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

Good afternoon, and welcome to SPI Energy's Third Quarter Fiscal 2022 Conference Call. As a reminder, this call is being recorded. [Operator Instructions] On today's call are SPI Energy's Chairman and CEO, Denton Peng, and 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 the purpose 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 the actual results to differ materially than 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, Wednesday, November 16, 2022. And SPI does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today. I'll now pass the call over to Denton Peng, Chairman and CEO. Mr. Peng please proceed.

Thank you, Cherry. And thank you to everyone for joining us today on our third quarter 2022 earnings call. We are pleased to report double digit year-over-year revenue growth in the third quarter, driven by the continued performance of our strategic investment and solar project development initiatives. With the recent passing of the Inflation Reduction Act, we anticipate our growth will be accelerated in the quarters ahead. The Inflation Reduction Act enable us to earn attractive incentive from our rapidly expanding solar module manufacturing operation in California, which is ramping up capacity to meet [ anticipated ] increase in consumer and commercial demand. Currently, most of our solar module manufacturing capacity have been sold out this year, with the operation gross margin more than 35%. As a part of our expansion, we signed a new property and facility lease adjacent to our current facility, in McClellan Park, California, during the third quarter. We anticipate this facility will enable us to increase our solar module manufacturing capacity 2.4 gigawatt in 2023, collectively with our new planned facility in the East and the mid part of the country. Under the Inflation Reduction Act, this additional $0.07 per watt manufacturing incentive will be starting next year in 2023 which we expect will help to further improve our income of solar module manufacturing business by additional 10% to 15% next year. Looking closer at the third quarter, SPI had another strong performance with the multiple milestone achieved. The foundation from a conventional player, SEM Wafertech and signing of a letter of intent to acquire 1.5 gigawatt of solar wafer manufacturing equipment was one of our key achievement during the quarter. As demand for solar continue to grow in the U.S., there's the increasing need for local sourced solar wafers. With the launch of SEM Wafertech, we gain the benefit of adding new high-margin revenue generating business segment while also mitigating potential future supply chain issue from overseas suppliers. Solar wafers are the key component used for manufacturing solar cells which are used in manufacturing of solar modules. We are targeting delivery and production of solar wafers in the U.S. by 2023 with the capacity to ramping up 3 gigawatts by 2024. This strategic investment stand to benefit greatly from expected rapid increase in demand driven by an attractive incentive of The Inflation Reduction Act, which will enable us to earn additional $12 per square feet produced. Before I pass this call over to H. K., I will conclude my comments by noting that our world class team is building on a multi-decade track record of success. I'm confident that with our strong foundation, combined with growing industry tailwinds place us in a great position to radically increase market share across each of our business units. It immediately enable us to unlock new value for our shareholders, as we accelerate growth in the quarters ahead. I now turn the call over to our Chief Operating Officer H. K. Cheong for further details of our operational performance in the third quarter. H. K.?

