Sky Solar Holdings, Ltd.
Q1 2017 Earnings Call Transcript

Published: 28 Sep 2017

[Operator:]

Good day everyone. Welcome to the Sky Solar Holdings First Half 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Gary Dvorchak. Please go ahead sir.

[Gary Dvorchak:]

Thank you and good morning everybody. I am Gary Dvorchak, Managing Director at The Blueshirt Group which is Sky Solar’s Investor Relations firm. With me today on the call are Mr. Hao Wu, Chairman of the Board, Mr. Andrew Wang, Chief Financial Officer and Sanjay Shrestha, Chief Investment Officer and President of Sky Capital America, Before we begin, I'd like to remind everyone that this call is being webcast and is available at the Investor Relations section of our website. A replay will be available on our website beginning later today. Also we would like to advise you that some of the information discussed in this conference call will contain forward-looking statements. These statements involve risks, uncertainties and assumptions that are difficult to predict and such forward-looking statements are not a guarantee of performance. The company's actual results could different materially from those contained in such statements. Several factors could cause or contribute to the differences. These factors are described in detail in the risk factors and other sections of our annual report and Form 20-F and other filings with the SEC. These forward-looking statements speak only as of the date of the call. The company undertakes no obligation to publicly update any forward-looking statements based on the information or revised expectations. With that, let me turn the call over to our Chairman Mr. Hao Wu. Hao?

[Hao Wu:]

Thank you, Gary. And thank you everyone for joining the call. For those who I haven’t met, I'm looking forward to meeting you and speaking with you in the near future, and would encourage you to visit us in Shanghai or New York. We want to enhance our communication with our shareholders and welcome your questions and comments. We have had some meaningful change at the company over the past few months, but we want you to know that we remain focused on growing our business and restoring investor confidence in the company. There has been a meaningful among other activities that you haven't really seen. So to get started, I will review of the operating highlights, then Sanjay will provide more details on the American region and then Andrew will cover the financial results. At the end of Q2, the company owned and operated 136.8 megawatt capacity of solar assets. Our assets are diversified around the world, giving us an attractive risk profile. We operate about 96 megawatt in Asia, mostly in Japan, about 10 megawatts in Europe, about 20 megawatts - 22 megawatts in North America and 8 megawatts in Latin America. At the start of the year, we operated 159.6 megawatts of assets. Our portfolio was reduced by the sale of 23 megawatt of assets in Greece, which we announced in February. This is in line with our overall strategy of recycling capital and to – and increasing exposure in our core markets with attractive returns. To fund our growth, we also monetized about 19 megawatts of assets in Japan. Those were owned by JV in which we hold a 30% stake. Total proceeds to us were Japanese yen 1.1 billion which we - which were reinvested to further grow our Japan pipeline and asset portfolio. Not only are the current operations strong, our pipeline is also sizable. Total pipeline is around 430 megawatts. Most notable are the projects are under construction which totalled 68 megawatts at end of Q2. Out of this 68 megawatts 63.6 megawatt are in Uruguay. We're happy to report that 63.6 megawatt project that completes on schedule and on budget, despite some weather related issues. With that completion, our operating project grew by over 30%. In addition we have 4.5 megawatts of projects in Japan under construction that we expect to be completed soon. As you can see, we remain focused on our key target markets like Japan and Americas. Let me now turn the call over to Sanjay to update you more about our success in America region. Sanjay?

[Sanjay Shrestha:]

Great. Thank you, Hao. And good morning, everyone. As Hao stated, we remain very focused on growing our presence in key target markets. Let me provide some more detail on the project under construction in the Uruguay [ph] which is a very important asset for us. We're pleased to report that we achieved mechanical completion on these projects during Q3, with the majority of the projects achieving it in July. These projects are now connected and generating electricity and feeding it into the grid. Getting these projects done was very much of a collaborative effort. We demonstrated strong collaboration with our local partner and received great support from both our private equity partner in the US, as well as our project financing partner IDB. Now looking beyond Uruguay, we're also expanding our presence in the distributed generation market in Chile. During Q2, we signed an LOI for 18 megawatt of project permits with a local developer that is under due diligence at this point. Now during Q3, we also signed a share purchase agreement with another developer for 24 megawatt of shovel-ready departments in Chile. We are also working to restart development on our 44 megawatt Arica project in Chile. Now shifting gears a little bit and talking about North America. We have brought about 10 megawatt of projects to essentially NTP status since the closing of first half. We're also working on 15 megawatt of projects in Canada, which are expected to reach NTP in early 2018 and COD by the end of 2018. Now given the ITC announcement that most of you know about, related to Section 201, needless to say we’re monitoring the US market very closely and in the meantime as you can see we're actively expanding in Chile and Uruguay. We're also exploring diversification in the US by looking at several combined hidden power opportunities that could deliver attractive returns. With that, let me turn the call to Andrew to go through financial details. Andrew?

