Emeren Group Ltd (SOL) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2018 ReneSola Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your first speaker, Gary Dvorchak. Thank you. Please go ahead.

Thank you, Evanne, and hello, everyone. Thank you for joining us on today's conference call to discuss the second quarter results. We released the second quarter 2018 results earlier today, and they're available on the company's website as well as from newswire services. You can also follow along with today's call by downloading a short presentation available on the company's IR section of the website at renesolapower.com.

On the call with me today are Mr. Xianshou Li, Chief Executive Officer; Mr. Xiaoliang Liang, Chief Financial Officer; Mr. Doran Hole, Group Vice President of Strategy; Mrs. [Jessie Jang], Director of Financial Reporting; and Mr. Johnny Pan, Director of Investor Relations.

Johnny will read Mr. Li's prepared remarks regarding ReneSola's operating highlights, and Mr. Liang will then review our second quarter 2018 financial results.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, which is 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. Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking information.

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

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

Thank you, Gary. So following on Mr. Li's prepared remarks. Thank, everyone, for joining our call this morning. We appreciate your interest in ReneSola.

To get started, I will provide a summary of our Q2 financial performance and review our operating highlights. I will then turn the call to our CFO, Xiaoliang Liang, who will cover financial results for the second quarter and provide guidance for 2018. We will then open the call to Q&A.

First, our Q2 financial results was solid, and we are pleased to -- with the right execution in this quarter. Revenue came in at higher end of our guidance. Gross margin exceeded all our expectations. Operating income was flat when compared to Q1 2018. Operating margin increased by around [2,100] basis points sequentially. Q2 operating results were equally solid.

So project pipeline is strong at around 1.5 gigawatts, of which 670 megawatts are late-stage. The new downstream-only strategy we implemented last year remains focused on small-scale solar projects around this award.

In the second quarter, we installed 13.1 megawatts of rooftop projects in China and 14 megawatts of projects in Poland. We sold a 6.75 megawatts of utility projects in the U.S. states of North Carolina to the New York-based Greenbacker Renewable Energy Company. Greenbacker is publicly registered, a non-traded Limited Liability Company that owns and operates a diversified portfolio of renewable energy power plants, energy efficiency projects and other sustainable investments.

We currently own and operate 226.5 megawatts of solar assets. Our geographic diversity meaningfully reduced our risk profile. We operate nearly 207 megawatts of rooftop projects in China, 15 megawatts in Romania and the 4 megawatts of rooftop projects in the U.K. We also have approximately 19 megawatts of rooftop projects under construction in China.

Slide 6 summarize this. Our pipeline is robust and diversified at all stages of development. The late-stage features 670.2 megawatts in the U.S., Canada, Poland, France, Hungary, Spain, India, South Korea and China, 134 megawatts of these projects are under construction. Our early-stage pipeline also covers the growth, bringing total planned capacity to approximately 1.5 gigawatts.

Now let's cover some details on various regions. First, China, shown on Slide 7. The rooftop markets in China is a lucrative opportunity for us. We now operate approximately 207 megawatts of rooftop solar, concentrated in a few Eastern provinces with attractive development environments. The commercial and the industrial electricity price in those provinces are relatively high, and the electricity off-takers are generally creditworthy enterprises. Self-consumption DG projects in those provinces are attractive investments.

In the second quarter, we installed 13.1 megawatts of rooftop projects in China. We believe unsubsidized self-consumption projects with the high PPA price will remain attractive.

In August, we announced the signing of a 60-day exclusivity agreement with the affiliate of Brookfield Assets Management. Under the agreement, we will negotiate the sale of our operating DG assets in China to them. If we reach that deal during the 60-day period, this transaction will substantially reduce the company's leverage ratio and significantly improve cash flow and the liquidity.

After completing this transaction, the proceeds from the sale will provide a substantial capital for us to recycle back into the growth of our business. In the meantime, we will continue to pursue opportunities to develop, build and then monetize small-scale and the DG projects in China and other geographies.

The U.S. is a large and important market for us. As shown on Slide 8, we have around 286 megawatts of late-stage projects, of which, approximately 69 megawatts is community solar in Minnesota and in New York.

In addition, we are pursuing small utility scale projects in Utah, Texas, Florida, Arizona, Colorado and California. As I mentioned earlier, in Q2, we recognized revenue from the sale of 6.75 megawatts of utility projects in North Carolina.

