Emeren Group Ltd

Hello, ladies and gentlemen, thanks for standing by for the Renee Sola Powers Third Quarter 2022 Earnings Conference Call. Please note that we are recording today's conference call. I would now like to turn the call over to Mr. Yuja Shai, Managing Director of the Blue Shirt Group. Please go ahead, Mr. Shai.

Thank you, Operator, and hello, everyone. Thank you for joining us today to discuss our Third Quarter 2022 results. We released our shareholder letter after the market closed today. It is available on our website at ir.renesolapower.com. There is also a supplemental slide deck posted on our website that we will reference during our prepared remarks. On the call with me today are Mr. Ewan Liu, Chief Executive Officer, and Mr. Kui Chen, Chief Financial Officer, and Mr. John Ewan, CEO of North America. Before we continue, please turn to slide two. Let me remind you that the remarks made during this call may include predictions, estimates, or other information that might be considered forward-looking. These forward-looking statements represent Rena Sola Power'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 Rena Sola Power's filings with the SEC. Please do not place undue reliance on these forward-looking statements which reflects Rana Sula Power's opinion only as of the date of this call. Rana Sula Power is not obliged to update you on any revisions to these forward-looking statements. Also, please note, 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.

Thanks, Yuja, and good day, everyone. Thank you for joining our call today. I'll give a high-level summary of our third quarter results and then elaborate our recent strategic initiatives as well as provide an update on our guidance. Then Ke, our company CFO, will review our financial results for Q3 in detail. After that, we'll be joined by our U.S. CEO, Jiang, for Q&A. Beginning with our financial performance, Q3 results outperformed the high end of our guidance range. and represents one of our best quarters in the last three years. Revenue grew 86% year over year to $28.9 million. Gross margin was 29.6%, and net income was $3 million, compared to $711,000 a year ago. We achieved these results despite economic challenges and a strong dollar, which negatively impact our revenue and earnings from Europe and China. by approximately three million. Excluding this foreign exchange impact, results would have been even stronger with nearly $32 million revenue and over $5 million in net income. These results were driven by solid performance of our project pipeline and our IPP solar assets in the US and China, and the recently acquired 50 megawatt solar farm in Princeton, UK. We closed acquisition of Breston on September 30th. The total transaction value was 41 million, of which 20 million was cash and 21 million was nine recourse project financing. This acquisition marks the beginning of our European IPP strategy, which will add predictable and stable cash flows to complement our project sales business. PPA prices have been trending strongly across Europe due to energy shortages and favorable regulatory conditions. In fact, we have already signed an attractive multi-year PPI for the Brenston project through March 31, 2027, which we estimate will provide over $25 million EBITDA by the end of 2026. In addition to Brenston, we completed the acquisition of Ameren on October 10, through an all-cash deal of $16 million with earn-out provisions. Ameren is an Italian-based utility-scale solar power and battery storage company. They have over 2.5 gigawatts of projects under development in different stages, including over 2 gigawatts of solar projects and over 500 megawatts of storage projects. As part of our European IPP strategy, we decided to withhold 110 MW of project sales in Poland and Hungary that we originally planned to sell at NTP stage in Q4 2022. We will now construct these projects and operate them in our European IPP portfolio. In October, we completed the first 10 MW across two solar farms in Hungary and expect the remaining 100 megawatts will be energized by Q3 of 2023. Because of this shift from sale to IPP, we will forego over $20 million revenue and 5 to 6 million of net income in Q4 2022, but we'll gain significantly higher lifetime revenues and stable cash flows. We estimate the payback period for this IPP projects to be four years or less while still retaining the optionality to sell this IPP assets in the future. Due to the strategy shift in Poland and Hungary and approximately $6 million of unexpected negative foreign exchange impact, we now expect our 2022 four-year revenue to be in the range of 85 to 90 million. We expect 2022 gross margin to be 25 to 30%. For net income, we anticipate full year net income will be approximately seven to eight million. Looking forward to 2023 and beyond, we have many things to be excited about. We have strong presence in the world's fastest growing solar markets, thanks to growing clean energy demand rising PPA prices, and supportive government policies. In Europe, we are excited about our newly acquired assets and growing IPP portfolios. For Brest, Amren, and 110 MW of IPP projects in Poland and Hungary, we have good visibility into 2023 and expect these assets to contribute approximately $35 to $40 million revenue and $10 to $50 million EBITDA. We are also aligning our China strategy to the rest of the world under one strategy of develop, own, or sell, compared to the original strategy in China as develop, build, own as IPP. In the immediate near term, we are in the process of monetizing certain China projects and expect to close the sale before the year end. For our project development business, we expect to monetize approximately 400 megawatts of our mid to late stage pipeline in 2023. And we are targeting to achieve a total pipeline of 4 gigawatts by the end of 2023. To conclude, the future looks bright for solar energy and also definitely great for our company. We believe we are well-positioned to capitalize on accelerating solar adoption across the world. Given our deep expertise in developing and operating solar projects, our extensive network of industry partnerships, our well-capitalized balance sheet, and our unmatched track record in closing financing transactions and profitability monetizing projects, We are progressing steadily in our goal of becoming a leading global solar developer and operator. With that, I'll now turn the call over to our CFO, Ke Chen. Ke.