Thank you, Denton. Yes, we began the second phase of utility scale solar project in Illinois during the third quarter. This 32.4 megawatts AC or 34.83 megawatts DC project is on a 167 acres of land in Kendall County, Illinois, and is expected to begin operation by 2026. In its first year of operation, the solar project is expected to produce 57 million kilowatt hour of energy. This is equivalent electricity needed to offset the CO2 emission of more than 5,000 homes in 1 year. Another exciting achievement during the third quarter was the signing of cooperation agreement between our SolarJuice Australia and Wallbox. Wallbox offers a complete portfolio of charging and energy management solution for residential, semipublic and public use in more than 100 countries. This agreement enhanced the premium offering in our portfolio, specifically with respect to solution for smart residential and commercial charging, as well as bi-directional charging. Also, I would like to provide more updates on our American make solar module manufacturing business. We are currently based in Sacramento, California, with 100 megawatts capacity in net production and start delivering American make solar modules to U.S. customers. The capacity of this production line has been fully booked for the remaining of this year with backlog orders of more than 20 megawatt. Our module business is primary in residential, commercial and industrial sector. So we have contract with national and regional distributor like CED, Krannich, ABC Supply and we are growing our C&I customer base as well. Our average ASP is $0.55 per watt, or more, and with our average cost of $0.36 to $0.37 per watt, we expect gross margin of more than 35% from this business. The recent Federal Inflation Reduction Act benefits SolarJuice as a U.S.-based solar module manufacturer, with incentive becoming effective in 2023, meaning we will be able -- eligible for an additional $0.07 per watt incentive which will increase our other income by 10% to 15%. Our Phase 2 capacity expansion of 550 megawatt commenced in quarter three this year, and is expected to be up and running by the end of 2022. With the completion of this expansion plan, we will have 650 megawatt capacity per year in our existing facilities. Now turning to our financials. This is the company's third 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 metric compared to our previous requirements as a [indiscernible] [ filer ]. For the quarter ended September 30, 2022, our net sales increased 10.9% to $43.2 million up from $39 million in Q3 of 2021. Revenues continue to be mainly driven by increasing sales from our solar business line. Our cost of revenue which consists primarily of raw material and labor costs increasing to $45.5 million in the third quarter, up from $40.1 million in Q3 of 2021, and consistent with our increase in net revenues. Our gross loss was $2.3 million in the third quarter compared to our gross loss of $1.1 million in the year ago period giving us negative margin of 5.3%. The decrease in gross margin was primarily due to the decrease in gross margin of our roofing and solar energy system installation segment. Since the company's indirect cost of job management is [indiscernible]. The decrease in number of work in progress jobs significantly decreased the overall gross profit. General administrative expenses were $8.8 million or 20.5% of net sales in the third quarter of 2022, and compared to $9.5 million or 24.4% of net sales in the third quarter of 2021. This decrease was mainly due to the decrease in stock-based compensation expense. Total operating expenses in Q3 decreased to $11.5 million or 27% of net sales, down from $14.9 million, or 38% of net sales in the third quarter of 2021. Interest expense was $1.3 million during the quarter with no significant changes in our convertible bonds and other borrowings during the period. Together, these and other factors resulted in net loss of $13.5 million in the third quarter, an improvement of more than $3 million from the net loss of $16.6 million in the third quarter of 2021. As of September 30, 2022, we had $6.1 million in cash, cash equivalents and restricted cash. So we look forward to sharing our ongoing success with you in future updates. We are now open the call for questions.

[Operator Instructions] Our first question is from Tate Sullivan with the Maxim Group.

In regards to your comments about the California facility and the manufacturing of solar modules, I hear you say your capacity is fully booked, or that rather that your backlog is approximately 20 megawatts of panels, please?

Yes, for this year the production is already fully booked. For next year, most of customers have commitment orders. In a way the demand is strong. I think we cannot produce enough. Maybe the demand is probably 10 times bigger than what we can produce today and for next year.

Next year, so they're placing advanced orders. Do a lot of the customers prefer to take delivery in 2023? Are they taking delivery currently in this current quarter, of the modules?

. We think that every almost every container -- panel they will take these every week. So most of our module now is we are shipping almost every week, a lot of module, you will see it produced. We are continuing to increase our production capacity. So most of our orders [indiscernible], we can produce the delivery this year. Of course, the demand for next year is much, much more demand than we can produce today and for next year.

Great, and then understanding this is your first quarter. We're reporting quarterly financials for the third quarter. I mean, with the quarter over decline in revenue, it appeared to have happened last year as well. Are there any seasonal factors to consider in the Australian solar distribution business or is that not the case for that business?

Yes, our revenue is still increasing double digit compared to last year same period? And yes, I said, we have limited or reduced some roofing business. We just focus more on solar installation only. So this is something that will be slowed down a little bit in the third quarter. But our module business in meantime already starting ramping up from we are starting first delivery in June and then started ramping up the capacity production in third quarter. I see we will have a much strong delivery in quarter 4 for a very profitable business in the -- for module manufacturing in U.S. and this will be the driver of our revenue growth in the coming quarters and especially for next year, because it's a big incentive from the recently passed of the Inflation Reduction Act. This will give an additional $0.07 for the module manufacturing in U.S. And we have already built 650 megawatt capacity in California. This is very big driver for our revenue growth for next year.

[Operator Instructions] Our next question is from Tim Moore with EF Hutton.

Do you have sales guidance for the fourth quarter, for the December quarter? Is it fair to assume that your previous guidance of $200 million to $220 million for the year might be a little bit of a stretched goal?

Yes, we have not provided guidance yet because this year still many things have happened. Especially, we are ramping up our module manufacturing, in Sacramento factory. And as we said, we have [ more cell ] capacity and probably 20 megawatts capacity, we can produce in quarter 4. We're already fully booked. This will be -- give us an additional revenue. So more than $10 million [ EV ]. So we have not yet put the guidance for this quarter because there is some uncertainty. We see some in the [ installation ] business and also in the distribution business. But generally, there's not too much. We will be [indiscernible] happen, because it's either the quarter 4 and the big increase will be like gross margin of the business because our American module manufacturing business have got 35% gross margin, and it's a very healthy business and the gross margin is higher than other business that we are operating today.