ReneSola Ltd (SOL) Q2 2018 Earnings Call Transcript

Gary Dvorchak - The Blueshirt Group Asia, IR Xianshou Li - Chief Executive Officer Xiaoliang Liang - Chief Financial Officer Doran Hole - Group Vice President, Strategy Jessie Jang - Director, Financial Reporting Johnny Pan - Director, Investor Relations

Justin Clare - ROTH Capital Partners

Ladies and gentlemen, thank you for standing. And welcome to the Second Quarter 2018 ReneSola Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. [Operator Instructions] I must advice you that this conference is being recorded today. I would now like to hand the conference over to your first speaker, Gary Dvorchak. Thank you. Please go ahead.

Thank you, Ivan, and hello, everyone. Thank you for joining us on today’s conference call to discuss the second quarter results. We released the second quarter 2018 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 IR section of the website at renesolapower.com. On the call with me today are Mr. Xianshou Li, Chief Executive Officer; Mr. Xiaoliang Liang, Chief Financial Officer; Mr. Doran Hole, Group Vice President of Strategy; Mrs. Jessie Jang [ph], 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 Mr. Liang will then review our second quarter 2018 financial results. Before we continue, please note 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, as shown on slide two. 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 information. 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, Gary. So following are Mr. Li’s prepared remarks. Thank you, everyone for joining our call this morning. We appreciate your interest in ReneSola. To get started, I will provide a summary of our Q2 financial performance and review our operating highlights. I will then turn the call to our CFO, Xiaoliang Liang, who will cover the financial results for the second quarter and provide guidance for 2018. We will then open the call to Q&A. First, our Q2 financial results were solid and we are pleased to -- with the right executing this product. Revenue came in at higher end of our guidance. Gross margin exceeded our expectations. Operating income was flat when compared to Q1 2018. Operating margin increased by around 100,000 [ph] basis points sequentially. Q2 operating results were equally solid. So project pipeline is strong at around 1.5 gigawatts, from which 670 megawatts are late-stage. So new downstream strategy we implemented in last year remains focused on small scale solar projects around the world. In the second quarter we installed 13.1 megawatts of rooftop projects in China and 14 megawatts of projected in Poland. We saw the 6.75 megawatts of utility projects in the U.S. States of North Carolina to the New York based Greenbacker Renewable Energy Company. Greenbacker is publicly logistic non-traded limited liability company that owns and operates at diversified portfolio of renewable energy power plants, energy efficiency projects and other sustainable investments. We currently own and operate 226.5 megawatts of solar assets. Our geographic diversity meaningfully reduced our risk profile. We operate nearly 207 megawatts of rooftop projects in China, 15 megawatts in Romania, and 4 megawatts of rooftop in the U.K. We also have approximately 19 megawatts of rooftop projects under construction in China. Slide six, summarizes this, our pipeline is robust and diversified at all stage of developments. The late-stage futures 617.2 megawatts in the U.S., Canada, Poland, France, Hungary, Spain, India, South Korea, and the China, 134 megawatts of these projects are under construction. Our early-stage pipeline also covers the growth, bringing total plant capacity to approximately 1.5 gigawatts. Now, let’s cover some details on various regions. First, China, turn on slide seven. The rooftop markets in China is lucrative opportunity for us. We now operate approximately 207 megawatts of rooftop solar, concentrated in our few Eastern provinces with attractive development environment. The commercial and industry electricity price in those provinces are relatively high and electricity offtakers are generally credit worthy enterprises. Self-consumption/DG projects in those provinces are attractive investments. In the second quarter we installed 13.1 megawatts of rooftop projects in China. We believe unsubsidized self-consumption projects with high PPA price will remain attractive. In August we announced the signing of 60-day exclusivity agreement with affiliate of Brookfield Asset Management. Under the agreement we will negotiate the sale of our pertaining DG assets in China to them. If we reach that deal during the 60-day period, this