Emeren Group - Q1 2024
May 23, 2024
Transcript
Operator (participant)
Hello, ladies and gentlemen. Thank you for standing by for Emeren Group Limited's first quarter 2024 earnings conference call. Please note that we are recording today's conference call. I will now turn over the call to Suzanne Wilson, Director of Investor Relations at Emeren Group. Please go ahead, Ms. Wilson.
Suzanne Wilson (Director of Investor Relations)
Thank you, operator, and hello, everyone. Thank you for joining us today to discuss our first quarter 2024 results. We released our shareholder letter after the market closed today, and 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 prepared remarks. On the call with me today are Mr. Yumin Liu, Chief Executive Officer, and Mr. Ke Chen, Chief Financial Officer. Before we continue, please turn to slide two. 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 risk and uncertainties that could cause actual results to differ materially.
Those risks are described under Risk Factors and elsewhere in Emeren Group 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 obliged to update you on any revisions to this forward-looking statement. In addition, please note that all financial numbers are discussed on this call are unaudited. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars. With that, let me turn the call over to Mr. Yumin Liu. Yumin?
Yumin Liu (CEO)
Thank you, Suzanne. Thank you everyone for joining our call today. I'll begin by providing an overview of our operational performance in Q1 2024, and Ke will discuss our financial results for Q1 and our outlook. In Q1, we generated $14.8 million in revenue, marking a 15% increase year-over-year. Our gross profit soared to $4 million, more than doubling from the previous year, with a gross margin reaching 27.2%. The operating loss was approximately $0.7 million, significantly reduced from last year. This substantial growth in revenue was primarily driven by our expanding development service agreement, or DSA business, which generated over $5 million in revenue. Our effort to improve operational efficiency across all regions is paying off. We decreased operating expenses by over 50% through strategic cut cost control measures.
That progress was offset this quarter by $0.7 million write-offs of canceled US early-stage projects due to our shifted focus on advanced-stage projects and an unrealized foreign exchange loss of over $3.2 million, which constituted the bulk of our net loss. We'll give you a quick overview of each of our business, business lines, starting with the quarterly primary catalyst, then we'll circle back with more details later. Our DSA initiatives contribute to a stable and predictable business model, enabling revenue recognition at the early stage of the project development. This approach is proving instrumental in managing risks and maximizing cash flow efficiency across the project life, life cycle. In Q1, DSA revenue accounted for 34% of our total, largely driven by Battery Energy Storage System, or BESS projects in Italy. Looking ahead, we are working to broaden our DSA partnerships on a global scale.
Concurrently, our BESS pipeline continues to grow steadily globally. We recently signed a DSA agreement for our BESS projects in southern Italy with Nuveen Infrastructure, formerly known as Glennmont Partners, one of the world's largest fund managers specializing in clean energy, aiming for a total power capacity of 199 MW or up to 1.59 GW. In April, we secure an additional agreement with Nuveen for 155 MW or up to 1.24 GW of battery storage projects, bringing the partnership total power capacity of 354 MW or up to 2.8 GWh. In Q1, our IPP assets were the primary drivers of growth and profitability, contributing to 38% of our revenue with a gross margin of 44%.
IPP continues to be a pivotal component of our business model, providing a dependable source of stable and predictable cash flow. Our IPP revenue is balanced between Europe and China, with a modest presence in the US as of today. In Europe, we have 67 megawatts of IPP assets that generate sustainable revenue. For legacy reasons, we have IPP assets in China, located in the five coastal provinces with favorable power prices, strong economies, and robust regulatory environments. We are now fortifying those assets by adding battery storage to the portfolio. As of the end of Q1, our battery storage portfolio comprised 90 megawatt-hours, all integrated into the virtual power plant platform. The VPP platform owned and operated by Huaneng Power International, one of the largest IPP operators in China. The VPP market in China is expanding rapidly. During the quarter, we continued to develop solar and storage projects.
As of the end of Q1 2024, we had over 2.6 GW of advanced-stage, high-quality solar projects. We maintain our expectation to monetize approximately 400-500 MW of projects in 2024 and beyond. At end of Q1, our total energy storage project pipeline had increased to over 8 GW or over 32 GWh. In conclusion, we are optimistic about our revenue growth potential, which is fueled by our strategic initiatives and a robust project pipeline, and our ability to achieve gross margin of over 13%. We are also confident we can continue to lower operating expenses. Now, let me turn the call over to our CFO, Ke Chen, to discuss our financial performance and guidance. Ke?