In the third quarter, we anticipate the signing of an agreement of our second set of community solar projects in Minnesota with a total capacity of around 13 megawatts.

In Canada, shown on Slide 8 -- 9, we have 7.6 megawatts of late-stage projects, all of which are under construction and shall connect to the grid by the end of 2018. These projects are eligible for the FiT3 scheme.

Poland is shown next on Slide 10. In the second quarter, we installed 14 megawatts of projects. On top of that, we have a late-stage pipeline of 41 megawatts, all of which is under construction and shall grid-connected in the second half of 2018. This 41 megawatts is part of the project awarded to us last -- in last year's government auction.

Slide 11 shows Hungary, where we continue to invest in small-scale DG projects. Our late-stage pipeline has grown to more than 17 microprojects, each with a size of 0.5 megawatt, bringing the total capacity to approximately 43 megawatts. All of these microprojects are under construction and shall connect to the grid in the second half of 2018.

We continue to believe this fits well with our overall downstream strategy to pursue opportunities in small-scale projects.

We announced last week that we closed our long-term project financing with K&H Bank, one of Hungary's largest banking and financial services firms. The deal will finance an approximately 8 megawatts KAT-licensed solar projects in Hungary. The projects shall grid-connected by October 2018. Additionally, we have 2 more KAT-licensed projects portfolio, seeking project financing from K&H Bank.

Now turning to Slide 12. We have covered the other regions. In France, in the first quarter of 2018, we formed a strategic partnership with Green City Energy from joint development of 4 solar parks in the south of France. With a total installed capacity of 69 megawatts, this work generates approximately 105 million kilowatt hour of electricity per year. Additionally, we were awarded 16 projects with the combined capacity of 4.65 megawatts in Q1, bringing the total projects pipeline to 73.7 megawatts in France. We expect COD from these projects in 2019.

We continue to penetrate the India solar market and have grown our project pipeline to 30 megawatts. Our projects, they are our ground-mounted open access projects similar to the U.S. community solar, which transfer electricity through the commercial and industrial off-taker and the long-term PPAs. We are excited about large market potential in the open access markets in India. We think we can duplicate our success in the U.S. community solar market in India.

Beyond those geographies I just discussed, we are actively pursuing opportunities in other international markets, including Spain, South Korea and Vietnam. For instance in Spain, we have a sizeable late-stage pipeline of 162 megawatts of private PPA purchase. In South Korea, we secured a 9 megawatts ground-mounted project. As you can see, we have a geographically diversified project portfolio, and I am very excited about the opportunities we are pursuing.

Before I turn the call over to Xiaoliang, I would like to take a minute to reiterate our business model and the strategy. Globally, we implement an asset-light project developed model with the focus on distributed generation and the community solar. Below is our projects rights at shovel-ready stage of build and transfer projects under grid connection. We typically achieve high gross margin in the sales of projects rights.

Downstream projects represent a large opportunity globally, and we are excited about our prospects. Our talented team, diversified geographic coverage and the record of accomplishments all position us for profitable growth.

With that, let me now turn the call over to Xiaoliang for comments on our financial performance. Xiaoliang?

Thank you, Mr. Li and Johnny. And thank you, everyone, for joining us on the call today. I will review our financial performance for the second quarter 2018 and then discuss our outlook.

Please turn to Slide 14. For the second quarter, revenue was USD 27.8 million compared to $44.8 million last quarter and $1.6 million in the same period last year.

Here is the revenue composition by segments. Project Development was $10.1 million, as we recognized the revenue from the sale of 6.7 megawatts of utility projects in North Carolina. EPC revenue was $7.6 million, mostly from EPC services for 8.4 megawatts of rooftop in China. Electricity sales were $9.9 million.

Gross profit was $8.2 million compared to a gross profit of $8.4 million in Q1 2018 and $1.1 million in Q2 2017.

Gross margin was 29.5%, well ahead of our expectations of 20% to 25% and up from 18.7% last quarter. Gross margin was up due to revenue mix, with small high-margin electricity sales due to seasonality, meaning in the summer high irradiance period.

Operating income was $5.9 million, flat when compared to Q1 2018. Operating margin was 21.2%, up from 13.1% last quarter.

Second quarter operating expenses was $2.3 million, down from $2.5 million last quarter and up from $1.9 million in the same period last year.

Sales and marketing expenses in Q2 was $0.2 million, up from $0.1 million in Q1 2018.

General and administrative expenses were $2.7 million, up from $2.4 million in Q1 2018.

