Emeren Group Ltd (SOL) 2023 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Emeren Group Limited's First Quarter 2023 Earnings Conference Call. Please note that we are recording today's conference call.

I will now turn the call over to Mr. Yujia Zhai, Managing Director of The Blueshirt Group. Please go ahead, Mr. Zhai.

Thank you, operator, and hello, everyone. Thank you for joining us today to discuss our first quarter 2023 results. We released our shareholder letter after the market closed today. It is available on our website at ir.emeren.com. We also provided a supplemental presentation that's posted on our IR website that we will reference during our prepared remarks.

On the call with me today are Mr. Yumin Liu, Chief Executive Officer; Mr. Ke Chen, Chief Financial Officer; and Mr. John Ewen, CEO of North America.

Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include predictions, estimates or other information that might be considered forward-looking. These forward-looking statements represent Emeren Group's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in Emeren Group's filings with SEC. Please do not place undue reliance on these forward-looking statements, which reflect Emeren Group's opinions only as of the date of this call. Emeren Group is not obliged to update you on any revisions to these forward-looking statements. Also please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars.

With that, let me now turn the call over to Mr. Yumin Liu. Yumin?

Thank you, Yujia, and good day, everyone. Thank you for joining our call today. I will begin by presenting a high-level overview of our first quarter 2023 results, followed by an in-depth discussion on our guidance. Then Ke, the company's CFO, will provide a comprehensive review of our financial results for Q1. Additionally, we are delighted to have our North American CEO, John join us for the Q&A session.

To start off, we closed Q1 with revenue of $12.9 million, gross margin of 12.4% and EBITDA of $1.8 million. Our Q1 revenue reflected solid contribution from our IPP and EPC business, driven partially by our recent acquisitions. However, delays in receipt of the final approvals and more conservative judgment in change of control in our RTB product sales business resulted in no revenue recognition during Q1 2023. In May, we completed the sale of 58 megawatt solar farm projects in Poland and this will be recognized in our Q2 results.

Looking forward, under a more conservative judgment in change of control, we expect to recognize revenue for RTB product sales starting from Q2 and more in the second half due to the timing of the expected final approvals of pending product sales. Accordingly, we expect our Q2 revenue to be about $38 million to $40 million and gross margin to be 32% to 35%.

Our second half results will be driven by the expected closings of over 300 megawatts of product sales in Europe and U.S. For the full year, we reiterated our revenue expectation to be in the range of $154 million to $174 million and gross margin to be approximately 30% and net income to be between $22 million to $26 million.

Despite the temporary delays mentioned earlier, our product development business remains very strong fundamentally. We are experiencing sustained strong demand for solar projects on global scale. We entered 2023 with 3 gigawatts of high-quality mid- to late-stage project pipeline and we anticipate to monetize about 500 megawatt of projects in 2023 and we are targeting to grow this pipeline to 4 gigawatts by the end of 2023, and beyond 2023 we are targeting to monetize a minimum 500 to 600 megawatts a year.

In China, we are making ongoing progress in our realignment strategy to the rest of the world as develop, build, own or sell compared to the original strategy of develop, build, own as IPP. In conjunction, we are refocusing our efforts to 5 coastal provinces that have the most favorable power prices supported by strong economy and regulatory environment. Our plan is to divest all of our solar assets outside of the designated 5 provinces as well as some assets within the specific target markets. This strategic move will help strengthen our balance sheet.

In conclusion, we remain excited about our revenue growth this year and beyond, driven by our strong product pipeline. We are well-positioned in the world's fastest-growing solar markets that are benefiting from increasing demand for clean energy, higher PPA prices and supportive government policies. The future of solar energy is extremely promising and we are positioned to fully capitalize on the accelerating adoption of solar technology across the globe.

With our exceptional expertise in developing and operating solar projects, extensive network of industry partnerships, a strong financial position, we are making great strides towards our goal to become a top global solar company. We are thrilled about the bright future of the solar energy and are excited to be at the forefront of this incredible transformation towards a more sustainable future.

Now let me turn the call over to our CFO, Ke Chen, to discuss our financial performance in detail. Ke, please.

Thank you, Yumin, and thanks, everyone, again for joining us on the call today. I will now go over our financial results for the first quarter. Our revenue of $12.9 million nearly tripled compared to Q1 2022 and decreased by $12.8 million compared to Q4 2022. The sequential decrease in revenue was primarily due to the 0 NTP revenue during the quarter as well as lower revenue from EPC business.