[Andrew Wang:]

Thank you, Sanjay. And good morning, everyone. Before I update you on the first half 2017 financial results, I want to emphasize that our financial position has remained solid. As of today, we have a cash balance of approximate $354.5 million and we have a sufficient liquidity to operate the business in a normal manner. And now let's into the results. First please note that we encourage you to review our financial results on an adjusted non-IFRS basis by looking at ongoing elements and removing the effect of what we expect to be one-time items. You will see the company in a way we are looking at it. We believe this will give you a better understanding both of our historical results and the prospects going forward. Also note and unless I state otherwise, all financial theorists refers to the first half of 2017, all comparison characterized as year-over-year is compared to the first half of 2016. Okay. Now on to the results. The EBITDA increased over nearly 33% year-on-year during the first half of 2017 to $18.5 million. This largely reflects the disposal of 19.5 megawatts assets in Japan in which the company have 30% stake. Electricity sales were $27.9 million, up 9% from $25.6 million in the same period of 2016. The year-on-year growth in electricity sales was primarily due to the increased average operating IPP assets globally, despite the global - despite the disposal of the Greece assets in the first half 2017. Electricity sales in Asia were up 16% year-over-year. The year-over-year growth was primarily due to the revenue contributed by the solar park in Japan that were connected during the year. Electricity sales in the North America were up 41.6% year-over-year, primarily due to the 22 megawatt operating assets that the company acquired in July last year. Revenues from system and other sales was $2.7 million, down 13.1% from the same period last year. The year-over-year declined the revenue for our system and other sales were primarily attributable to the company's continued shipping business model to towards IPP electricity sales. Total revenue was $13.6 million, up 6.6% from $28.7 million in the same period of 2016. Cost of sales and service was $12.8 million compared to $11.8 million in the same period of 2016. The increase was mainly a result of the increase in the average capacity of operating assets in the first half of 2017. Gross profit of $17.8 million was up 5.4% year-over-year and gross margin of 58.3% was flat compared with 58.9% in the same period of 2016. SG&A expenses were $12.6 million, up 8.7% year-over-year. This increase was primarily due to our increased professional fees related to the financing in core markets, such as Japan, United States and Uruguay. Gain on disposal of interest in subsidiary of $1.5 million was mainly a result of issuance of preferred shares of Canadian projects to the existing strategic partner. Operating incomes was $6.8 million, down 8.4% from $7.4 million in the first half of 2016. Financing costs were $5.5 million, compared to $2.9 million in the same period of 2016. The increase in financing cost was primarily due to the increased average balance of bank loans. Other non-operating income was $8.4 million, compared to other non-operating expense of $3.8 million in the same period of 2016. And other non-operating income was mainly a result of the disposal of the 30% equity stake of 19.4 megawatts assets in Japan. Net income in the first half of 2017 was $5.2 million, compared to a net loss of $2.2 million in the same period of 2016. Basic and diluted income per share was $0.012 in the first half of 2017. Basic diluted income per ADS in the first half of 2017 was $0.10. As I mentioned earlier, adjusted EBITDA was $18.5 million, up 32.4% from $14 million in the same period of 2016. Now on to our balance sheet. As of June 30, 2017, we have bank balance and cash of $54.5 million, restricted cash of $66.1 million, trade and other receivables of $48.6 million and IPP solar park assets of $285.7 million. Total borrowing was $239 million, including $15.5 million borrowing due within one year. As I’ve said at the beginning, our balance sheet remains solid and we have sufficient liquidity to operate the business in a normal manner. So with that, we will like now to open up the call for any questions that you may have for us. Operator, please go ahead.

[Operator:]

Thank you, sir. [Operator Instructions] We'll take our first question from Philip Shen with Roth Capital Partners.

[Philip Shen:]

Hi, everyone. Thank you for the questions. Let's start with Japan. Can you share some more detail about the asset sale, specifically what was the ASP per watt you know, and what kind of fit was on the assets and if you can also talk about the financing on that asset that would be great? Thanks.