transaction will substantially reduce the company’s leverage ratio and significantly improve cash flow and liquidity. After completing this transaction the proceeds from the sale will provide a substantial capital for us to recycle back into the growth of our business. In the meantime, we will continue to pursue opportunities to develop, build, and monetize small-scale and DG projects in China, and other geographies. So U.S. is the large and important market for us. As shown on slide eight, we have around 286 megawatts of late stage projects. Of which, approximately 69 megawatts is community solar in Minnesota and in New York. In addition, we are pursuing small utility scale projects in Utah, Texas, Florida, Arizona, Colorado and California. As I mentioned earlier, in Q2 we recognized revenue from the sale of 6.75 megawatts of utility projects in North Carolina. In the third quarter we anticipated signing of agreement of our second set of community solar projects in Minnesota, with total capacity of around 13 megawatts. In Canada, turn on slide eight -- nine, we have 7.6 megawatts of late-stage projects, all of which are under construction and shall connected to the grid by the end of 2018. These projects are eligible for the FIT3 scheme. Poland is shown next on slide 10. In the second quarter, we installed 14 megawatts of projects. On top of that we have late-stage pipeline of 41 megawatts, of which is under construction and shall grid connected in the second half of 2018. This 41 megawatts is part of the project awarded to us in last year’s government auction. Slide 11 shows Hungary. Well, we continue to invest in small-scale DG projects. Our late-stage pipeline has grown to more than 17 micro projects, each with size of 0.5 megawatts, bringing the total capacity to approximately 43 megawatts. All these micro projects are under construction and shall connect to the grid in the second half of 2018. We continue to believe this fits well with our overall downstream strategy to pursue opportunities in small-scale projects. We announced last week that we closed on long-term project financing with K&H Bank, one of Hungary’s largest banking and financial service firms. The deal will finance approximately 8 megawatts KAT-licensed solar projects in Hungary. The project shall grid connected by October 2018. Additionally, we have two more KAT-licensed project portfolio, seeking project financing from K&H Bank. Now turn to slide 12. We have covered other regions. In France, in the first quarter of 2018, we formed our strategic partnership with Green City Energy from joint development of four solar parks in the South of France, with a total installed capacity of 69 megawatts, it will generate approximately 105 million kilowatt hour of electricity per year. Additionally, we were awarded 16 projects with a combined capacity of 4.65 megawatts in Q1 bringing the total project pipeline to 73.7 megawatts in France. We expected COD from these projects in 2019. We’ll continue to penetrate the India solar market and have grown our project pipeline to 30 megawatts. All projects are ground-mounted urban access projects, similar to the U.S. community solar, which transfer electricity through the commercial and industrial offtaker and long-term PPAs. We are excited about large market potential in the urban access market in India. We think we can replicate our success in the U.S. community solar market in India. Beyond those geographies, I just discussed, we are actively pursuing opportunities in other international markets, including Spain, South Korea and Vietnam. For instance in Spain, we have a sizeable late-stage pipeline of 162 megawatt of private PPA purchase. In South Korea, we secured 9 megawatts ground-mounted projects. As you can see, we have a geographically diversified our projects portfolio and I am very excited about the opportunities we are pursuing. Before I turn the call over to Xiaoliang, I would like to take a minute to reiterate our business model and the strategy. Globally, we implement an asset-light project developed model, with the focus on distributed generation and community solar. Below is our projects rights and shown our late-stage of good and transfer projects under grid connection. We typically achieve high gross margin in the sales of projects right. Downstream projects represent a larger opportunity globally and we are excited about our prospects. Our talented team diversified our geographic coverage and the record of accomplishment all positioned us for profitable growth. With that, let me now turn the call over to Xiaoliang for comments on our financial performance. Xiaoliang?

