Emeren Group Ltd (SOL) 2018 Q3 法說會逐字稿

Hello, ladies and gentlemen, thank you for standing by for ReneSola's Third Quarter 2018 Earnings Call. (Operator Instructions) Please note that we are recording today's conference call Monday, 19th of November 2018. I would now turn over the call to Mr. Gary Dvorchak, Managing Director of The Blueshirt Group Asia. Thank you. Please go ahead, Mr. Dvorchak.

Thank you, Annie, and hello, everyone. Thank you for joining us on this conference call to discuss ReneSola's third quarter results. We distributed the press release earlier today. It's available on the company's website and from newswire services. Furthermore, in this call, we reference slide presentation deck which you can download from our website.

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, Strategy; Mrs. Jessie Zhang, 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 third 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. SEC. ReneSola does not assume any obligation to update any forward-looking information.

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

To get started, I will provide a summary of our Q3 financial performance and review our operating highlights. I will then turn the call to our CFO, Xiaoliang Liang, who will cover the financial results for the third quarter and provide guidance for Q4. We will then open the call to questions.

First, we delivered solid financial performance this quarter and are pleased with our continued execution in the quarter. Revenue came in at higher end of our guidance. Gross margin exceeded our expectations. Operating margin increased by more than 900 basis points sequentially. Net income increased approximately 750% quarter-over-quarter.

Equally important is that our Q3 operating KPIs were as solid as our financial results. As you know, there are 2 elements to our business, the projects we developed and sell and the projects we own and operate. Our focus is development, due to the lower capital requirements, so we are evolving to an eventual or development model. However, by pursuing both models now, we reduce our risk and better utilize the capital we have. The Development business recycles capital quickly via operating assets generated stable high margin recurring revenue. Let me take a quick look at each.

The Development pipeline is strong at around 1.5 gigawatts, of which 783 megawatts are late-stage. This late-stage features 783.3 megawatts in the U.S., Canada, Poland, France, Hungary, Spain, India, South Korea and China. Approximately 132 megawatts of late stage is under construction, while 6.2 megawatts was connected in Q3. The connected projects were all China rooftop DG. Also we sold 13.9 megawatts of community solar projects in the U.S. state of Minnesota to Nautilus Solar Energy. As many of you know, Nautilus is a leading U.S. company that does solar project acquisition, development and asset management.

Our owned and operated portfolio throws off high-margin recurring revenue. It totals 231.7 megawatts. Of that, we operate 212 megawatts of rooftop projects in China, 15 megawatts in Romania and 4 megawatts of rooftop projects in U.K. Looking ahead, we have nearly 17 megawatts of rooftop projects under construction in China. Slide 3 provides our projects business in more detail.

Now let us cover some details under various regions. First, China, shown on Slide 6. We now operate approximately 212 megawatts of rooftop solar, concentrated in a few eastern provinces with favorable development environments. The commercial and industrial electricity prices 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 order to evolve the company into an asset-light solar project developer, we expect eventually to monetize our China DG assets. This will further strengthen our balance sheet, reduce leverage and improve cash flow.

We will remain highly focused on China due to the attractiveness of unsubsidized grid-parity projects that are free of regulatory risk and a subsidy delay. In addition to DG projects, we intend to develop and monetize [600] megawatts (corrected by company after the call) of ground-mounted on subsidized projects located in the Northern Provinces in 2019, as shown on Slide 6.

So the U.S. remains a large and important market for us, as highlighted on Slide 6 -- on Slide 7. Our late-stage projects, there are total 347 megawatts, of which approximately 124 megawatts are community solar in Minnesota and in New York. Additionally, we are pursuing small utility projects in Utah, Texas, Florida, Arizona, Colorado and California. During the quarter, we recognized revenue from the sale of 13.9 megawatts of community solar projects in Minnesota to Nautilus. These project set represented Nautilus' second acquisition of community solar assets developed by ReneSola. Similar to last year's first acquisition, this community solar portfolio is also qualified under Xcel Energy's rapidly expanding community solar program in Minnesota. Construction of the asset is expected to be completed in 2018 and come online during the first quarter of 2019. We look forward to working closely with Nautilus on future projects.

In Canada, shown on Slide 8, 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.

We show Poland on Slide 9. We have total projects there of 55 megawatts, of which 41 megawatts are under construction and 14 megawatts are operating. We plan for the 41 to come online gradually through our fourth quarter and first quarter of 2019. These are all part of the projects awarded to us in the government auction last year. Importantly, in September, we entered into a letter of intent to sell all 55 megawatts of projects in Poland to Chroma Impact Investment. Chroma is a global investor in renewable energy. They focus on large-scale solar, B2B and storage projects. Our Polish portfolio consist of 55 installations of 1 megawatt each. All of the projects will sell power under Poland's Contract for Difference regime and are eligible for 15 years guaranteed tariff. Poland is a key market for us and we are one of the largest project developers in the region. We believe this is a positive development, as the LOI validates our ability to develop and monetize solar projects across different geographies.

