SOL - NYSE

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

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 and 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 the 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 obligated 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'll 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 QA 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 project 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 project sales starting from Q2 and more in the second half due to the timing of expected final approvals of pending project 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 megawatt of project sales in Europe and U.S. For the full-year, we iterated 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 project development business remains very strong fundamentally. We are experiencing sustained strong demand for solar projects on global scale. We entered 2023 with three 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 four gigawatts by the end of 2023. And beyond 2023, we are targeting to monetize a minimum 500 megawatts 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 five 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 these designated five provinces, as well as some assets within this 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 project 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, and 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 zero NTP revenue during the quarter, as well as lower revenue from EPC business. And IPP of Q1 is typically our seasonally 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 low-margin EPC service 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 sequentially 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 costs 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 attributable to Emeren Group Ltd's common shareholders per ADS was $0.00, compared to $0.03 in Q4 2022 and $0.03 in Q1 2022. Cash used in operating activities was $23.7 million which was primarily for the continued development of Poland and Hungary COD projects; cash used in investing activities was $1.9 million, and cash used in financing activities 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 used in operating activities as well as finance activity of $16.2 million for shares buyback and finance leasing loan payment. Our net asset value or NAV is approximately $5.85 per ADS. Our debt-to-asset ratio at the end of Q1 2023 was 11.3% compared to 11.1% at 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 executing 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.

Thank you. Our first question comes from the line of Philip Shen of ROTH MKM. Your question please, Philip.

Hey, guys. Thanks for taking my questions. First one is on your four gigawatt pipeline target by year-end 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? Thanks.

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 will say in the four gigawatts, I would expect about three gigawatts will come from Europe, and the another major part will be from U.S., and China represent about around 5% in the whole portfolio.

Okay. Great. Thanks, Yumin. 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 and so forth could – and should still drive very healthy demand? Thanks.

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 two, three years ago. In most people including us, our financial model, if you look at two years ago, in normal case with the merchant curve, you talk about €0.60, €0.70, the 60, 70 euro/dollars 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 job of the CapEx. Just recently, as everybody knows that the polysilicon price goes down and the module price continues to goes down, and the whole overall price from the suppliers are going down. So on these two 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. Thank you. 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 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're seeing in general? Thanks.

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. Actually, in general, including U.S., we still see a big demand. Okay? In the market, even in some market, people predicted that the 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 eight 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 at minimum or in most cases, two, three 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 two, three and at the end, we definitely pick one and we disappointed more. So the trend in general, as I see it's a timing issue and now, it is still very, very good as money inflow 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?

I'm here.

Go ahead.

Can you hear me?

Yes.

Perfect. So – hey, 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 that they have all of their statutory rights to be built. So 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 – a financial wheelhouse and a 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, it's not technically a secondary, I guess it could be called a secondary market of already constructed assets that 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 a 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. And that could be the distinction between the unregulated arm of a utility or a player that's highly sophisticated because they have their own power purchasing and capability. So 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, if there's a potential pool of 40, we go to the seven or six 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, 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 focus on RTB sales. Again, right now, people are still chasing high quality RTB ready projects. The demand is still very strong.

Okay. Thanks to you all. I'll pass it on.

Thank you, Phil.

Thank you. Our next question comes from the line of Donovan Schafer of Northland Capital Markets. Your question please, Donovan.

Hey, guys. Thanks for taking the questions. 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?

Thank you, Donovan. As I mentioned, in the remaining eight 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 setting those projects in most cases as RTB, RTB is the word the European people most likely to use instead of NTP. So most of the deals are RTB sales in the countries, as I mentioned. And in China, is the only country we sell deals at the 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.

Great. Okay. Fascinating. Okay. Sorry, I cut you off.

And also, another point, Donovan, that the – as you see our business model, as we listed all the details of the project 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, we are seriously considering to build those ourselves. So in some countries, we just will turn, we say monetize, we will turn those development portfolios into the IPP assets. So Italy, we also have development service type of business, we help third-party to develop the projects.

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's this 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 a 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 in – 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, I think it was like chips on the table, but it's 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 and holding your …

Yes. That's indeed in the project assets. On the balance sheet, it's roughly between US$18 million and US$20 million.

Okay. $18 million and $20 million just kind of holding places. Yes. That’s all refundable. Okay. And is there a – let's see. And I guess it would vary by country, so I'll have to dig into it with 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 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.

Great. Okay.

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 on those projects under construction or being completed.

Okay. Great. And then with the new account 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, maybe the 58 or 38-megawatt project you already mentioned. But if that was sort of seemed to be very nearly or effectively sort of done in the fourth quarter, then I'm sort of assuming the associated cash use would've 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's actually for incremental projects in addition to the Poland project in the fourth quarter, that was…

Yes. Donovan, you're right. 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 in the other Poland COD projects and also Hungary COD project, which Yumin just mentioned, we are going to monetize those and receive cashback 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 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, I think it's like an SEC requirement or something, but I believe now that 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 – is it just that you have to do those filings instead or is there a more formal process and does it involve actually going – 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 a formal process. We will expect to starting to do it in Q1 2024. And again, but in terms of direct listing, that's different process.

Okay. All right. Great. I'll take the rest of my questions offline. Thanks, guys.

Thank you, Donovan.

Thank you. Our next question comes from the line of Pavel Molchanov of Raymond James. Your question please, Pavel.

Thanks for taking the question. So first on your U.S. portfolio, we just saw the guidance from 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 costs 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 is just a – it's more complicated to figure out post facto, post sale exactly what ended up happening with their financing structure. But we do with – we do capture that upside in the form of specifically calling out if you get 40% ITC. We get a – 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 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 is just this quarter everything is GAAP.

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

Yes. Some special items, yes.

Okay. That's clear. Okay. Thank you, guys.

Thank you, Pavel.

Thank you. Our next question comes from the line of Amit Dayal of H.C. Wainwright. Your question please, Amit.

Thank you. Good afternoon, everyone. 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. Thank you, Ke. 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 early talk is we are waiting for government approvals. For the ones we already signed the contract, we file for government approvals, for example, in the country of Hungary that the government will give us within four to six 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 is how we delayed the recognition to the following quarter. But now, we do not see anyone which will fall through or slip through into 2024 yet.

Okay. Thank you, Yumin. 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. It's around $90 million to $100 million.

Okay. Understood. Thank you, guys. I will take my another questions offline. Thank you.

Thank you, Amit.

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