ReneSola Ltd (SOL) Q1 2019 Earnings Call Transcript

Hello, ladies and gentlemen, thank you for standing by for ReneSola Limited’s First Quarter of 2019 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]. Please note that we're recording today's conference call, Thursday, 27th of June 2019. I'll now turn over the call to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group Asia. Please go ahead, Mr. Dvorchak.

Thank you, Amy, and hello, everyone. Thank you for joining us on this conference call to discuss ReneSola's first quarter 2019 results. We distributed the press release and shareholder letter earlier today and it's available on the company's website and from Newswire services. Furthermore, the call includes a short presentation deck, which you can also download from our website at renesolapower.com. On the call with me today are Mr. Xiaoliang Liang, Chief Financial Officer; Ms. Shelley Xu, Vice President of Asia; Ms. Jessie Zhang, Director of Financial Reporting. Our Chairman, Mr. Li had an important engagement and he could not be on the call tonight. As such, Ms. Ella Li, our Manager of Investor Relations, will read the prepared remarks covering ReneSola’s operating highlights and then Mr. Liang will review our first quarter 2019 financial results. 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, as shown on Slide 2. 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. SEC. 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 our Manager of Investor Relations, Ella Li. Ella, please go ahead.

Thank you, Gary, and thank year everyone for joining our call today. We appreciate your interest in ReneSola. To get started, we will provide a summary of our first quarter financial performance and review our operating highlights. The call will then turn to our CFO, Xiaoliang Liang, who will cover financial results in some detail and as well update on 2019 guidance. We will then open the call to questions. We are off to a solid start in 2019. Revenue of $13.1 million grew 134% sequentially and was above the high-end of our guidance range. We made good operating progress in Q1. We successfully connected 3.7 megawatts of FiT project in Canada and sold 21 megawatts of project rights in the U.S. and 2.5 megawatts of project rights in France. Furthermore, our global pipeline remains strong. Late-stage is now 753 megawatts, while total is a robust 1.4 gigawatts. We are in a good financial condition with a healthy balance sheet that can fund growth. Mr. Liang will go over the details of our financial results later in the call. First off, because it is in the news, let me comment on the latest subsidy policy for solar projects in China, which impacts our China DG business. As many of you know China’s National Energy Administration or NEA recently released a statement regarding the government subsidies for solar projects. Under the new policy, in 2019, China will allocate a RMB 3 billion or US$435 million of subsidies for new solar projects. Of that total RMB 750 million or US$109 million will be awarded to household projects with a combined capacity of 3.5 gigawatts. The balance will be directed to solar power stations. To participate in the new subsidy program, project developers and operators are required to submit applications for subsidies to the NEA by July 1, 2019. The applications must specify the expected generating capacity and annual operating hours for their projects. We have already submitted applications for subsidies to the NEA ahead of the deadline. We view the latest subsidy announcement for solar projects by the NEA as a positive development both for the industry and for ReneSola. We are optimistic about the current environment, and remain focused on rapidly developing new DG projects in China. While we are focused on the development business, we are also actively pursuing other segments of the business to reduce our risk and better utilize our capital. In particular, the development business recycles capital quickly, where operating assets generate a stable high margin recurring revenue. We that, let's now turn our attention to operating highlights. Our development pipeline remains strong at 1.4 gigawatts, of which 753 megawatts is late-stage. This late-stage pipeline is geographically diversified and spread across the U.S., Canada, Poland, France, Hungary, Spain, India, South Korea, Vietnam and China. Approximately, 50 megawatts of the late-stage is under construction, whereas 3.7 megawatts was connected in Q1. The connected projects were all big projects in Canada. We also sold to Nautilus Solar 21 megawatts of project rights in the U.S. State of Minnesota. Also we sold 2.5 megawatts of project rights in France to [Green City] a French developer. In addition to our development pipeline, we currently own and operate a 228 megawatts portfolio of solar projects. That generates high margin recurring revenue. The portfolio consists of 208 megawatts of rooftop in China, 15 megawatts of ground-mounted in Romania and 4 megawatts of rooftop in the UK. Looking ahead, we have approximately 11 megawatts of rooftop projects under construction in China. Slide 3 captures our project business in more detail. Now, let me review the geographies in more detail. First, China. As shown on Slide 6, we now operate approximately 208 megawatts of rooftop solar concentrated in a multitude of Eastern provinces with strong robust development environment. The C&I electricity price in those provinces are relatively high and electricity off-takers are generally creditworthy enterprises. Self-consumption DG projects in those provinces are attractive investments. In an effort to evolve and transform ReneSola into an asset-light solar project developer, we expect to monetize our China DG assets eventually. What does the monetization do for us? The simple answer is that, this will further strengthen our balance sheet, reduce the leverage and improve cash flow. That is the key focus area for us. Next, let's talk about the U.S. The U.S. remains a large and important market for us, as highlighted on Slide 7. Our late-stage projects, they total 327.4 megawatts, of which approximately 107.8 megawatts are community solar in Minnesota and New York. Additionally, we are pursuing small utility-scale projects with a mix of corporate, municipal and utility off-takers in other states including Utah, Texas, Florida, Arizona and California. Of the late-stage projects, 24.1 megawatts are under construction and expected to grid connect in the second and third