ReneSola Ltd (SOL) Q1 2017 Earnings Call Transcript

Ralph Fong - Director, Blueshirt Group Asia Rebecca Shen - Director, IR Xianshou Li - CEO Maggie Ma - CFO

Justin Clare - ROTH Capital Partners Maheep Mandloi - Credit Suisse

Hello, ladies and gentlemen. Thank you for standing by for ReneSola's First Quarter 2017 Earnings Conference Call. Following the presentation is a question-and-answer session. [Operator Instructions]. Please note that we're recording today's conference call. I will now turn over the call to Mr. Ralph Fong, Director of the Blueshirt Group Asia. Please go ahead, Mr. Fong.

Hello, everyone. Thank you for joining us on ReneSola's conference call to discuss first quarter results. We released the first quarter 2017 results earlier today and they are available on the company's website as well as from newswire services. You can also follow along with today's call by downloading a short presentation available on the company's website at www.renesola.com. On the call with me today are Mr. Xianshou Li, Chief Executive Officer; Ms. Maggie Ma, Chief Financial Officer; and Ms. Rebecca Shen, Director of Investor Relations. Rebecca will read Mr. Li's prepared remarks regarding ReneSola's operational highlights and strategy, and Maggie will then review our first quarter 2017 financial results in detail. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's Annual Report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statements except as required under applicable law. 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 Rebecca, who will translate Mr. Li's prepared remarks. Rebecca?

Thank you, Ralph. The following are Mr. Li's prepared remarks.

Thank you everyone for joining our call this morning. We appreciate your interest in ReneSola. I will begin our call with important strategic comments about the business and our performance, then Maggie Ma, our CFO, will present operating and financial details for the first quarter 2017 and provide guidance. We will then open the call to Q&A. Now let me quickly recap our Q1 2017 results. Please turn to slide 3. We reported revenues of 156.6 million for the first quarter of 2017 in line with our expectations. We shipped approximately 526 megawatt of solar products, down 17% sequentially and down 25% compared to the same period last year. The LED distribution business was solid with sequential revenue growth although at a slower pace as we had anticipated. Overall gross margin came in at 1.1% down sequentially and year-over-year. On the bottom line we reported a net loss of 23.2 million or a loss of $1.16 per ADS. EBITDA of 2.7 million declined over 90% year-over-year. Let me now update you on our project development efforts. Downstream projects remain a sizeable opportunity globally and equipment manufacturers like us have a natural advantage in designing and developing projects. I'm excited that we continue to gain traction in developing a robust pipeline of future projects across different geographies. We now have over 1.4 gigawatts of projects in various stages of development. Our shovel-ready pipeline featured 613 megawatts in multiple geographies including the U.S., the UK, Turkey, China, Japan, Canada, France, and Poland. In addition we have approximately 270 megawatts of projects under construction and over 550 megawatts we expect to be built in 2017. This provides you with a sense of the size of the coming monetization opportunity of the project assets. The UK remains one of our key developed market. The recent activities continues the high level competitive advantages there. In Q1 we connected to ground mounted projects in the UK with a combined capacity of approximately 10 megawatts. Both projects are under [1.2] [ph] programs with revenue expected to be recognized in Q2. The U.S. continues to be a large and robust market for us. We have approximately 100 megawatts of shovel-ready projects of which 70 megawatts are community solar projects. The projects are located in California, North Carolina, and Minnesota. In Q1 we signed agreements to sell two solar projects in Massachusetts with a combined capacity of approximately 1.3 megawatts and 6.75 megawatts utility-scale projects located in North Carolina. We expect to recognize revenue from the service of this project in Q2. We're looking to sell the project [rates from some of our] [ph] community solar pipelines before construction which we believe is the more profitable project which should help [Indiscernible]. We won 13 solar utility projects in Southern Poland each with an installed capacity of 1 megawatt. The projects are eligible for guaranteed tariff and a 15 year power purchase agreements and are expected to be connected to the grid by December 2017. In Canada we intend to construct approximately 9 megawatt, small scale utility projects under the FIT3 program in 2017. These projects are expected to be connected to the grid in August this year and April of 2018. In Turkey we have 16 megawatts projects under construction. All of the projects are unlicensed thus qualifying for the feed-in tariff of 134 per megawatt hour. In our domestic market of China we are continuing to see an opportunity for smaller projects with more attractive economics. As discussed smaller installations on commercial, industrial, and residential buildings can be cost competitive for the building owners, provide good IRAs, and get the support of the Chinese government. As of June 2017 the company had approximately 307 megawatt solar wafer projects in the shovel ready stage in China. All the projects are on file with the National Development and Reform Commission and the company has obtained legal rights to develop these projects. The projects are located in the Eastern and Central part of China. We intend to commence construction of all of these projects with the current calendar year. We're working with multiple institutions such as China Resources, China Power Investments, [Indiscernible] etc. regarding the financing of these projects. Now let me shift gears and talk about LED business. We remain confident that we will be able to develop a solid LED distribution business by leveraging our global footprint and brand equity. It's an exciting new opportunity for us which we expect will create an accelerated growth on top of project development. As I mentioned earlier on this call, the LED business delivered good financial performance in Q1. We saw sequential revenue growth with a gross margin of nearly 31% and had approximately 4,319 customers as of March 31st. The energy efficiency market is a large and growing market and the LED lighting is a critical element. We are continuing to expect this market to further expand as energy efficiency retrofit growth as a trend around the world. We are continuing to position ourselves to capture this opportunity in the years ahead. Moving on let’s discuss another key strategic objective and that is generating cash and paying our debt. Our total debt increased by 54 million in Q1 and the increase was largely due to an increase in [build] [ph] discounts. However we remain committed to reducing our debt and are confident that we're going to achieve that for the remainder of 2017. We are continuing to streamline our operations with high cost control during down cycles while we take a cautious approach to spending in a number of areas. We do plan to invest 15 million this year to replace our current manufacturing equipment with [diamond] [ph] wire cutting technology. We believe this will increase wafer capacity by 200 megawatts to reduce silicon usage thus lowering our overall production cost. In summary Q1 results were generally in line without expectations. As we continue to gain traction with our downstream project efforts and LED distribution business offset by challenging market conditions for the solar product business. We are continuing to execute our strategy to shift our business focus from manufacturing to downstream project development. We remain excited about the progress we're making. For Q2 we expect downstream projects to increase relative to Q1 as a result of continued growth in the project pipeline and solar execution in the project monetization.

