Sky Solar Holdings, Ltd.
Q2 2016 Earnings Call Transcript

Published: 8 Sep 2016

[Operator:]

Thank you for standing by and welcome to the Second Quarter 2016 Sky Solar Holdings Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday the 8th of September 2016. I would now like to hand the conference over to your first speaker today, Armin Seifart, Vice President and Corporate Counsel for Sky Solar. Please go ahead.

[Armin Seifart:]

Thank you and welcome to Sky Solar's second quarter 2016 earnings conference call. Joining us today on the call from the Company are Sky Solar's Chief Financial Officer, Mr. Andrew Wang and Sky Solar's Chief Investment Officer and President of Sky Capital, Mr. Sanjay Shrestha. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including statements regarding expected future financial and industry growth, development and construction of projects, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Further information regarding these and other risks is included in Sky Holdings filings with the U.S. Securities and Exchange Commission, including its final perspectives pursuant to rule 424-D4. As required by law, the company does not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Now, I'd like to turn the call over to our Chief Investment Officer, Sanjay Shrestha. Sanjay?

[Sanjay Shrestha:]

Great. Thank you, Armin, and thank you everybody for joining our conference call today. Again, I would like to begin the call by recapping our key accomplishments during the second quarter of 2016, and provide some updates on ongoing key initiatives for the year and beyond similar to sort of what we have done in our quarterly intercalls. With that, again from an installation standpoint during the quarter, it was essentially flat; hopefully this does not come as a surprise to anybody as we continue to remain focused on strategic initiative to unlock the shareholder value. While the installation was flat on a sequential basis, we are very pleased to report that our EBITDA actually increased over 90% year-over-year during the quarter to $8.6 million, this largely reflects our growing portfolio of operating assets on a global basis. Furthermore, return on our EBITDA was 28.4% during the quarter and we are very pleased to report this strong EBITDA and solid return on our CapEx which allows Sky Solar to continue to deliver growth in the future. As a recap, we also announced the signing of the LOI in August to sell 152 megawatt of operating and shovel-ready assets in Japan. I would like to highlight to you all that negotiations are ongoing and we'll keep you all updated as we continue to make progress. Just as a reminder, we expect to reallocate the net proceeds from this transaction to build remaining shovel-ready and advanced pipeline of projects that are in excess of 100 megawatt in Japan as well as reallocate capital in other target markets and renewable assets class that meet or potentially exceed return versus some of the PV opportunity on a global basis right now. For the U.S. market, we continue to pursue opportunities and remain disciplined with our investment return metrics. We have begun operating 22 megawatt of operating solar plant with average remaining PPA of more than 15 years and this was the transaction we closed on 15th of July in 2016. We believe the sustainable cash flow expected to be generated from this solar park provide a strong foundation for future growth and business development for the Company. We also aim to enter into definitive agreement to acquire additional PV development pipeline in the U.S. within the third quarter of 2016. This is in addition to recently acquired 22.5 megawatt of development stage premise in the U.S. which we had acquired in August of this year. We are also expanding our partnership with Hudson Clean Energy Partners. They have been our strategic partner and we have actually expanded this relationship to also include the U.S. market beyond our ongoing collaboration with them in Latin America. We are building 82 megawatt of portfolio in Uruguay in partnership with Hudson and also collaborated with Hudson on our recently acquired 22 megawatt operating portfolio in the U.S. I am very pleased to add that we are also in discussion with other strategic partners to expand our presence in our target key markets. We hope to be able to update you all in near future. We are also advancing our conversation with potential partners to explore opportunity in other renewable asset class such as distributor generation opportunity which we believe could generate returns higher than one could have in PV markets especially in the U.S. Again, our key focus remains on reducing our cost to capital and focus on owning or developing renewable assets with higher returns on capital. We look forward to reporting on our progress throughout the fiscal year. Now, real quick on the pipeline update. At the end of the quarter, company owned and operated 133.1 megawatt of solar assets which remain at the same level again as I said as the Q1 of 2016 including the recently acquired operating asset in the U.S. the company’s total operating asset now stands at approximately 155 megawatt. We had about 27.9 megawatt of project under construction during the quarter. This compares to about 24.1 megawatt under construction at the end of Q1, 2016 and all of this 27.9 megawatt of project under construction are located in Japan. In total, the Company had 1.2 gigawatt of projects in various stages of development, at the end of the quarter; again this includes the project under construction described as well as 232 megawatt as shovel-ready projects and more than 1 gigawatt of projects and pipeline. An important point to note, this does not include any incremental opportunity associated with project opportunity in the U.S. or in Latin American markets. And with that, let me turn the call over to Andrew. Andrew, please go ahead.

