ReneSola Ltd (SOL) Q4 2017 Earnings Call Transcript

Ralph Fong - Director, The Blueshirt Group Asia Xianshou Li - Director and Chief Executive Officer Weiguo Zhou - Interim Chief Financial Officer Doran Hole - Group Vice President of Strategy Xiaoliang Liang - Vice President of Investment and Financing Johnny Pan - Director of Investor Relations

Justin Clare - ROTH Capital Partners Philip Shen - ROTH Capital Partners

Hello, ladies and gentlemen, thank you for standing by for ReneSola's Fourth Quarter and Full-Year 2017 Earnings Conference Call. Please note that we are recording today's conference call. I'll now turn over the call to Mr. Ralph Fong, Director of The Blueshirt Group Asia. Please go ahead, Mr. Fong.

Thank you, operator. Hello, everyone. And thank you for joining us on ReneSola's conference call to discuss fourth quarter results. We released fourth quarter and full-year 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 renesolapower.com. On the call with me today are Mr. Xianshou Li, Chief Executive Officer; Ms. Weiguo Zhou, Interim Chief Financial Officer; Mr. Doran Hole, Group Vice President of Strategy; Mr. Xiaoliang Liang, Group Vice President of Investment and Financing; [Ms. Jessie Huang], Director of Financial Reporting; and Mr. Johnny Pan, Director of Investor Relations. Johnny will read Mr. Li's prepared remarks regarding Renesola's operating highlights, and Weiguo will then review our fourth quarter and full-year 2017 financial results. Before we continue, please note to that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are mainly related to the Company's continuing operations and you may not be able to compare such information with the Company's past performance or results. 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 statement 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 Johnny, who will translate Mr. Li's prepared remarks. Johnny?

