ReneSola Ltd (SOL) CEO Yumin Liu on Q1 2020 Results - Earnings Call Transcript

ReneSola Ltd (NYSE:SOL) Q1 2020 Earnings Conference Call May 29, 2020 8:30 AM ET

Company Participants

Gary Dvorchak - The Blueshirt Group Asia

Yumin Liu - Chief Executive Officer

Ke Chen - Chief Financial Officer

Conference Call Participants

Philip Shen - ROTH Capital Partners

Operator

Hello, ladies and gentlemen. Welcome to the First Quarter 2020 ReneSola Power Earnings Conference Call. All participants will be on listen-only mode. After the managements prepared remarks, there will be a Q&A session. Today’s conference call is being recorded.

I would now like to turn the conference over to your first speaker today Mr. Gary Dvorchak. Please go ahead, sir.

Gary Dvorchak

Thank you, Rochelle, and hello, everyone. Thank you for joining us on today's call to discuss first quarter 2020 results. We released our shareholder letter a couple of hours ago, available on our website. There's also a supplemental slide deck posted on the website that we will reference during our prepared remarks.

On the call with me today are Mr. Yumin Liu, Chief Executive Officer; and Mr. Ke Chen, Chief Financial Officer.

Before we continue, please turn to slide 2. Let me remind you that remarks made during this call may include predictions, estimates or other information that might be considered forward-looking. These forward-looking statements represent ReneSola Power's current judgment for the future. However, they are subject to risks and uncertainties that could cause actual results to differ materially. Those risks are described under Risk Factors and elsewhere in ReneSola Power's filings with the Securities and Exchange Commission.

Please do not place undue reliance on these forward-looking statements, which reflect ReneSola Power's opinions only as of the date of this call. ReneSola Power is not obliged to update you on any revisions to these forward-looking statements.

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

With that, let me now turn the call over to Mr. Yumin Liu, who will discuss the quarter's operating highlights. Yumin?

Yumin Liu

Thank you, Gary and thank you everyone for joining the call. Before we discuss our Q1 results and operating highlights, let me start by saying that I hope you and your families are safe and healthy. Our hearts go out to those who have suffered from COVID-19 pandemic. I also want to thank all the frontline medical workers across the globe that are fighting the virus and saving lives.

Let me spend a couple of minutes discussing the COVID challenges we faced and actions we are taking to overcome them. As the virus spread across Europe and the U.S. in March, we took action to ensure the health and safety of our employees and business partners.

We first transitioned all our employees in Europe and the U.S. to remote work. There were a few exceptions where physical presence is necessary for operating projects. Our law office in Shanghai was already closed for Chinese New Year, but reopened in late February when safety was assured based on Chinese government guidelines.

Throughout the crisis, we were able to operate because we and the whole energy industry are deemed essential. For the most part, work continued at our projects in both the U.S. and Europe. Projects close to completion were delayed due to travel restrictions that passed commissioning and testing. Similarly, a few other projects under construction are temporarily delayed, while awaiting delivery of modules, inverters and other key components.

The net impact on completion dates is somewhat uncertain at this point. We currently estimate delays of several months for projects under construction. Other than that construction is moving forward without interruption and projects that have all parts and components delivered.

In addition to construction delays, travel restrictions caused slippage in closing the sale of two projects in Hungary. We disclosed that delay last month. The closing was originally scheduled for late March, but slipped into early April. Revenue from the sale will be recognized in Q2.

Overall, we feel that the impact from COVID-19 was limited. Despite these challenges, we executed well during the first quarter. Our team did an excellent job navigating the crisis and completing the sale of projects in Canada and Hungary.

And we received additional support from various government programs to help with our working capital. As the crisis stabilizes and governments relax lockdowns, we are starting to resume normal business activities.

Now let's turn our attention to Q1 results. I will summarize our financial performance and review our operating highlights in the quarter. I will then turn the call over to Ke, who will cover financial results in more detail and provide 2020 guidance. We will then open the call to questions.

Our revenue grew 62%, gross margin expanded more than 360 basis points, and our general and admin expenses were down by 12% from a year ago, as we prudently managed costs.

As a result, we narrowed our operating loss by nearly $1 million versus Q1 2019. Importantly, we maintained a healthy balance sheet, providing the financial flexibility to drive growth in the quarters ahead.

At quarter end, our total project pipeline was about 700 megawatts, including about 423 megawatts in late stage. Notably, we added approximately 30 megawatts of late-stage projects to our pipeline in France. As I mentioned, we sold projects in Hungary and Canada.