Thank you, Yu-Ming. And thanks everyone again for joining us on the call today. As a reminder, a long gap-to-gap reconciliation is included in our shareholder letter. We use long gap measures because we believe they provide useful information about our operating performance that should be considered by investors along with the gap measures. Revenue was 28.9 million, up 252% sequentially and 86% year-over-year, largely driven by our project-driven business in the U.S., strong EPC revenue in Poland, and IPP solo assets. GAAP goals profit was $8.5 million up from $3.7 million in Q2 2022 and $6.1 million in Q3 2021. The goals margin was 29.6%. Turning to our operating expenses, operating expenses were $3.5 million compared to $3.9 million in Q2 2022 and $3.4 million in Q3 2021. Net income attributed to Radon Solar Power common shareholder was 3 million. Diluted earning per ADS was 4 cents compared to diluted net loss per ADS of zero in Q2 2022, and diluted net income per ADS of 1 cent in Q3 2021. Cash used in operating activity was 5.2 million. Cash used in investing activity was 31.2 million. and the cash used in financing activity was 45.7 million. Cash used in operating activity were mainly driven by project expenditure for Poland, Hungary, and US NTP projects. Cash used in investing activity were primarily due to Hungary IPP and acquisition of Brunston. Cash used in financing activity primarily related to 42 million share repurchase transact on September 2nd, 2022 with Red Solar Singapore. Now let's review the balance sheet. Our cash balance as of September 30th, 2022 was 123 million compared to 208 million at the end of Q2 2022. The decrease was primarily due to the share repurchase, the Brownstein acquisition and project capital expenditure related to the construction of our IPT assets in Poland-Hungary. Our debt-to-asset ratio at the end of Q3 increased to 12.8% compared to 8.3% in Q2 2022 as a result of long-recourse debt acquired as part of Bronson acquisition. Finally, for guidance, we now expect full-year 2022 revenue to be 85 to 90 million, gross margin to be 25 to 30%, and let the income to be 7 to 8 million. For Q4, we expect revenue to be 44 to 49 million and the gross margin to be 20 to 25%. Now, we would like to open up the call for any questions. Operator, please go ahead.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star 1 1 on your telephone. One moment for our first question. And our first question comes from the line of Philip Shen from Roth. Your question, please.

Hey, guys. Thanks for taking my questions. The first one is on 2023. I know you haven't given official guidance, but was wondering if you could talk about how much you might sell NTP next year. It sounds like you have plans to build 200 megawatts. and keeping those on balance sheets in Europe by the end of 2023. So what's the expectation for the other geographies? It sounds like China is going to be sold by this year. So what are the NTP sale expectations for next year? And then total build-out beyond 200 megawatts, if you expect to take on assets in the U.S., That would be useful to know as well. Thanks for taking the question.

