Emeren Group Ltd (SOL) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to a business update and earnings conference call. (Operator Instructions) Now I would like to hand the conference over to your speaker for the day, Mr. Gary Dvorchak. Over to you, sir.

Hello, everyone, and thank you for joining us on ReneSola's conference call today. We'll provide a business update as well as discuss the company's project development strategy. We released second quarter 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 presentation that's on the website. I'll talk more about that in a second.

On the call with me, today are Mr. Xianshou Li, Chief Executive Officer; Maggie Ma, Chief Financial Officer; and Ms. Rebecca Shen, Director of Investor Relations. Rebecca will read Mr. Li's prepared remarks regarding ReneSola's business highlights and strategy. Maggie will briefly discuss the second quarter 2017 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. Forward-looking statements involve inherent risks and uncertainties, 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 and Form 20-F and other documents filed with the U.S. SEC. ReneSola does not assume any obligation to update any forward-looking statements, except as required under applicable law. And please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars.

Also before we start, I want to point out that we have posted a new corporate PowerPoint in the Investor Relations section of the website. This new presentation describes in detail the transaction and our project development strategy. We highly recommend reviewing it after the call is over.

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

Thank you, Gary. The following are Mr. Li's prepared remarks. Thank you, everyone, for joining our call this morning. We have great news to discuss today. This week, we announced the signing of a definitive agreement for the sale of our manufacturing and LED business. Because our story has changed in profound ways, we thought it best to provide a business update, and then enable you to ask questions. After my prepared remarks about operations, Maggie will briefly cover the financials, and then we will open the call to Q&A.

This week, we announced that ReneSola entered into a definitive agreement in which I will buy the company's polysilicon, wafer, cell, module manufacturing and LED distribution businesses. The transaction will also transfer substantially all of ReneSola's related debt to me. This transaction transforms ReneSola into a pure-play solar downstream player with a portfolio of our outstanding project assets around the world and a solid balance sheet with very little debt.

Let us start with an overview of the transaction structure. And then I will discuss the key benefits and rationale. After that, I will spend some time discussing our downstream efforts and growth strategy.

Although details are always complex, the deal is conceptually simple. We have consolidated the ownership of all of our manufacturing and LED business into our Singapore subsidiary. All of the debt currently carried by ReneSola was also assigned to that subsidiary. ReneSola will spin off the entity to me. The entity will also cancel all trade payables owed to by ReneSola.

After the deal closes, ReneSola will become a pure project development business with almost no debt. As part of the deal, because I am taking on a huge amount of debt, ReneSola is compensating me by issuing $18 million of ADS to me. This is especially important as my family is personally guaranteeing that debt. The manufacturing and LED business have a negative value, appropriate given the losses in that mode. We engaged Roth Capital for a fair opinion -- for fairness opinion on the deal. And they concurred that it is reasonable, given there's risk involved.

There are numerous benefits to me -- numerous benefits to the transaction. And we expect it to be accretive to ReneSola in the longer term. First, from a strategic perspective, this transaction completes the transformation that we initiated in 2015. We will completely exit manufacturing, which is frankly a very challenging business burdened by overcapacity and low profit. We will become a pure-play company in project development, which is an increasingly profitable and rapidly growing segment of the solar value chain. Our entire board believes this is the best and only path forward for ReneSola.

The losses and the capital needs of the manufacturing business were significant constraints to the growth of our downstream business. I am incredibly excited to see ReneSola start anew with a significantly improved balance sheet, strong team and abundant growth opportunities ahead of us. We believe this transformative transaction represents a key step in the evolution of ReneSola as we strive to build a premium organization. This transaction is critical to positioning us as an emerging market leader in solar project development across the globe.

Second is that definitive agreement substantially improves ReneSola's balance sheet, providing the financial flexibility necessary to drive the growth of project development efforts. The deal specifies that ReneSola will no longer be liable for over RMB 3 billion of bank borrowings. The agreement also cancels substantially all of the trade payables of over USD 200 million owed by ReneSola to me to the manufacturing business. The board is aware of the investor sentiment and the softness in our share price. We believe this transaction should restore investor confidence in the company. Our balance sheet will be pristine. The drag of money-losing operations will be gone and our project business continues to gain traction with a solid global pipeline to ensure future growth.

