Emeren Group Ltd (SOL) 2017 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for ReneSola's First Quarter 2017 Earnings Conference Call. (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 Asia. Please go ahead, Mr. Fong.

Hello, everyone. Thank you for joining us on ReneSola's conference call to discuss first quarter results. We released first quarter 2017 results early today, and they're available on the company's website as well as from our newswire services. You can also follow along with today's call, by downloading a short presentation available on the company's website at renesola.com.

On the call with me today are Mr. Xianshou Li, Chief Executive Officer; Ms. Maggie Ma, Chief Financial Officer; and Ms. Rebecca Shen, Director of Investor Relations. Rebecca will read Mr. Li's prepared remarks regarding ReneSola's operational highlights and strategy, and Maggie will then review our first quarter 2017 financial results in detail.

Before we continue, please note that today's discussion will contain forward-looking statements under -- made under the safe harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statement except as required in the applicable law.

Please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars.

With that, let me now turn the call over to Rebecca, who will translate Mr. Li's prepared remarks. Rebecca?

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

Thank you, everyone, for joining our call this morning. We appreciate your interest in ReneSola. I'll begin our call with the important strategic comments about the business and our performance, then Maggie Ma, our CFO, will present operating and financial details for the first quarter 2017 and provide guidance. We will then open the call to Q&A.

Now let me quickly recap our Q1 2017 results. Please turn to Slide 3. We reported revenue of $156.6 million for the first quarter of 2017, in line with our expectations. We shipped approximately 526 megawatts of solar products, down 17% sequentially and down 25% compared to the same period last year. The LED Distribution business was solid with sequential revenue growth although at a slower pace as we had anticipated. Overall gross margin came in at 1.1%, down sequentially and year-over-year. On the bottom line, we reported a net loss of $23.2 million or a loss of $1.16 per ADS. EBITDA of $2.7 million declined over 90% year-over-year.

Let me now update you on our project development efforts. Downstream projects remained a sizable opportunity globally, and equipment manufacturers like us have a natural advantage in designing and developing projects. I'm excited that we continue to gain traction in developing a robust pipeline of future projects across different geographies.

We now have over 1.4 gigawatt of projects on various stages of development. Our shovel-ready pipeline features 613 megawatts in multiple geographies including the U.S., the U.K., Turkey, China, Japan, Canada, France and Poland. In addition, we have approximately 270 megawatts of projects under construction and over 550 megawatts we expect to be built in 2017. This provides you with a sense of the size of the upcoming monetization opportunity of the project assets.

The U.K. remains one of our key developed markets for us. The recent activities continue to highlight our competitive advantages there. In Q1, we connected 2 ground-mounted projects in the U.K. with a combined capacity of approximately 10 megawatts. Both projects are under ROC 1.2 programs. This revenue is expected to be recognized in Q2.

The U.S. continues to be a large and robust market for us. We have approximately 100 megawatts of shovel-ready projects, of which, 70 megawatts are community solar projects. The projects are located in California, North Carolina and Minnesota. In Q1, we signed agreements to sell 2 solar projects in Massachusetts with a combined capacity of approximately 1.3 megawatts and one 6.75 megawatt utility-scale project located in North Carolina.

We expect to recognize revenues from the sales of these projects in Q2. We're looking to sell the projects rates to some of our community solar pipeline before construction, which we believe is the most profitable plan that could help with the cash, if successful.

We won 13 solar utility projects in Southern Poland, each with an installed capacity of 1 megawatt. The projects are eligible for guaranteed tariff and a 15-year power purchase agreement and are expected to be connected to the grid by December 2017.

In Canada, we intend to construct approximately 9 megawatts of small-scale utility projects under the FIT3 program in 2017. These projects are expected to be connected to the grid in August this year and April of 2018.

In Turkey, we have 16 megawatts of projects under construction. All of the projects are unlicensed, thus, qualifying for the FIT3 tariff of 134 per megawatt hour.

In our domestic market of China, we continue to see an opportunity for smaller projects with more attractive economics. As discussed, smaller installations on commercial, industrial and residential buildings can be cost competitive for the building owners, provide good IRRs and got the support of the Chinese government.