Before I turn the call over to Maggie I would like to take a minute to cover one other topic and that is the proposal from Mr. Li regarding company's manufacturing and LED distribution business. The company's Board of Directors have given the preliminary non-binding proposal dated June 13, 2017 from Mr. Xianshou Li, the company's Chairman and Chief Executive Officer, to acquire the company's manufacturing business including polysilicon, solar wafer, and solar module manufacturing and LED distribution business and [assumed] [Ph] related investments. The proposal estimates the value of both the manufacturing and LED distribution business [neither have] [ph] assumed investments to be approximately negative 81 million. The proposal also contemplates the exchange [Indiscernible] assumption by Mr. Li of such investments. The company would issue additional ADS each representing 10 shares of the company to Mr. Li at $4.50 per ADS. If the transactions contemplated by the proposal are consummated, the company's remaining business would be focused primarily on solar project developments. The Board has formed a special committee consisting of Mr. Martin Bloom, Mr. Tan Wee Seng, Ms. Julia Xu, and Mr. Weiguo Zhou each an independent Director to consider the proposal and other alternatives available to the company and has granted a special committee the authority to consider review, evaluate, and if appropriate negotiate a strategic transaction on behalf of the company in order to maximize shareholder value. The special committee will conduct this process with assistance of financial advisors and legal counsel. Now let me turn the call over to Maggie for details on our financial performance. Maggie.