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

Thank you, everyone for joining our call this morning. We appreciate you interest in ReneSola. So it get started, I will make some important strategic comments about the business. Our performance and reviews operating highlights then we will go to our Interim CFO, who will cover the financial results for the fourth quarter full-year 2017 and provide 2018 guidance. We will then open the call to Q&A. 2017 was a transformative year for us. We exited the manufacturing business becoming a pure play in the fast growing project development markets with that. So fundamentals for our project business have improved tremendously. We achieved a profitability and maintained a healthy balance sheet, providing the financial flexibility to drive all our growth. Our operating results of the continuing business in Q4 were largely in line with our expectations. On a year-over-year basis, Q4 revenue grew 60% and operating income was up over 136%. We are very pleased with our overall Q4 results. Our overall solar power project pipeline remains strong at around 1.1 gigawatts. We continue to execute our downstream strategy and resulted to pursue opportunities in small-scale solar projects in diversified regions. In 2017, we are successfully connected 270 megawatts of solar rooftop projects in China and continued to expand our global reach. I will go over our geographic coverage in just a few moments, but I am very excited that we successfully entered the Hungarian market with the pipeline of 38.4 megawatts. The project portfolio in Hungary compared to number of Micro project, which [indiscernible]. This fits well with our overall downstream strategy to pursue opportunities in small-scale projects. As we discussed previously, there are several factors on why we focused on business market. First, small-scale projects are supported by the Government in [indiscernible] jurisdiction, including China, Poland, Turkey, Canada, and Hungary and so on. Second, compared to last year utilities projects, small-scale projects are usually secured with higher PPA price and thus bringing higher returns. Third, small-scale projects especially rooftop projects show more flexibility compared to ground-mount projects as the electricity generated for those projects can be end users directly in all the centers with less transmission loss. Fourth, unlike large scale projects, good value can be created by significant amount of capital investment, low cost of financing, economics or scale can be achieved for EPC activities It is possible to drive significant value in small-scale project in the earlier development stage. For instance, to secure the project plan close to interconnection points with and quality electricity users. It is difficult to create value in EPC activities for small-scale projects, due to small project size and fragmented EPC markets. ReneSola as they experienced global project developer can leverage its development expertise in this niche market. ReneSola currently announce and operate 212 megawatts of solar assets. Our assets are geographically diversified, giving us an attractive risk profile. Over the 212 megawatts of assets, we operate 187.3 megawatts of rooftop projects in China, 15.4 megawatts in Romanian and 9.3 megawatts of rooftop projects in United Kingdom. We now have approximately 28 megawatts of China rooftop projects under construction. We anticipate owning 350 megawatts to 400 megawatts of rooftop projects in China by the end of 2018, 150 megawatts to 200 megawatts of which are new additions in 2018. Our current operations are strong and our pipeline remains large. We have a robust pipeline of future projects across different geographic regions in various stage of development. Our late-stage pipeline features 546.5 megawatts in the U.S., Turkey, Canada, Poland, Hungary, and China. Our early total pipeline features power projects around the world, bringing total capacity to approximately 1.1 gigawatts in addition. We are actively pursuing opportunities in other markets including Spain, France, South Korea and India. Now turning your attention to our downstream efforts in several key geographic regions. First, China, the rooftop markets in China remains a solid and lucrative opportunity for us. Rooftop solar provides steady cash flow, attractive IRRs and reduced risk of curtailment or subsidy delays. On the market side, the Chinese governments have received several supporting policies to encourage DG projects on April 13, 2018. National Energy Administration published our policy to formalize the regulation and managements for DG market and to encourage net-metering project. The quality also allows permitted or licensed to gross-metering project to be connected within the permitting period. We think the market expectation is that unconnected growing metering projects would be expired immediately. On April 17, National Energy Administration published a document - to establish electricity's power trading market. The power price of electricity in certain province are higher than the solar IT rates which is good news for the DG markets. April 21, National Development and Reform Submission released 2018 new installations for DG markets, which grew tremendously. The country connected a 7.7 gigawatts of DG projects in Q1, grew 217% on year-over-year basis. So 2017 full-year new installation for China DG projects was 19.4 gigawatts. We now have over 187 megawatts of rooftop under operation, concentrated in a handful of eastern provinces with attractive development environment, including Zhejiang, Shanghai and Jiangsu province. Those are the most developed regions in China. Commercial and industry electricity users in those areas are initially creditable enterprisers, whom we considered to the ideal net-metering electricity off takers. As I mentioned earlier, we anticipate on 350 megawatts to 400 megawatts of solar rooftop project in China by the end of 2018. In the first quarter of 2017, we connected 76.8 megawatts of rooftop projects in China, which we intent to hold. In 2017, we connected 270 megawatts of rooftop project in total. Going forward, we intend to continue to pursue opportunities in China DG markets under net metering scheme especially those commercial and industrial rooftop was higher PPA price, thus less reliance on subsidies. Our steady to folks on the China rooftop market is favorable. Our efforts in the market there have enabled us to become the only U.S. listed company leverage to the large and growing China rooftop opportunity. On the financing front, we have built solid relationship with a number of financing institutions to fund the projects. In addition to that we are now in late-stage discussion with the strategic investor to form a partnership to co-own our China DG Holdco. So investor plans to inject RMB 200 million in cash into our China DG Holdco, in exchange for minority interest of the Holdco. We are hoping to finalize the details of our partnership later in a few days and we are updating the market one we have market share on that one. Beyond this, we are also actively on continuously engaging our potential strategy investors to fund our IPP business in attractive China DG market. The U.S. continues to be a large and important market for us. We will have over 188 megawatts of late-stage project, of which approximately 45 megawatts is community solar in multiple states, including Minnesota, Massachusetts, and in Europe. Additionally, we are also pursuing small utility scale project in Utah, Oregon, Europe, Texas, and in California. In Canada, we have 18.8 megawatts of late-stage project, which are under construction in the current quarter. These projects are eligible for FiT3 price higher than CAD 0.28 and FiT 4 with price higher than CAD 0.18. In Poland, we're awarded 55 megawatts projects from the government auctions last year, each will size to one megawatt. 14 megawatts of these projects are under construction and we expect them to be connected to the grid in Q2. In Turkey, ReneSola holds 50% of the economics were up approximately 120 megawatts of projects pipeline, of which 10.4 megawatts is under construction was better secured. As discussed previously, we connect our total of 12.6 megawatt of ground-mount projects in the third quarter of 2017, 8 megawatt of which was sold and revenue recognized in the first quarter. [Third] of remaining 4.6 megawatts will be recognizing in the first half of 2018. We were selling remaining interest in the Turkish pipeline and exit Turkish market. In France, we formed a strategic partnership with Green City Energy, to jointly develop solar parks, and also in France with total installed capacity of 69 megawatts, generating approximately 105 million kilowatt hour of solar power per year. In addition, we awarded 16 projects in resin tender with the combine capacity of 4.65 megawatts in the first quarter of 2018. In addition to those geographic I just mentioned, we are actively pursuing opportunities in market including Spain, South Korea and India. For instance, in India, we have earlier stage of pipeline of 162 megawatts as you see we have geographically diversified portfolio and I am very excited about opportunities we are going after. Before I turn the call over to Weiguo, I would like to reiterate our business model and strategies. In China, we implement IPP model for DG projects, given that results in high margin recurring revenue. As I mentioned earlier, we were oppose on the well-developed eastern province and the select high qualities rooftop under commercial and industrial electricity users. Overseas, we implement an asset-light project development model, involving earlier development stages to sell project rights and shovel-ready [indiscernible] greater connection. We have achieved a very high gross margin in the project right there. We are expecting significant profit derived from overseas project, development business, thus accelerating our China DG IPP business. In summary, downstream projects represent a large opportunity globally and I am excited about opportunity ahead of us. We have a strong team in place and as team continue to exclude. We successfully connected a total of 76.8 megawatts of projects in China and generated 22.6 million kilowatt hour of electricity from DG solar projects in China in Q4. We currently have over 92 megawatts of projects under construction globally. We believe that our talent team, diversified the geographic coverage and the track record of success at every stage of project development will position us for profitable growth. With that, let me now turn the call to Weiguo for comments on our financial performance. Weiguo?