Our goal for 2020 is still to expand the pipeline by 1 gigawatt. Based on our activity level, we believe this can be achieved even with the COVID situation. Our optimism is grounded in the factors that differentiate us from our peers. Let me quickly review them.

Most importantly, we have a global diversified project pipeline focused on fast-growing markets. The global solar power industry is very large yet continues to grow. Our targets are countries where solar power usage is growing rapidly, supported by stable government policies and natural demand for green energy.

We are exposed to the dominant trend in our industry, small-scale projects with a high PPT and feed-in-tariff price. We have significant experience and success in developing this type of projects, especially distributed generation and community projects.

That experience gives us a distinct advantage compared to large utility scale developers. This advantage is a function of our outstanding team, which averages over 10 years' experience in our industry. We have expertise in project development, project management, strategic investment and capital markets.

Our track record is excellent since starting our downstream business in 2012. We have successfully completed over 800 megawatts of small-scale projects. That means several hundred individual projects. We have monetized nearly 600 megawatts while still operating 216 megawatts.

Importantly, we have the ability to grow beyond the current pipeline. As I mentioned earlier, we intend to add another 1 gigawatt of projects to the current pipeline by the end of 2020, as shown on slide 5. I remain comfortable with this target, which we believe is realistic and achievable based on our current level of activity.

Let's now discuss highlights from certain key geographies. First, let's turn our attention to the U.S. shown on slide 7. Our late-stage projects stand at around 171 megawatts, of which 53 megawatts are community solar in Minnesota and New York.

Additionally, we have projects under development with a mix of corporate, municipal and utility off-takers in other states such as Utah, Florida and Maine. In the meantime, we operate 24 megawatts of utility projects in North Carolina.

In Poland, shown on slide 8, our key asset is a portfolio of project rights. We have a pipeline of 28 megawatts of ground mounted projects under development.

Slide 9 refers to Hungary, where we also invest in small-scale DG projects. Our late-stage pipeline has a number of micro projects. Each is 0.5 megawatt, bringing total capacity to about 27 megawatts in the country. Of this late-stage portfolio, 15 megawatts are under construction and expected to be connected to the grid in the second and third quarter of this year.

Slide 10 and 11 detail our pipeline in France and Spain. We have 71.5 megawatts in France and 36 megawatts in Spain, all of which are ground mounted and currently under development.

In the U.K., shown on slide 12, we have a project pipeline of 90 megawatts, all of which are ground mounted projects under development. Over the years, we have successfully developed 16 portfolios of projects and sold a total of 127 megawatts of projects in the U.K.

In addition to our development pipeline, we currently operate a portfolio of 216 megawatts of solar projects that generate high-margin recurring revenue. As you see on Slide 14, our operating assets including 172 megawatts of commercial rooftop in China, 24 megawatts of utility solar in the U.S., 15 megawatts of ground mount in Romania and 4 megawatt of rooftop in U.K.

In summary, our forward optimism is based on our globally diversified project portfolio spanning multiple stages in both rooftop and ground mount. The global solar industry is large and growing. We are becoming a leading global project developer by focusing on high-quality and high-return projects in our core countries.

Let me now turn the call over to Ke Chen for comments on our financial performance. Ke?

Ke Chen

Thank you, Yumin, and thanks again everyone for joining us on the call today. Our shareholder letter and the supplemental slides contain all the figures and the comparisons you need. I'm not going to repeat every number. Instead, I'm going to focus on the factors that influence the results.

As I speak, please keep in mind that we will discuss certain non-GAAP financial measures. We use non-GAAP measures, because we believe they provide useful information about our operating performance that should be considered by investors along with the GAAP measures. A non-GAAP to GAAP reconciliation is included in our shareholder letter.

Let's begin with our Q1 financial highlights on slide 16. Revenue was down sequentially, but up significantly versus last year. Revenue exceeded the high end of the updated guidance we provided in our April 21 press release. Gross profit was down sequentially, but essentially flat with last year.

Middle single-digit gross margin was about double the gross margin percentage of last year. Revenue growth was in part a function of Canada sales we originally expected in Q4 2019. The change in gross profit and gross margin was due to the mix of the revenue, especially the lower margin associated with the Canada sale.

One of the key activity of our new management team has been improving the profitability of our pipeline. As you recall, we have shared marginally profitable projects, one of which was this one in Canada. Canada is no longer a focus market for us. As you look at our pipeline, it's smaller than a year ago and has far more embedded profit. You can be rest assured that as we work toward adding incremental gigawatt to our pipeline, we will be highly disciplined in sustaining our long-term gross margin profit in the high-teens to low-20s.