As of June 2017, the company had approximately 307 megawatts solar projects in a shovel-ready stage in China. All of the projects are on file with the National Development and Reform Commission, and the company has obtained legal rights to develop these projects. The projects are located in the Eastern and Central part of China. We intended to commence construction of all of these projects with the current calendar year. We are working with multiple institutions, such as China Resources, China Power Investment [in a lease] et cetera regarding the financing of these projects.

Now let me shift gears and talk about LED business. We remain confident that we'll be able to develop a solid LED distribution business by leveraging our global footprint and brand equity. It's an exciting new opportunity for us, which we expect will create a next layer of growth on top of project developments.

As I mentioned earlier on this call, the LED business delivered good financial performance in Q1. We saw sequential revenue growth with the gross margins nearly 31% and had approximately 4,390 customers as of March 31. The energy-efficiency market is a large and growing market, and the LED lighting is the critical element. We continue to expect this market to further expand as energy-efficiency retrofit's grow as a trend around the world. We continue to position ourselves to capture this opportunity in the years ahead.

Moving on, let's discuss another key strategic objective and that is generating cash and paying our debt. Our total debt increased by $54 million in Q1, and the increase was largely due to an increase in bill discount. However, we remain committed to reducing our debt and are confident that we're going to achieve that for the remainder of 2017. We continue to streamline our operations with tight cost control during downcycles, but we take a cautious approach to spending in a number of areas. We do plan to invest $15 million this year to replace our current manufacturing equipment. With diamond wire cutting technology, we believe this will increase wafer capacity by 200 megawatts and reduce leaking usage, thus, lowering our overall production costs.

In summary, Q1 results were generally in line with our expectations. As we continue to gain traction with our downstream project effort and LED distribution business, offset by challenging market conditions for ReneSola product business. We continue to execute our strategy to shift our business focus from manufacturing to downstream project development, and we remain excited about the progress we are making. For Q2, we expect downstream projects to outpace relative to Q1 as the result of continued growth in the project pipeline, ReneSola's execution and the project monetization.

Before I turn the call over to Maggie, I would like to take a minute to cover one other topic, and that is the proposal for Mr. Li regarding company's manufacturing and LED distribution business. The company's Board of Directors has released a preliminary nonbinding proposal dated June 13, 2017, for Mr. Xianshou Li, the company's Chairman and Chief Executive Officer, to acquire the company's manufacturing business, including polysilicon, solar wafer and solar manufacturing -- the solar module manufacturing and LED distribution business and assume related indebtedness.

The proposal estimates the value of post to manufacturing and LED distribution business, net of assumed indebtedness, to be approximately negative $30 million -- $81 million. The proposal also contemplates that in exchange for the assumption by Mr. Li of such indebtedness, the company would issue additional ADS, each representing 10 shares of the company to Mr. Li at $4.50 per ADS. If the transactions contemplated by the proposal are consummated, the company's remaining business would be focused primarily on solar project developments.

The Board has formed a special committee consisting of Mr. Martin Bloom, Mr. Tan Wee Seng, Ms. Julia Xu and Mr. Weiguo Zhou, each an independent director, to consider the proposal and other alternatives available to the company and has granted the special committee the authority to consider review, evaluate, and if appropriate, negotiate a strategic transaction on behalf of the company in order to maximize shareholder value. The special committee will conduct this progress -- this process with assistance of financial adviser and legal counsel.

Now let me turn the call over to Maggie for details on our financial performance. Maggie?

Thank you, Mr. Li and Rebecca, and thank you, everyone, for joining us on the call today. I will review our operations and financial performance for the first quarter 2017 and discuss our outlook.

Let's begin with Slide 4. Revenue of $137 million for the first quarter was down 33% sequentially and down 40% year-over-year. Q1 revenue came in better than our guidance of $130 million to $150 million. The year-over-year decline was largely due to lower solar product's pricing and fewer production shipments to external customers.

As we had anticipated, gross profit of $1.7 million declined by 65% sequentially and 96% year-over-year. Q1 gross margin remained under pressure at 1.1%, down from 2.1% in Q4 2016 and 17.1% in Q1 2016. The sequential decline in gross margin was primarily due to lower module ASP as well as annual maintenance of our polysilicon plant.

