Sky Solar Holdings (NASDAQ: SKYS ) Q4 2015 Earnings Conference Call March 31, 2016 8:30 AM ET Executives Armin Seifart – Vice President and Corporate Counsel Sanjay Shrestha – President and Chief Investment Officer Andrew Wang – Chief Financial Officer Analysts Philip Shen – ROTH Capital Partners, LLC Colin Rusch – Oppenheimer & Co. Inc. Jesse Pichel – ROTH Capital Partners LLC Operator Thank you for standing by, and welcome to the Sky Solar Fourth Quarter 2015 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, [March 31], 2016. I would like now to turn the conference over to your first speaker today, Mr. Armin Seifart with Sky Solar. Please go ahead, sir. Armin Seifart Thank you, and welcome to Sky Solar’s fourth quarter and full-year 2015 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 Annual Report on Form 20-F. Except 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, Mr. Sanjay Shrestha. Sanjay, if you like to start? Sanjay Shrestha Thank you, Armin, and thank you everybody for joining our conference call today. I thought what I would like to do is begin our call by recapping our key accomplishments during 2015 and then discussing some of the key initiatives we are undertaking for 2016 and beyond. So let’s start with 2015. During 2015, we established a key partnership with Hudson Clean Energy to expand our presence in Latin America and Japan as well as further potentially expand our presence in the U.S. market. We also established our U.S. operating subsidiary made key strategic hires and have made significant progress on our efforts to expand in the U.S. market by targeting potential opportunity to acquire operating assets and project pipeline. We also began the process of realigning our internal resources in the Americas Region and I am pleased to report that we have made significant progress on that front. We have also made significant progress in strengthening our financial underwriting, technical and business development activities here and expect these efforts to have a meaningful positive impact in 2016 and beyond. In addition, we grew our operating portfolio from 53 megawatt to 83 megawatt in Japan as a result of our expanded partnership with Farallon. On an operational level, our results in 2015 were modestly below our expectation driven primarily by lower than expected connection in Japan in fourth quarter of 2015. We only ended up connecting 11 megawatt in Japan in fourth quarter versus our prior guidance of 30 megawatt to 40 megawatt this was primarily driven by construction timing and some of you guys know in the solar space a month delay can result for being in one quarter to the next. As a result we ended the year with 83 megawatt of operating assets in Japan and we currently have 28 megawatt under construction in Japan. As all of you know Sky Solar has remained very focused on its key target markets with operations in Japan, U.S., Canada and Latin America. As a part of our internal capital allocation strategy we believe it is very important for us to review any potential changes in operating conditions in our key markets and then reflect that in our corporate capital allocation decision. As it stands today we see increasing attractiveness in the U.S. market to expand our footprint. Our scale and focus should enable us to expand into both solar and non-solar opportunity in U.S. and broadly speaking North America. To give you some incremental color we are pleased with several ongoing initiatives in North America, which includes closing on operating assets, and acquiring sizable pipeline from multiple parties. In Canada, we were recently one of the only handful of companies to be awarded a 14 megawatt large renewable project, which was a very highly competitive bidding process. However, in Latin America and particularly in Chile we see substantial changes in near-term financing and power market condition. We have a meaningful pipeline in Chile and we’re continuing to assess the impact of these changes on our shovel-ready project as well as our pipeline in Chile. This could potentially impact timing of project construction in Chile as we focus on making sure that anticipated project returns meet our internal target. However, on a positive note, we are also seeing sizable distributed generation opportunity with very attractive returns in this market. As you all know we have a meaningful presence in Japan with 83 megawatt of operating asset and another 28 megawatt under construction as I just mentioned. In addition, I would like to point out that our current operating assets in Japan are meaningfully under levered and furthermore we have another 135 megawatt of shovel-ready pipeline in this market. Now, in light of some of the changes in Latin America, as I just talked about more specifically in Chile and our highly under levered FIT 1 operating assets in Japan and our expanding presence in the U.S. market, Management and Board had [Audio Dip] strategic review of our global operation in order to unlock shareholder value, while we are considering a number of possible path forward, we will update you on the progress made in this respect in the coming months. As a result, we are withdrawing our prior guidance for 2016 at this point. Now, I would like to turn the call over to Andrew, our Chief Financial Officer to go over details of our fourth quarter results. Andrew? Andrew Wang Thanks, Sanjay. First, I’d like to note that we encourage you to review our financial results on an adjusted non-IFRS basis. By looking at the ongoing elements and the removing the effect of what we expect to be one-time items, you will see the Company in the way we are looking at it. We believe that this will give you the best understanding both of our historical results and prospect going forward. Also note unless I stated otherwise, all financial figures refer to the fourth quarter of 2015. Any comparison characterized as year-over-year is comparing to the fourth quarter of 2014 and