ReneSola Ltd (SOL) Q2 2019 Earnings Call Transcript

Hello, ladies and gentlemen. Thank you for standing by for ReneSola's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session [Operator Instructions] Please note that we are recording today's conference call. I will now turn over the call to Mr. Ralph Fong, Director of The Blueshirt Group. Thank you. Please go ahead, Mr. Fong.

Thank you, Justin. Hello, everyone. Thank you for joining us on today's call to discuss second quarter 2019 results. We released our results earlier today. The release is available on our website, as well as from Newswire services. There is also a short presentation slide deck posted to the Investor portion of our website, which we will be referencing during our prepared remarks. On the call with me today are Ms. Shelley Xu, Chief Executive Officer; Mr. Xiaoliang Liang, Chief Financial Officer; Ms. Jessie Zhang, Director of Financial Reporting; and Ms. Crystal Li, Assistant to Chief executive Officer. Before we continue, please turn to Slide 2. Let me remind you that remarks made during this call may include projections, estimates or other information that might be considered forward-looking. These forward looking statements represent ReneSola's current judgment for the future. However, there are subjective risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in ReneSola's filings with the Securities and Exchange Commission. Please do not place undue reliance on these forward-looking statements, which reflect ReneSola's opinions only as of the date of this call. ReneSola is not obliged to update you on any revisions to these forward-looking statements. Please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars. With that, let me now turn the call over to Crystal, who will translate Ms. Xu's prepared remarks. Crystal?