Thank you, Mr. Li, and Johnny, and thank you, everyone for joining us on the call today. This will be my first exposure to many of you. I look forward to meeting and speaking with all of you in the near future and I would encourage you to reach out as appropriate. I have been on the ReneSola Board of Directors since 2016, and I am very familiar with the Company, its leadership and the opportunities and the challenges before us. Note that unless otherwise specified, the results presented during the call exclude the discontinued operations. Discontinued operations relate to the Company's manufacturing business and LED distribution business which were disposed of in the third quarter of 2017. Note that the Company's full financial results including discontinued operations are not available at this time. I will now review our financial performance for the fourth quarter and the full-year 2017 for the continuing business and to discuss our outlook. For the fourth quarter, revenue was $64.8 million was up 61% year-over-year. This compared to our guidance of $55 million to $60 million. Revenue from the project development business in the quarter was $44.4 million as we recognized revenue from the several part sales, including 44.2 megawatts of rooftop projects in China. 13.3 megawatt of community projects in the U.S. and 8.1 megawatt of utility projects in Turkey. Revenue from the EPC business was $15.4 million as we recognized revenue from the provision of EPC service of 25 megawatts rooftop projects in China. Electricity sales were $5 million. As Mr. Li mentioned, the Company generated 22.6 million kilowatt hours of electricity from these operating project in China in Q4. Full-year 2017 revenue was $103 million, up 28% when compared to last year. Revenue from the project development business was $64.8 million, revenue from the EPC business was $25.9 million, electricity sales was $12.3 million. For the fourth quarter, gross profit was $6.8 million was up over 70% year-over-year, gross margin was 10.5% within our guidance range of 10% to 15%. Gross margin from the electricity sales was 49.8% in line with our expectation of 48% to 53%. Full-year 2017 gross profit was $14.1 million, up 95% year-over-year. Gross margin for full-year 2017 was 13.7%, up from 9% in 2016. Q4 EBITDA was $4.7 million and full-year 2017 EBITDA was $11.6 million. Now let's turn our attention to operating income. For the fourth quarter operating income was $4.9 million, compared to operating income of $2.1 million in the same quarter last year. Operating margin was 7.6% compared to 5.2% in the same period of last year. Fourth quarter operating expenses were $2 million down sequentially from $2.5 million in Q3 2017 and up from $1.9 million in Q4 2016. Sales and marketing expenses were $0.6 million, largely flat when compared to Q3 2017. General and administrative expenses were $1.7 million, down from $1.9 million in Q3 2017. Full-year 2017 operating income was $6.6 million, up from $2.3 million in 2016. Operating expenses were $7.6 million, up from $4.9 million in 2016. Sales and marketing expenses were $1.7 million up from $0.5 million in 2016. General and administrative expenses were $6.2 million, down from $6.8 million in 2016. Below the operating line, fourth quarter non-operating expenses of $2.9 million included exchange expenses of $1.1 million and foreign exchange loss of $1.7 million. Full-year 2017 non-operating expenses were $3 million, which includes interest expenses of $3.9 million and foreign exchange gains of $0.9 million. For the fourth quarter, income before income tax and non-controlling interests from continuing operations was $2 million, compared to $4 million last quarter and $1.7 million in the same quarter last year. Full-year 2017 income before tax and non-controlling interest from continuing operations was $3.5 million, up from $2.2 million in 2016. Now let's turn to our balance sheet. The Company had cash and cash equivalents of $13.4 million as of December 31, 2017, compared to $5.2 million as of September 30, 2017. Long-term borrowings were $32.5 million as of December 31, 2017, associated with the Romanian projects. Other long-term liabilities were $77.5 million as of December 31, 2017, associated with the financial leasing payables for rooftop projects in China. Finally, we conclude with our guidance. For the first quarter of 2018, the Company's project business is expected to generate revenue in the range of $30 million to $35 million with overall gross margin in the range of 15% to 20%. The Company expects to connect 5 megawatts to 10 megawatts of DG projects in China, and to monetize 5 megawatts projects in international markets during the first quarter of 2018. For 2018, the Company expects revenue to be in the range of $130 million to $140 million and overall gross margin in the range of 20% to 25%. The Company intends to connect 150 megawatts to 200 megawatts of DG projects in China, and to monetize 50 megawatts to 70 megawatts of projects in conditional markets. With that, we would now like to open up the call for any questions that you may have for us. Operator, please go ahead.