Thank you, Mr. Li and Johnny, and thank you everyone for joining us on the call today. I will review our financial performance for the second quarter of 2018 and then discuss our outlook. Please turn to slide 14. For the second quarter revenue was $27.8 million, compared to $44.8 million last quarter and $1.6 million in the same period last year. Here is the revenue compensation by segment. Project development was $10.1 million as we recognized the revenue from the sale of 6.7 megawatts of utility projects in North Carolina. EPC revenue was $7.6 million, mostly from EPC services of 8.4 megawatts in rooftop in China. Electricity sales were $9.9 million. Gross profit was $8.2 million compared to a gross profit of $8.4 million in Q1 2018 and $1.1 million in Q2, 2017. Gross margin was 29.5%, well ahead of our expectations of 20% to 25% and up from 18.7% last quarter. Gross margin was up due to revenue mix with small high margin electric sales due to seasonality seen in the summer high a radiance period. Operating income was $5.9 million, slight when compared to Q1 2018. Operating margin was 21.2%, up from 13.1% last quarter. Second quarter operating expenses was $2.3 million, down from $2.5 million last quarter and up from $1.9 million in the same period last year. Sales and marketing expenses in Q2 was $0.2 million, up from $0.1 million in Q1 2018. General and administrative expenses were $2.7 million, up from $2.4 million in Q1 2018. Below the line, second quarter non-operating expenses totaled $5.5 million. This includes interest expenses of $2.6 million and the foreign exchange loss of 2.9 million. The forex loss was due to the depreciation of the euro, pound sterling and Polish zloty against the U.S. dollar. Net income was $0.4 million, compared to an income of $12.4 million in Q1 2018, and $0.8 million in Q2, 2017. Second quarter EBITDA was $5.2 million, compared to $9 million last quarter. Now the balance sheet shown on slide 15, we had cash and equivalents of $24.8 million as of June 30, 2018, an increase of about $14 million during the quarter. Long-term borrowings were $72.7 million as of June 30, 2018, an increase of $40 million during the quarter. The debt increase related to construction loan for the Polish projects. We extended the term and size during the quarter. We have long-term liabilities related to capital leases and build sale leaseback. These relates mainly to rooftop project in China and yearly grow along with the growth of the operating expense within the DG portfolio. Those liabilities were $85 million, an increase of approximately $7 million during the quarter. Finally, we will discuss guidance shown on slide 18. For the third quarter of 2018, we expect revenue in the range of $15 million to $20 million and the gross margin in the range of 35% to 40%. We also expect to monetize 13 megawatts project in international markets. For the full year, we continue to expect the revenue in the range of $130 million to $140 million with gross margin between 20% to 25%. We intend to monetize 250 megawatts to 300 megawatts of projects in international 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.

[Operator Instructions] Our first question comes from the line of Justin Clare from ROTH Capital Partners. Please ask your question.

Hi, everyone. Thanks for taking my questions.

Hi.

So, first off, in Q2 could you share what the gross margin was for the project sales versus the EPC business and then versus the sale of electricity?

Yes. [Foreign Language] So gross margin for IPP for Q2 is around 80% and for EPC is around 20% and for, yeah, okay, sorry, I’ll just start it again. The IPP gross margin for Q2 is around 70%, for EPC is around 20% and for project development it’s, yeah, it’s a special event in Q2.

Okay. All right. So I wanted to move on to your 2018 guidance. So you are maintaining the revenue and margin guide from last quarter, but you’re now considering selling the 207 megawatts of operating assets in China. So it looks like the sale of those assets is not included in the guidance, can you confirm that is the case. And then share which projects sales are actually included in the revenue guide at this point?

Yes. You’re correct. For the 200 megawatts sales in China, because -- we expecting due to because by the end of the year or, yeah, so it’s not -- it will not reflect in this year’s earnings and we’re not impacted revenue. It’s only… [Foreign Language] Yes, Justin, Mr. Li just confirmed that the sales of 200 megawatts assets in China will not impact our revenue and the gross margin and the gross profit. It only changes our net income, net profit…

Okay.

It’s selling of the assets.