[Andrew Wang:]

Okay. Maybe I can give some background on that. For those assets we disposed which is totalling 19.4 megawatts, we actually have 15% [ph] stake of the joint venture with a local called [indiscernible]. And basically we sell the 30% stake through the partner at an average price between 380 to 400 per watt. And basically these assets is [indiscernible] assets and the local bank provided for the financing.

[Philip Shen:]

Okay. That’s really helpful. Thanks. You know, shifting gears to the ongoing situation with the CEO and Co-Founder or Founder. Can you kind of just give us more background as to - you know, we've obviously seen the press releases, but you know, what were the transactions and fund transfers that did not receive you know board - an audit committee authorization. Can you kind of give us some more detail around what's actually happening?

[Hao Wu:]

Well, this is Hao. And so we put out a press release when we find out these transaction which was not approved by the former Chairman and CEO, we took action and we removed all the positions in the company and we engaged independent committee, with former independent [ph] committee comprised of independent directors to investigate the situation and the independent committee engaged a outside law firm to carry out the investigation. You know, so the details I think it's confidential at the moment. I think the conclusion is very clear that these transactions and some transfers here - for the audit committee authorization and the – I think it is the lack of - for the audit committee authorization and there was insufficient documentation in support of such fund transfer. And subsequently as we see it in the press release, the company has entered into a settlement agreement [indiscernible] former chairman and a CEO agreed to pay back the amount approximately to [indiscernible] and have certain mechanism to make sure that’s executable. So I think you know, its unfortunate destruction to our business, but this has already been put it behind us. We are focusing on growing our business and we have strengthened our internal control and we have hired additional personnel to make sure these types of incidents won't happen again. So you know, it does not have any material impact on our historical business – our ongoing business. So I think if anything that [indiscernible] I think is better suited to carry out cost at hand and to grow the business. So we are - we will see this is unfortunate destruction, but we want to look forward rather than backward.

[Philip Shen:]

Okay. Thank you, Hao. And I just want to make sure I understand did you say that you have an agreement in place with the former CEO for him to pay back the $50 million. I know you guys ordered him to pay it back, but has he agreed to pay back the 50 million and over what time frame did this $50 million get disbursed? Thank you.

[Hao Wu:]

Yeah, the agreement has been reached and he agreed and signed documents to in fact to pay back the $50 million. The timeline with interest on ’18 and you know, we have an interest...

[Philip Shen:]

Okay. And over what time frame did the transactions occur? Like how long does it last?

[Hao Wu:]

The transaction last only I think – short of period of time in May, only a few days, I think any time spent.

[Philip Shen:]

Interesting. So should the cash balance be $15 million higher than it is now?

[Hao Wu:]

That's correct.

[Philip Shen:]

Okay. And so who is the CEO now and what is the price if there is nobody there. Are you guys working to find one? And over what time frame could somebody be appointed?

[Hao Wu:]

Yes. Right now the Board has formed a – the company has formed a management committee comprised of three person and myself as one and also two from other corner [ph] shareholders. So the three of us action [ph] CEO role myself, I mean, I am running the day to day business. We are in a process of finding a CEO. But at this juncture I think all business motto - I as the chairman and the member - the management of the management committee are making day to day business decisions. So it's not - it's not like there is nobody you know, be responsible for the others position, there is and as far as the CEO is concerned we are actively looking for suitable candidate. You know, if we are running a global business, we have business in Japan, in the US, in Europe and in Latin America. And so it is – it would take a bit time to find a suitable candidate to fill this position. So it will take a while.

[Philip Shen:]

Okay. All right. So one more for me if I may. I think over that transition period over the past few months, I think three independent directors left the company. Are there any empty board seats now and do you expect to replace, I think there may be one. When do you expect to fill that role and can you also talk about why those independent directors left, especially the one that only spent two weeks with the company?

[Hao Wu:]

Right. We already have put three to all three positions. We have very strong independent directors right now. We have three independent directors and serving the board. The - you know - as to the three independent directors who left the company two of those are apparent actually - you know with or without incident - schedule to leave the company in any case, one particular one, the short thing it’s a personal reason. We are not sure about the situation, its [indiscernible]

[Philip Shen:]

Okay. Great. Well, thank you for answering the questions and I'll pass it on.

[Hao Wu:]

Thanks.

[Andrew Wang:]

Thank you.

[Operator:]

[Operator Instructions] We’ll next go to Colin Rusch with Oppenheimer.