Thank you, Phil. We do expect to close the year with 4 gigawatts of the pipeline by 2023. We also target to sell at NTP 400 megawatts in this pipeline. In addition, we plan to build 200 megawatts, to build a total 200 megawatts by the end of D2D Q3, Q4 next year. That include the already existing 50 Brestan and 10 megawatts in Hungary. So that means we have 140 megawatts to go, including 100 megawatts is being planned and constructed in Poland and Hungary. And those are the big numbers. 400 megawatts sales, 200 megawatts IPP, 4 gigawatts the pipeline. And that 400 megawatts sales, including All three regions, U.S., Europe, and China.

Great. Okay. And then the 165 megawatts, is that expected to be sold all by the end of this year? Or do you think you'll recognize, how much do you think you'll recognize in Q4 in terms of the China IPP or China megawatt sales? And then how much do you think is in 23?

The majority will be in 23. We applied, as I mentioned, we applied the similar or same strategy, develop, build and sell or own. In the past in China, as we announced like 18 months ago, we say we'll do everything in China as on the IPP basis. But now we change it up to about two, three months ago, we will use the same model as we use in the US and Europe. So we are in the process of setting our first project portfolios in China will continue doing so in the year of 2023. Okay, great.

And then for the 200 megawatts that you expect to build in Europe, you mentioned 50 is Branson and 10 is Hungary. What's the incremental amount of cash or equity that you would expect to invest in Either that 140 or the 200?

For the first 100 megawatts in the remaining part of the 100 megawatts in Poland and Hungary, we expect the equity portion of about $30 million. And additional 40 to 50 megawatts, that will take another $10 to $20 million. So the total will be $40 to $50 million for the total equity injection for the additional 140 megawatt projects.

Okay, got it. And then historically, because your strategy before was to sell at NTP, you were not procurers or buyers of modules and tracker. Is it fair to say now that you'll be in charge of the EPCs and you will make the module and tracker procurement decisions in Europe?

uh yes and no the uh in general the answer is yes in fact even in 2020 21 and even this year we are we have been acquiring modules trackers and making those epc management including the major procurement in europe not in the us but in europe and china we do have those procurement obligations okay but in 2023 We expect we'll continue working on the necessary EPC activities. At the same time, build our 100 megawatt in Portland, Hungary, and continue doing either self-build or self-development build, 40 megawatts or more, or acquire a couple smaller size M&A, through M&A, acquire a couple smaller size operating projects in Europe. That is the target to go to 200 megawatts in Europe. by the end of 2023.

Okay. Thanks, Yiming. And then I know I've taken a lot of questions, but can I ask another one on 23? You gave us the megawatts. I was wondering if you could kind of help us understand what the revenue might be for next year. If you have 400 megawatts being sold, I'm guessing that you could generate close to know 500 million dollars of revenue uh i know the china assets will be less but the european and the u.s assets should be close to a dollar so just curious if so maybe it's closer to 400 million are we in the right ballpark in terms of um uh revenue for 23. thanks we are not ready to give the 2023 detail forecast yet today but we will do it when we conclude the 2022 number

But in the meantime, we do know we'll grow. Not only we grow from these three acquisitions we talk about, the two acquisitions I'm talking about is really Branson IPP and plus the another 150 plus megawatts in Europe and plus the Ameren acquisition. Those three, as I mentioned, will contribute around $40 million top line revenue and also about $10, $15 million EBITDA in the year of 2023. Other pipeline sales, 400 megawatts, and plus other sales and the EPC activities will absolutely help both top-line and bottom-line, but we are not ready to release that number yet.

Okay. I can appreciate that. Thanks for taking all my questions, and I'll pass it on. Thanks, Yiming.

Thank you, Phil. Thank you. One moment for our next question. And our next question comes from the line of Amit Dayal from H.C. Wainwright, your question, please.

Thank you. Good afternoon, everyone. Congrats on all the progress. Just with respect to the 4Q guidance for 2022, does this factor in the monetization from China assets or will that be upside to the guidance?

It reflected a portion of it as we are closing the first portfolio of in China, and we are working on the second portfolio right now. So it represents the understanding of the first portfolio, which is to be closed very, very soon. So we know the number, but the second one is still in the negotiation mode.

That's not in the guidance, I guess, right?