[Andrew Wang:]

Thank you, Sanjay. First, I would like to 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 can evaluate the company in a similar way in which we look at it. We believe this will give you the best understanding, both of our historical results and the prospects going forward. Also note that unless I stated otherwise, all financial figures refer to the first quarter of 2016, any comparison characterized as year-over-year is comparing the second quarter of 2015 and any characterized as sequential is comparing to the first quarter of 2016. Okay, now onto the results. Electricity sales in the quarter were 15.6 million, an increase of 40.2% year-over-year and 57.4% sequentially. The year-over-year growth in electricity sales was primarily due to the increase in the company’s operational IPP assets globally. The sequential increase in electricity sales was due to the seasonal high solar radiation across the company’s major geographic markets. Electricity sales in Asia were up 69.2% year-over-year and 53.5% sequentially. The year-over-year growth is primarily due to the revenue contributed by the solar parks in Japan that was connected during the year. The sequential increase in the electricity sales was due to the seasonally higher solar [Indiscernible] across the company’s major geographic markets. Electricity sales in North America were up 17.1% year-over-year and 184.5% sequentially primarily due to the seasonality. Electricity sales in Europe were up 2% year-over-year and 80.9% sequentially as a result of seasonality. Revenues from system and other sales were down 7.5% year-over-year and 24.4% sequentially. The year-over-year and the sequential decrease in revenue for our system and other sales was primarily due to the sales in Japan and the total revenue was $17 million, increasing by 34.6% year-over-year and 44.8% sequentially. Cost of sales and service was $5.4 million, compared to $4.3 million in the same period of 2015. This increase is in line with increased capacity of IPP solar park during the second quarter of 2016. Gross profit, which was $11.6 million this quarter, was up 38.8% year-over-year and gross margin increased to 68.2% this quarter from 66.2% in the same quarter of 2015. This increase was mainly due to the high percentage of revenue contributed from luxury sales, which had higher margin compared to the systems sales and others. The increase in electricity sales as a percentage of a total revenue primarily came from increase in electricity sales in Japan. SG&A expenses were $6.8 million, up 21.4% year-over-year. This increase was primarily due to the increase project financing activities in Japan. Other operating income was $119,000 compared to $75,000 in the same period quarter of 2015. The increase in other operating income was due to land lease income during the second quarter of 2016. Other income – operating income was $4.9 million compared to operating income of $8.8 million in the second quarter of 2015. Included in the operating profit in the second quarter of 2015 was a $6.0 million reversal of tax provision of previously recorded VAT and other tax provision. Finance costs were $1.5 million, compared to $0.8 million in the same period of 2015. The increase in finance costs was primarily due to the increased average balance of bank loan in the second quarter in 2016. Other non-operating expenses were $2.2 million compared to other non-operating expenses of $1.9 million in the same period of 2015. The increase in other non-operating expenses were primarily due to an increase of charges in fair value changes as a result of increase in external financing as compared with the same period in 2015. Net loss was 1.4 million compared to the net income of $8.8 million in the same period in 2015. Basic and diluted loss per share was $0.04, basic and diluted loss per ADS was $0.03. Adjusted EBITDA was $8.6 million. Keep in mind that adjusted EBITDA is a non-IFRS measure. Our calculation removes the effects noted above as well as other items. Please be sure to study the reconciliation table include in the press release for full details on how we arrived at adjusted EBITDA calculation. The use of adjusted EBITDA has limitation as analytical tool and you should not consider it in isolation or as a substituting for analyze of the company’s financial results as reported in IFRS. Now let me turn to our balance sheet. At end of Q2, we have bank balance and cash of $37 million, the increase of cash balance compared to the end of Q1 reflected additional project financing completed in Japan. Cash including restricted cash was $36.7 of equity compared to 39.8% at the end of Q1. The carrying amount of IPP solar parks was 323.4 million or 74.6% of our total assets of 433.3 million. Total borrowings of 142.5 million represented 32.9% of our capitalization. Long-term borrowings of 123.3 million were primarily non-recourse project financing. Short-term borrowings of 19.2 million were deployed for working capital. Finally, we'll remain EBITDA positive and the balance sheet remains healthy. We look forward to updating you with our overall updates as we undertake key strategic initiatives to unlock shareholders value. Now I will turn the call over to operator for the question-and-answer session. Operator?

