scale solar fields. So I think we continue to get better and better in that function and people do understand the value of that. I think we have got the ability to lower their total cost of ownership. That is a competitive advantage for Shoals along with our patent protected products. So both are very important to us. As it relates to international, fantastic point. I think as we grow internationally, we will have put that engineering capability on the ground and region wherever we operate. So we can get close to the customer. We are operating on the same time zones, so forth and so on. Additionally, as we have mentioned on prior calls, we are going to invest likely in manufacturing and supply chain in those regions where we operate. So I would think of our international footprint in the future state as being more of a full business offering similar to what you would see here in the United States. I think I answered your question there.

And your next question comes from Derek Soderberg from Cantor Fitzgerald.

I just have one line of questioning here just around international growth. I'm curious what specific criteria for inorganic growth opportunities are you targeting. Is it really to pursue local manufacturing to get scale, is it to expand into new products? It's a pretty significant TAM there. I'm just curious what's sort of the best way to go about accelerating that growth internationally?

Look, we're evaluating international markets in a pretty comprehensive way. I mean, obviously, we want to pick an area that has fantastic scale and forward looking market growth. We're also looking for areas that are maybe easier to operate in than other areas. So political and economic climate obviously plays a part into that. And then again, how well our value proposition may or may not resonate in that market. So, look, as I mentioned, we're working harder to refine that strategy now, maybe get more granular than we have in the past, quite honestly. So I think organic growth on the table, potentially inorganic growth on the table. And we're specifically in that market looking at solar applications right now. So it would not be an area outside of solar at the moment. We want to stick to that solar space and where we can drive our brand and value proposition. The good news for us is a lot of these larger EPCs or global EPCs, they learn about the Shoals name. You're working domestically and may take us to other areas around the globe. So we think we've got a fantastic opportunity and we'll continue to invest in that space.