Below the line, second quarter nonoperating expenses totaled $5.5 million. This includes interest expense of $2.6 million and the foreign exchange loss of $2.9 million. The ForEx loss was due to the depreciation of the euro, pound sterling and Polish zloty against the U.S. dollar.

Net income was $0.4 million compared to an income of $5.4 million in Q1 2018 and $0.8 million in Q2 2017.

Second quarter EBITDA was $5.2 million compared to $9 million last quarter.

Now the balance sheet, shown on Slide 15. We had cash and equivalents of $24.8 million as of June 30, 2018, an increase of about $14 million during the quarter. Long-term borrowings was $72.7 million as of June 30, 2018, an increase of $40 million during the quarter. The debt increase related to the construction loan for the Polish projects, we extended the term and size during the quarter.

We have long-term liabilities related to capital leases and failed sale-lease backs. These relate mainly to rooftop project in China and yearly grow along with the growth of the operating assets within the DG portfolio. Those liabilities were $85 million, an increase of approximately $7 million during the quarter.

Finally, we will discuss guidance, shown on Slide 18. For the third quarter of 2018, we expect revenue in the range of $15 million to $20 million and the gross margin in the range of 35% to 40%. We also expect to monetize 13 megawatts projects in international markets.

For the full year, we continue to expect the revenue in the range of $130 million to $140 million with gross margin between 20% to 25%. We intend to monetize 250 to 300 megawatts of projects in international markets.

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

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

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

Yes. (foreign language)

(foreign language)

So gross margin for IPP for Q2 is around 80%; and for EPC, it's around 20%. And for...

(foreign language)

Yes. Okay, so. Sorry, I'll just start it again. The IPP gross margin for Q2 is around 70%; for EPC, it's around 20%; and for Project Development, it's in...

(foreign language)

Yes, it's a special event in Q2.

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

Yes, you are correct for the 200-megawatt sales in China because we're expecting the deal to be closed by the end of the year. Yes, so if not, it will not reflect in this year's earnings. It will not impact the revenue. It's only...

(foreign language)

Okay. (foreign language)

(foreign language)

Yes, Justin. Mr. Li just confirmed that the sales of 200 megawatts assets in China will not impact our revenue and the gross margin and the gross profit. It only changes our net income, net profit. It's selling of their assets.

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

Yes. Yes, correct.

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

(foreign language)

(foreign language)

(foreign language)

(foreign language)

Just one minute.

(foreign language)

(foreign language)

(foreign language)

(foreign language) I'm not sure what do you mean by connected because we also have EPC business, IPP business and the Project Development business. So if you consider all of this, we're expecting to connect 42 megawatts in Q3, and we're expecting to sell around 13 megawatts in Q3.

Okay, yes, that's what I was looking for, it's the combination of -- across all of your businesses, how many megawatts do you plan to connect in Q3? So it sounds like 42. And then what about for Q4 across all of your businesses?

(foreign language)

(foreign language)

In Q4, we plan to connect 26 megawatts.

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

(foreign language)

(foreign language)

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

(foreign language)

(foreign language)

(foreign language)

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

In the second half of 2018.

(foreign language)

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

(foreign language)

Okay. So 97 megawatts to be connected in Europe. And if we also consider projects in the U.S., we're going to have 116 megawatts projects to be connected to the grid in the second half of 2018. We also have a breakdown of projects under construction in the presentation.

Okay. And then what about the...

And for your -- yes, just back to the question, I'll just explain to Mr. Li (foreign language)

(foreign language)

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

Okay. And so how much debt do you think you could repay?

How much debt, you mean?

Yes, so also with the proceeds, how much debt could you repay? Or would the buyer assume the debt that is associated with the project?

Okay. (foreign language)

(foreign language)

Okay. We were paid back other project finance, so financial leasings for the Chinese projects, it's around USD 85 million.

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

(foreign language)

Mr. Li also update comments that the financial leasing would be USD 110 million around. Could you just repeat your question for this one?

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

Okay. (foreign language)

(foreign language)

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

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

(foreign language)

(foreign language)

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

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

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. We are pleased with our Q2 results and our continued execution of Project Development strategy. We are committed to growing profitability, managing our operations and strengthening our financial position. We remain optimistic about our opportunities around the world, and we look forward to providing you with our business update in a few months.

Thank you, all, again, for your participation. This concludes our call today. You may all disconnect.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.