And IPP as Q1 is typically our seasonal slowest quarter. Gross profit was $1.6 million and gross margin was 12.4%, down from $6 million in Q4 2022 and up from $1.1 million in Q1 2022. The lower sequential gross margin was mainly due to more lower-margin EPC servers recognized in Q1.

Operating expenses were $4.6 million, down from $7.2 million in Q4 2022 and up from $3.4 million in Q1 2022. The sequential lower operating expenses were mainly attributable to lower G&A expenses, primarily due to a one-time expense incurred in Q4 2022 related to the acquisition cost of Emeren Italy, changing auditor and other one-time costs related to rebranding. Net loss attributed to Emeren Group LTD's common shareholders was $0.2 million compared to $1.7 million in Q4 2022 and $1.7 million in Q1 2022.

Net loss attributed to Emeren Group LTD's common shareholders per ADS was 0 compared to $0.03 in Q4 2022 and $0.03 in Q1 2022. Cash used in operating activity was $23.7 million, which was primarily for the continued development of Poland and Hungary COD projects. Cash used in investing activity was $1.9 million and cash used in financing activity was $16.2 million.

In terms of our financial position, cash and cash equivalents at the end of Q1 2023 was $66.7 million compared to $107.1 million at the end of 2022. The decrease was primarily due to a higher cash use in operating activities as well as finance activity of $16.2 million for share buyback and finance leasing loan payment. Our net asset value or NAV is approximately 5.85 per ADS. Our debt-to-asset ratio at end of Q1 2023 was 11.3% compared to 11.1% at the end of Q4 2022.

Moving to our share buyback program. We purchased $13.2 million of our common shares during the quarter and intend to proceed with the execution of the share buyback program with $17 million remaining.

Now we would like to open up the call for any questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from the line of Philip Shen of ROTH MKM.

First one is on your 4 gigawatt pipeline target by year-end or next year. For that incremental gigawatt, what would you expect that mix of business to come from or to be? How much Europe versus the U.S. versus China or rest of world?

Thank you, Phil. The major part of the pipeline will continue coming from the strong demand in Europe. And I will say the current percentage or the current portfolio percentage from Europe remains to be similar to the end of the year. I would say in the 4 gigawatts, I would expect about 3 gigawatts will come from Europe. And the other major part will be from U.S. and China represent about around 5% in the whole portfolio.

Okay. Great. So -- and then in terms of Europe, power pricing is down meaningfully. It seems like that's not impacting your pipeline or maybe it could. Do you expect any projects to become either uneconomic or more challenged with the lower pricing? Or do you think the uncertainty for gas pricing due to the war and so forth can and should still drive very healthy demand?

In fact, we look at this thing from two folds. One is that the current merchant price, although it's absolutely significantly lower compared to 12 months ago, but it is still higher than 2, 3 years ago. In most people, including us, our financial model, if you look at 2 years ago, in normal case, with the merchant curve, you talk about EUR 0.60, EUR 0.70 -- EUR 60, EUR 70 per megawatt hour, okay? And now the merchant price is higher than that price. And the demand is a lot bigger or stronger in the market.

At the same time, we look at on the supply side, we absolutely have seen the drop of the CapEx. Just recently, as everybody knows that the polysilicon price goes down and the module price continue goes down and the whole overall BOS price from the suppliers are going down. So on these 2 points, we do not see any projects, literally any project going uneconomical. And we still see high bid, high demand on the high-quality projects.

Okay. One last one for me, staying with this topic here. Can you talk about the recent auctions or sales processes that you've been hosting? How have they been in terms of numbers of bidders, quality of the bidders? Maybe you can talk about the dynamics in the U.S. as well as Europe and maybe how that sales process might be changing? Do you expect to see more and more bidders still? Over the past couple of years, that's been the trend, more and more kind of buyers for the projects. But have you seen that plateau? Or do you continue to see that grow? And maybe just talk through and characterize the demand that you see in general.

