SPI Energy Co., Ltd. (NASDAQ:SPI) Q3 2022 Earnings Conference Call November 16, 2022 4:30 PM ET
Company Participants
Denton Peng – Chairman and CEO
Hoong Khoeng Cheong – COO
Conference Call Participants
Tate Sullivan – Maxim Group
Tim Moore – EF Hutton
Operator
Good afternoon, and welcome to SPI Energy’s Third Quarter Fiscal 2022 Conference Call. As a reminder, this call is being recorded and participants are in a listen-only mode. The call will be open for questions-and-answer following the presentation. 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 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, Wednesday, November 16, 2022. 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.
Denton Peng
Thank you, Cherry. 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 will have another strong performance with the macro milestone achieved. The translation 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 while also mitigating potential future supply chain issue from overseas suppliers.
Solar wafer are the key components used for manufacturing solar cells which are used in manufacturing of solar modules. We are starting delivery and production of solar wafers in the U.S. by 2023 with the capacity to ramping up three 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 enables 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 educate. H. K.?
Hoong Khoeng Cheong
Thank you, Denton. Yeah, 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 one 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, semi-public 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 mass 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 in the 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 solid SolarJuice as a U.S.-based solar module manufacturer, with incentive becoming effective in 2023, meaning we will be 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 foreign 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 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 largely fixed. 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 34.4% 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 now open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is from Tate Sullivan with The Maxim Group. Please proceed.
Tate Sullivan
Thank you. Good day all. 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?
Hoong Khoeng Cheong
Yeah, for this year the production’s already fully booked. For next year, most of customers have commitment orders. So in a way the demand’s strong. I think we cannot produce enough. Maybe the demand is probably 10 times bigger than what we can produce today for next year.
Tate Sullivan
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?
Denton Peng
We think that every almost every 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 modules, we can produce good delivery this year. Of course, the demand for next year is much, much more demand than we can produce today and for next year.
Tate Sullivan
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?
Denton Peng
Yeah, our revenue is still increasing double digit compared to last year same period? And yeah, I said, we have limited or reduced some roofing business. We just been more focused on 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 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 think we will have a much stronger delivery in quarter four for a very profitable business for module manufacturing in U.S. 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. We have already built 650 megawatt capacity in California. This is very big driver for our revenue growth for next year.
Tate Sullivan
Okay, thank you very much Denton. Have a good day. Thank you.
Denton Peng
Thank you.
Operator
[Operator Instructions] Our next question is from Tim Moore with EF Hutton. Please proceed.
Tim Moore
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?
Hoong Khoeng Cheong
Yeah, 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 additional revenue. So more than $10 million easily. So we have not yet put the guidance for this quarter, because there’s some uncertainty or some uncertainty. We see some in the insulation business and also in the distribution business.
But generally, there’s not too much. We will be — it will happen, because it’s either the quarter four 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 isn’t higher than other buildings that we operate in today.
Tim Moore
That’s helpful. Just I have two questions related to that. When you start reporting your March quarter, when you report early next year, will you add a separate revenue stream line item for the solar module and wafer manufacturing or will it be rolled up and part of solar PV components when you report your sales numbers next year?
Hoong Khoeng Cheong
Yeah, I think we just consolidate revenue in — because in the current most of our business is profitable. So the electricity sale business is power purchase agreements. We have very stable electricity in Hawaii and in Greece, in Italy, in the United Kingdom. So this has been very stable. However strong cash flow and very healthy gross margin, is more than 40% because it’s just electricity, but revenue is slow.
Then we have time to time sell our PV project business. This year, this one time, sometimes but we have a lot of pipelines. Currently the company have more than 400 megawatts pipeline globally, as mentioned in most of projects based in U.S. This is a very valuable project in especially like project in Oregon, Hawaii, Massachusetts, Illinois and Maryland.
Also in California. So all this project it’s value is very high. We have invested a lot of money in this area and developed this project in last 5 to 10 years. So this will be a very, very big value asset in U.S. This project that we will have business still open time to time. Then we have very strong distribution business in Australia. It’s always been profitable last few years, continue growing year by year. And we still see that business growing and still profitable in this business.