Speaking of project development, let me review our success to date and growth strategy. We entered the project development business several years ago. And since then, we have developed over 480 megawatts of projects around the world. Projects range from utility-scale to smaller rooftop distributed generation. All of the projects share the common traits of operating in stable, mature markets with attractive subsidies. We believe our strong record of accomplishment will allow us to accelerate the development of the pipeline as well as attract financing on favorable terms. Going forward, we intend to focus on small scope projects, which differentiates us from our peers.

Let me now spend some time discussing our capabilities in our project development business. We have a global team with a solid industry background. Our in-house development team enables us to achieve higher project IRR than acquired projects. On the construction side, we have obtained EPC qualification within China and have an in-house EPC team in Europe as well. Going forward, we intend to expand our in-house O&M team globally, thus further lowering the operating cost as an independent power producer.

Additionally, we have a robust pipeline of future projects across different geographies in various stages of development. Our late-stage pipeline features 480 megawatts in the U.S., the U.K., Turkey, Japan, Canada, France, Poland, Thailand and China. Our early total pipeline features power projects around the world, something to a capacity of approximately 1 gigawatt. With that, we believe our credentials and capabilities continue to give us a competitive edge over our peers.

Now I would like to highlight our downstream efforts in several key geographic regions. First, China, China rooftop market is a solid and lucrative opportunity for us. We have aggressively established our presence in this market. Rooftop solar can provide steady cash flow, double-digit IRRs and reduced risk of curtailment or subsidy delays. We now have 100 -- over 130 megawatts of rooftop solar into the operation, concentrated in a handful of Eastern provinces with attractive development environments.

Our efforts in the China rooftop market enables us to become the only U.S.-listed company levered to the exciting China rooftop opportunity. We have established solid relationships with numerous financial institutions to fund the projects. We expect to further lower the financing cost with our improved balance sheet after the transaction closes.

The U.S. continues to be a large and robust market for us. We have over 150 of shovel-ready projects, of which 40 megawatts is community solar. We'll continue to identify opportunities in the areas which we see higher PPA prices than utility projects. In Canada, we have 8.6 megawatts of projects to start construction in Q4 2017. These projects are eligible for FIT3 with higher-priced -- with price higher than CAD 0.28. In addition, we have approximately 10 megawatts of FIT4 projects in the process of being acquired.

In Poland, we were awarded 55 megawatts of projects from the government auction, each with the size of 1 megawatt. We expect 13 megawatts of these projects to be connected to the grid in Q4 2017 or early next year. Turkey is another important market for us with abundant sunshine resources. We have approximately 133 megawatts of projects, of which 13 megawatts are under construction. Meanwhile, we're also exploring opportunities in markets such as France, Thailand and Japan.

Build and transfer has been and will be an important strategy for us all over the -- for us over the near term. However, we also intend to start retaining more projects, becoming an operator that sells power. The independent power producer, or IPP, model is especially attractive, given its resulting high-margin recurring revenue. Over time, we intend to shift a meaningful amount of revenue to high-margin recurring power cells. And some downstream projects remain a sizable opportunity globally. And I'm excited as we continue to gain traction in developing a robust pipeline of future projects across different geographies.

We have a pipeline of over 1 gigawatt of projects in various stages. Additionally, we have demonstrated our ability to successfully build and transfer solar power projects around the world. Our project development team consists of 314 dedicated employees located around the world. That team, our extensive financial relationships, and our relative success give us high confidence that we can profitably grow the new ReneSola.

With that, let me now turn the call over to Maggie for very brief comments on Q2 financials. Maggie?

Thank you, Mr. Li and Rebecca, and thank you, everyone, for joining us on the call today. Our financial discussion is going to be very brief today with the definitive agreement signed and ReneSola is about to be transformed fundamentally and the historic financials are not particularly relevant. I'll go through a few line items on the P&L. But the majority of the revenue and losses is related to the business being sold, the consolidated results are not indicative of the company's future financial structure and outlook.