Slide 9 -- Slide 10 shows Hungary, where we continue to invest in small-scale DG projects. Our late-stage pipeline has more than 70 micro projects, each with a size of 0.5 megawatts, bringing total capacity to approximately 43 megawatts. All of these micro projects are under construction and should connect to the grid throughout the fourth quarter and the first quarter of 2019.

We show India on Slide 11. We are making meaningful progress in India, with a project pipeline of 236 megawatts. Most projects there are ground-mounted open access projects, similar to U.S. community solar. Indian projects can sell electricity to different commercial and industrial off-takers under long-term PPAs. Our strategy in India is a pure project developer model. We want to develop projects to the shovel-ready stage and then sell the project rights to investors. This model allows us to leverage our expertise in project development and our global network of solar project investors.

Now turning to Slide 12 where we cover other regions. In France. In the third quarter, we recognized revenue from the sale of 6.7 megawatts of projects. This came out of the strategic partnership with Green City Energy that we announced earlier this year. The deal calls for the joint development of 4 solar parks in the south of France. We expect COD for the parks in 2019. With a total installed capacity over 69 megawatts, the 4 parks will generate approximately 105 million kilowatt hours of electricity per year. Additionally, in the last tender, we won projects with a combined capacity of 2.5 megawatt. We -- our total projects pipeline in France is now 71.5 megawatts.

Beyond those geographies I just discussed, we are actively pursuing opportunities in other international markets, including Spain, South Korea and Vietnam. In Spain, we have a late-stage pipeline of 12 megawatts of private PPA project. And in South Korea, we secured a 9 megawatts ground-mounted project. In sum, we have a geographically diversified project portfolio, and I am optimistic about opportunity ahead of us.

Before I turn the call over to Xiaoliang, I would like to take a minute to reiterate our business model and strategy. We continue to execute a global asset-light project development model with a focus on distributed generation and community solar. Either we sell shovel-ready projects right, or sell build-and-transfer projects after grid connection. We typically achieved high gross margins from monetizing project rights. Downstream projects represented a large opportunity globally for us, and we're excited about our business prospects. Our talented team, diversified geography coverage and record of accomplishments put us in a prime position to grow profitably.

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

Okay. 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 third quarter of 2018 and then discuss our outlook.

Please turn to Slide 14. For third quarter, revenue was USD 18.8 million compared to USD 27.8 million last quarter and $36.3 million in the same period last year.

Here is our revenue breakdown by segment in Q3. Project Development was $5.5 million, as we recognized the revenue from the sale of 13.9 megawatts of utility projects in Minnesota and 6.7 megawatts of projects in France. EPC revenue was USD 3.3 million, mostly from EPC services for 3.7 megawatts of DG in China. Electricity sales were USD 10 million, mainly from 66.1 million kilowatt hour of electricity generated by the company's operating DG projects in China.

Gross profit was USD 8.6 million compared to a gross profit of USD 8.2 million last quarter and $6.4 million in the same quarter last year.

Gross margin was nearly 46%, well ahead of our expectations of 35% to 40% and up from 29.5% last quarter. The sequential increase in gross margin was attributed to -- attributable to revenue mix, with more high-margin electricity sales due to the seasonality of high irradiance during the summer months. Additionally, some high-margin project development business also contributed to the overall increase in gross margin.

Operating income was USD 5.7 million, largely flat when compared to Q2 2018. Operating margin was 30.4%, up from 21.2% last quarter.

Third quarter operating expenses were USD 2.9 million, up from $2.3 million last quarter and up from $2.5 million in the same period last year.

Sales and marketing expenses in Q3 were $0.1 million, down slightly from $0.2 million in Q2 2018. General and administrative expenses were $2.6 million, down slightly from $2.7 million in Q2 2018.

Below the line, third quarter nonoperating expenses totaled USD 2.1 million, down from $5.5 million last quarter. Q3 nonoperating expenses include interest expense of $2.6 million, interest income of $0.1 million, partly offset by a foreign exchange gain of $0.4 million. The forex gain was due to the appreciation of Polish zloty against the euro.

Net income was $3.6 million compared to an income of USD 0.4 million in Q2 2018. Third quarter EBITDA was USD 3.9 million (sic) [USD 7.9 million] compared to $5.2 million last quarter.

Now the balance sheet, shown on Slide 15. We had cash and equivalents of USD 8.1 million as of September 30, 2018, a decrease of about $17 million during the quarter. We used the cash primarily for the construction of our projects in Poland and Hungary in Q3.