[Operator:]

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

[Philip Shen:]

Thanks for taking my questions. I know the negotiations in Japan are ongoing. When you announced the sales of the Japan's assets last month you had targeted close date of August 31st. When do you expect to close on the sale now and can you comment in general on how the discussions are progressing?

[Andrew Wang:]

Hey, Phil, how are you? Thank you for that question. So, here is where we are. We are really in net deep negotiating on sort of some of the key parameters of this transaction here, right. And even when I think we spoke -- again our expectation had been that, you know trying to get it done by the end of August within aggressive time line. So, hopefully it doesn't come as a surprise to anyone that is gotten extended from there. We do plan to actually get the transaction done hopefully in the near future here. But I think it is a bit premature given that we are sort of in a pretty active negotiation here with the party to give your precise timeline, but we would love to be able to come back to you sooner rather than later with a concrete update and at this point that is best that we can share with you right now.

[Philip Shen:]

Okay. Fair enough. Shifting to Uruguay in Latin America, you know on the last call you guys talks about finalizing the financing with IPP by the end of the summer. Can you give us an update on where you are on that process with IPP and on you 82 megawatt pipeline in general in Uruguay?

[Andrew Wang:]

Yes, absolutely happy to do that. We actually are having a lot of – we have – we see update call with these guys that's actually picked up. We're probably going to make that by weekly update call. We are essentially closing out all the different items, right. There is very few pending items per IPP, can actually go through their final credit committee to get the final sign-up and look at the larger institution that we're dealing with, right, and what we are internally trying to do is hope that everything is buttoned up by the end of September here and tend to slip a week or so in terms of actually final closing with IPP, its possible. But again, we have actually made tremendous progress here and there are very, very few pending items that we need to button up with them and that is a current status with IPP right now.

[Philip Shen:]

Great. And let's say, you can close on it at the end of this month or soon thereafter, would you, when do you, what's the updated kind of COD date for that project in Uruguay?

[Andrew Wang:]

Yes. So there is a sort of two buckets there, Phil, right on that. I mean, I think given as a part of the loan documents and everything we are actually looking to get these things to COD no later than April and May of next year, right, and that has been our target timeline. And one of the thing I just would like to share here is we continue to sort of do the civil work and necessary work given some transmission line we acquired so that the project actually continues to move forward. So its not like it is in stand still because we are very, very committed to make sure that we're meeting that time line of when this project actually need to get the COD even at the part of the IPP loan document some things like that. So from that standpoint there is no change there. It's really, you know for one particular batch of the project the deadline in April. For another the deadline is May.

[Philip Shen:]

Okay. Great. In terms of our models in Q3 and Q4, can you just give us quick view on how we should think about megawatt connections in these quarters?

[Sanjay Shrestha:]

Andrew, do you want to take that real quick and then I can jump back in.

[Andrew Wang:]

Yes, sure. I mean, so we -- other than the Latin America, Europe that we expect to have a COD by some time Q2 next year. We expect to start to construct some projects that we have recently acquired in U.S., the pipeline recently acquired in the U.S. in the fourth quarter. And other than that, we are still expecting to have some connections in Japan, but I mean giving the situation that we are still looking to sell the existing projects, operating projects, so the real connection of Japan could be limited.

[Sanjay Shrestha:]

Yes. But Phil, one more thing I'll add to that, right, and I think look, I mean, part of the reason I think where we are sort of shine away from giving you concrete answer on this is hopefully no different than what we've talked about in the beginning of this year, right. This was the reason why we decided to sort of take the guidance out for 2016, because of all the moving parts and the lot of things were focused on, right. Hopefully this will all come out to be positive and actually ends up creating shareholder value much a lot of cash, lot of opportunity to deploy that cash and returns that we are happy with. Now one thing though that I think will be incremental here is, we did close on this 22 megawatt of operating asset in the U.S., on July 15, right, so, Andrew I think for the half of the Q3, so that is an incremental revenue and EBITDA that actually would be additional to sort of what we did not have in the past, that is something that actually will be a part of the Q3 numbers.