That is right.

Okay.

Okay.

Thank you. Thank you. And then, you know, just looking at operating costs after these recent acquisitions and then moving more towards IPP ownership in Europe, et cetera, how should we think about operating cost changes going forward?

I mean, I think, first of all, for Brownstone, it's an operating project, so we don't expect a whole lot of operating cost increase. And for Emeron, we do have additional 22 people on our payroll. So, again, we only expect a small increase of operating costs. Again, I would say between 3.5 and 3.7. That's what we're expecting, quarterly.

Understood. Okay. And then, you know, with respect to these recent board changes, Is there any strategic implications from that that we should, you know, think about?

You talk about ownership change?

Yes. You know, with the new new board appointments, etc. I know you have pointed towards. Yeah, we do have incorporation, etc. You know, moving to the Delaware incorporation. Is that still in play, and what should we be reading into those types of implications from these changes?

Okay, let me answer the first part of the story, and then I'll go to Kikian about the next steps, which is in the process for access. The first one is we do have a bunch of changes. One is the ownership change. as we explained earlier, also from the press release last month or a couple of months ago. We did a share purchase from the Venezuela Limited Singapore and controlled by Mr. Lee, the founder of the company, 7 million shares. So Mr. Lee's ownership goes from 22% to about eight plus percent now at this time. So at the other side, the board has also appointed SAR Capital's managing director and CIO, Himanshu Shah, as our board chairman. In addition, we also restructure our committees of the board. On top of that, we are making more moves in different reasons considering how to refund, how to report to our investors. On the other side, especially on meeting the ICC demand or requirement, I'll let Ke to comment on this.

Yes, first of all, let me point out the business first. If you look at our revenues since 2020 and 2021, and now you will see that US, Europe business will account for majority of business this quarter, almost 80%. So that's our strategic decision about three years ago. We continue to drive the business in this direction. So this is in line with our shareholder structure change to focus on the U.S. and European market, which is the best market right now for renewable energy. And again, with Ximena Sharpe becoming the chairman, we are even more focused and clearly strategically driven shareholder value here. And also we are, again, to make the requirement to HCC requirement and also maybe again, became a U.S. fighter here going forward.

Understood. That's all I have for now, guys. Thank you.

Thank you, Ahmed. Thank you. And as a reminder, ladies and gentlemen, if you have a question, please press star 1-1 on your telephone. Our next question comes from the line of Donovan Schaefer from Northland Capital. Your question, please. Hey, guys.

Thanks for taking my questions. And sorry for some background noise. I'm at the airport right now. So the first question I have is just to be clear for the kind of lower revenue outlook for the fourth quarter. It seems like you were saying that it was not a matter of delays at a project level or push outs, but just it was a decision at the corporate level to retain them. So then there's lower revenue recognition. And was this an incremental, because you kind of hinted at this on the second quarter call, you know, desire to hold because of PPA pricing that, you know, made it more attractive to hold on to these assets. Was this an incremental kind of an additional tranche of assets you decided, hey, we're going to hang on to, here's an extra cluster of assets we want to hang on to in Poland and Hungary?

you are absolutely right that the for two reasons not only we see the demand in Europe and the PPA price going up but also as we are so active in Europe we want to be a local player operating the solar farms long term the definitely more importantly the solar farms owning the ownership as IPP player in Europe give us tremendous great economic returns from those deals. So literally speaking, about six months ago, the management decided not to sell those 110 megawatts in Q4 of this year, and instead will keep all of them. So we do have this plan to build them in the next, I would say, nine to 10 months, and The deals, the projects are under construction. A bunch of them are under construction now, and some are under financing now. But in any case, this will add the stable cash flow and significant good returns to the company. And as I also mentioned earlier, that the return changing from the sale, NTP sale to IPP, the payback is less than four years. And by the way, last four years, we already used a pretty conservative PPA price in merchant curve estimate in Europe, not really counting those $300, $400, $500 per megawatt hour.

Well, Donovan, a lot of reason for lower revenue is because currency impact of weak euro. So I just want to point out that.