Ke Chen (CFO)
Thank you, Yumin, and thanks, everyone, again, for joining us on the call today. Our revenue of $14.8 million represented an increase of 15% year-over-year from Q1 2023, and a decrease of 36% from Q4 2023. The sequential decline was due to normal seasonality, while the year-over-year increase in revenue was primarily driven by our growing DSA business, which accounted for 34.4% of our revenue. Gross profit was $4 million, compared to $3.3 million in Q4 2023, and $1.6 million in Q1 2023. Gross margin was 27.2%, compared to 7.6% in Q4 2023, and 12.4% in Q1 2023. The gross margin improved sequentially, primarily driven by high-margin business contributed from DSA business.
Operating expenses were $4.7 million, an improvement from $9.5 million in Q4 2023, and comparable to $4.6 million in Q1 2023. Our Q1 operating expenses were impacted by $0.7 million write-off of canceled early-stage project in the U.S. Net loss attributed to Emeren Group Ltd common shareholder was $4.4 million, compared to net loss of $8.1 million in Q4 2023, and a net loss of $0.2 million in Q1 2023. Diluted net loss attributed to Emeren Group Ltd's common shareholder per ADS was $0.08, compared to diluted net loss of $0.15 in Q4 2023, and a diluted net loss of $0.00 in Q1 2023. Cash used in operating activity was $3.3 million.
Cash used in investing activity was $2.6 million, and cash used in financing activity was $8.4 million. Negative operating cash flow was primarily due to delayed payment from Huaneng projects. Looking at our balance sheet, cash and cash equivalent at end of Q1, 2024, were $155.1 million, compared to $70.2 million in Q4, 2023. Net asset value or NAV is approximately $6.05 per ADS. Our debt-to-asset ratio at the end of Q1, 2024, was 9.99%, compared to 9.44% at the end of Q4, 2023. Additionally, during Q1, we purchased approximately $6.3 million worth of ADS.
Moving to our outlook, we anticipate that our Q2 revenue will fall within the range of $20 million-$23 million, with a gross margin between 40%-45%. For the full year 2024, we reaffirm our expectation for revenue to range from $150 million-$160 million, and for a gross margin of approximately 30%. Additionally, we expect our net income for 2024 to be around $22 million, with consideration of foreign exchange impact, and expect earning per ADS to be approximately $0.43. We illustrate our expectation for our IPP revenue in 2024 to be between $24 million-$26 million, with a gross margin of approximately 50%. We expect gross margin contributed by DSA globally to be within the range of 15%-20%. With that, let's open up the call for any questions.
Operator, please go ahead.
Operator (participant)
... Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Philip Shen with Roth MKM. You may proceed.
Philip Shen (Managing Director)
Everyone, thanks for taking my questions. Wanted to talk about your guidance. So Q1 was a little bit light. Q2 was also, your guide was a little bit light versus our expectations, and so, there's a big ramp in Q3 and 4. Was wondering, because you're gonna, you plan on monetizing, you know, 450 megawatts in 2024. What do you think, the monetization might be by quarter? Just to give us a rough cadence of, the monetization. Thanks.
Ke Chen (CFO)
Sure, Phil. Again, like I said, we confirm our full year revenue guidance and gross margin guidance. Yes, we do expect a ramp up in the second half, and again, some of the projects are under negotiation right now, so we do expect again, ramp up both in Q3 and Q4.
Philip Shen (Managing Director)
Right. So what do you expect to happen to allow for that ramp up? And what have the delay, the reasons for the delay been?
Ke Chen (CFO)
Again, for some of the approval delays, we still expect that, but we're expecting those to happen in the second half. And also, again, we are negotiating some of the contracts right now, and we expect those contracts to be executed in Q3 and Q4.
Philip Shen (Managing Director)
Right. I'm sorry, Ke, I'm not asking about the timing. I, I'm asking about the reasons for the delay. So, you know, in the U.S., I know there's a lot of reasons, you know, interconnection, transmission queues, long lead time, high voltage equipment-
Ke Chen (CFO)
Yeah.
Philip Shen (Managing Director)
You know, high elevated rates. What else? Labor constraints, EPC constraints. Those are all resulting in delays in the U.S. projects on the margin. What are you seeing in Europe? Are those the same issues in Europe, or is it... I'm imagining it's a different set of issues, so can you give us some color as to, you know, what is causing the delay?
Ke Chen (CFO)
Sure.
Philip Shen (Managing Director)
Is it, or is it just bilateral negotiation kind of,
Ke Chen (CFO)
Oh, yeah. Let me...