Moving down the P&L. We demonstrate strong expense control, moving non-GAAP operating expense down sequentially. As the COVID situation hit, we reduced travel and took other actions that both ensure safety and promote more efficient operations.

Beyond the operating loss, non-operating expense were largely sequentially, although flat versus last year. This was mainly due to a foreign exchange transition loss that was caused by the appreciation of the U.S. dollars, which led to exchange loss on the balance sheet. All this results in a bottom line loss. Although, we never wanted to lose Mali, we are satisfied with our operating performance, concerning the COVID challenge. Foreign exchange is not in our control.

Now let's review the balance sheet shown on slide 17. At the quarter end, we had cash and equivalents, including restricted cash of about $70 million. We used $10 million of cash for operations, mostly to reduce accounts payable. Long-term borrowing were up, while short-term borrowing was down. Please keep in mind that all of our debt is project-based and almost all is non-recurrent. We have no debt at the corporate level.

Let's cover 2020 guidance, as shown on slide 23. For the full year 2020, we continue to expect total revenue in the range of $80 million to $100 million and gross margin in the range of 18% to 20%. For the second quarter of 2020, we expect revenue in the range of $22 million to $25 million and gross margin in the range of 17% to 20%.

Our outlook takes into account that global economic conditions are highly uncertain now due to the COVID-19. We must see how the health aspect of the pandemic play out as well as the second effect economic. We currently anticipate some slowdown in customer activity in 2020 and believe it's prudent to factor in quarter variability in our outlook.

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

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Philip Shen of ROTH Capital Partners. Please ask your question.

Philip Shen

Hi, everyone. Thanks for the question. I wanted to dig into the 1 gigawatt target a bit more. Specifically, I just want to make sure this is an incremental 1 gigawatt on top of your existing late-stage pipeline of 423 megawatts. So by the end of 2020, we should expect something on the order of 1.4 gigawatts of pipeline. Is that correct?

Yumin Liu

Phil, thank you. It is the case that we're based on our Q1 results or last year result adding 1 gigawatt within this year. We already added or expanded our pipeline in Q1 by almost 100 megawatts.

Philip Shen

Great. Thank you, Yumin. So the last -- I think the first time you announced this target was at the end of March so two months ago. And since then and now that we have seen two months of COVID-19 impact on operations, are you more optimistic or pessimistic in your ability to hit the 1 gigawatt target? Because we have just a little more than half a year left. So just curious if you're incrementally more optimistic or pessimistic?

Yumin Liu

Actually, I'm more optimistic based on the current activities we have in both U.S. and Europe. We will continue active development in the U.S. in the core states. And also in the focus countries in Europe, we are diligently working on expanding the pipeline. I feel really comfortable expanding the pipeline by 1 gigawatt this year. And it's -- I think it's really realistic and achievable.

Philip Shen

Okay. Thank you, Yumin. Can you talk about the criteria for being added to the pipeline for projects to be added? So what -- for example, what kind of margin thresholds and return rates are required? What stage in the development process will you consider? What milestones need to be addressed or satisfied in order to be added to the pipeline definition?

Yumin Liu

That's a very good question, Phil. We add the projects into our pipeline considering many things. Number one, we are working on the small DG and community solar programs, including in the -- both U.S. -- like Hungary, like Poland and we do those small deals. But at the same time, in those core countries in Europe, we also expand our access to a little bit bigger size utility-scale projects.

And we see the -- number one, we see the development cycle; and number two we see the ROE or return on the projects. We do have a high expectation of ROE. We will not do anything 25% or 30% -- below 20% to 25%, 30% ROE. Our target is to grow those pipelines and make the returns within 24 months or shorter. So the old activities or growth of our pipeline is based on our experience in the focus countries and focus states in the U.S.

Philip Shen

Okay. So it sounds like you need to have at least a 25% return on equity. And what are the milestones to allow for you to feel comfortable to add a project to the pipeline?

Yumin Liu

Let me talk about the milestones. We definitely have gained the lend rate. And sometimes, we are actively working on the interconnection or even gain the interconnection rate or sign the interconnection agreement. And the last stage in some countries we do have the commercial or no-PPA type of projects.

But in some other countries, like Poland, like Hungary like U.S. we are also using the projects bidding into the tenders or auctions. While in the past, our bidding rate is very high, we haven't really lost any in Poland, Hungary in those tenders or auctions. So we carefully review all the projects we added or newly added to our pipeline and make sure we deliver the results.