Right, right, weak euro. Okay. And then I also wanted to ask, If you're seeing any kind of trends, you know, in some way kind of a follow-up on Phil's question about for the projects you do take to COD and sell or NTP, because, you know, of course, those are still potentially parts of the strategy. I think NTP is favored to COD, but that could happen sometimes. So when you're doing those sales, you know, I tend to think of NTP as often being kind of in a range of 10 to 20 cents a watt. And COD sales often, you know, in the U.S. and Europe are typically around $1 a watt. But so much has been changing. So I kind of just wanted to check in on that. If you've been seeing, we've talked a lot about PPA prices, but have you been seeing significant changes or trends for the ASPs when you're doing an NTP sale or you're doing a COD sale? I just want to get kind of an update there. I think you are... And maybe you could, if you're okay with sharing it, perhaps you could refer to the ASP you got on the Pennsylvania megawatts, if that's at all helpful. I know those are more sort of on the utility scale size, so maybe that's lower ASP than traditionally, but I think that could be useful as an example.

You know, in fact, I cannot really release the details on the project. For example, you mentioned Pennsylvania deal sales. In general, the smaller deals in some regions or some countries in Europe or U.S. normally enjoys a better per watt price. But big utility scale sounds like normally smaller per watt price will be lower. That's number one big concept. Another one is that the PPA price goes in normal cases, very high in Europe, which in turn drives the sales price very high. You are right, the COD buyer, COD payment, normally is in the one to $1.1 million per megawatt in Europe, or in the US, a bit different, when you put the structure of that tax equity into it. But in Europe, it's very easy to say that people are offering $1 to $1.2 million per megawatt. That's the typical price. And also on NTP, that could go as much as from, let's just use the per watt by cents, from 20 cents to 50 cents. It's really, really have a big range and vary from country to country. And also from the different functions of the solar farm for example in italy the industrial land the ntp sales price can be as high as three to four hundred dollars per megawatt okay now i'm sorry three to four hundred k thousand per megawatt but for farmland it is around 200k so And also in countries of Poland and Hungary, all those numbers can be different depending on the size, depending on the countries. But in general, all the average sales price go up in average.

Okay. Right. Because it's just sort of a lagging. It follows PTAs probably on kind of a lagging basis. Maybe less sensitivity. Yeah.

You know, Donovan, another good thing is that we do have noticed that the supply chain is coming down. And we do have, as we are continuously acquiring, procuring modules, and we do have seen the module price comes down in the last couple of months, and we forecast that starting Q2 next year, it will go further down. That will help our IPP initiative. also help driving our EPC activities more profitable.

Donovan, I want to add, for U.S. communities solar projects, the price is much, much higher than you just mentioned here. So, we also have community business here in U.S., so the pricing is pretty good right now.

Okay, great. And if I can just squeeze in one last question for the MRN, for the team, if I recall correctly, I think, Yumin, you used to work with a couple of these guys back at Recurrent, or that was before, I guess, Recurrent was acquired by Canadian, and you guys partnered with them back in July. Not this July, but I guess it would be a year and a half ago now. So it seems like you have a pretty good familiarity with them, and they were kind of, I guess maybe there's sort of two questions on this, where one of you could just kind of remind me, what the background is there that gives you some familiarity. And then two, what kind of, like there's a sort of a good match here because as I understand it, they kind of did this land grab move in Italy where, you know, you can put on down small sort of deposits with the land rights owners and whatnot to kind of secure the sites. But then there are these to go from early stage to mid or late stage, you need more meaningful cash to put down for deposits, interconnections and whatnot. So what kind of cash requirements will that have? You have a healthy cash balance, but it seems like that's part of what you're bringing to the party, if you will. So what would the cash needs be there to help advance these projects, say, over the next 12 months? 24 months, kind of however you want to frame it.