Philip Shen (Managing Director)
Delays.
Ke Chen (CFO)
First of all, U.S.-
Philip Shen (Managing Director)
Thank you.
Ke Chen (CFO)
What you mentioned is correct, but what we, our focus in US is actually community solar. And again, we are focusing on, like, New York, for example. That delay actually helped us because some of the latter adders added for NYSERDA, so allow us to get a better price. So instead, we sell the project in Q4, we already negotiate the contract, we're getting better price, so the delay will help us in Q2, starting Q2 and mainly in Q3 and Q4. So, US, you hit a good point there, but for Europe, I think we experience, continue to experience, administration delay, for example, from Spain, but we are expect those to happen in Q4.
And so, again, some of the project we mentioned in Hungary, we're expecting some delays, but we are, again, expect those happen again in the second half.
Philip Shen (Managing Director)
Okay. So, did you say there are administrative delays, so they're bureaucratic, it's based on the local governments and the challenges they might be having?
Ke Chen (CFO)
Yeah, the approvals, some of the permits for Spain, be specific, and they allow for, like, more than, like, up to 12 months delays in some of their regions, so-
Philip Shen (Managing Director)
Right.
Ke Chen (CFO)
But we are pushing through all these approvals.
Philip Shen (Managing Director)
Okay, so there's a chance that these could extend as well, right? I mean, some of these challenges could sustain beyond 2024? I mean, what's the
Ke Chen (CFO)
Um-
Philip Shen (Managing Director)
potential that it could take longer than you think?
Ke Chen (CFO)
Again, our team is working very hard to minimize this impact, so like I said, we're renegotiating this contract, try to get this done in Q3 and Q4.
Yumin Liu (CEO)
Let me add some color on this one, Phil, at the-
Philip Shen (Managing Director)
Thanks, Yumin.
Yumin Liu (CEO)
For example, Spain, that we signed the contract, SPA, back over six months ago, and we expected that to be done within Q1 timeframe or even as early as last Q4. But it didn't happen, as the Spain government issued a new rule which allows the local admin office to have 14 months, up to 14 months time, to get project approved based on the priority of the deal. So we now consider that's one of the deals we're supposed to close within the first half, but now it goes to second half, or most likely will be in Q4. Okay? So that is one example, and Hungary, the same thing. That every single deal we go, we went through the foreign buyer, it will be under the local government policy.
You cannot look into the local government regulation. It's not easy to sell to foreign buyers, so we have to switch local buyers, and now we are in the process of the negotiation. So the all those delays will happen, but the we are fully confident that those closing will happen in second half.
Philip Shen (Managing Director)
Okay. One last question, I'll pass it on. As it relates to the Polish payments, I guess that was an issue for Q1. What exactly was going on there? And then do you expect that challenge to sustain in Q2, or even through the back half of the year? Thanks.
Ke Chen (CFO)
We are working with the buyers to settle this, so we're expecting the payoffs in June. And again, we are not expecting further delay anymore.
Philip Shen (Managing Director)
What is the root cause of the issue? What, what happened?
Ke Chen (CFO)
Again, there is a PAC delay, like, the local Polish government, same thing. They have to prove this power plant to be connected. So there's a so-called PAC certificate, certification. So-
Yumin Liu (CEO)
Basically, that the power plant need to be constructed, receiving so-called PAC, Performance Acceptance Certificate. And then after that one, we get paid. But there's another big thing is that the project is entered in the final stage of closing its financing, and it's supposed to be done within the next several weeks. So that's why Ke mentioned, we expect the payment starting in June.
Philip Shen (Managing Director)
Okay. Okay, great. Best of luck as you get through the year. I'll pass it on.
Yumin Liu (CEO)
Thank you, Phil.
Ke Chen (CFO)
Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Pavel Molchanov with Raymond James. You may proceed.
Pavel Molchanov (Equity Research Analyst)
Thanks for taking the question. Zooming out first, are there any complications with module supply on either side of the Atlantic? And do you envision the supply situation worsening with the new tariffs announced in Washington?
Yumin Liu (CEO)
Yes and no. For the US, the good part of our story is we don't plan to do much of the EPC work in the US as we flip the deal before or as an NPT. But we do have some considerations doing a small deal, which we are doing, which, all the modules has been secured for a small deal in Maine. So on that part, we are lot less impacted. And but going to the future, that may limit many other utility scale players that are on the module supply. But in any case, that we see that happen, within weeks, but not really impacting us much. But for Europe, we don't see that yet. At this time, still, it carries through the very competitive pricing without any additional tariff.