[Andrew Wang:]

That's correct.

[Philip Shen:]

Yes. Great. That's fair. Thanks Sanjay, thank you Andrew. I will jump back in the queue.

[Andrew Wang:]

Thanks, Phil.

[Sanjay Shrestha:]

Thank you.

[Operator:]

Your next question comes from the line of Colin Rusch from Oppenheimer. Please go ahead.

[Unidentified Analyst:]

Hi. This is Shivani [ph] sitting on for Colin. So, on the project level debt in the U.S. and then in South and Central America, can you just give us a view on what you are seeing from lenders on that?

[Sanjay Shrestha:]

Sure. So, again, I think in the U.S. we are actually in the midst of refinancing our project level debt in one of the portfolio that we just acquired, right. So, rather than give you the precise number, I'll tell you that the rates are sort of lower than 5%. And I would not want to get in to specific numbers, right now because they are also going to their credit committee and we hope to actually button that up either within a month here, so that's one. And second thing is, I mean, in Latin American with IPP, there is no change, there is 6% plus that that's been the number all along and there's not a whole lot of incremental update there. However having said that, once we construct the 82 megawatt in Uruguay, two things I would like to highlight here is, one, is we expect incremental opportunity in that market there. And two, we believe that there will be opportunity to sort of take cash out from that projects from a variety of different ways given that that this is a 32-year dollar denominated government PPA in an economy which is an investment grade, right. So we think we'll actually have a lot more opportunity to recycle capital from Uruguay, but that's basically what those numbers are.

[Unidentified Analyst:]

Got it. And then, going back to the pipeline of acquisition opportunities how competitive would you say it is at that point?

[Sanjay Shrestha:]

How competitive the market is?

[Unidentified Analyst:]

Yes, for acquisitions opportunities.

[Sanjay Shrestha:]

So, again, so let me take a step back on that, right. So, I think – so just a recap maybe for a second. So, what is it that we strive to do and what do we think is our core value and sort of strategic purpose of the company, right. Maybe let me touch on that and then I can come back to you specifically on sort of the overall competitive dynamics. First of all, as a part of this ongoing effort in Japan, there would still be a sizeable pipeline that actually you know, that gives us a pretty active returns that we want to plan to build as a part of redeploying the capital that we received from this ongoing negotiation and this transaction, first thing, okay. And as we sort of mentioned there is over 100 megawatt of incremental opportunity most of which is FIT-2 and the returns are very attractive there. So we don't need to go and source anything incremental. Second, we tend to be somewhat selective in terms of the market we serve in for the exact reason and the point you brought up, which is how competitive the market is, because we're trying not to get into a aggressive competitive bidding process, so that's why we feel like we have a very strong local presence in Uruguay and we continue to remain focus on that market. We do have sizeable pipeline in Chile and we are starting to evaluate what is the right time to potentially remove or remobilize on some of these opportunity in Chile, but you would not see us go after competitive bidding in Mexico or competitive bidding process in Argentina, because the reality of the matter is, the competitive bidding process is very, very competitive. Now let's come back to the U.S. We think that -- I mentioned this on our earlier calls as well. Market remains very robust. Everybody is chasing opportunity in U.S. but from our standpoint what we're really trying to do is twofold. But one is we're trying to go after opportunities which is not necessarily very large from a scale standpoint, relatively small opportunity if it’s close to NTP or if it’s sort of assets of COD, so that we can bring a lot of our development and technical expertise to the table and do a lot of work, but despite sort of like cookie-cutter type of a bigger scale acquisition. That's one. Second thing we also tend to get involved a little bit earlier on from the acquisition standpoint sort of north of things that are close to NTP and we're willing to do the leg [ph] work so that we can actually maintain the return profile that is absolutely necessary for us. And last but not least, given the competitiveness in the market, we have been advancing conversation in other renewable asset class that is now PV and we think we can actually have significantly higher returns in some of the other renewable asset class than which you could actually make in PV in the U.S. market.

[Unidentified Analyst:]

That's very helpful. Thank you. Just one additional question from us. With the recent price declines on equipment how much benefit can you see from these changes?