Thank you, Ralph, and thank you, everyone, for joining our call today. We appreciate your interest in ReneSola. To get started, we will provide a summary of our second quarter financial performance, and review our operating highlights. The call will then go to our CFO, Xiaoliang Liang, who will cover financial results in more detail, and he will update 2019 guidance. We will then open the call to questions. I am very pleased with our second quarter results. Business momentum was solid, and we executed well relative to our expectations. Revenue of $13.6 million, grew 4% sequentially, and was above the high end of our guidance range. Our better-than-expected topline, excellent gross margin and the prudent spending resulted in an operating margin of 52%. Importantly, after two consecutive quarters of losses, we returned to profitability. We ended the quarter with a healthy cash balance of approximately $8.7 million. Mr. Liang will go over the details of our financial results later in the call. We continue to make solid operating progress in Q2. We successfully connected a total 37 megawatts projects in several jurisdictions. We signed a development service agreement with X-Elio in North America to develop large utility scale solar projects in the U.S., and we sold two project companies in China, including 10 rooftop DG projects with a combined capacity of 12 megawatts. Overall, we had a lot going on in this quarter and we’re encouraged by the progress we've made. I will now provide an update on our project pipeline. Our project pipeline remains quite strong at 1.4 gigawatts, of which 714 megawatt is late stage. This late-stage pipeline is geographically diversified, which spread across different countries, as listed on Slide 3. Approximately 34 megawatt of the late-stage is under construction. As I mentioned earlier, in Q2, we connected a total 37-megawatt projects in several geographies, including the U.S., Poland, China, and Canada. In addition to our development pipeline, we currently own and operate 241-megawatt portfolio of solar projects that generates high-margin recurring revenue. As highlighted on Slide 3, our operating asset include 201-megawatt of rooftop in China, 20 megawatt of utility solar in the U.S, 15 megawatt of ground mount in Romania, and 4 megawatt of rooftop in the U.K. Looking ahead, we have approximately 5 megawatt of rooftop projects under construction in China. Now, let me review the various geographies in more detail. First, China. As shown on Slide 6, we operate approximately 201 megawatts of rooftop solar, concentrated in multiple Eastern provinces with favorable development environments. Self-consumption DG projects in those provinces are attractive investments. As we evolve and transform into an asset-light solar project developer, we are on track to monetize our China DG assets enabling us to strengthen our balance sheet, reduce leverage, and improved cash flow. We plan to use the cash to develop more high margin solar projects. By the way, as we discussed on our last call, we’ve submitted applications for subsidies for our residential DG projects to the NEA ahead of the July 1 deadline. We have been awarded a total of 10.2 megawatt of projects. For those projects awarded, the subsidy price is RMB0.05 per kilowatt hour. This is a positive development for ReneSola. We're optimistic about the current environment, and we remain focused on rapidly developing new DG projects in China. Next, let’s turn our attention to the U.S. As highlighted on Slide 7, our late-stage projects stand at around 307 megawatts, of which 107 megawatt of community solar in Minnesota and in New York. Additionally, we have small utility-scale projects with the mix of corporate, municipal and the utility off-takers in other states including Utah, Texas, Florida, Arizona, North Carolina, and in California. Of the late stage projects, 4.5 megawatt are under construction and expected to grid connect in Q3. As discussed on our last earnings call, we entered into a development service agreement with X-Elio, North America, that specializes in the development, construction, operation and the maintenance of solar plants. Our team will originate and develop large utility-scale solar projects for X-Elio. We will assist X-Elio in obtaining site control, permitting, interconnection and offtake agreements. We will also support their projects through the financing and in construction phases. This contract with X-Elio is a key milestone in our company’s history, as it demonstrates our ability to leverage our development platform and capability to support our customer needs. Longer term, this also could open up potential opportunities to engage with other project developers and operators as well. We have an excellent team in place and a solid track record of developing solar projects globally. We believe, we’re in a great position to add tremendous value and help them expand their presence in the U.S. In Canada, we’ve connected 0.6 megawatt of FIT DG projects in Q2. We now have 2.7-megawatt of late-stage projects, all of which are under construction and should connect to the grid in Q3. As we alluded to you on our last earnings call, we’ve connected 11-megawatt of DG projects in Poland in Q2. Slide 9 shows that we now have a total of 26 megawatt in development stage. The 26 megawatt individual projects are the projects awarded to us in the government auction in 2018. Additionally, our key asset in Poland is a portfolio of 55 installations of 1 megawatt each, all of which are completed, operating, and up for sale. Slide 10 shows Hungary, where we invest in small scale DG projects. Our late stage pipeline has more than 67 micro projects, each with a size of 1.5 megawatt, bringing total capacity to approximately 34 megawatt. Of the late stage projects, 21 megawatt are under construction and expected to be connected to the grid in Q4 or Q1 2020. Moving on to India, on Slide 11. We have 50 megawatt in our project pipeline. Most projects there are ground-mounted, open access projects. Our strategy there is to implement a pure project developer model. We develop projects to the shovel-ready stage and then sell the project rights to investors. Now, please turn to Slide 12, where we cover other regions. In France, we've formed a strategic partnership with Green City Energy last year to co-develop four solar parks in the South, with a total installed capacity of 69 megawatt. We expect COD for the parks in 2020 or 2021. We are also pursuing opportunities in other international markets, including Spain, South Korea and the Vietnam. In Spain, we have a late stage pipeline of 12 megawatt of private PPA projects. And in South Korea, we secured a 9 megawatt ground-mounted project. In Vietnam, we obtained the land rights for 200 megawatt ground-mounted project. In summary, we have a globally diversified project portfolio, spanning multiple stages in both rooftop and the ground mount. And I am positive on opportunities ahead of us. The global solar power project development business is large, and it continues to grow. We’re becoming a leading global project developer by focusing on high quality projects in the attractive regions. Before I turn the call over to Mr. Liang, I will like to discuss the proposed investment by Shah Capital, as outlined in the press release, we put out earlier today. Last week, our major shareholder, Shah Capital tentatively agreed to terms for the purchase of newly issued shares. The term sheet contemplated Shah Capital purchasing 100 million ordinary shares at to the price of US$0.11 per share, for a total consideration of US$11 million. The purchase price of $0.11 per share is equivalent to $1.10 per ADS, which represents an approximately 12% premium based on the average closing price in the last 30 trading days. The completion of the transaction will be contingent on customary closing conditions. We believe, this proposed strategic investment can provide an important capital infusion for ReneSola, enabling us to further execute our downstream project development trend globally. With that, let me now turn the call over to Mr. Liang for comments on our financial performance. Mr. Liang?