Thank you Mr. Li and Rebecca and thank you everyone for joining us on the call today. I will review our operations and financial performance for the first quarter 2017 and discuss our outlook. Let's begin with slide 4, revenue of 157 million for the first quarter was down 33% sequentially and down 40% year-over-year. Q1 revenue came in better than our guidance of 130 million to 150 million. The year-over-year decline was largely due to lower solar product pricing and fewer product shipments to external customers. As we had anticipated cost and profit of 1.7 million declined 65% sequentially and 96% year-over-year. Q1 gross margin remained under pressure at 1.1% down from 2.1% in Q4 2016 and 17.1% in Q1 2016. The sequential decline in gross margin was primarily due to lower module AFPs as well as annual maintenance of polysilicon plant. Operating loss for the first quarter was 17.8 million compared to operating loss of 21.8 million last quarter and operating income of 12.2 million in the prior quarter. Operating expense for the first quarter of 2017 were 19.5 million down 27% sequentially and down nearly 40% year-over-year. Decreasing operating expense in the quarter was largely attributable to high cost control initiatives that were put in place across the entire company coupled with the reverse of the warranty expenses. Sequentially SG&A expense decreased to 39% and R&D expense decreased 30% when compared to the same period with the last year. As discussed we are taking a cautious approach to spending in a number of areas. In particular we remained profitable in managing our discretionary expenses across the companies. Below the operating line now operating expenses of 9.1 million includes net interest expense of 8.9 million and loss on derivatives 0.3 million partially offset by foreign exchange gain of 0.2 million. Net loss for the first quarter was 23.2 million which compares to a net loss of 25.5 million in Q4 of last year and a net income for 5.7 million in the same quarter last year. Loss per ADS was $1.16 a quarter compared to loss per ADS of $1.26 in Q4 of last year and earnings per ADS for $0.06 in the prior year quarter. Slide five provides a summary of the key line items of our income statement over the last several quarters. Please turn to slide six which highlights portion of our balance sheet. Cash and equivalents include the restricted cash was a 144.4 million at the end of the first quarter up from 133.2 million at December 31, 2016. During the quarter the company increased the total debt by approximately 54 million to 679 million, the increase was largely due to an increase in bill discount. Our long-term objectives to reduce debts remain intact and we strongly believe that each dollar for debt and reduction will yield a similar increase in the value of the company's equity. Slide 7 highlights those recent trends of working capital efficiency. Day sales outstanding in Q1 increased to 84 days from 59 days in Q4 based on the inventory increased to 93 in Q1 from 61 in Q4. Before I move on to our product sales in Q1 I want to reiterate that our financing team remains focused on improving our balance sheets and we are happy with continuous progress the team made in the past several quarters and see opportunities to further reduce debt in coming quarters. Now let's move on to the details about our project pipeline. Slide 8 shows our recent history of project sales including few commercial and a one utility scale projects in the U.S. in Q1. Slide 9 shows our geographic footprint and slide 10 projects our project pipeline by country. As Mr. Li mentioned we now have a pipeline of over 1.40 gigawatts of projects in various stages of the development. Our shovel ready pipeline features 613 megawatts across different geographies as shown on slide 10. In addition we have a approximately 270 megawatts of projects under construction. Slide 11 summarizes the results for LED business. We continue to grow LED revenue in the first quarter although at a slower pace than in Q4. Revenue was 9.6 million in Q1 up from 9.3 million last quarter. The slow sequential growth in revenue was largely attributable to short-term adjustment to product offering coupled with the international management in the quarter. Gross margin was approximately 31% in Q1 up from 26% in the prior year quarter. We remain optimistic about the growth prospects for the LED business. As of end of March we have about 4390 customers. We believe we can leverage our brand name and global distribution footprint to build an attractive, high margin business. The LED business accounted for over 6% of our total revenue in Q1 and we anticipate a meaningful revenue contributions from the business overtime. Now let me summarize our module and wafer product shipments in the quarter shown on slide 12. In Q1 total eternal module shipments were 267 megawatts down 19% sequentially and down 24% from a year ago. The year-over-year decrease reflects our ongoing exits from the OEM business as we transition our business model to focus on project development. Total wafer shipments were 260 megawatt down 15% sequentially and down 26% from the same period the last year. As anticipated our income manufacturing costs for loss [ph] in Q1 was $0.35 due to declines in processing and silicon costs. We expect the in-house costs to further decrease in the remainder of 2017. The pie chart highlights the geographic breakdown of module shipments in the first quarter. We saw a significant increase in demand from India in Q1 representing 42% of total shipments up from 6% in Q4. Demand in China declined in Q1 which represents 37% of total shipments down from 69% last quarter. Japan remains an important market for us representing 6% of total shipments in Q1. Demand in Europe rebounded in Q1 which made up 11% of the shipments up from 1% in Q4. The U.S. accounted for less than 1% in the quarter similar to Q4 levels. Our module ASP decreased to $0.37 per watt in Q1 2017 from $0.40 per watt in the fourth quarter of 2016. Compared to prior quarters we did not ship much to the U.S. in Q1 which typically has higher pricing. Finally we conclude with guidance which is on slide 13. In the second quarter of 2017 we expect revenue to be in the range of 180 million to 200 million. External wafer shipments in the range of 220 megawatt to 240 megawatt and external module shipment in the range of 230 megawatt to 250 megawatt. On the downstream business front we expect downstream projects sales to increase in Q1 relatively to Q1. The Q2 revenue guidance also reflects our expectations that we will be redirecting more external module shipment to downstream projects. For the full year 2017 we will maintain our revenue guidance range of 900 million to 1 billion. We would like now to open up the call for any questions that you may have for us. Operator, please go ahead.

[Operator Instructions]. The first question is from Justin Clare of ROTH Capital Partners. Please ask your question.

Hi everyone, thanks for taking my questions. So first I was wondering if you could help us understand the process for evaluating the proposed strategic transactions, what are the steps in the process and what is the expected timing? And if you could address whether there'd be -- there will be a shareholder vote and if you need to get approval from your lenders for the transactions, that would be helpful.