[Colin Rusch:]

Thanks so much guys. Can you talk a little bit about your conversations with project lenders and the sorts of terms that you're seeing at this point in terms of interest rate and leverage ratios and some of the assets that you have in potential sources of capital via those lenders?

[Hao Wu:]

I’ll let Sanjay to answer the question.

[Andrew Wang:]

Yeah. Hey Alan, how are you. I'm happy to take that as it relates to the Americas question, right. So in the US we remain in active dialogue with both our existing partner and some new ones, right. So availability of financing is not an issue at this point in time. Obviously you know, the project lender also want to make sure that you know I think after not releasing them - everybody sees what our balance sheet is like. You know that the company continues to grow. So that was one of the comments that had come back up, right. But I think the level of activity, the engagement with the project lender - availabilities there. In the U.S. market the terms of debt have not changed at all far from what we're looking at right, I think there are folks who are willing to provide construction for that thing, you know, construction to term debt, great. And in even in Latin America what I'm pleased to report is for some others given distributed generation opportunity that we're talking about in Chile, you know, we're looking at 55% to 60% on the leverage, right the 15 year term debt somewhere around 6% in change. And even for this Arica project we've actually received a soft commitment from a local bank. So that's what we have going on the project financing side. And Colin as you know we do tend to work with a lot of other strategic financial partners, right, that can provide us with sort of project less capital. And from that perspective I think you know nothing new to report, but we'll continue to work with multiple different parties.

[Colin Rusch:]

Okay. That's super helpful. And then you know you talked about the CHP opportunity, just touching the prepared remarks. Could you talk about how you're thinking about diversifying the technology exposure for the company? And you know obviously I'm assuming that some of this is on a case by case basis. But are there particular areas where you guys have gotten comfortable other than CHP in terms of making investments and how should we think about the relative return hurdles compared to what we've seen on the solar side so far?

[Hao Wu:]

Right. Right so as you've heard from us in the past call and right for us we don't just think about megawatt, we tend to think about it more from the perspective of return on that megawatt, right. And you know for PV we have a very strict underwriting criteria. If it's in the US market we're open to go to you know relatively lower return than the returns we acquired when we do business in Latin America. Obviously in Japan given our strong presence, we tend to actually make good returns there. Now in terms of diversification, I would not want anybody to read too much into it like we are aggressively diversifying. This is very much an opportunistic move on our part, if I may put it like that. And in terms of CHP the hurdle rate has to be - we have to make ideally higher returns than the returns that we're going to be making in solar simply because we're sort of going into a new technology that is not necessarily our core in the past, but Colin if it's okay with you, all I – I am comfortable saying at this point in time it's a very attractive return. It's higher than PV, but at this point in time I'd rather not call the exact number, if that's okay.

[Colin Rusch:]

That's perfect. All right thanks. I’ll hop bank in the queue.

[Operator:]

[Operator Instructions] We’ll take a follow up from Philip Shen with Roth Capital Partners.

[Philip Shen:]

Hi. Thanks for the follow ups. You know you mentioned that you know the cash on the balance sheet as June 30th should be $15 million higher. But I was wondering if the - you know there there's some other reflection on the balance sheet of $15 million, you know perhaps in some sort of receivable as an asset or you don't know if there is a corresponding liability, but is there some kind of impact on the balance sheet besides the cash being $15 million lower?

[Andrew Wang:]

Yes. Of course, I mean, the Q2 balance sheet when you look at Q2 and that's the balance sheets, other than the cash and restricted cash, we also [indiscernible] parties, SO we have a $17 million among [indiscernible] parties and which include the number we're talking about.

[Philip Shen:]

Okay. great. Good. That's helpful. Thank you. And then in terms of Japan you know we talked about were you sold, but can you talk about what you see ahead. You know what are the development opportunities ahead, is there resolution to some of the ongoing negotiations that you were having. And when do you expect to build out the rest of the pipeline and how do you expect to monetize those assets?

[Hao Wu:]

You know, this is Hao you know, its how we see it, we actually - majority of our pipeline 433 megawatts I think are more than half of that is in Japan. We are actively constructing that get them to the shovel ready status and activate – develop for more. We are - we have investment partners in Japan and now we are actually seeking more. We have one big project for example 40 megawatt project in Japan and we're working with a new partner. So I think Japan is - you know we still have a lot of attractive opportunities that we're actively to finish all the other work at hand right now.

[Philip Shen:]

Okay. So it's fair to say that those ongoing negotiations that were being - that were happening have they quieted down and so you're kind of getting back to the work of doing the development internally and realizing the projects yourself?