This is a very interesting question that the -- very good question, by the way, Phil. I will cover the Europe first and ask John to cover the U.S. part. The -- absolutely, in general, including U.S., we still see a big demand, okay? In the market, even in some markets, people predicted that they're starting after summer, the demand will go slower or the bidders will be less. But I see currently, the demand is very strong. And for any portfolios as we expect to have at least 15-plus transactions to be closed within the next 8 months. And the current ongoing ones, either we do it by ourselves or we hire a broker to do it for us.

Literally, we see a dozen as minimum or in most cases, 2, 3 dozens bidding seriously on to our deals. Okay? But for certain market, for certain portfolios, smaller or big at the end, we always struggle ourselves to pick the best ones. Normally, we go with 2, 3. And at the end, we definitely pick one and the disappointed more. So the trend in general, as I see, it's a timing issue. Now it is still very, very good as money in-flow into the solar market as I see it's stronger than the people standing on the sidelines.

John, would you comment on the U.S. part in some detail? John, are you on mute? Go ahead.

Can you hear me?

Yes.

Perfect. So -- hi, Phil, it's important to make the distinction that in the U.S., we sell NTP projects. So physically, they have not yet been built, but they have all of their statutory rights to be built. By definition, the buyer that we go to is a pretty sophisticated buyer in the sense that they take on some level of engineering, design, procurement, execution and some of them do that internally. Some of them have very strong relationships with panel manufacturers or engineering providers and construction providers.

So we don't -- it's not like you just turn that spigot on and instantly become both a financial wheelhouse and the construction, engineering management and asset operator. So we focus on those accounts. So the number stays a little bit more constant, while there might be financial buyers that are buying assets in the secondary market or we -- it's not technically a second, I guess it could be called the secondary market of already constructed assets and have some operating history. That's the first point.

And the second segregation is there are certain markets where we're challenged just because it's either a regulated market and folks don't play there or it is an unregulated market and folks don't play there. So we know which accounts like certain types of assets, whether community or utility, regulated, unregulated, the different power pools and markets that folks wish to own assets in. And that could be the distinction between the unregulated arm of the utility or a player that's highly sophisticated because they have their own power purchasing and capability. That's a subtle kind of subcategory.

But just in general, I would say the real answer to the question is there's more demand than the number of people that we're comfortable taking deals to, meaning there's a potential pool of 40. We go to the 7 or 6 that really know the markets, and we know that they like the market because as Yumin hinted at, in his comment, I'd actually rather -- I don't need to go to everybody and have most people upset that they didn't win something with us.

What we want is a high-quality pool of folks who know the market and can execute. It's not just getting the highest bid, it's who can actually execute in a particular market. And we don't have perfect insight there, but we have decent data on who's doing what, where, based on talking to the accounts and talking -- seeing what they're doing engineering-wise. So I'd say right now, still demand outstrips our supply if we had 5x the number of projects we'd be able to sell them. And that's a quick and dirty answer.

Phil, I would like to add, like John said here, in Europe, also we focused on RTB sales. Again, right now people are still chasing high-quality RTB-ready projects. The demand is still very strong.

Our next question comes from the line of Donovan Schafer of Northland Capital Markets.

I first want to start with the mid- to late-stage pipeline where you have it broken out by country and you give a range of expected sale dates or the date when a project come online and generate revenue as an IPP project. And it looks like you have ranges that for quite a few countries, you have a range starting in 2023. We've got Poland, Hungary, Spain, France, Italy, the U.S. and China. I know in Poland, Hungary, the U.S. and China, you've got some projects there that could really be sold at any moment if the price is right. But I'm less familiar with the projects you have on the ground in Spain, France and Italy.

Could you elaborate on those projects? And what the likelihood is that there could be sales in those countries in 2023? Are they existing -- I mean, they're not IPP assets. Are they all just sort of NTP and you've got some that are tied up with a bow that could be sold? Or what is kind of that layout or the -- your situation in Spain, France and Italy for 2023?

Okay. Thank you, Donovan. That the -- as I mentioned, in the remaining 8 months of the year, we will have -- we expect to have a minimum 15, 16 different portfolio sales in those countries. That include not only the country you mentioned, Poland, Hungary, but also in Italy, in Spain, in France, in Germany, in almost every single market, we have projects. We are selling those projects, in most cases, as RTB, RTB is the word the European people most likely to use instead of NTP. So the -- most of the deals are RTB sales in the countries as I mentioned. And in China, it's the only country we sell deals at COD. And in the U.S....

