SPI Energy Co., Ltd. (SPI) Earnings Call Transcript & Summary

Good afternoon, and welcome to SPI Energy's Second Quarter Fiscal 2022 Conference Call. As a reminder, this call is being recorded [Operator Instructions] I will now pass the call over to Randy Conone, Senior Vice President of Investor Relations and Finance. Mr. Conone, you may begin.

Thank you, Laura. Joining me on the call today are SPI Energy's Chairman and CEO, Denton Peng; as well as our COO, H.K. Cheong. Before we begin, the company would like to remind everyone that various remarks about future expectations, plans and prospects constitute forward-looking statements for purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. SPI cautions that these forward-looking statements are subject to risks and uncertainties that may cause their actual results to differ materially from those indicated, including risks described in the company's filings with the SEC. Any forward-looking statements made on this conference call speak only as of today's date, Tuesday, August 16, 2022, and SPI does not intend to update any of these forward-looking statements to reflect events or certain circumstances that occur after today. I'd now like to turn the call over to SPI's Chairman and CEO, Denton Peng, for opening remarks. Please go ahead, Denton.

Thank you, Randy, and good afternoon, everyone. Our team continued to deliver strong performance in the second quarter of 2022, generate top line growth across our divisions and delivering our long plan goals of carving out Phoenix Motor in Nasdaq IPO. Meanwhile, our solar module facility at Sacramento has started pilot production and our first Made-in-California solar module delivered to customers. Overall, we have built solid foundation in high-growth markets that positions SPI for accelerating growth moving forward as we capitalize on the revenue expanding demand for renewable and clean energy solutions. Our world-class team is building on a multi-decade track record of success. We further augment this already impressive team in the second quarter with the addition of William Chen as Chief Operating Officer of SolarJuice. William brings over 20-years of experience as effective in construction management area and was the CEO of one of the largest residential solar integrators in the U.S. for more than 10 years. He is another great addition to our team and is already providing strong value as we continue to expand our SolarJuice operations. I'm confident that our strong foundation, combined with growing industry tailwinds, place us in a great position to rapidly increase market share across each of our business units, ultimately enabling us to unlock new value for our shareholders as the asset growth in the quarters ahead. I now turn the call over to H.K. to cover our operations and key success in great details. H.K.?.

Thank you, Denton, and good afternoon, everyone. As Denton has noted, SPI had a strong quarter with multiple milestones achieved across all facets of our business. I'll begin with some further insight into our accomplishments in our solar and battery storage business unit. We began another major solar project in our home state of California with the initiation of development for 7.2-megawatt, 8.39-megawatt DC community solar project on the 34 acres land in Southern California. We also continued the expansion of our solar module manufacturing capacity at our flagship facility in McClellan Park, California and expect to reach a capacity of 650 megawatts of production capacity by the end of this year. Indeed, we have already started solar module delivery to customers, starting from quarter 3 this year. Our expanding capacity at this state of -- state-of-the-art solar module manufacturing facilities, which combines California highly skilled workers with machine-to-machine connectivity features a high degree of precision automation that will drive continuous improvement of our solar module manufacturing. Also, it's in our plan to further increase our solar module production capacity to 1.2 gigawatts. We also signed a 2-gigawatt supply agreement during the second quarter with Sungrow, a global leading inverter solution supplier for renewables. With COVID restrictions continue to win, we had an opportunity to meet face-to-face with buyers at 2 key events, showcasing our latest SolarJuice product offerings at Smart Energy 2022 Australia premier event for solar, storage, and energy management as well as our solar and renewable energy products, including solar panels, residential energy storage systems and EV charger at the RE+ Texas Solar & Energy Storage trade show in San Antonio, Texas. Lastly, I want to note, we further strengthened our intellectual property within this division of the company through the filing of 2 provisional patents. One regarding machine learning technologies to improve solar module manufacturing processes and a second patent application for an innovative pet to improve the efficiency and accuracy of solar module IV testing process. On the EV side of our business, obviously, the major news was the completion of the Phoenix Motor IPO on NASDAQ, which raised gross proceeds of more than $15 million. We continue to retain approximately 80% ownership in Phoenix post-IPO. And importantly, we began delivery of our new Phoenix Motor lithium-ion forklifts during the second quarter and have been very pleased with the initial customer respond. With a successful showcase of these next-generation forklifts alongside our electric bus, solar power pickup truck and EV charging solution at the ACT Expo in May, we anticipate continued strong sales growth from this product line moving forward. We also relocated our corporate headquarters to Sacramento County during the second quarter, bringing our senior management into close proximity to our solar module manufacturing facility. As sales continue to grow from our increased production capacity, we believe this will improve, assets will provide tremendous strategic value creating positive synergies across our solar and renewable energy business development efforts. I will now hand the call back to Randy for a discussion of our financial performance in the second quarter as well as the review of our guidance for 2022. Over to you, Randy.