quarter of 2019. Our U.S. business continues to gain traction. As I mentioned earlier, we sold Nautilus Solar a 21.1 megawatts community solar portfolio in Minnesota that was developed by our team. As many of you know Nautilus is a leading U.S. company engaged in solar project acquisition, development and asset management. This sale to them represents the third acquisition of community solar asset from us. Similar to the 2017 and 2018 deals we had with them, this community solar portfolio was also qualified under Xcel Energy’s community solar program in Minnesota. Furthermore, as highlighted in our recent press release, we signed a development service agreement with X-Elio North America, a subsidiary of X-Elio, a Madrid, Spain-based company that specializes in the development, construction, operation and maintenance solar plants. Under the agreement, our North American development team will originate and develop large utility-scale solar projects for X-Elio. The parties are in the process of conducting joint diligence on an initial portfolio of projects in California, Oregon and Arizona with a total installed capacity of over 500 megawatts. Many of these projects will include battery storage systems. ReneSola will assist X-Elio in obtaining site control, permitting, interconnection and off-take agreements. We will also support other projects through the financing and construction phases. We are very excited to engage with X-Elio and leverage our development platform and capacity to support further. We have a talented team and a solid track record of developing solar projects globally. So we are in an excellent position to help them expand their presence in the U.S. In Canada, shown on Slide 8, we connected 3.7 megawatts of FiT 3 projects in Q1. We now have 3.3 megawatts of late-stage projects. All of these are under construction and should connect to the grid in the second and third quarters of 2019. All these projects are eligible for the FiT 3 scheme. We show Poland on Slide 9, where we have a total of 37 megawatts in various stages. Our main asset there is a portfolio of 55 installation of 1 megawatt each. 44 of those are completed, operating and up for sale. The other 11 are under construction. In addition to the 55 installations late last year, we won the auction for another 26 megawatts of project development rights, which are for sale. All of the projects will sell power under Poland’s Contract for Difference or CFD regime and are eligible for a 15 year guaranteed tariff. The 26 we won are eligible for 15 year guaranteed tariff of PLN 354.8 to PLN 358.8 per megawatt hours. This is close to the highest auction price of PLN 364.9 per megawatt hours. Poland is also a key market for us and we are one of the largest project developers in the country. As such, the auction win in late last year is a positive development, as it once again demonstrates our ability to deliver reliable cost competitive distributed power to serve growing energy demand in the region. Slide 10 shows Hungary. While we continue to invest in small-scale DG projects, our late-stage pipeline has more than 67 micro projects, each with a size of one-half megawatts bringing total capacity to approximately 33.6 megawatts. We expect the construction of all of these micro projects to start in the second and third quarter of 2019. In Q1, we entered into a bridge finance agreement with Eiffel Energy Transition Fund for our solar projects in Hungary and Poland. As discussed in our last call, Eiffel Energy Transition Fund is a specialized investment vehicle of 350 million euro, strictly reserved for institutional investors. This fund meets the financial needs of energy transition players focused on renewable energy production and energy efficiency solutions. Under the terms of the agreement Eiffel Energy Transition Fund will finance us 41.3 megawatt projects in Hungary and 55 megawatt projects in Poland in the amount of 13.4 million euro. We are excited to partner with Eiffel. This facility demonstrates the confidence that the capital markets put in our ability to successfully develop projects in this region. We continue to expect both Hungary and Poland to be growth markets for us in the years ahead. Moving on to India on Slide 11. Our project pipeline currently stands at 50 megawatts. Most projects there are ground-mounted open access projects. Similar to U.S. community solar, Indian projects can sell electricity to different commercial and industrial off-takers under long-term PPAs. Our strategy in India is a pure project developer model. We want to develop projects to the shovel-ready stage and then sell the projects rights to investors. This model enables us to leverage our expertise in project development and our global network of solar project investors. Now turn to Slide 12, where we cover other regions. In France, we've formed a strategic partnership with Green City Energy last year to jointly develop four solar parks in the south with a total installed capacity of 69 megawatts. The four parks will generate approximately 105 million kilowatt hours of electricity per year. We expect COD for the parks in 2020 and 2021. Beyond the regions I just discussed, we are actively pursuing opportunities in other international markets including Spain, South Korea and Vietnam. In Spain, we have a late-stage pipeline of 12 megawatts of private PPA projects. And in South Korea, we secured a 9 megawatts ground-mounted project. In Vietnam, we obtained the land right for a 200 megawatts ground-mounted project. In summary, we have a globally diversified project portfolio spanning multiple states in both rooftop and ground-mounted. Because of this, we are very optimistic about the opportunities ahead of us. Before I turn the call over to Mr. Liang, I would like to take a minute to emphasize the strength of our strategy. We are pursuing a global asset-light project development model with a focus on distributed generation and community solar. Revenues come from the sale of shovel-ready projects rights and the build-and-transfer projects after grid connection. We typically achieve high gross margins from monetizing project rights. Downstream projects represent large opportunities globally for us, and we look forward to capturing those opportunities. Our talented team, diversified geographic coverage and the record of accomplishments puts us in an excellent position to grow profitably. With that, let me now turn the call over to Mr. Liang for comments on our financial performance. Mr. Liang?