So you're saying you actually expect that there'd be RTB sales in Spain, France, Germany and Italy this year?

Yes, absolutely.

Oh, great. Okay. Fascinating. Okay. Sorry, I cut you off. If there's more...

And also another point, Donovan, that -- as you see our business model, as we listed all the details of the product portfolio in each country, we not only have the RTB sale model, but we also have IPP model. So in the cases of some portfolios, they are seriously considering to build those ourselves. So in some countries, we just will turn -- we see monetize, we will turn those development portfolios into the IPP assets.

Donovan, for Italy, we also have -- developing several type of business. We help third party to develop the projects.

Right, right. Okay. And then I want to talk about -- I don't think we've touched on this for maybe a little while is the idea of kind of having a lot of these countries there is kind of land grab going on, but instead of scrambling to grab land, you're trying to scramble to get to the front of the line for interconnections and that can involve putting down a deposit and that was sort of the strength of your cash position before. Cash has come down a decent amount, but you can see that, that's also being deployed in projects. And so you get kind of assets and projects in process on the balance sheet.

So I'm curious if you can kind of paint a picture for us about how does this -- like in a perfect world, I wish I could like look at a map and see, okay, think of it as like chips on a table, but it's a map. And it's like, okay, Emeren has this many millions deposited in this spot holding this interconnection and this many here, holding that, so on and so forth. But absent that, I'm wondering if you can kind of somehow paint a picture for us of where that cash is for interconnection deposits of course, I mean it wouldn't be restricted cash. I'm guessing maybe it's tied up in the project assets.

But can you give us a sense for how much money is deployed in that kind of a deposit like capacity out there at holding your place in some of the -- yes.

Yes, that's indeed stating the project assets on the balance sheet. It's roughly between USD 18 million and USD 20 million and that...

Okay. So that between $18 million and $20 million just kind of holding places. Yes, and it's all refundable. okay. And is there a -- let's see -- and I guess it would vary by country. So I'll also dig into some more detail with you guys offline, but it'd be interesting to see how that translates. Like I said, almost if you could allocate that $20 million on a map and say, with just $20 million, we've got X number of megawatts of prime real estate under our belt. But that's got to be easy thing to do on the call.

Let me, Donovan, just give you a quick background about the deposit and even the cash use, I'll ask Ke to give you the cash use in detail. But on the deposit side, U.S. is the major spending of this $18 million, $20 million, as U.S., literally speaking, is the only country demanding big interconnection deposit, okay? Other countries like in Spain and in some European countries like Spain, they do require interconnection deposit, but we use that in the form of the bond from insurance companies to cover those. So the deposit in the whole European market is smaller than the total use in the U.S. That's the first point.

The second is the major part of the cash use was due to the decision by the management of sponsoring the construction of the projects in Poland and Hungary. Together with the closing of the sales of those projects in Poland and Hungary, we expect the cash will be coming back within this year. So that's the confidence that we have a very strong financial position of the company, although I believe you asked the question based on our current cash below $70 million, but we are expecting the big cash inflow from the execution of the sales of those projects under construction are being completed.

Okay. Great. And then with the new accountant and the restatement of fourth quarter, I think there was a project in Poland that probably looks like it's most likely going to get -- it may be the 58 or 38 megawatt project you already mentioned. But if that was sort of -- seems to be very nearly or effectively sort of done in the fourth quarter, then I'm sort of assuming the associated cash use would have already been -- that's not something that would be restated for the fourth quarter because the cash side of things would stay the same.

And so am I correct in assuming the incremental $20-some odd million in cash used in the first quarter for projects in Hungary and Poland, that that's actually for incremental projects in addition to the Poland project in the fourth quarter that was (inaudible)?

Yes, Donovan, you're right. With 58 megawatt project, we received the full payment just a few weeks ago. So that's not related to the cash we used in the first quarter. The first quarter cash usage is other Poland COD projects and also Hungary COD project, which Yumin just mentioned, we're going to monetize those and receive cash back from those projects in the coming quarter and the second half.

Okay. Great. And then my last question is just with -- I'm not sure kind of what the exact right language to use is here. But I know you're currently listed in the U.S. as an ADR and you do the kind of foreign filing 20-F and 6-Ks. And as I understand it, I think it's like an SEC requirement or something that I believe now that you are -- your investors are majority U.S. investors, you're going to be required to do like a regular 10-Q. Is there anything more to -- just that you have to do those filings instead? Or is there a more formal process? And does it involve actually not being an ADR anymore and being like a direct listed security?