Long-term borrowings were approximately $73.3 million as of September 30, 2018, exactly flat when compared to last quarter. We have long-term liabilities related to capital leases and failed sale-lease backs of approximately USD 80 million, a decrease of USD 5 million during the quarter. This relates mainly to rooftop projects in China.

Finally, we will discuss guidance, shown on Slide 18. For the fourth quarter of 2018, we expect the revenue in the range of USD 20 million to USD 30 million, and the gross margin in the range of 20% to 25%.

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

(Operator Instructions) We have one from Justin Clare of Roth Capital Partners.

So first off, I wanted to ask, can you share what the margin was for your electricity sales, EPC services and then your project sales in Q3?

Okay. (foreign language)

(foreign language)

Justin, for Q3, the Project Development margin, gross margin was around a 15%, and the gross margin for IPP around 75%.

75%. Okay. Great. That's helpful.

Gross margin for EPC, 10%.

10%, okay, for EPC. All right. And then for Q4, can you share which projects you're planning to sell? And how much of your revenue you expect from those project sales versus EPC services and then electricity sales?

Okay. (foreign language)

(foreign language)

The revenue for IPP around $500.34 million revenue and the Project Development around $28 million, and EPC around $0.4 million. And we are going to sell the project in U.S. -- Minnesota and 10 megawatts and the 14 megawatts project in Poland and the 7 megawatts in Hungary -- 7 megawatts project in the Hungary.

Okay. And those numbers are in RMB, right? The...

No, that number is U.S. dollar.

U.S. sorry, you did you say $500 million, I missed what you said, I guess.

$500.3 million is IPP, the electricity generated from our IPP project.

Okay. All right. So then if we look into 2019, I know you haven't provided guidance here, but can you give us a rough sense for how many megawatts you plan to sell in 2019? And if you could share the cadence of when you plan to sell those projects? Will it be weighted more toward the first half or the back half, that could be helpful.

(foreign language)

Justin, let's start with China DG. We're monetizing our China DG operating assets. So in the -- probably in Q1 next year, we will sell 150 megawatts in China. And then in the first half of next year, we will sell our project in Poland, that is 41 megawatts. And another 35 megawatts in Hungary. And for the second half of 2019, we will sell shovel-ready projects rights for our projects developed in China, India and U.S., total around 600 megawatts. And then we have IPP revenue.

Okay. And then -- did you have any more? Okay, IPP revenue. Can you share approximately how much IPP revenue you expect?

(foreign language)

It's around 126 megawatts operating assets we will -- selling electricity next year for our IPP business.

Okay. So then those --

The revenue is around...

Generally -- well, go ahead.

Okay. What's your question?

You were going to say, the revenue, please go ahead.

On the IPP.

IPP. (foreign language)

(foreign language)

It's around $14 million.

Okay. So then I just wanted to ask a little bit more broadly about the China market. So you've announced plans to build and sell 600 megawatts in the China market that are unsubsidized projects. But it looks like that NEA could announce an updated solar policy within the next few months or may be early next year, and that policy could have new subsidies. So I was wondering, can you just share your expectations for what new policy could potentially be announced? And how that might affect your development plans in 2019?

Okay. (foreign language)

(foreign language)

Justin, I need to correct that you said, we were to 6 megawatt projects in China, but actually 6 megawatts -- 600 megawatts, it's for China, India, and U.S. In China, we plan to do 300 megawatts. And for your question of the new policies in China with the subsidy, actually, we believe that we are developing unsubsidized project at greater priority because EPC cost is lower enough to unsubsidize the projects in many provinces in China.

Okay. So if a new solar policy were to be announce, that would not change your development plans for the year, is that right?

That's right.

The next question is from Kevin Huang of [CITIC.]

Justin, it's a spot question about the Chinese market. So that's enough information. So I want to ask, well, ReneSola continue to build and own DG projects?

Where to build and own DG projects, sorry.

Yes. Well, you continue to build and own DG projects.

Okay. (foreign language)

(foreign language)

(foreign language) Kevin, Mr. Li said for next year for DG, we don't have the support for financial institutions because the financial -- financing cost is increasing, so we would like to spend more time on the ground-mounted the greater parity projects.

(Operator Instructions) There are no questions at this time. I would like to hand the conference back to Mr. Johnny Pan. Please go ahead, sir.

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. We are very pleased with our Q3 results and our continued execution of Project Development strategy. We remain committed to growing profitably, managing our operations and strengthening our financial position. We are optimistic about our opportunities around the world and look forward to providing our business update in few months. Thank you all for -- again, for your participation. This concludes our call today. You may all disconnect.

Thank you, ladies and gentlemen. This does conclude the conference call for today. Thank you for participating. You may now all disconnect.