Philip Shen

Okay. Good. So let's talk about some of the recent results. You guys on April 7 announced the closing of a 50-megawatt portfolio sale in Hungary to Obton. I don't recall that you shared the economics of that deal. Can you provide that to us now? So, for example, did you meet your 25% return on equity threshold? And perhaps you can share what the revenue was, maybe what the margin was as well.

Ke Chen

Phil….

Yumin Liu

Go ahead.

Ke Chen

Yes. Phil, we never disclose detailed financial information of our projects. But, again, as you can see, the gross margin guidance, it's much higher on the first quarter. So that's -- I mean, says something about this sale.

Philip Shen

Good. So, if I could -- can you talk -- did you meet your 25% threshold of return on equity? So maybe you can't give the specifics of that particular deal, but perhaps you can talk about whether or not you met the criteria that -- some of the criteria that we just discussed.

Ke Chen

We have to disclose this offline, Phil. I cannot talk about this here.

Philip Shen

Okay. I understand. Coming back to the pipeline, I mean the gigawatt. What is the -- what do you expect the success rate to be of the pipeline? So clearly, it's the beginning of the process. But of the gigawatt, do you expect 50% to ultimately be developed and sold, or do you think it's closer to 80% or maybe something less than 50%?

Yumin Liu

We expect a lot higher success rate than 50%. As I mentioned, we expand our pipeline, or adding the 1 gigawatt in the core countries we have extensive experience and those who have local team. So the experience and local team members, literally will do all the screening, and careful consideration due diligence before we add any project into our pipeline.

Also as I mentioned, for example, in Poland and Hungary, we have not missed any auction or tender bidding or using our project bidding into the process. Our bidding rate, bidding into those auctions, literally speaking, was 100%.

Philip Shen

Great.

Yumin Liu

And from that point on after bidding the PPA, auction or tenders, our failure rate was minimum, very minimum.

Philip Shen

Got it. Okay. Thank you, Yumin. One last question and I'll pass it on. As it relates to the target, the gigawatt, do you have a breakdown by country? 100 megawatts in Hungary, 150 megawatts in Poland. Since the COVID situation has become -- became worse, it's now starting to improve, which of those regions do you think has the greatest risk to the downside, and which ones have the greatest risk to the upside?

Yumin Liu

Phil, this is a very interesting question and a very good one. My answer will be also complicated. For example, in Poland and Hungary, we see the impacts to the two countries are minimum compared to the Spain, Italy and U.K., okay?

So we plan to grow our pipeline, significantly compared to what we had before. And we are talking to different co-developers or local developers expanding our pipeline. That's one reason we feel very confident or -- the COVID-19 has no impact unless in those two countries.

And for example, U.K. is another example, we do see the big impacts, but amazingly we also see there's a big opportunity for us working on UK market. The UK government policy it absolutely support the growth of solar. And we see a great future in the next following years in the UK market. And amazingly, UK projects are available to us. We have been looking at or doing due diligence on several portfolios and selectively taking the right one fitting our company's need.

So in general, I'm very optimistic. And COVID-19 allow us to do all the paperwork, all the discussions except doing the site maintenance. But we expect in late June, all the site bridges or travel within Europe will be opened up. Then we can do the final stat on the site bridges completing the due diligence and acquiring more projects in Europe. That's what we see and even that I'm talking about including the heavily impacted countries like Spain, Italy and UK.

Philip Shen

Great. I think that color is very helpful. And I think in Europe there is a focus on renewables in climate that after coronavirus is an area of focus for the government there. So I think that might be a positive tailwind for you guys. Okay. Thank you very much. I'll pass it on.

Yumin Liu

Thank you, Phil.

Operator

[Operator Instructions] There are no further questions at this time. I would now like to turn the conference back to today's presenter Mr. Yumin Liu. Please go ahead.

Yumin Liu

Sorry, sorry. I put myself on mute. Thank you, operator. Before we finish, let me mention that we will be presenting next Tuesday at Cowen 2020 Virtual Industrial Technology Robotics and Sustainability Summit. There will be a link to our formal presentation in the IR section of our website. We will also host Virtual one-on-one meetings. Please contact your Cowen sales representative to schedule a meeting.

To conclude, we are committed to grow profitability, managing our operations efficiently and strengthening our financial position. We are very excited about the opportunities ahead of us and are looking forward to updating you on our progress again in the few months.

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