Revenue of $151 million for the second quarter was down 3.2% sequentially and down 39% year-over-year. The year-over-year decline was largely due to lower product shipment to external customers. Gross profit of $4.1 million was up 140% sequentially and is down 90% year-over-year. Gross margin increased sequentially to 2.7 percentage from 1.1 percentage in Q1 2017 and decreased from 16% in Q2 2016.

Operating expense was $24.5 million, representing 16.2% of revenue, up from $19.5 million in the first quarter of 2017 and down from $34.8 million in the same quarter last year. Operating loss for the second quarter was $20.4 million compared to operating loss of $17.8 million last quarter and operating income of $6.4 million in the prior-year quarter.

Net loss for the second quarter was $31.5 million, which compares to a net loss of $23.2 million last quarter and net income of $5.25 million in the same quarter last year. Loss per ADS was $1.57 in the quarter compared to a loss per ADS of $1.16 in Q1 of 2017 and earnings per ADS of $0.27 in the prior-year quarter.

Our project business results are relevant to our future as a pure-play developer, so let's discuss those. We recognized $3.1 million from the sales of 3 megawatts rooftop projects in China. In Q2, we also signed an agreement to sell our utility-scale projects located in North Carolina with the capacity of approximately 6.75 megawatts with revenue expected to be recognized in Q3.

Subsequent to the end of this quarter, we signed an additional agreement to sell projects overseas, including: 2 ground-mount projects in the United Kingdom with a combined capacity of approximately 10 megawatts with revenue expected to be recognized in the second half of 2017; and a portfolio of ground-mount projects in North Carolina with an aggregate capacity of 24 megawatts. We expect those projects to be connected to the grid by the end of December this year.

Now let me turn to guidance. Again, because of signing the transaction, we'll give you the relevant numbers, which are the stand-alone project development business as it will be formed when the transaction closes. So for the third quarter, we expect the revenue in the range of $40 million to $45 million and gross margin in the range of 15% to 20% while gross margin from IPP business would be in the range of 65% to 70%. The company also expects to connect 20 to 30 megawatts of projects during this quarter.

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

(Operator Instructions) The first question comes from the line of Justin Clare from Roth Capital Partners.

Congratulations on getting that transaction completed. So first, I just wanted to ask about -- I know you haven't provided guidance beyond Q3. But I was wondering if you could comment on how many megawatts could you build for sale in 2018 versus how many megawatts could you build and keep on your balance sheet. What's the plan there?

You mean 2018, not this year?

Yes, in 2018. Right, not this year. I'm just trying to think a little further out what the plan is.

So basically for the next year in China, we'll basically try to operate the projects we developed. So we will develop 400 megawatts of projects more to operate. For the overseas projects, we plan to develop 100 more and try to sell it.

Okay, got it. And then for Q3, I just wanted to get a little bit more detail on the revenue. Can you share what the mix is from electricity sales versus projects that you have sold in the quarter?

So basically, you can see that in our outlook, the revenue would be like $40 million to $45 million, which includes $4 million from electricity sales.

Okay. So the rest is project sales. It looks like you've sold 6 -- close to a 7-megawatt project in North Carolina. Can you share what other projects you have sold in Q3?

That includes 500 in the United Kingdom and 800 -- sorry, that's 5 megawatts in the U.K. and 8 megawatts in the U.S. I think the 24 megawatts North Carolina projects will be recognized in...

In Q4.

Right. It's not in Q3.

Okay, great. That's helpful. And then if we could turn to the balance sheet, I know you've presented some kind of high-level numbers as to what the assets and liabilities would be post-transaction. But can you provide a little bit more detail? For example, in the assets, how much of that will be cash versus how much will be the value of projects?

The proportion of cash is very small. It's just like $2 million to $3 million at present. But you know that since most of our projects in China have already connected to the grid, so currently we've captured the bank loan drawdown already gradually in Q3 and also in Q4. So this will turn into cash.

Okay. And then can you share a little bit more detail on the liability side as well? So this $33 million, I think, that is bank debt, what comprises the other portion of the liabilities?

So this is the data as of the end of Q2. So in this $33 million, $30 million is for a Romania project, which we operated for almost 2 years. And for the additional $3 million, this is together with the newly developed Chinese rooftop projects.