Thank you, sir. [Operator Instructions] Your first question comes from the line of Justin Clare from ROTH Capital Partners. Please ask your question.

Everyone, thanks for taking the questions. So first off I wanted to start with the guidance. Can you share what the expected revenue mix is between electricity sales, project sales in the EPC business for both Q1 and for 2018?

[Foreign Language]

We will have - the project develop business comprises about 25% of the total revenue in Q1. And we will have around 60% of revenue coming from project development was at 2018 full-year. For IPP, we will have over 10% for Q1 and over 20% for the full-year.

Okay. And then the EPC…

No, it's IPP. We have some revenue recognized for the UK project that we sold in 2015.

I see, okay. And then also on the guidance, can you also share what your expectations are for the gross margin for electricity sales versus the project sales? If you can share for both Q1 and 2018 that would be helpful.

So for Q1 the gross margin for the IPP business we are expecting around 40% project in spring. So solar radiation is slightly lower than summer. The IPP gross margin for the full-year, we are expecting to be 50% to 55%.

Okay. And then what about for the projects that you planned to sell in Q1 and the projects that you planned to sell for the full-year? Can you share what the gross margins might be for those?

We expect the gross margins to be over 10% - around 10%, both for Q1 and 2018.

Okay. Got it. So then moving to the capital that you're going to need to develop the projects for 2018, you've talked about adding 150 megawatts to 200 megawatts for the balance sheet. Can you share what you expectations are for the total capital that you'll need, and then also how you plan to fund that capital expense in terms of how much debt - how much equity you may need, and I know part of that may come from the strategic investments, but could you help us understand how that all play out?

[Foreign Language]

So for the DG market, if we connect 200 megawatts in China, we would need RMB 1 billion and around 70% of them were coming from the project finance. So we need around RMB 300 million as equity. We currently have a strategic investor who would like to inject RMB 200 million in a few days. And we are planning to continuously looking for strategic investors in the next half of 2018.

Okay. All right. Got it. So thinking about the strategic investors, I know the deal is not done yet, so you may now be able to share much here. But just wanted to ask, can you talk about how much you might be considering for sale in terms of the China DG Holdco, what percent of that subsidiary might you sell? And then for your project with the strategic investment be for all of your current operational projects and all future projects that would be put into that Holdco or would it just be for operational projects right now?

[Foreign Language]

Hey, Justin. We expect to give the strategic investor 40% - around 40% of the Holdco shares. And Holdco operating assets are reconnected and so late-stage pipeline.