Operating loss for the first quarter was $17.8 million compared to operating loss of $21.8 million last quarter and an operating income of $12.2 million in the prior quarter. Operating expense for the first quarter of 2017 were $19.5 million, down 27% sequentially and down nearly 40% year-over-year. The decrease in operating expense in the quarter was largely attributable to tight cost control initiatives that were put in place across the entire company, coupled with the reversal of the warranty expenses.

Sequentially, SG&A expense decreased 39%, and R&D expense decreased 30% when compared to the same period last year. As discussed, we are taking a cautious approach to spending in a number of areas. In particular, we remain prudent in managing our discretionary expenses across the company.

Below the operating line, nonoperating expense of $9.1 million includes net interest expense of $8.9 million and loss on derivatives of $0.3 million, partially offset by foreign exchange gain of $0.2 million.

Net loss for the first quarter was $23.2 million, which compares to a net loss of $25.5 million in Q4 last year and a net income of $5.7 million in the same quarter last year. Loss per ADS was $1.16 in the quarter compared to loss per ADS of $1.26 in Q4 last year and earnings per ADS of $0.06 in the prior-year quarter.

Slide 5 provides a summary of the key line items of our income statement over the last several quarters.

Please turn to Slide 6, which highlights portion of our balance sheet. Cash and equivalents, including restricted cash, was $144.4 million at the end of the first quarter, up from $133.2 million at December 31, 2016.

During the quarter, the company increased the total debt by approximately $64 million to $679 million. The increase was largely due to an increase in bill discount. Our long-term objectives to reduce debt remain intact, and we strongly believe that each dollar of debt reduction will yield a similar increase in the value of the company's equity.

Slide 7 highlights the recent trend of working capital efficiency. Days sales outstanding in Q1 increased to 84 days from 59 days in Q4. Days of inventory increased to 93 in Q1 from 61 in Q4.

Before I move on to our project sales in Q1, I want to reiterate that our finance team remains focused on improving our balance sheet, and we are happy with the continued progress the team made in the past several quarters and see opportunities to further reduce debt in coming quarters.

Now let's move on to the details about our project pipeline. Slide 8 shows our recent history of project sales including 2 commercial and 1 utility-scale projects in the U.S. in Q1.

Slide 9 shows our geographic footprint, and Slide 10 breaks out our project pipeline by country.

As Mr. Li mentioned, we now have a pipeline of over 1.4 gigawatts of projects in various stage of development. Our shovel-ready pipeline features 613 megawatts across different geographies, as shown here on Slide 10. In addition, we have approximately 270 megawatt of projects under construction.

Slide 11 summarizes the results for LED business. We continue to growth LED revenue in the first quarter although at a slower pace than in Q4. Revenue was $9.6 million in Q1, up from $9.3 million last quarter. The slow sequential growth in revenue was largely attributable to short-term adjustments to product offering coupled with the inventory management in the quarter.

Gross margin was approximately 31% in Q1, up from 26% in the prior quarter. We remain optimistic about the growth prospects for the LED business. As of end of March, we have about 4,390 active customers. We believe we can leverage our brand name and global distribution footprint to build an attractive high-margin business. The LED business accounted for over 6% of total revenue in Q1, and we anticipate meaningful revenue contributions from the business over time.

Now let me summarize our module and the wafer production shipments in the quarter shown on Slide 12. In Q1, total external module shipments were 267 megawatts, down 19% sequentially and down 24% from a year ago. The year-over-year decrease reflects our ongoing exits from the OEM business as we transition our business model to focus on project developments.

Total wafer shipments were 260 megawatts, down 15% sequentially and down 26% from the same period last year. As anticipated, our income manufacturing cost for wafer in Q1 was $0.35 due to a decline in processing and silicone cost. We expect the in-house cost per watt to further decrease in the remainder of 2017.

The pie chart highlights the geographic breakdown of module shipments in the first quarter. We saw a significant increase in demand from India in Q1 representing 42% of total shipments, up from 6% in Q4. Demand in China declined in Q1, which represents 37% of total shipments, down from 69% last quarter. Japan remains an important market for us, representing 6% of total shipments in Q1. Demand in Europe rebounded in Q1, which made up 11% of the shipments, up from 1% in Q4. The U.S. accounted for less than 1% in the quarter, similar to Q4 levels.

