SPI Energy Co., Ltd. (SPI) CEO Denton Peng on Q2 2022 Results - Earnings Call Transcript

Aug. 16, 2022 6:38 PM ETSPI Energy Co., Ltd. (SPI)
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SPI Energy Co., Ltd. (NASDAQ:SPI) Q2 2022 Earnings Conference Call August 16, 2022 4:30 PM ET

Company Participants

Randy Conone - Senior Vice President of Investor Relations and Finance

Denton Peng - Chairman and Chief Executive Officer

Hoong Khoeng Cheong - Chief Operating Officer

Conference Call Participants

Tate Sullivan - Maxim Group

Tim Moore - EF Hutton

Operator

Good afternoon, and welcome to SPI Energy's Second Quarter Fiscal 2022 Conference Call. As a reminder, this call is being recorded and all participants are in a listen-only mode. The call will be open for questions-and-answers following the presentation.

I will now pass the call over to Randy Conone, Senior Vice President of Investor Relations and Finance. Mr. Conone, you may begin.

Randy Conone

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 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.

Denton Peng

Thank you, Randy, and good afternoon, everyone. Our team continued to deliver its 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 position 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 HK to cover our operations and key success in great details. HK?

Hoong Khoeng Cheong

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 three 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, is 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 two key events, showcasing our latest SolarJuice product offerings at Smart Energy 2022 Australia Premium event for Solar Storage and Energy Management, as well as our solar and renewable energy products, including solar panels, residential energy storage system and EV charger at the RE+ Texas solar and energy storage tradeshow 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 two provisional patents: one regarding machine learning technologies to improve solar module manufacturing processes and a second patent application for an innovative apparatus 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 relocate 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 as this 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.

Randy Conone

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.

Question-and-Answer Session

Operator

At this time we'll be conducting a question-and-answer session. [Operator Instructions] First question comes from the line of Tate Sullivan with Maxim Group. You may proceed with your question.

Tate Sullivan

Yes, thank you. 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?

Randy Conone

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 megawatts 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 cases.

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.

Tate Sullivan

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?

Denton Peng

Yes, we H.K. [Technical Difficulty] color for the operations side.

Hoong Khoeng Cheong

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 2] (ph). 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 four. So we expect the ramp-up was starting from the -- 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.

Tate Sullivan

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?

Hoong Khoeng Cheong

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.

Tate Sullivan

Okay. Thank you very much.

Hoong Khoeng Cheong

Thank you. Thank you.

Operator

Our next question comes from the line of Tim Moore with EF Hutton, you may proceed with your question.

Tim Moore

Thank you. 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 if it's about the same?

Randy Conone

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

Denton Peng

Yes, we see here 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.

Tim Moore

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 up months. Are you seeing more traction with any specific type of customer? Are municipalities showing more interest? Or is it corporate 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?

Denton Peng

Yes, we are [Technical Difficulty] currently to residential market for different distribution channels. We have already dialogued with also contract with several large -- 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 [indiscernible] past the deals still waiting to probably this end that 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 to buy 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 Sacramento factory. So we are ramping up, and we are ready and more and more importantly, our capacity is increasing now.

Tim Moore

That's helpful to hear. Thanks for sharing the color on that. My next question is, it’s actually a two-part question.

Denton Peng

Yes. Sorry, yes.

Tim Moore

Well go ahead.

Denton Peng

So also from the bill for the also have an additional for incentive to manufacturing for solar module Made-in-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 who like to buy the products Made in California, especially from a facility in Sacramento.

Tim Moore

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 the 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?

Hoong Khoeng Cheong

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

Denton Peng

Yes, H.K. you go, please.

Hoong Khoeng Cheong

Yes. I think we start to see quite a bit of traction or in the residential space, 400 watt, 410 watt for the residential rooftop application. And for the C&I space, we do see quite a bit of 550 watts, which are -- these are the two main products that we see quite a lot of traction. And in fact, our line are actually geared up to produce these two particular product for the rooftop application. Certainly, the Phase 3 will come in -- will kick in for the bigger panel in the 610 watts. But therefore, our Phase 2, our focus has been on the 410 -- 400 watt modules for the residential space and the 450 watt module for the C&I space.

Tim Moore

And I was wondering if Sungrow is that going to start this summer with shipments? Or how does that phase in? I know that was a two big one --

Hoong Khoeng Cheong

Yes. I mean some Sungrow -- in fact, we have growing with Sungrow in Australia. So we have been -- we signed a 2 gigawatt contract with a lot of Sungrow, new product in Australia. So Sungrow has been the product for Australia focus, mainly for the an Australia focus.

Tim Moore

Thank you for sharing that. And I was just wondering if you can provide an update on the Maryland and Illinois solar projects and timing there. They're large projects. I'm just wondering, is there any kind of estimate on an update there for when they'll be more underway?

Hoong Khoeng Cheong

Yes, I think the -- it's still in the development phase. So it will probably take a little while before we hit the MTP. So we are progressing as planned for these two utility-scale projects in Maryland, Illinois.

Tim Moore

Good. Two more questions. The first one is around the electric forklifts. I read a lot about that a few months ago, and it's a great product. I saw that revenues were almost $1.25 million, I believe. How much in revenues do you think you can generate for that if you look out a year? And do you have enough production capacity to fill big orders if some big major corporates come in and decide to order a fleet of them?