Okay. Got it. So one other thing I wanted to understand here then I can pass it on. The financing in China, if I look at your balance sheet right now, it doesn't look like you have any project that associated with your operational Chinese projects. Can you talk about - do you have the ability to add project that to those projects and if so why have you not done that already?

[Foreign Language]

Hey, Justin. Actually, we do have project finance in the balance sheet. We have $67.5 million on the balance sheet as a long-term liabilities that's for financial leasing payables for rooftop project in China.

Okay. So that's where that is. Okay, got it. That will do it for me. Thanks for answering the questions. I'll pass it on.

Okay. Thanks.

[Operator Instructions] Your next question comes from the line of Philip Shen from ROTH Capital. Please ask your question.

Hi, Philip.

Hi, everyone. A very quick question here, in terms of the China DG market, last year, I think the size of the market was 19 gigawatts. What do you think the size of the market could be in China for DG in 2018?

[Foreign Language]

Hi, Philip. Mr. Li forecasted it's around 20 gigawatts for the 2018 full-year.

Okay. So he doesn't see much growth there. So he thinks - because I think the Q1 DG interconnections were up meaningfully over the last year's Q1, maybe up 200%. So do you expect it to slowdown in Q2, Q3 and Q4? And why doesn't he see some more growth in 2018?

[Foreign Language]

Hey, Philip. Mr. Li think the Q1 figures of new installation is not so creditable because solar installation has seasonalities in spring, in winter. During winter or spring, we won't install a lot. The reason why the Q1 figures are so high maybe because of the project that were rushing for December 31, last year. They are late for the connection. So they are connected in Q1. So Mr. Li thinks conservatively about new installation in the following quarters because the government limits the new installation for gross-metering scheme, and gross-metering projects will have quarter under the management of the NDRC. And Mr. Li also thinks the interest rates in China will remain high in the following quarters.

Okay. Great that's helpful. What are the one in terms of the deadlines for the traditional utility scale projects historically or in the past, the deadline to receive the 2017 or the prior year presenter was June 30 of the following year. It sound like the rumors that deadline could be pulled to December 31. So this year I think there is a rush by June 30% 2018 to receive the 2017 presenter, if they pull forward that I guess the question is that you think the deadline for June 30, 2019 will be pulled forward to December 31, 2018. So in China, could we see two different rush periods in 2018?

[Foreign Language]

Hey, Philip. Mr. Li thinks in this year 2018 some market shows relatively lower demand than last year or before. Don't thing as a market where rush for June 30 or December 30 in 2018.

Can you ask him to explain why there is no rush this year?

Because of low demand for the projects.

And is that caused by the financial buyers or the banks slowing down there activity investing in the sector was the cause at the lower demand?

[Foreign Language]

Hey, Philip. Mr. Li think reason one will be [banks] because the interest rate is hiking and signalize reducing bringing down the project written and third line is the government where reject scale of solar projects.

Okay. That's really helpful. And then one other question here. Of your operating assets, I think you have 187 megawatts for China DG. What percentage of that is receiving the full presenter today? So for example how much are you receiving all the cash of those DG project right away if not what percentages weighting and then how long do you think that way could be?

[Foreign Language]

Hey, Philip. We have around 50% of operating assets located in Zhejiang, Shanghai, and Jiangsu province. In those three provinces, we received full subsidies. As far [RS], we only received the price for the electricity not for the subsidy.

[Foreign Language]

We are expecting two years to three years delay for those with subsidy delays.

Okay.

And in 2018 we focused to develop projects in Zhejiang, Jiangsu, and Shanghai. As we are based in Shanghai and we are - our factories was in Zhejiang province. We have a lot with our Zhejiang enterprises.

Okay. So of the 500 were actually for China, I think it's 125 megawatts, what percentage is in the Zhejiang, Jiangsu, and Shanghai.

[Foreign Language]

Around 90 megawatts in Zhejiang, Shanghai, and Jiangsu.

Great. Okay. That's very helpful. Yes, I understood. Thank you. I'll pass the call.

Thanks.

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to today's presenter, please continue.

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. Project development and IPP business is our business folks, and we are very excited about opportunities ahead of us. We are looking forward to providing you with our business update in a few months. Thank you all again. This concludes our call today. You may all disconnect.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.