You know that the company has just received the proposal from Mr. Xianshou yesterday and the special committee has just formed yesterday. So right now it's hard to tell how long it will take but I think with Legal Counsel assistance the special committee will come out with the procedure steps and the timeline as to when it’s possible.

Okay, great. So I was wondering if you could share how much debt is associated with each of your businesses and then how much would remain with ReneSola as a listed company if the proposed transactions are completed? And then if you could also talk about how cash would be allocated? So I'm interested in the gross debt and the net debt for each of the businesses?

Regarding the bank loan you can see that actually most of our loan is for manufacturing business. So, as of the end of Q1 there's about only 5% of our debt is related to the project. So the rest 95% is related to manufacturing.

Okay so I just wanted to see that again on this particular question is very important, as you understand it now do the debt holders need to approve the transactions or not debt holders but your lenders…?

It's not known yet. The special committee has just formed yesterday so it's still under evaluating.

Okay. Maybe one final question for me then, so you had previously talked about selling 440 megawatts of projects in 2017, can you just update us on that view and share how many megawatts you might sell by quarter?

How many megawatts of projects we would sell?

Yes, exactly.

In this year, right?

Yes.

It’s like for Chinese projects we are to sell like 60 to 80 megawatt in the coming two quarters. And for the overseas project we’re to sell 100 to 130 megawatts in this year.

Okay, it looks like it will be less than 200 megawatts plan for sale this year then?

Right.

Okay, alright. Thank you very much.

You’re welcome.

The next question comes from the line of Maheep Mandloi from Credit Suisse. Please ask your question.

Hi, thanks for taking the question. Could you just talk more about the privatization bid [Indiscernible] could you explain what was the rationale behind the 4.50 offer for the manufacturing business?

Hold on a second, Maheep, the company has just got a proposal from Mr. Li so it is from Mr. Li’s proposal. Right now we do -- the special committee still needs to with assistance from some financial advisors to evaluate this price.

Okay, on the cash – sorry, go ahead.

The 4.50 pricing is based on Mr. Li’s own financial advisor. So we cannot comment on that pricing yet.

[Indiscernible] cash, I mean you did say 5 plus [Indiscernible] is project debt but how much cash would you have say if this transaction goes to next quarter, so how much cash will you have [Indiscernible]?

How much cash will we - yeah, I think this is the same as the previous question raised by Justin. It's like as I said as of the end of Q1 the debt belong to the manufacturing business accounted for like over 95% of our total debt.

On the cash side, is it the same?

Yes, the cash is -- all I would like to tell you at the end of Q1 actually the project assets amounted to like 80 million at the end of Q1. So most of our overseas projects are for BT models. So those can be so monetized to cash.

Okay, yes, that makes sense and just a question on Q2 guidance for wafer and module shipments. Is the lower guidance because of the higher shipments to your downstream business or lower production in general?

You mean for the second quarter there's a lower to external right, there will be lower shipments too. I would say that for our quarter there will be like 230 megawatts to external customers and the rest will go to our downstream business.

Thanks for taking the question.

You’re welcome.

Your next question comes from the line of John Fredrick [ph]. Please ask your question.

Hi, I think it's sort of going to answer it but just maybe if I take a crack at it one more time so, under that proposal if the value of the business plus debt is negative 81 million are you saying that 95% of the debt would move over, that's how much debt is being assigned to the transaction?

Yes.

Yes, okay. And then in addition the company would issue shares to Mr. Li. Mr. Li will be paying 4.50 per share for every outstanding ADS that exists at the company, so that's how much cash would be coming into the new entity?

No, there will be no cash coming to the new entity.

Okay, so when you're saying you are issuing him shares at 4.50, there's actually no cash coming in, it's just a dilutive transaction for the existing shareholders priced at 4.50? Maggie M&A: The company will issue shares directly to Mr. Li because he takes over negative assets if the transaction was --

So he takes all the assets since the debt and you're going to give him extra shares on top of that and that's a transaction, that will be priced at 4.50 but no cash would come in?

Right.

Got it, okay, thank you so much.

[Operator Instructions]. Seeing no more questions in the queue let me turn the call back to Rebecca Shen for closing remarks.

Thank you Operator and let me make some closing remarks on behalf of Mr. Li. I want to reiterate our commitments to shareholders who are the owners of the company and our partners. I'm optimistic about our opportunities in 2017. We're working diligently to create what we believe is the fastest and safe profitability. Project development remains our focus while we also continue to deliver high quality power products. In the meantime we will focus on high cost control, cash generation, and further strengthening our balance sheet. That concludes our call today, you may all disconnect.

Thank you. Ladies and gentlemen this concludes your conference for today. Thank you for participating and you may all disconnect.