Thank you, Crystal. Thank you, Shelley. And thank everyone for joining us on the call today. I will review our financial performance for the second quarter 2019 and then discuss our outlook. Please turn to Slide 14. Revenue was $13.6 million, up 4% sequentially and down 51% year-over-year. Q2 revenue exceeded our guidance range of $10 million to $12 million. Breaking out our revenue by segment. Project development was $3.9 million. This was largely driven by the recognition of remaining $3.1 million from the 26.1 megawatts of U.K. projects, that was sold in 2016 and the terms of the sales agreement, we signed in 2016, the final acceptance certificate passed on these projects would commence 2 years after the agreement was signed. We've successfully completed the test in Q2 2019. As a result, we’ve recognized the remaining portion of that project revenue. IPP electricity sales were $9.7 million, mainly from the 61.7 million kilowatt hours of electricity generated by our operating DG project in China. Gross margin - gross profit was $10.5 million, up from $0.4 million last quarter and up from $8.2 million in the same quarter last year. Gross margin was 77%, which was significantly ahead of our expectations of 55% to 65%. This compares to 3% last quarter and 30% a year ago. The increase in gross margin was due to the revenue mix shift towards high margin IPP electricity sales. Operating income was $7.1 million, compared to operating loss of $2.1 million last quarter. Operating margin was 52%, compared to negative 16% in Q1. Operating expenses were $3.4 million, up 38% sequentially, and up 48% year-over-year. The increase was due to the accretion of bad debt expense, likely uncollectible receivables. Sales and the marketing expenses were $77,000, up from $23,000 last quarter and down from $173,000 in the same quarter last year. General and administrative expenses were $2.7 million, up slightly from $2.3 million last quarter and essentially flat when compared to the same period last year. General and administrative expenses of $2.7 million were up sequentially due to an account receivable right-off of $0.89 million. Excluding the right-off, the G&A expenses would have been down quarter-over-quarter. Below the line, non-operating expenses totaled $0.5 million, down from $3.4 million last quarter. Q2 non-operating items include interest expense of $2.4 million and foreign exchange gain of $1.7 million. The ForEx gain was mainly due to appreciation of the Romanian leu against the euro. Net income was $5.1 million or $0.01 per share compared to net loss of $5.4 million or $0.01 per share last quarter. EBITDA was positive $10.6 million, compared to negative $1 million in the previous quarter. Now the balance sheet, shown on Slide 15. We had cash and equivalents of $8.7 million as of June 30, 2019, an increase of $1.7 million during the quarter. Long-term borrowings were approximately $10.7 million, as of June 30, 2019, which was largely flat when compared to the first quarter. We have long-term liabilities related to failed leaseback and lease liabilities of approximately $78.7 million, a decrease of $7.4 million during the quarter. This relates mainly to rooftop projects in China. Finally, let’s turn our attention to guidance shown on Slide 18. For 2019, we continue to expect the revenue to be in the range of $150 million to $170 million and the overall gross margin in the range of 20% to 25%. We anticipate meaningful revenue growth in the second half relative to the first half of 2019, as we expect the significant revenue contribution from project sales. For the third quarter of 2019, we expect revenue in the range of $15 million to $20 million and gross margin in the range of 35% to 40%. Gross margin will be well below Q2 due to the revenue shift back to project sales. 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] We have questions from the line of Philip Shen from Roth Capital Partners. Please go ahead.

Hi. Thank you for taking for taking the questions. Shelley, congratulations on your new role. For your guidance, I think, you have $160 million as a midpoint for revenue for the full year 2019, and given your Q3 guidance of $18 million and what you did in the first half, the implied Q4 revenue guidance is, I believe, $116 million. How realistic is this? And how do you expect to - in which projects do you expect the sale in Q4? And are those projects on track? Thanks.

Please allow me to translate

[Foreign Language] Okay. So please allow me to translate on behalf - for Shelley. Now we are entering into sales for Poland project and the Hungary project. So at this point, we estimate we can fulfill around 70% to 80% of our forecast.

So, when you say 70% to 80% of your forecast, which forecast are you talking about? Is that the $160 million revenue guidance? Do you think you can be 70% to 80% of that $160 million or are you talking about 75% of the Poland, Hungary sales, expecting?