Our module ASP decreased to $0.37 per watt in Q1 2017 from $0.40 per watt in the fourth quarter of 2016. Compared to prior quarters, we did not show much to the U.S. in Q1, which typically has higher pricing.

Finally, we conclude with guidance, which is on Slide 13. In the second quarter of 2017, we expect revenue to be in the range of $180 million to $200 million. External wafer shipments in the range of 220 megawatts to 240 megawatts and the external module shipments in the range of 230 megawatts to 250 megawatts.

On the downstream business branch, we expect downstream project sales to increase in Q1 relative to Q1. The Q2 revenue guidance also reflects our expectations that we'll be redirecting more external module shipments to downstream projects. For the full year 2017, we maintain our revenue guidance range of $900 million to $1 billion.

We would like now to open up the call for any questions that you may have for us. Operator, please go ahead.

(Operator Instructions) The first question is from Justin Clare of Roth Capital Partners.

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

So you know that we -- the company has just received the proposal from Mr. Xianshou Li yesterday, and we -- the special committee has just formed yesterday. So right now, it's hard to tell how long it will take, but we -- I think with the legal counsel's assistance, the special committee will come out the procedure steps on the timeline as soon as possible.

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

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

Okay. And then -- so I just wanted to see -- to ask again on this particular question, it's very important. Do you -- as you understand it now, do the debt holders needs to approve the transaction -- or not debt holders, but your lenders? Or do you not know that yet?

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

Okay. Maybe one final question from me then. So you had previously talked about selling 440 megawatts of projects in 2017. Can you just update us on that view? And share how many megawatts you might sell by quarter?

You mean how many megawatts of projects we would sell?

Yes, exactly.

In this year, right?

Yes.

Okay. It's like -- so for Chinese project, we are to sell like 60 to 80 megawatts for the -- in the coming 2 quarters. And for the overseas projects, we are to sell 100 to 130 megawatts in this year.

Okay. So you -- Okay. So it looks like it'll be less than 200 megawatts planned for sale this year then?

Right.

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

Could you just talk more about the privatization bid? And could you explain what's the transaction behind the $4.50 offer for the manufacturing business?

Hold on a second, Maheep. The company has just got the proposal from Mr. Li. So it is from Mr. Li's proposal. Right now, the special committee still need to -- with the assistance from some financial advisors, should evaluate this price.

Okay. And on the cash -- sorry, go ahead.

I mean, the $4.50 price in this is based on Mr. Li's own financial adviser, so we cannot comment on that pricing yet.

Can you just comment on cash? You did say 5% of this project debt, but how much cash would you have saved if this transaction goes through in the next quarter? So how much cash will you have, in millions?

How much cash will we...

Be on the balance sheet following this transaction.

How much is our cash?

Yes.

Okay. Yes. I think this is the same as the previous question with -- by Justin. It is like -- as I've said, as of the end of Q1, the debt belong to the manufacturing business accounted for like over 95% of our total debt.

On the cash side, is it the same?

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

Okay. And yes, that makes sense. And just a question on Q2 guidance for wafer and module shipments, is there newer guidance because of higher shipments to your downstream business? Or lower production in general?

You mean -- for the second quarter, there's a lower (inaudible) to external, right? There will be lower shipments, too. I would say that for every quarter, there will be like 250 megawatts to external customers, and the rest will go to our downstream business.

Your next question comes from the line of John Segrich of Luminus.

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

Yes.

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

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

Okay. So when you're saying you're issuing him shares at $4.50, there's actually no cash coming in. It's just the dilutive transaction for the existing shareholders priced at $4.50?

The company will issue shares to Mr. Li because he takes over negative assets, if the transaction works out.

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

Right.

(Operator Instructions) I'm seeing no more questions in the queue. Let me turn the call back to Rebecca Shen for closing remarks.

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li.

I want to reiterate our commitment to shareholders for the owners of the company and our partners. I'm optimistic about our opportunities in 2017. We're working diligently to create what we believe is the path to sustained profitability. Project development remains our focus, while we also continue to deliver high-quality power products. In the meantime, we'll focus on tight cost control, cash generation and further strengthening of our balance sheet.

That concludes our call today. You may all disconnect.

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