Okay. And then so the liabilities is -- $170 million in liabilities. So what is the -- what comprises the rest of the liabilities? Is that debt? Or is that some other payable or something else?

Yes, payable to the suppliers, equipment suppliers.

That's right.

Okay, got it. And then maybe one last question for me. In terms of the financing for projects, what is your plan looking ahead? Like how much of the projects do you plan to finance with debt versus equity? And then do you have plans to go to the equity markets to raise capital? Can you give us some color on that?

Well, we are -- for project financing, we generally look at a leverage ratio of around 70% to 80%. From the corporate perspective, we plan to do a public offering in the first half next year, which we plan to raise $50 million from the market.

Okay. And then near term for this year, you already have the capital that you require to reach your targets?

Right. Right, correct.

So we will check with Mr. Li to see if he has anything he wants to add.

(foreign language)

So he said we are working with a lot of financial institutions to fund the China DG projects. And currently, we have obtained RMB 360 million from financial leading companies. And we still have a lot under approval process. And Mr. Li said after the completion of the transaction, he think it will be a lot easier for us to get financed. And our next step is to negotiate with banks so that we could further lower the financing cost. Right now, our interest rate is around 5.5% to 7%. And if we engage with the banks, we expect the financing cost could be lowered to 6%.

(foreign language)

And he said as for our overseas markets, we have obtained a construction loan for our projects in the U.S., in Poland, in the U.K. as well as in Canada. He thinks that the financial institutions, they are in favor of our transactions. So he thinks that we are very optimistic about the future financing ability.

Okay. And if I could actually fit one more in here, you indicated that SG&A expenses will drop to $12 million a year. So I just want to make sure I understand. Does that imply that we should expect about $3 million of SG&A for Q4? And then do you have any R&D spending that you plan ahead? Or what should we expect there?

Yes, the $3 million is close.

(foreign language)

No, we don't see any R&D expenses, just SG&A and financing costs.

(Operator Instructions) The next question comes from the line of Joseph Osha from JMP Securities.

This is McCrea Dunton on for Joe. So given ReneSola's transition here to a pure-play developer, it looks like a significant portion of your pipeline, about 152 megawatts out of 480, is located in the U.S. So given the upcoming tariff actions under Section 201 that may be implemented by the U.S. administration, can you discuss the potential impact this would have on the pipeline?

(foreign language)

Well, he said one thing that differentiates us from our peers is that we do not do utility -- we do not do big-ticket scale utility projects, which the PPA price is just around $0.03 to $0.05. So he thinks that these types of projects will be negatively affected by the 201 petition. He thinks that -- we do a small scale or community solar projects. And for our smaller scale projects, the PPA price could be as high as $0.10, which means that we will be least affected by the 201. He thinks that our construction costs for the community solar projects is around $1.50 to $2, so we are not going to be greatly affected.

(foreign language)

Yes, $1.50 to $2.

Okay. Just one question on the Chinese market. The company obviously isn't going to be planning on getting into any larger utility-scale projects. But how quickly does the DG market or the company expect the market in China to grow?

(foreign language)

Well, he thinks that the China DG market is going to be the future for the China solar industry. He thinks that the market, the China DG market is going to grow rapidly this year. He thinks that around 40% to 50% of the total installation will come from the China DG market. He thinks that these projects, they have very high subsidy.

(foreign language)

Yes. And thus, will have a very attractive IRR. So yes, so...

(foreign language)

And we do not need to worry about the curtailment or subsidy delay or things like that. So he is very optimistic about the opportunity.

The next question comes from the line of Carter Driscoll from FBR Capital.

If somebody could comment on your strategy for securing your upstream equipment. I would assume, given the disruption with Section 201, a logical outcome would be to continue to source from the assets that are going private. If you could just discuss longer term, once the 201 dies down, your strategy for either bidding out your -- the acquisition of your upstream going forward, whether it be by region or any type of commentary to help would be helpful.

Hold on a second. Can you repeat your question? I'm sorry.