Thank you, H.K. This is the company's second quarter filing as a U.S. company on Form 10-Q and follows the filing of our first annual report on Form 10-K in March. This translates to increased transparency and more timely reporting of our performance metrics compared to our previous requirements as a form filing. For the quarter ended June 30, 2022, our net sales increased 6% to $48.6 million, up from $45.8 million in Q2 of 2021. Revenues continue to be mainly driven by increasing sales from our solar business lines although we expect EV revenues to represent an increasing share of overall revenues moving forward. Our cost of revenues, which consist primarily of raw materials and labor costs, increased to $44.7 million in the second quarter, up from $40.6 million in Q2 of 2021. Gross profit in the second quarter was $3.9 million, giving us a gross margin of 8%. General and administrative expenses were $7.6 million or 15.7% of net sales in the second quarter of 2022 compared to $7.7 million or 16.7% of net sales in the second quarter of 2021. Total operating expenses in Q2 were $9.5 million or 19.5% of net sales, up moderately from $9.2 million or 20% of net sales in the second quarter of 2021. Interest expense was $1.6 million during the quarter, with no significant changes in our convertible bonds and other borrowings. Together, these and other factors resulted in a net loss of $2.3 million in the second quarter, a significant improvement from the net loss of $6.6 million in the second quarter of 2021. As of June 30, 2022, we had $21.3 million in cash, cash equivalents and restricted cash. Now turning to the year ahead. As mentioned earlier, our solar and EV wholesale business, coupled with our residential solar and roofing installation business and the new American solar module manufacturing business, are expected to be the primary revenue drivers in 2022 with EV sales accelerating as the year progresses. We believe this will ultimately drive our overall revenue to between $200 million to $220 million for 2022. This range takes into consideration ongoing logistics and supply chain challenges globally. We look forward to sharing our ongoing successes with you in future updates. We'll now open the call for questions.

[Operator Instructions] Our first question comes from the line of Tate Sullivan with Maxim Group.

On the solar module manufacturing facility in Sacramento, I believe you said that you started delivering to customers this current quarter. What needs to happen for you to get to capacity of 650 megawatts by the end of this year? Are there any additional testing or certification processes or do you need to install more equipment? How do you get to that 650-megawatt capacity, please?

Sure. Thanks, Tate. So it's a staging process that's basically going to occur from the start of 2022 to the middle of 2023. We expect to get to about $600 million, $650 million -- I'm sorry, 600 to 650 megawatts by the end of this year, and then 1.1 gigawatts by the middle of next year. So the process is that we acquire and ship equipment over here, and then we have to install it and quality control it and that equipment comes in several passes. So we've got some of the equipment in producing panels other pieces of the equipment are still being quality controlled and then still other pieces of equipment are in route over here. So it's a staging process, but the Sacramento should be at full capacity around the end of Q2 next year.

And then -- okay. And then getting there and then within -- I mean, with providing what you can share, do you target -- I mean, operating at a portion, a percent of that capacity initially as you stage up? Or when do you expect to match capacity in terms of match production with that capacity?

Yes, we -- [Audio Gap] color for the operations side.