[Sanjay Shrestha:]

So, there is some incremental benefit on that, right, but I think one of the things though this is again not a surprise to I think anyone in the industry per say, so which is also partly why we feel like is -- this is being reflected in some of the competitive bidding process in some of the markets, right. Having said that though, we do believe that we can obviously enhanced our return potential than what maybe we had originally anticipated even in this ongoing project in Uruguay. We can probably sort of come back and revisit opportunity in Chile, because of what has happened to the equipment prices, right. But specifically to the U.S. market competitive pricing and dynamic is such that lot of the benefit that you're seeing from a reduction in the equipment prices is basically being taken away by aggressive bidding from PPA pricing standpoint,

[Unidentified Analyst:]

Got it. Thanks.

[Andrew Wang:]

Of course, you're welcome.

[Operator:]

Your next question comes from the line of Carter Driscoll from FBR Capital. Please go ahead.

[Carter Driscoll:]

Good morning. How are you?

[Andrew Wang:]

Fine, Carter. How are you?

[Carter Driscoll:]

Just kind of following up on the last question, obviously it seems lot of pricing pressure on the equipment side. I guess as relates to your own kind of internal or target IRRs and specific geographies, because of your nimbleness and trying to stay away from as you mentioned earlier, aggressive bidding, have you had to adjust at all or do you foresee adjusting at all your target IRRs in any of the specific regions? I realize you're relatively focused on in a few geographies right now, but I know it's kept out some of the other regions. If you could highlight maybe some geographies where you are seeing, it hold up better than others or whether you had to adjust your expectations, kind of take a step back and give us a kind of broader view of where you're seeing going forward, obviously talk a lot about the U.S., and Latin America, but maybe some other geographies were necessarily on the radar screen for potential expense in longer term?

[Andrew Wang:]

So, very fair question, right, and internally I think from a overall return threshold standpoint not much has really changed for us, right, plus or minus 100 basis points is something I think everybody will be willing to work with depending on the scale, depending on strategic nature of what we're trying to do, right. Having said that though, I think – look, I mean, I think our returns that we can sort of make in Japan remains better than most of the other markets, right, so obviously we'll continue to remain very focus there despite what we – despite the ongoing negotiation here with the LOI, there is still plenty more to do. Second thing is, I think this question is probably a lot more be in pertinent if you would – if one would just think about the U.S. market, right, and I think for the Latin American opportunity as I said, I mean, we feel like we have a very strong foot on the ground and we could very well be aggressive in Mexico, in Argentina, reason we're not is because we don't -- we're concerned about what kind of return one would make and we also don't like the currency exposure. So, we're really not going to re-tweak our return parameters in that market, but in the U.S., I'll just give you example, right. If there is a sizeable and a project with scale that actually has a very attractive both cash on cash yield as well as a project level IRR, would we be willing to be bit more competitive from a pricing standpoint? Yes. We would be. We are open to revisit that thinking, but we're not going to go from basically like we need – these are not the numbers to be taken on an absolute basis, but this is an example we're not going to go from like 11% return down to 7.5% return, but we'll certainly be willing to sort of be flexible from 100 to 150 basis points.

[Carter Driscoll:]

Okay. It's very helpful. How about the length of the PPAs, are there any shifts in terms of compression in some of the utilities looking for shorter PPA lengths. Have you had any pressure to kind of compress the timeframes when you're looking to [Indiscernible]?

[Sanjay Shrestha:]

Yes. That certainly been a chatter of the industry, right. There's a lot of folks sort of coming at it from much shorter duration PPA, which hopefully is a short term thing and not something that its going to become a trend here in the U.S. market, because that certainly is not good for anybody at the end of the day, right. So -- but you're right, you are starting to see some of that, but again, Carter, from our standpoint we're trying to do two things, right. We're trying to sort of get involved in opportunity that is a lot of as a leg work for larger players. And two, this is a reason why we're starting to be even more diligent and focused on things that are necessarily not PV related opportunity in the U.S. market.

[Carter Driscoll:]

Yes. All right. That's all I had.

[Sanjay Shrestha:]

Thank you so much.

[Operator:]

There are no further questions at this time. So Mr. Sanjay Shrestha, please continue.

[Sanjay Shrestha:]

Thank you, operator. Once again I'd like to thank everybody for participating on our call today. We appreciate your interest and look forward to reporting to you again next quarter with even greater progress. Thank you everyone. Have a good day.

[Operator:]

This now concludes our conference for today. Thank you for your participation. You may all disconnect.