Yes, I'm just trying to -- as you break apart the business and the manufacturing assets are privatized, I'm trying to get the sense of where you're going to source your upstream equipment from. I'm assuming it would be from the privatized assets at the beginning. But will you set this out for bid once the Section 201 noise dies down? I mean, has that been a disruptive part? Could you just elaborate on who you potentially will be sourcing your upstream assets from if it isn't the privatized side?

Okay.

(foreign language)

Well, he said with the spinoff, we will definitely acquire from our manufacturing facility but only after fair price. And he said that for our overseas market, we are gradually purchasing from our competitors. For example, for our projects in Poland, we buy from JASO. And for our projects in Turkey, we buy from other solar manufacturers as well and...

(foreign language)

And for the U.S., because of the 201, we use our own modules.

Okay. My question is will that potentially change if 201 dies down? I'm assuming because such a large percentage of your pipeline is in the U.S., will that be set out for competitive bid once 201 -- assuming it is a reasonably benign tariff or other type of remedy, will that potentially be competitively bid out in 2018?

(foreign language)

Yes, we think we're very flexible. We just purchased at the fair price either from the upstream manufacturing or the competitors.

Okay. Maybe just one more question for me, if I may. So I realized that the transaction is fully not complete yet. But your debt to asset about 68%, obviously significantly lower post-transaction. But as you shift over more to build-to-own and operate certain assets, how do you think your target leverage ratio could change? Would it be -- I mean, I could see cases for increasing and decreasing, just trying to get a sense of as the mix changes more towards build-to-own, should we expect the leverage to go down or up?

(foreign language)

He said that when we start to build more and more projects, the leverage ratio will go up. But on the other side, we're going to be profitable and we're going to do another round of public offering. So he thinks that overall speaking, we're targeting asset leverage ratio at around 70%.

The next question comes from the line of Paul Strigler from Esplanade.

Just a couple questions on the China DG market and more of the project dynamics. Are there escalators built into the PPAs you signed with commercial clients?

Are there what?

Escalators? So in one of the projects you show in your presentation slides...

I'm sorry, Paul. Sorry to interrupt you, Paul. I'm so sorry to interrupt, your voice is not very clear. Can you be a little away from the mic? I think it's very close to your mouth.

Sure. Does that sound better?

Yes, that sounds better.

All right. So it looks like you guys are selling -- one of these projects you're selling to an off-taker at about RMB 0.64 to kilowatt hour. Is that a flat rate over a 20-year period? Or is there an escalator built into that?

It's a flat rate over the next 20 years.

Understood. And who are some of these commercial off-takers? Are these creditworthy off-takers? Are these local businesses? Who are some examples sort of customers, clients of yours on the DG side?

(foreign language)

Paul, if you look at our Investor Relations presentation, we have a cash flow model for China DG Projects in the appendix. Yes. So Mr. Li just explained that there are 2 types of China DG projects. The first type is those that will be fully connected to the grid. So it works like the utility projects of 6 FIT rate, which is around CNY 0.85 to CNY 0.98, it depends on different regions. And the other type is the China net metering project. And for the part that will be connected to the grid, the price is made of a standard price plus CNY 0.42 of national subsidy. And for the type that will be consumed by the off-takers, the price is made of CNY 0.65 to CNY 0.70 plus CNY 0.42 of national subsidy.

Understood. And then when we look at sort of the IRRs, it looks like you modeled out 25 years when these are 20-year feed-in-tariffs or net metering schemes. And you also have O&M cost that's flat for the entire 25-year period. Just with Chinese inflation is, are those fair assumptions? I'm just trying to understand what a 20-year equity IRR might look like versus the 25-year with escalating O&M costs.

(foreign language)

Well, we have factored in the year from 20 -- the year 21 to year 25 that's without national subsidy. So on the project IRR side, for those that will be fully connected to the grid, the project IRR should be around 8% to 9% and the China net metering projects could be...

(foreign language)

10% to 11%. That's for the IRR.

And then I guess it looks like you modeled flat or just not increasing O&M cost, operations and maintenance expenses. Is that an accurate representation of sort of how O&M cost should trend over 25 years? Or should we factor in maybe a little bit of an escalator or some sort of inflation to that base operation and maintenance cost?