That's different from the direct listing. So first of all, there is a formal process. So we have to do 10-Q based on the shareholder structure. So that's the formal process. We will expect to start it in Q1 2024. And again, but in terms of direct listing, that's a different process from ADR.

Our next question comes from the line of Pavel Molchanov of Raymond James.

So first, on your U.S. portfolio, we just saw the guidance from the Treasury about what needs to happen for projects to get bonus tax credits for local content as well as low-income community bonuses. Based on your existing project pipeline in the U.S., do you anticipate being eligible for either the local content or the low-income community or both?

Both. Yes, Pavel, both.

On what portion? Yes.

Yes, on both. So we -- obviously, when it was just guidance and it wasn't actually stated, we were still building into our sales structures upside related to both of those components, right? So at the end of the day, what really ends up happening is the buyers themselves have the best visibility into their own procurement, how they're going to manage local content, what the cost of implementing local content are going to be, the risk of tariffs on the other side, the cost of acquiring low-income or LMI offtake, which obviously is positive and it pays for itself and is a good thing.

But that reflects itself in stronger bids to begin with. So they internalize, it's kind of like trading when you can't really tell if a bid has already got the Fed rate hikes or moves already embedded in the bid, but that pricing is priced in. Beyond that, we also structure into our deals upside related to them achieving those specific, whether it's going from 30% to 40% ITC basis or achieving a certain offtake mix or matrix in the offtake.

But to be frank, I find deals are best negotiated right up to the point of sale and chasing somebody later for things that are underneath the hood of their shop, like their exact tax equity deal and how they monetize credits and all that, I'd rather not. It's just -- it's more complicated to figure out post-facto -- post-sale exactly what ended up happening with their financing structure. But we do -- we do capture that upside in the form of specifically calling out if you get 40% ITC, we get -- we split the benefit or have some upside related to it.

But first and foremost, for competitively bid projects, a lot of that is baked into the bids, which is good. So it's kind of a little bit of both. And it's worth a lot. I mean it's worth a lot. It's worth to us, it's worth -- without being too specific, it's worth tens of millions of dollars of extra developer fee over the next X number of single-digit years.

Yes. Pavel, we just saw this recently, the price jumped in recent weeks, so for our projects.

Let me follow up with kind of a CFO question, I suppose. Until today's earnings release, you reported adjusted EBITDA and adjusted net income. And today, I do not believe you included either of those numbers. Is that deliberate? And if so why did you change that reporting method?

Yes. It's just -- we don't have any adjusted in this quarter. So most of them are just GAAP. So that's not deliberate. It's just this quarter, everything is GAAP, so.

Okay. So you will be publishing adjusted EBITDA in the future when you have some special...

If we -- yes, some special items. Yes.

(Operator Instructions) Our next question comes from the line of Amit Dayal of H.C. Wainwright.

Most of my questions have been asked, guys. But just a few from my side. How much of the 2Q revenue guidance is already delivered?

I will say almost over 60% has been delivered.

Okay. And then with respect to the 300 megawatts you are targeting to close in the second half this year, what are the risks we should be aware of in terms of these getting pushed out or not coming through -- not -- all of it not coming through this year?

I do not expect any of those not coming through. As for example, the ones, as I mentioned in my earlier -- early talk is we are waiting for government approvals. For the ones we already signed a contract, we filed for government approvals, for example, in the country of Hungary that the government will give us within 4 to 6 weeks the approval. So that's one example.

As we are, as we explained the last time when we filed the 20-F, we are the whole company-wide taking a more conservative approach, recognizing revenue at the moment we all believe should be recognizable. And that always delay the recognition to the following quarter. But now we do not see anyone which will fall through or slip through into 2024 yet.

Okay. Just last one for me. You touched on some of the cash-related discussion earlier. But with sort of the visibility you have right now where do you expect to end 2023 with respect to your cash position?

Yes, Amit, we expect very significant increase from current level by end of this year.

Can you share a range maybe or is that...

Yes. Okay. It's around $90 million to $100 million.

Seeing no more questions in the queue, that concludes our call for today. Thank you, everyone. You may disconnect at this time.

Thank you, Lateef.

My pleasure.