Thank you, Ella. And thank you everyone for joining us on the call today. I will review our financial performance for the first quarter of 2019 and then discuss our outlook. Please turn to Slide 14. Q1 revenue was $13.1 million compared to $12.6 million last quarter and $44.8 million in the same period last year. Q1 revenue was ahead of our guidance range of $8 million to $10 million. Here is our revenue breakdown by segment in Q1. Project development was $8.4 million as we recognized the revenue primarily from the sales of project rights of 21.1 megawatts in the U.S. IPP, our electricity sales were $4.6 million mainly from the 31.2 million kilowatt hours of electricity generated by our operating DG project in China. Q1 gross profit was $0.4 million compared to a gross margin -- gross profit of $2.9 million last quarter and $8.4 million in the same quarter last year. Gross margin of 2.8% was in line with our expectations of zero to 5% and was down from 51% last quarter. The sequential decline in gross margin was attributable to revenue mix, coupled with unfavorable margin from project sales in the U.S. First quarter operating loss was $2.1 million compared to operating loss of $1.9 million in Q4 of 2018. Operating margin was negative 16% compared to a negative 34% in Q4. First quarter operating expenses were $2.5 million, down from $4.8 million last quarter and essentially flat when compared to the same period last year. Q1 sales and marketing expenses were $23,000, down from $0.5 million in Q4 of 2018 and down from $0.1 million in Q1 2018. Notice that the year-over-year decrease in sales and marketing expenses outpace the year-over-year decline in revenue. General and administrative expenses were $2.3 million, down from $2.5 million last quarter and down slightly from $2.4 million in the same period last year. The decrease in both sales and marketing, and general and administrative expenses reflect our strong focus on disciplined expense control. Below the line, first quarter non-operating expenses totaled $3.4 million, up from $2.6 million last quarter. Q1 non-operating expenses include interest expense of $2.3 million and foreign exchange loss of $1.2 million. The ForEx loss was mainly due to the depreciation of the Romanian leu against the euro. Q1 net loss was $5.6 million a $0.01 per share compared to net loss of $4.3 million or $0.01 per share in Q4 of 2018. Q1 EBITDA was negative $1 million which was flat when compared to last quarter. Now, the balance sheet, shown on Slide 15. We had cash and equivalents of $7 million as of March 31, 2019, a small increase of about $0.2 million during the quarter. Long-term borrowings were approximately $11 million as of March 31, 2019, down from $41.4 million in Q4. The decline was a result of the reclassification of the $28.8 million Romania construction loans from long-term borrowings to short-term borrowings because it is due in March 2020. We have long-term liabilities related to sale-leaseback and lease liabilities of approximately $78.1 million, an increase of $0.2 million during the quarter. This relates mainly to rooftop projects in China. Finally, let’s pay our attention to guidance shown on Slide 18. For 2019, the company continues to expect revenue to be in the range of $150 million to $170 million, and overall gross margin in the range of 20% to 25%. The company intends to monetize approximately 270 megawatts of projects in international markets. We anticipate meaningful revenue growth in the second half relative to the first half of 2019 as we expect significant revenue contribution from project sales in the second half of the year. For the second quarter of 2019, we expect revenue in the range of $10 million to $12 million, and gross margin in the range of 55% to 65%. 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. [Operator Instructions]. Our first question comes from the line of Philip Shen of Roth Capital Partners. Please go ahead.