Okay. So can you just help explain a little bit more, if the sales were to be completed this year, so it sounds like it would not impact the revenue or margin, but we would see an impact to your net income, is that correct?

Yes.

Yes. Correct.

Okay. So then can we move to just the plants development can you share how many projects you plan to connect in Q3 and then also in Q4 in terms of megawatts?

[Foreign Language] I am not sure what do you mean by connected, because we also have EPC business IPP and project development business. So, if considered all of this, we’re expecting to connect 42 megawatts in Q3 and we expecting to sell around 13 megawatts in Q3.

Okay. That -- yeah. That’s what I was looking for, the combination of -- across all of your business, how many megawatts do you plan to connect in Q3, so it sounds like 42 and then what about for Q4 across all of you businesses?

In Q4 we plan to connect 26 megawatts.

Okay. Great. And then I wanted to actually follow up on the potential sales of your assets in China. If the sale were to go through, can you share how you would use the proceeds? So, first, how much debt could you pay back with the proceeds and then would they be distributed 60% to you and then 40% to your strategic partner after repaying debt?

[Foreign Language]

Okay. Mr. Li just added comment for your last question, sorry. So for the connection in Q4, we are expecting around -- actually around 90 megawatts for projects in Poland and Hungary.

[Foreign Language]

Okay. So, is the 90 megawatts in total for Q4?

In the second half of 2018.

[Foreign Language]

Because all of our projects in Poland and Hungary are under construction, already finished half of them.

Okay.

[Foreign Language]

Okay. So 97 megawatts grid to be connected in Europe, and if we also consider project in the U.S. we are going to have 116 megawatts project to be connected to the grid in the second half of 2018.

Okay. Got it.

We also have a breakdown of projects under construction in the presentation.

Okay. And then what about…

Yeah. Justin, other question…

Okay.

… I just staying to my study.

Okay.

[Foreign Language]

Hey, Justin. Regarding your this question, Mr. Li says that, the joint venture with our strategic investor is on the vertical level. The vertical holds our projects SPV and our current transaction, the potential transaction with Brookfield is to sell the project SPVs. So we will not distribute the 40% of earnings to the strategic investors.

Okay. And so how much debt you could pay?

How much debt you mean.

Yes. So also with the proceeds how much debt could you repay or would the wire assume the debt that it’s associated with the projects?

[Foreign Language]

We were paid back other project finance so financial leasing for the Chinese projects its around US$85 million.

Okay. And then just one final question from me. So can you just update us on the strategy in China at this point. You’ve had IPP business model in China? Are you continuing with that strategy ahead or are you moving to build and sell model at this point?

[Foreign Language]

Mr. Li also updated comment that financial leasing would be US$110 million around.

Okay.

Could you just repeat your question for this one.

Yeah. So then I just wanted to get a general update on the strategy for project development in China with the 207 megawatts that you plan to sell it seems like this previously you had expected to hold these assets on balance sheet. So at this point looking forward are you planning to hold the assets on balance sheet in China or are you shifting the model to where you are building and selling assets now?

[Foreign Language]

[Foreign Language]

Mr. Li said, we will continue to develop projects in China, DG projects in China and we are going to hold the portfolio to a certain scale and we will sell it.

I see. And is that scale around 200 megawatts or can you help us understand that a little bit better?

[Foreign Language]

[Foreign Language]

It depends on the market and potential investors. So it might be like portfolio 15 megawatts it depends.

Okay. All right. Thanks very for the questions. I will pass it on.

Okay. Thanks.

Thanks.

Thank you. [Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to Johnny. Thank you.

Thank you, Operator. Let me make some closing remarks on behalf of Mr. Li. We’re pleased with our Q2 results and our continued execution for project development strategies. We are committed to growing profitability, managing our operations and strengthening our financial position. We’ll remain optimistic about our opportunities around the world. And I look forward to providing you with our business update in a few months. Thank you all again for your participation. 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 all disconnect.