Yes. I think this H.K.speaking, and I would like to add a bit of color as far as this solar module manufacturing in McClellan Park California. So we are at Phase 1 and Phase 1 (sic) [ 2 ]. Phase 1, we have 100-megawatt now in production capacity, and we have already started delivering product from this Phase 1 production line. So we are in the process of installing the second phase, which is the 550-megawatt kind of new [ M10 ] production line. So that will be completed by the early part of the quarter 4. So we expect the ramp-up was starting from the year -- toward the November, December time frame all the way until the next year. So we expect full capacity probably by the middle of next year of this Phase 2 production capacity. And we will start the expansion to the Phase 3, another 550 megawatts of production line coming on board. So that will bring us a total of 1.2 gigawatts by the end of next year. It's a ramp-up process.

Absolutely. And just to make sure I understand, with that 650 to 1,100 and to 1,200 megawatts, I mean can you provide -- will you try to provide discount prices to the companies out there? I know some other solar equipment companies do give guidance per megawatt or -- but it does imply hundreds of millions of dollars for that type of -- for your type of facility? I mean, do we talk about a range of revenue here with that kind of megawatt capacity at a later date?

Yes. I mean so certainly that we are still in the Phase 1 of the production. So when we ramp up, we will achieve the economy of scale. So we expect adjustment on our efficiency, productivity as well as the volume. So that will -- they would reduce our costs progressively throughout the year.

Our next question comes from the line of Tim Moore with EF Hutton.

It was nice to see what appeared to be about 8% organic sales growth in the quarter, excluding the PDI acquisition contribution. I saw that you reiterated that your revenue guidance for the year despite the continued supply chain disruptions. I'm wondering how the supply chain disruptions and logistic delays with port congestion improved for you over the last couple of months? Because I believe that was a reason for the range on the guidance. I'm just wondering if it's gotten any better or if it's about the same?

Yes. I'd say definitely improved, but I'll let the other guys come over the top.

Yes, we see there is some improvement in the logistics, but it depends on which items, some items still shortage. So we -- I think we are managing this challenge of logistic issues.

Great. That's helpful. I have a follow-up question to the update on the Sacramento solar module manufacturing facility. I'm curious given it's very early stages, you mentioned Phase 1, and it's just underway in the last couple of months. Are you seeing more traction with any specific type of customer? Are municipalities showing more interest? Or is it corporates or home builders? Are you seeing any more demand from one of those types of parties that are willing to pilot and check out the quality batches?

Yes, we are [Indiscernible] currently to residential market for different distribution channels. We have already dialogued with -- also contract with several leading distribution company in the nation for residential market. And now we also see more and more commercial and utility customers coming to require made in Made-in-U.S. solar modules. You see the -- some of the past the deals still waiting to probably this end. They have additional incentive to -- for the buyer customers to buy more Made-in-U.S. products. I think this will be given a lot of more customers will be interested by the Made-in-U.S. products. And I think we are in very good spot to supplying the Made-in-U.S. products from our segmental factory. So we are ramping up, and we are ready and more and more importantly, our capacity is increasing now.

That's helpful to hear. My next question is - it's actually a 2-part question.

Yes. Sorry, yes.

Go ahead.

So also from the bill for -- the also have an additional incentive to manufacturing for solar modulating U.S., we see that from the bill they also have about $0.07 for incentive for the manufacturing for solar module Made-in-U.S. So these are additional incentive for the products Made-in-U.S. So I think we also -- this is another thing to be -- or increase our capacity and also to get more customers to like to buy the products made in California, especially from a facility in Sacramento.

No, that's helpful to hear. And I know the tariffs, you tend to be a lot from the imported ones and it's nice to see the Made-in-U.S. I was wondering for my next question, are you seeing pretty good initial traction on your 450- ,550-watt commercial modules? And when do you think the Sungrow supply agreement will start kicking in with shipments? Is that going to happen this summer?

I think we tend to see -- yes, sorry, Denton, go ahead.