[Hao Wu:]

Yeah, I think as I said, you know, Japan is very important markets to choose Sky Solar and we are working with the landlords, the authorities and the financial institutions in Japan to fully deploy our capabilities there to compete on the projects that you know we have permits and we have permissions and we have to develop more. So the - you know - I think the former CEO [indiscernible] destruction, but we have put that behind us. I think we are actively have a dialogue with the institutions in Japan to facilitate that market growth.

[Philip Shen:]

Okay, great. And then you know if – as we look - I know you don't have official guidance for 2018 or even guidance for I think Q3 or ‘04. And we have - but we do have you know what's under construction. Can you guide us as to how we should think about 2018 in terms of perhaps interconnections or how much might be under construction?

[Andrew Wang:]

Maybe I start with the answer first, maybe Hao and Sanjay you can provide more colors on that. So if we are talking about 2017, obviously we will like to - I mean with these more projects and materialize most of the [indiscernible] in Japan. So we are about to be to at least the 10 megawatts roughly 10 megawatts projects which is I mean roughly 1 to 2 megawatt size for each projects in the second half of the year. And are we about to also start a construction of another 40 megawatts in Japan, but that connection time could be two to three years on the construction. So we started to at least start to construct around two megawatts in Japan. And also we are starting to start a construction of another 40 megawatts in Japan maybe in the Q4 of – Q4 this year or Q1 next year. That’s in Japan. And I think that may be Sanjay you can give a little more color on…

[Sanjay Shrestha:]

Yeah, I'm happy to do that Andrew. So Phil we - as I mentioned in my prepared remarks, right, so you know just thinking about Latin America we have successfully completed obviously our project and we're very happy about that. So that should obviously be reflected in the P&L going forward. Second thing is we just signed a share purchase agreement on 24 megawatt shovel ready PZ [ph] projects in Chile, right. We can actually break ground on that as early as beginning of 2015, right. And we also signed an LOI for another 18 megawatt. We think half of that that could actually go to construction ready status in 2018. And as I said we have about 10 megawatt in North America, obviously given Section 201 and ITC dynamics we're watching what the market does, what the pricing does. But these are also close to a shovel ready status. But we are trying to be mindful of what the overall pricing would look like. We've actually got multiple EPC quote but the variability still remains what happens to the module crisis. So that's something we're watching closely. And finally in Canada we have about 15 megawatts which is expected to get to NTP by early 2018 and we're looking at COD for that by the end of 2018.

[Philip Shen:]

Great. That's all very helpful. Just a quick follow up there Sanjay. In terms of the 10 megawatts in North America closed to shovel ready, let's say hypothetically we do hit $0.50 per watt module ASP, what happens to those projects, do they get renegotiated or do they go away effectively?

[Sanjay Shrestha:]

They would not go away. I think again as you know, Phil, right, I mean I think whenever we've sort of heard about this trade cases there is a gyration in the market, volatility in the market for six to nine months and market do tend to normalize. And frankly I think it is premature to give you any precise response on how things are going to unfold here at this point in time. We've sort of seen some of these things multiple times before, right. So the consensus seems that there will be some sort of a tariff at the end of the day, right. There was a lot of different numbers floating around. You have sort of seen the module price impact already being reflected, right. But what I can tell you is you know, I think out of those there were some projects that would still make economic sense and some project will probably have to go back to the authority and renegotiate. So frankly speaking at this point in time it's premature to say exactly how it unfolds. But what I do feel comfortable saying is do they go away? No. We will figure out a way to make sure that this project do move forward either by working with our EPC [ph] partners, modules or if the need be go into the local authority and saying look here's the situation we need to kind of move this forward and these are the parameters we need.

[Philip Shen:]

Okay. Great. Sanjay, Andrew and Hao thank you again. I’ll pass it on.

[Sanjay Shrestha:]

Thank you.

[Operator:]

[Operator Instructions] It looks like we have no further questions at this time. So I'd like to turn it back over to Mr Hao Wu for any closing remarks.

[Hao Wu:]

Thank you, operator. The most important message we want you to take away is that the company is in good hands, it's functioning normally and in books we are growing our business. We think the company is now stronger, better managed and is being a better position to grow the business of the initial position is solid. We believe that we have many years of success ahead of us. This will conclude our call. And you may now all disconnect. Thank you.

[Operator:]

And that does conclude the conference. We thank everyone for their participation.