The first one I would like to ask is about the margins on the U.S. projects. Can you help us understand why the margins on those projects in Q1 fell short of expectations or why there are so low? Thank you.

Thank you for the question. I’ll answer the question. The lower margin in U.S. project is because of deferral revenue -- deferral in revenue on to the COD, which I mean we will [ramp up].

Okay. So can you share actually what the margins were for the U.S projects?

For the U.S. projects? It’s negative 16% now but if we recognize revenue into COD, the gross margin will be near zero.

Okay. So -- and just to be clear, did you sell the project closer to NTP as opposed to COD?

We sell it as NTP but we will have payments into COD.

Okay. And then when you look at overall U.S. pipeline late-stage, what kind of margin profile do you expect for that pipeline?

In 2019? Okay. Hello, Doran, would you please answer this question?

Yes. Phil, hi, it’s Doran.

Would you please answer?

Yes. Sure. And Phil, just really quickly I’m going to slightly elaborate on the margins for the projects sold. Just understand that there are purchase price adjustments attributable to certain elements of that transaction having to do with the interconnection costs and final interconnect costs and final subscriptions for the Minnesota community solar which we are expecting to result in slightly different margins which are all adjusted and paid at COD. So it is a little bit hard to forecast exactly what that number is going to look like. With respect to the remainder of the portfolio …

Sorry, Doran. Just as a follow-up there. Does that mean you expect at some point to get a benefit from those adjustments at COD or does this higher the projects realize that?

We realize that, and those are a mixture of benefits and detriments, Phil, as you can expect. When the final interconnection costs are made, determination are made post COD that there is an adjustment and that’s -- that interconnection costs, risk and benefit is something that ReneSola maintains as part of the sale. So those could be two way adjustments. I mean we are expecting on balance what we've seen so far that those adjustments will be in our favor. However, there's no certainty on some of the other adjustments that may appear and those are unknowns as you would expect from when a utility does its final reconciliation of interconnection costs, right?

Fair enough.

So with respect to the remainder of the pipeline in the United States, I would say that the gross margins there will vary. I would say that the range is likely -- I believe we’ll have some projects where that might be as low as say 10%, but then certainly they could go as high as in some cases, 40%. That’s again with projects in varying stages is a little bit difficult to forecast these numbers. And that's why the range is so wide, but we do expect those margins to be much better.

Okay. Thanks, Doran. Let's shift over to China for a moment. I think the China DG assets declined in Q1 to about 208 megawatts from 212. So did you sell 4 megawatts in Q1? I think you guys only talked about selling U.S. project rights and a project sale in France, so was 4 megawatts also sold in China?

Yes, yes, we sold our project in China, total 4 megawatts.

Great. What was the margin profile on the China project?

It’s almost near zero.

Okay. And then I also noticed that you guys had, I think, in the China pipeline, as much as 350 megawatts of grid parity projects that was listed in Q4. But now they're not listed in the pipelines today. What happened to the 350 megawatts of grid parity projects in Northern China?

Hi, Phil. We cancelled some ground-mounted grid parity projects.

You cancelled them, is that right?

Yes. And we are -- currently we are forecasting some DG projects and as many of our major projects that has high gross margins.

How high?

It's around 55% to 60%.

I'm sorry, I didn't hear the gross margin. Can you say it again?