That is why we need to double, triple our growth potential in Europe compared to what we are doing in the US.
Pavel Molchanov (Equity Research Analyst)
Okay. When I look at your project pipeline, the advanced stage looks relatively balanced by country. The early stage is more than two-thirds Spain. What explains the scale of these early stage opportunities in the Spanish market?
Yumin Liu (CEO)
That's a very interesting question, that the Spanish market is one of the most focused market for our company in Europe, and we believe Spanish market still or continues presenting us good potential. Okay? We have spent lots of time developing partnerships with local, smaller developers. We also develop partnerships going forward with our joint venture partners, like Apple, to see if we can put more resources into the early stage all the way on the development. Okay? I will see that the Spanish market continues to be strong, especially we learned that the Spanish government is considering adding battery storage into the market play. So with that new initiative, I, I'm looking confident about the growth.
Pavel Molchanov (Equity Research Analyst)
Okay, interesting. Last question: You've, you know, continued to repurchase shares. You know, obviously, the stock is still down quite a bit, year to date. How much more cash are you willing to allocate towards buyback?
Yumin Liu (CEO)
Pavel, we still have, I think, roughly $15 million left from the board authorization. So that has been approved, so that's what we could use.
Pavel Molchanov (Equity Research Analyst)
$15.15 million?
Yumin Liu (CEO)
Yeah.
Pavel Molchanov (Equity Research Analyst)
Okay. Thanks very much.
Yumin Liu (CEO)
Thanks, Pavel.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Donovan Schafer with Northland Capital Markets. You may proceed.
Donovan Schafer (Managing Director)
... Hey, guys, thanks for taking questions. So first I wanna ask for Spain for the, for the storage project pipeline. So looking at the letter to shareholders from last quarter, there was about 1 GW of, a 1 GWh of battery storage, that was advanced stage for Spain. And then in this, the letter for this quarter, it, that was, it looks like that was essentially eliminated. It went from about 1 GW down to 36 MW. And I, it looks like the early stage really jumped, which Pavel was kind of commenting on. I mean, that it also went up for solar as well. But, so is that a reclassification from advanced stage for Spain to, to classify it back, to, to, to bring it back down to early stage?
Or what happened to that gigawatt of advanced stage Spanish?
Yumin Liu (CEO)
You know, Donovan, thank you. It's a very interesting question, and also you hit the right spot. You know, we are becoming more and more conservative in consideration of the global level interconnection bottleneck. Spain is also one of the countries or the markets facing the challenges of the interconnection issues. So we pass through, in all markets, our conservative review, so-called recategorize, our advanced stage or early stage projects. And that resulted in this, moving this 1 gigawatt all the way from advanced stage to early stage to be more conservative. That is the reason that we are continuing developing those projects, but nothing wrong. But the only thing is that we foresee the interconnection approval delays, which is less optimistic than last quarter.
That is why we moved that from advanced stage to early stage. But-
Donovan Schafer (Managing Director)
Okay. Okay.
Yumin Liu (CEO)
One thing-
Donovan Schafer (Managing Director)
Okay.
Yumin Liu (CEO)
You know, Donovan, I have to point out, our advanced stage pipeline in Europe is continuing growing, so we have more than last quarter in general.
Donovan Schafer (Managing Director)
Okay, okay. And then turning to the solar pipeline, so for Germany, as I'm looking at the early stage. So the advanced stage for Germany stayed the same, so it doesn't look like there's any movement there. But the early stage dropped from 690 megawatts to 360 megawatts. And you mentioned, you know, there was a write-down or an impairment for early-stage projects in the U.S. But is there... Would that kind of thing trigger, you know, I guess, first, you know, what caused the reduction in Germany? But then secondly, you know, why was that not also an impairment or a write-down of some kind? Or, you know, did that have an impact on the financials?
Ke Chen (CFO)
Let me, let me answer that, Donovan. Actually, we bid two project in Germany, which fell through, so we didn't win the bid, so that pipeline get removed. There is some small, very small impairment in Germany also, but that's very small compared to what we mentioned here in U.S. It's only like less than $50,000.
Donovan Schafer (Managing Director)
Okay, got it. And then just one more from me. You know, you've got some IPP assets in China. You know, you do, you do, you're doing some development work there. And I know, you know, there's, I think you're still maybe Cayman Islands based, so you're not technically a U.S. company. But the question is, you know, is there any risk of sort of, of like retaliation or anything that could impact you guys?