We have an EV business, consolidated electronic motorcars. This business of course, maybe it takes some time to be profitable. But this business is already, it had IPO in June, at a valuation of $150 million. So we raised $60 million since that IPO. We have a solar installation business. We bought, two or three years ago, from the Petersen-Dean. But this business is now also starting to grow and provide a very good fundamental for sale our module in China and a very good brand. So this is a business already running where we are now.
So for the solar, we especially forecast, the solar installation in California. Most importantly, we want to highlight our newly set up from end of last year, the solar module manufacturing business in Sacramento and we invest a lot of money and other efforts, lot of employees here. So now our employees increasing almost every week. So now we have ramped up to full capacity of 650 megawatts, and have very strong demand for the solar, American make module. So and last year recently also have a solar wafer factory made in U.S. This will also bring additional, very important revenue for the company in the future.
Tim Moore
It’s great, when maybe I should ask you a different way. When you get more revenue at the Sacramento plant, for the American made modules, will you tell investors what that revenue number is each quarter going forward? Would you say, $10 million, $15 million this quarter, $20 million? Will you actually share that in the press release or on the conference call?
Hoong Khoeng Cheong
Yeah. So for example, if you see, next year for fourth quarter, we have fully booked over 20 megawatt orders. This mean our current selling price is more than $0.55. Easily we can sell in $11 million, as an operation gross margin was 35%. That’s from this business itself. And the next year, we have capacity of 650 megawatts module production. So even we take like a similar price of that and the footprint, we can easily have probably $0.55 by 650 megawatts, you can easily have more than $300 million in revenue for next year.
So this is I think will be more than the revenue we can have today for last few years. So this is why we say this is a very, very big change for the company, and a big driver for the company. So we have just for in California Sacramento facility, the 650 megawatt module manufacturing capacity may put us over more than $300 million revenue if we produce all the modules we produce.
The demand is very, very strong for next year, and probably 10 times bigger than we can produce today from our current partners.
Tim Moore
Yeah, that’s really helpful, H. K. Thank you. Thanks for those numbers and for sharing that color. I just have two more questions. Could you maybe elaborate a little bit more for the September quarter that you just reported results, there was a gross loss in the quarter. It’s usually been a positive gross margin for the quarter. Can you maybe explain a little bit more on maybe what that was, what really dragged it down? Would you expect to have a gross margin, a positive gross margin in the December quarter?
Hoong Khoeng Cheong
Yeah, I think we have a EV business, is still loss. Of course, we do mostly engineering, so we consolidate, and also we have solar and roofing insulation business, original we bought from Petersen-Dean. We are focused on more on California and more focused on more solar installation.
So and this have some leasing cost and also in the third quarter, our solar module still in the phase two ramping up. So we still in the coming many, many more hiring expenses is still there. Still a small revenue because ramping up and changing periods. So this will be certainly will be more change, totally starting from quarter four and especially for next year. Because most of our ramping-up process will be to full capacity for next year. So especially for our module manufacturing capacity. So most of the expenses will be flowing through the profitability. So the only business will continue properly, haven’t lost money is the PV but is already spring off from June. So most our business will be very profitable next year.
Tim Moore
Well, that’s really helpful H. K. My last question is about the EV business. For the electric vehicles I know when Phoenix Motor reported earlier this week that there was battery supply constraints and a software issue that was being resolved, do you think that it will take until the end of the first quarter to recoup those delayed revenues, that you were maybe anticipating for the September and December quarters?
Do you think it’s pushed out or do you think that the EV business can do a few million of revenue in the December quarter?
Hoong Khoeng Cheong
Yeah, I think for the EV business and the Phoenix Motor they will report separately. If any question you can definitely to contact the managing team of the Phoenix. But generally they have as they said, you know, they have some delay on the battery as such but the backlog is still very strong. Still everything’s moving as they planned. They are doing very well in in operation of Phoenix Motor. So if we have more detailed questions, happy to, you can connect with the management of Phoenix Motor.
Tim Moore
Thank you so much H. K., I appreciate it. Thank you Denton.
Hoong Khoeng Cheong
Thank you.
Operator
That concludes our question-and-answer session. I would like to turn the conference back over to Denton for closing comments.
Denton Peng
Thank you for your interest.
Hoong Khoeng Cheong
Thank you very much.
Operator
Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.
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