Denton Peng

We see the demand for the electric products, especially the logistics customers for the probably is increasing. So we think we try to service more markets can only service the California market. So we also try to increase to service other markets. So definitely, we'll be try to do more or elect to keep more inventory for these products and check us service more customers. So the shipment will be increasing. But it will not happen in one or two months, because you're building a relationship with China, it always takes some time.

Tim Moore

Understood. That makes sense. My last question is, how should I think about the general and administrative expense total for this year. It came down in the second quarter. And I know that last year had integration costs on PDI, and there was some other one-off cost last year. Do you think the recent quarterly number is more indicative of a run rate going forward? Or do you think it will go up as the year goes on?

Denton Peng

Yes. Our CapEx for solar module, definitely, we'll be increasing just for building this Made-in-U.S. solar module factory in Sacramento. And our operation cost for the [indiscernible] because this is now -- most of our business is starting moving to profitable, especially our solar project development [indiscernible] and our cell electricity business from [indiscernible] also, we are now also moving to the solid installation business try to move into profitable. And our -- so -- and the distribution business always be profitable.

So of course, we have still a challenge for the EV business we still put a lot of R&D still some time to be profitable. And I think our solar module manufacturing business will be very strong, very profitable in a few quarters. So I think the company is in a very good shape to moving totally to profitabilities in the short terms.

Randy Conone

I think things like head count may go up a little, but it's going to be -- as the scale grows, especially in the solar module manufacturing, we should get quite a bit of operating leverage going forward.

Tim Moore

Good. Thank you. I appreciate you answering my questions and that's it for my questions today.

Randy Conone

Thank you.

Operator

Our next question comes from the line of Tate Sullivan with Maxim Group. You may proceed with your question.

Tate Sullivan

Hi, thank you, a couple of follow-ups, if I may? I heard you mention capital expenditures a couple of times, just looking at about $2 million in 2Q ’22 to get the pilot production started? Should it decline from there or will actually increase based on the speed and what you're installing equipment?

Denton Peng

In Q3, because most of the new equipment in view of installation in Q3 and maybe early Q4, so this is some CapEx will be spent for the solar module manufacturing. But this is -- already you see some prepayments of the equipment already done, so not too much impact of the cash flow, but the CapEx definitely will be increasing in Q3 and a little bit in Q4.

Randy Conone

Yes, tate, I would over time, not kind of weeks and months, but quarters and longer periods of time, the CapEx is going to go up our plan over time once we get Sacramento up to full capacity is to replicate it. So the CapEx should keep growing over time.

Tate Sullivan

Great. And then -- well, on replicating the facility and Denton, also I wanted to ask you about the sources of financing for that? Is there -- I mean, I think the Inflation Reduction Act and some previous acts indicates some funding for domestically manufactured solar modules. Is that a possibility that you may look to secure that type of funding in the future?

Denton Peng

Yes, we are looking for this kind of possibility also. But currently, we have already due to most open funds already secured. And this is -- we just are planning as our goes. And of course, we will, through other ways, try to increase our -- when we increase the capacity, we will probably to continue to ease some money to do some CapEx. And at current stage, the solar module business seems it's very profitable.

Randy Conone

Yes. I think we're probably going to pursue both on public money and then funds in the capital markets up and down the stack over time as we grow.

Tate Sullivan

Great. And just one last financial question for me. If -- I mean, other income -- I mean maybe we could take it offline after, but other income was about $3 million on the income statement in the quarter. Is that related to some of your other businesses that you've had before? Or is it a foreign currency, possibly? I think it was about $5.5 million in the quarter.

Randy Conone

Can I get back to you on that, Tate.

Tate Sullivan

Yes.

Randy Conone

Yes. Okay, thanks.

Tate Sullivan

Okay. Well, thank you all for answering my question.

Denton Peng

Thank you.

Operator

Thank you. Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Randy Conone for closing remarks.

Randy Conone

Thanks very much, Laura. I want to highlight the extraordinary opportunities from projected growth in the solar and EV industries over the next decade. SPI Energy has tremendous revenue and earnings growth potential if we are able to capture even a small percentage of the solar and EV TAMs going forward.

Our company has a proven ability to generate revenue in the solar and EV markets, and we are implementing several strategies to exploit the growth in those markets. SPI Energy also has a history of making targeted deep value acquisitions of distressed assets and companies, and we will continue to consider such transactions in this challenging economy, as we generate more cash flow and raise additional capital.

SPI Energy, through its wholly-owned affiliate EdisonFuture, also owns approximately 80% of our EV division, Phoenix Motor Cars, which is publicly traded under the ticker PEV and currently has a market cap of approximately $75 million. SPI Energy foresee significant synergies between its solar and EV divisions going forward, including opportunities to sell packages of solar, EV and green energy storage and battery equipment to customers seeking integrated green energy loops.

We also believe at the new Federal Green Energy legislation will be a tailwind to SBI Energy solar and EV operations, and that complementary private sector financing will consequently increase to the green energy sector.

That concludes our remarks today. We're very glad you were able to join us and look forward to your continued interest in SPI Energy.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.

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