You know, I know someone already asked about modules applying to the US, but just in terms of, you know, inside China or even in European countries or other places where maybe you work with Chinese, you know, Chinese companies, or source panels from China or anything, is there any risk of you guys being negatively impacted if the Chinese government were to take some kind of a, you know, retaliation against the United States?
Yumin Liu (CEO)
No, I, I don't think so, and we don't see that either. The currently, China solar market, China represent over 60% of the downstream market in the world, while the supply chain side, not only modules, but also battery storage, China represent over 80% or even a lot more, okay? So the definitely U.S. 201, 301 tariffs will set some limitations or restrictions for China sell and potentially in the future, the battery storage components coming to U.S. But as I answer Pavel's question, that we grow not only very fast in Europe, but also we are, we are strategizing, not hoping that the 201, 301 U.S. tariff will not impact our U.S. activities.
But going back to China, definitely we don't see any negative impacts as the China CapEx continue going down, down and down. The battery storage goes to about $70 per kWh for an apple-to-apple comparison and also the module goes to below $0.09. So everything looks so good, and the market is strong, and we feel confident that it's not bringing any negative impact to the company.
Ke Chen (CFO)
But Donovan, just make a correction. We are BVI company. And again, we don't see the impact because we're running IPP business in China. All the offtaker is individual enterprise in China and in out of five most economic high-cost area. I don't think any impact because those businesses are still ongoing.
Donovan Schafer (Managing Director)
Okay. All right. Thanks, guys. I'll take the rest of my questions offline.
Ke Chen (CFO)
Thank you.
Operator (participant)
Thank you. One moment for questions. Our next question comes from Amit Dayal with H.C. Wainwright. You may proceed.
Amit Dayal (Managing Director of Equity Research)
Thank you. Good afternoon, everyone. So with respect to the, you know, heavier contribution, with respect to the outlook, you know, coming in the second half, is there any particular projects that make up, you know, majority of these expected revenues in the second half? Just trying to see if there's any, you know, concentration risk with respect to any projects that you are looking to monetize in the second half.
Ke Chen (CFO)
Yes, Amit, I think we've mentioned this Hungary project, and that's the one we are actually under negotiation right now. So, but we confidently will happen in the second half.
Amit Dayal (Managing Director of Equity Research)
Okay. Thank you. And the higher gross margins in Q2 you're expecting, is it, again, just so coming from the China business and the DSA revenues?
Ke Chen (CFO)
Yes. So for Q2, the higher margin, first of all, this is a higher season in terms of IPP, for sure, so that help with the margin. Secondly, we continue doing our DSA business, and the DSA business, like we mentioned in the first quarter, bring, stay at a high margin. And also we have, again, expect project, some project sale in Europe. Those are like NTP sales, so that maintain high margin. So overall, that bring the higher gross margin, gross margin guidance.
Amit Dayal (Managing Director of Equity Research)
Okay, understood. Thank you for that. Just last one, you know, you do still have a pretty good balance sheet. I know in the last call, you gave guidance that you might end the year with $100 million in cash.
Ke Chen (CFO)
Yeah.
Amit Dayal (Managing Director of Equity Research)
Is that still in play?
Ke Chen (CFO)
Of course, we are still confident about that at this point.
Amit Dayal (Managing Director of Equity Research)
Okay. Then, you know, with that kind of balance sheet, do you think you might want to pursue more IPP opportunities, given sort of the margin strength you're seeing, you know, with that segment?
Ke Chen (CFO)
Of course. Like we mentioned this in the last few calls, we are like IPP business model to continue to identify high return IPPs, especially out of Europe. So we are again continue looking at those opportunities.
Amit Dayal (Managing Director of Equity Research)
Okay. So that's all I have, guys. I'll take my other questions offline. Thank you.
Operator (participant)
Thank you. As a reminder, to ask a question, please press star one one on your telephone. I'm not showing any further questions in queue. I'd like to turn the conference back to Mr. Liu for any closing remarks.
Yumin Liu (CEO)
Thank you, operator. Despite challenges such as a high interest rate and the U.S. election cycle, we are strengthening our position in fast-growing solar markets, thanks to increasing demand for clean energy and supportive policies. Our expertise and strong industry partnerships are pushing us toward becoming a leading global renewable energy company. We are excited about solar energy's future, and grateful to our employees, customers, partners, and shareholders for their continuous support. Thank you again for joining our call today. You may now disconnect.
Operator (participant)
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.