I'd say, it's around the 55% to 60%.

Okay. Fine. So let's move on to the guidance for the full year. Can you update us now on how many megawatts you plan to monetize in 2019 in each region? And then give us a sense for how many megawatts per quarter you plan to monetize?

Hi, Philip. For the full year 2019, we are planning to monetize 270 megawatts and it’s mainly concentrated on the second half of the year. For Q3, we are planning to monetize around [115] megawatts and the remaining will be Q4.

And I think on the last call, you talked about, of the 270 megawatts, 170 megawatts would be sold at NTP and then 100 megawatts would be sold at COD. Is that -- what do you expect now? Is that mix of NTP and COD still the same?

Around 90 megawatts were at the COD, and around 170 megawatts at NTP.

You said 90 megawatts at COD, is that right?

Yes.

So it's roughly the same?

Yes.

Great. And when you think about -- in this quarter the margin profile of the projects you sold was either zero or negative. When you think about the [150] megawatts you expect to sell in Q3, what does that margin profile look like? Perhaps you can talk about the regions that those projects are in.

The average gross margin is around 16%.

16% margin. Okay.

Gross profit, the average gross profit across Q3 is about 16%.

16, right?

Yes.

Great. And what regions are the -- what's the mix of geographies for the 150 megawatts?

It is in Canada, Hungary and Poland.

Okay. Great. And then can you give me the same for Q4, what's the regional or geographic mix and then what does the margin profile looks like?

For Q4, the gross profit is around at 22%. And it will be in Hungary, U.S. and South Korea.

Okay, great. In terms of your projects for your partnership with X-Elio, you talked about 500 megawatts developing and originating for them. Can you -- is there a sense of timing that you can share with us? I’d imagine it may not be for over a year. But can you talk to us about when that 500 megawatts could actually -- you could start to realize some sales there? Thanks.

I will jump in here, Phil. So the way that that deal is set up in fact is we have a relatively detailed schedule of milestones -- development milestones with portions of the agreed upon developer fee assigned to those milestones. And so, we will start to see small amounts of this as even site control comes through on some of these projects. As the release says we're in diligence on the first handful of projects, those are primarily at west, each of those projects are relatively large in size. So certainly getting those through to NTP will be a process that takes between 18 and 24 months. However, during that period of time we do expect to see some of this income come in as we reach some of these milestones and milestones related to site control permitting interconnection agreements et cetera.

Great. When you think about …

And I do expect to -- go ahead, I’m sorry.

No, please, please, finish.

I was going to say, I do expect some element of that to be flowing in during 2019, but given that we’re in diligence initially and it’s a new relationship, that's not something that we’re including in our forecasts here.

Got it. I think you just answered my question there. So, great. Well, congrats on the X-Elio partnership. And one last question. And this might be to Doran as well as others. But from a technology standpoint, bifacial has started to gain more prominence especially with exemption the Section 201 in the U.S. To what degree are you guys considering greater late stage projects, what percentage of them are being -- or are factoring in the use of bifacial?

In the U.S. it’s still relatively small percentage, Phil. I think you guys did a nice job outlining some of the engineering challenges associated with that. That switch is not something you can just simply do on the flat. However, I would say that the number is certainly greater than zero. We are looking closer at bifacial for a number of projects, I’d say it’s sort of less than 25% of our pipeline that’s being considered as well as some of the large projects that we're looking at like X-Elio. That’s sort of the best answer I can give at this point.

Okay, great. And I would love to get Mr. Li’s opinion on bifacial as well. Are you guys using bifacial globally or/and also how does he -- what’s his opinion on bifacial?

Hi, Phil. We can tell you, it depends on the market situation. Currently it's not free to us or that readily and we think currently we may not use this better, we may consider it later.

Okay, great. Well thank you everybody for taking all those many questions. I appreciate it and I look forward to the next time we connect.

[Operator Instructions]. No more question as of this time, I’d now like to hand the conference back to Ms. Ella Li, please go ahead.

Thank you, operator. We are pleased with our Q1 results that reflect our continued execution of our project development strategy. We remain committed to prudently managing our operations and strengthening our financial position. We are optimistic about our opportunities and look forward to discussing continually improvement in a few months phase. Thank you all again for your participation. This concludes our call today. You may all disconnect it.