[Foreign Language] We were referring to the $160 million revenue, the 70% to 80% of that, and that's all highly dependent on the two sales we mentioned before, which are expected to complete in Q4.

Okay. Just to be clear, the 70% to 80% is on the $116 million, expected in Q4, or is it on the $160 million for the full year?

[Foreign Language] Okay. So on the – we’re talking about project size. Our forecast is 270 megawatt, right? And we are confident that we can achieve 70% to 80% of that 270 megawatt. And when we talk about sales revenue of $160 million and - we are also confident that we should be able to perform as - between the range of $150 million and $170 million, that's the range we provided.

Okay. So the 70% to 80% of your forecast, is that -- I'm still a bit confused because she said, 70% to 80% of something, right? So is that on - what is that applied to? And I know you're confident around $160 million. But what you just said, you think 70% to 80% of the 270 megawatts, so did you need that 270 megawatts to hit your $160 million before or do you only need 70% to 80% of your 270 megawatts to hit your $160 million of revenue guidance?

[Foreign Language] Yes. Okay. So just to be clear, we have - we've forecasted the total like annual. So we are confident that we can complete - we can - for 2019 forecast, we are confident we can complete 70% to 80% of the 270 megawatt, which is around 200 megawatt, right? And it's highly dependent on the Q4 performance to determine whether we can achieve that 200 megawatts. So, the current revenue, which reflects the 200 megawatts would be around 1.4 - will be around $140 million.

Okay. So the - if you do 200 megawatts, then that implies $140 million of revenue for the full year? So...

Correct. Yes.

So you’re confident around the $140 million. You're more confident around that than your prior guidance, it seems like, so - okay. Let's move on to - so in order to reach the 200 megawatts, because, I believe, in the first half, you only sold 36 megawatts, right? 24 megawatts in Q1, 12 megawatts in Q2, so you’ve 36 megawatts in the first half, okay? So, that would imply 164 megawatts in the back half. What is the split between Q3 and Q4 of that 164 megawatts? And what projects specifically - yes, go ahead…

[Foreign Language]

Hello, are you guys still there?

[Foreign Language] Yes. So we think the rest of the - the forecast is 200, and we have sold 31 in the first half year - 36 in the first half year, and we think the rest will be sold in Q3 and Q4. Now as the - including the sale of Poland projects of 55 megawatt and Hungary project of 13.9 megawatt. And also include several projects in U.S. and in Korea.

Okay. That's very helpful. Was there another piece to translate?

No. That's it.

Okay. Thank you. And then you changed your total pipeline, I think, it was reduced to 714 megawatts from Q1 of 753 megawatts. Can you talk about the major additions and major subtractions to result in the net change of about 40 megawatts?

Please allow us a second for discussions. Hold on, please.

Okay.

[Foreign Language] So the decrease in our late-stage pipeline was mainly due to the completion of construction of those projects, and we moved them into operating assets.

Okay. Great. And one final question. How much of your late stage pipeline do you believe does not require a subsidy?

[Foreign Language] So except for the projects in China, all the rest projects usually doesn't need a subsidy.

So the U.S., I would define as a subsidized country, because they have the investment tax credits. And then if there’s a country that gives you a feed in tariff that is above market rates or pretty high, I wouldn’t believe that that's also a subsidized market. So if you take that into consideration, what percentage do you think maybe only subsidized?

[Foreign Language] Okay. This shouldn't - it shouldn’t be a large part of our current pipeline. And also we think that, that's a totally different definition of subsidy for those, kind of, subsidies and the subsidies we’re talking about in China. So it needs to be looked into case-by-case.

Okay. Thank you very much for taking the time for all the questions. I’ll pass then.

Okay. Thank you.

Thank you for the questions. [Operator Instructions] There are no more questions from the line. I’d like to hand the call back to management for any closing remarks.

Okay. Thank you, operator. Okay, we are pleased with our Q2 results that reflect our continued execution of our project development strategy. We are optimistic about our opportunities and look forward to updating you on our business progress in a few months. Thank you, again, for your participation. This concludes our call today. You may all disconnect.

Ladies and gentlemen, that concludes the conference call today. Thank you for your participation. You may now disconnect.