(foreign language)

He said we modeled $0.05 per watt as an O&M cost because we think that with our scale coming up, we would be able to keep the cost. We would be able to bring down the O&M cost. And with the future technology, we think that it's fair that we model $0.05 for the O&M cost in the years ahead.

The next question comes from the line of Ke Chen from Shah Capital.

Sure. This -- you're just mentioning that we're going to be profitable. Look at your outlook and your operating cost. Well, looking at it, at least 5% net profit margin, is that a right estimate?

You mentioned 5% of net profit margin, right?

Yes, roughly.

(foreign language)

Okay. So he said that right now that only 10% of our revenue is coming from the power cells. We're looking at to hold 150 to 200 megawatts of China DG projects by the end of next year -- by the end of this year. And by the end of next year, we're going to hold 600 megawatts. And for those China DG projects, the profit margin could be as high as 65% to 70%. And if we take out depreciation, O&M cost, rental and financial interests, he thinks that the net profit margin could be 30%. So with that holding more and more China DG projects on hand, he believes that our profitability will improve as well.

Okay, that's great. Again, I look at your presentation on Page 6, you show your DG targets have high growth from 2018 to 2020. So could you talk more about -- again, to raise it out to 30% net profit margin, I mean, can you map out the rough estimation for the next 3 years in terms of net profit growth?

(foreign language)

He said that we're going to add 100 to 150 of China DG projects per quarter and with us accumulating more and more projects. And we just guided a gross margin of 65% to 70%, so he thinks that the profitability is predictable. And with us holding more and more China DG projects on hand, he thinks we are developing towards a more profitable business model.

(foreign language)

If we are able to hold 550 megawatt China DG projects by the end of next year, he thinks that the net profit could be $20 million for next year.

The next question comes from the line of Peter Law from Quentec.

What is the Chairman's strategy for the module business regaining profitability? If he's personally guaranteeing the debt, he must have a plan. What is that plan?

(foreign language)

He thinks in the past, our business model was very complicated and we -- with us -- with the transaction being closed, the project business will be able to recover its financing ability and will able to finance itself. So the manufacturing business would no longer have to invest money for the project business so that it will improve the cash flow for the manufacturing business. And the manufacturing business is able to invest money into a technology improvement to reach the profitability.

But where's the money going to come from? Because right now, the gross margin is 2.7%. I mean, your operating margin is negative. So it's not coming from operating cash flow. I mean, the question is if there was a viable strategy for the module business, why did you have to sell it to the Chairman? Why could ReneSola not have done it itself?

Well, because if we combine those 2 business segments together, it will -- each will constrain the development for the other. So we think it's better that we split the 2 companies.

Is the Chairman going to inject new equity into the module business?

Is what?

Is the Chairman going to put new money into the module business, new equity into the module business once he takes control?

(foreign language)

Well, he doesn't think it's an appropriate time to talk much about the manufacturing business. But he definitely believes that there are a lot of ways to solve the problem for the manufacturing business.

Okay. Well, it is an appropriate time because your investors today still own the manufacturing business. So in order for them to gauge whether it's a fair price or not, they should have that type of information.

I'm sorry. Could you say that again?

No, it's a statement, not a question, that right now, your shareholders still own the manufacturing business. So in order to gauge whether or not they're receiving a fair deal, it's good to have that information.

(foreign language)

He said that definitely it's harder for the manufacturing business. But he thinks that the project business is very promising. And on the other hand, ReneSola Singapore Ltd. will hold like 47% of the listing vehicle. So he's very confident.

(Operator Instructions) There are no further questions at this time. I would like to hand the conference back to the speakers, back to Rebecca. Please go ahead.

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. I want to reiterate our commitment to the shareholders, who are the owners of the company and our partners. I am optimistic about our opportunities for the remainder of 2017 and beyond. And this transformative transaction represents the start of a new era for ReneSola. We continue to work diligently to create what we believe is the path to sustained profitability. Project development is our business focus. From an operational standpoint, we'll retain our focus on tight cost control and cash generation that will further strengthen our balance sheet. That concludes our call today. You may all disconnect.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect the lines now. Thank you.