Okay. Let me address your question, two, three questions separately. One is, you are right. The founder of the company and a couple key guys in the company driving the development, finance, and legal all used to work for me when I run the email region for Canadian Solar. And they started the partnership with us back to 18 months ago, since summer of last year. We know them well, we absolutely trust their capabilities developing projects. The second point is that Italy is one of the top three solar market in Europe. We've been thinking to go to Italy and driving or hiring a local team and build up the local structure to develop this market, very important market. And that is why to the point when we partnering with Ameren, we believe it's better for them to join us. So that comes to the conclusion of the acquisition. Another point is that Italy, for Ameren's structure, they have five DSA partnerships. DSA really, Development Service Agreement. Literally speaking, that answers your question about cash flow. This company, Ameren, has a very unique structure of the development. All the projects, they have developed before we joined are to be allocated to the five DSA partners. And the DSA partners will pay Ameren based on the milestone achievements. Milestone zero, one, two, three. And as such, the cash need is pretty minimal. But at the same time, they do have the need in short term For example, for the land and some time interconnection, they do need some cash in the short term before we turn those to the DSA partners. And then after the acquisition, we decided not only we work with the DSA partners, other four, but also we will develop internally our pipelines. which is about 500 megawatts internal pipelines on solar side and also another 500 megawatts storage pipeline. That's storage, 500 megawatts, not 500 megawatt hours. So that is how meaningful we say this acquisition really is.

Okay, great. Well, thank you, Yimeng, and I'll take the rest of my questions offline. Thanks, guys.

Thank you, Donovan. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Pavel Machina from Raymond James. Your question, please.

Thanks for taking the questions. As you own and operate more power plants in Europe, I suppose you have to start thinking about these price caps in the EU and separately in the UK that governments are imposing on Is there any financial impact on any of your IPP assets from these regulations?

Great question, Pavel. I will say that the situation is still uncertain. We have news one day, news the other day, especially UK. The current news reflected to us we can't really say, affirmatively say, oh, it will not impact us at all. But we do have considered all those potential press caps. As I mentioned, Paolo, earlier, that we say our IPPs, we decided not sell, but keep in Portland and Hungary. The payback time is less than four years. And that is not based on the aggressive merchant curve Power price as a merchant curve price for the 23 24 are still 250 350 per megawatt hour But we use your own model pretty conservatively in consideration, especially on the potential price caps In UK the same thing we sign the long-term PP not long-term multi-year PPI for Breslin to secure a in the water and toll market a very good cash flow. And those PPAs, as we know by far, will not be impacted. And also they are reasonable, nice PPAs and should not be impacted by the U.K. to be executed price caps.

Okay, that's helpful. Turning to the U.S., opportunities. You know, like every utility scale developer are watching the ADCBD tariff saga and the restrictions on imports from China. So just to ask the question, in a general sense, are you having any difficulty importing modules for your assets?

I will turn this one to John, our North America CEO, but as you know, we do not do any procurement in the US, although we absolutely care about ADCVD case or any forced labor issues. John, please.

Yeah, I mean, I would just echo that. I think Yumin's answer is the answer, although it's the same thing as when COVID, you know, it's the same type of answer as when COVID started and pushed you know, supply chain prices up. We are somewhat insulated. And, you know, the value of the development slice, I still, you know, I maintain that I'm not saying it's a fixed component forever and ever, but it is a valued piece of the chain because you can't build solar projects without development. So we're somewhat insulated from it. I think insulated from it because we're not the procurer directly, but we're also insulated from it because in a competitive process, the NTP assets are valued and paid up for. Um, and some of that, you know, inflation probably, um, you know, makes its way to the PPA pricing. So the development slice is relatively protected, uh, on both ends. So.

Okay. And maybe just in, uh, kind of accounting question, given how much M&A and buyback you've done recently, can you give your cash balance as of, let's say, November 1st or December 1st?

Well, we actually have a very strong cash flow. We're collecting operating cash from the project we're selling this quarter. So our cash position is still pretty strong right now. Okay.

Appreciate it, guys.

Thank you, Paolo.

Thank you.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks.

Thank you, operator. We believe that our strategy is sound and our track record of execution is strong. We continue growing profitability. We are energized by the opportunities ahead and looking forward to updating you on our progress again in a few months. Thank you again for joining us today and for your continued support. If you have any questions, please contact our investor relations team. Wish you all a wonderful holiday season. This concludes our call today. You may all disconnect.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.