any characterized as sequential is comparing to the third quarter of 2015. Okay, now onto the results. Electricity sales in the quarter was $7.9 million, an increase of 128.4% year-over-year, but down 30.1% sequentially. The year-over-year growth in electricity sales was primarily due to the increase in the Company’s operating IPP assets globally, which include additional project connected in Japan during the fourth quarter. The sequential decline in the electricity sales was impacted by seasonally lower sun hours grow across other Company major geography markets. Electricity sales in Asia were up 197.4% year-over-year, but down 18.1% sequentially, primarily due to the revenue contributed by the solar parks in Japan that were connected during the year and the lower seasonality in the fourth quarter of 2015. Electricity sales in North America were up 185.3% year-over-year, but down 64.1% sequentially, primarily due to the seasonality and devaluation of Canadian dollars against the U.S. dollar. Electricity sales in Europe were up 24.2% year-over-year as a result of higher solar irradiation compared to last year and also sales were down 46.8% sequentially due to the seasonality as well. Total revenue were $12.2 million, increased by 49% year-over-year, and 1% sequentially. Revenue from system and other sales was down 8.4% year-over-year, but up 456.4% sequentially. The year-over-year decrease in revenue from system and other sales was primarily due to the ongoing shift in our business model from system sales services to IPP electricity sales, while the sequential increase was due to increased system sales services in Canada during the fourth quarter. Cost of sales and services was $7.6 million compared to $7.1 million in the same period of 2014. As a result of above, gross profit, which was $4.6 million for this quarter, was up 318% year-over-year and gross margin increased to 37.9% for the quarter from 13.1% in the same quarter of 2014. During the fourth quarter, we also recorded an impairment loss of $1.1 million as a result of disconnected license in Canada and Latin America due to the certain project timing and technical issues compared to $269,000 in the same period of 2014. SG&A expenses were $7.4 million down 85% year-over-year. The decrease was primarily due to a non-recurring equity incentive fee expense of $43.7 million recorded in the fourth quarter of 2014. Other operating income was $42,000 compared to $346,000 in the same quarter of 2014. The decrease was due to a non-recurring disposal of permits in the fourth quarter of 2014, no such disposal was recorded in the fourth quarter of 2015. Operating loss was $4.9 million compared to operating loss of $48.1 million in the fourth quarter of last year. Finance costs were $1.2 million compared to $2.1 million in the same period of 2014. The decrease in financing costs was primarily due to the lower interest rate of a bank loan denominated in Japanese YEN in the fourth quarter of 2015, compared to that of the loan denominated in U.S. dollar in the fourth quarter of 2014. Other non-operating expenses were $1.2 million, which mainly represented foreign exchange losses resulting from the depreciation of the Euro against the U.S. dollar. This compared to a non-operating expenses of $9.9 million in the same period of 2014. The decrease in other non-operating expenses were primarily due to a decrease of fair value changes as compared with the same period of 2014. Net loss was $7.4 million compared to a net loss of $16 million in the same period of 2014. Basic and diluted losses per share was $0.02, basic and diluted loss per ADS was $0.15. Adjusted EBITDA was $542,000. Keep in mind that adjusted EBITDA is a non-IFRS measure. Our calculation removes certain effects noted above as well as other items. Please be sure to study the reconciliation table included in the press release for full details on how we arrived after the adjusted EBITDA calculation. The use of adjusted EBITDA has limitation as analytical tools. And you should not consider it in isolation or as substitute for analyze of the Company’s financial results as reported in IFRS. Now let me turn to our balance sheet. At end of Q4, we have bank balance of cash of $26.3 million. The decreased cash balance compared to the end of third quarter 2015 reflect additional investments to build projects mainly in Japan. Cash including received cash was 28.2% of equity compared to 44.6% at the end of Q3 2015. In Q4, we spent more than – around $20 million related to our solar park assets, all related to new project constructions. Recurring amount of IPP solar parks was $259.4 million or 1.8% of our total assets of $361.1 million. Total borrowings of $98.3 million represented 27.2% of our capitalization. Long-term borrowings of $84.7 million were primarily non-recourse project financing. Short-term borrowings of $13.4 million were deployed for working capital. Now, let me briefly look at full-year financial results. Again all figures of our quarter year – for the full-year 2015 unless otherwise noted and the comparison all with full-year 2014. Revenue was $47.2 million up 43.5% year-over-year in line with our strategy shift to IPP electricity sales were $35.5 million up 59.8%, while system sales were $11.7 million up 9.4%. Electricity sales in Europe were down 19.2% to $11.2 million, while electricity sales in Asia were up 155.8% to $19.4 million. North America especially Canada was due mainly in system sales market for us with system sales were up 63.1% to $8.4 million. Gross profit was $28.6 million representing the gross margin of 60.6%. SG&A expenses was $23.7 million. Operating profit for the year was $8.2 million. Net loss was $1.6 million or $0.04 per share and the negative $0.03 per ADS. Adjusted EBITDA was positive $15.7 million. Remind again for the year adjusted EBITDA remove certain effects noted above as well as other items. Please be sure to study the reconciliation table included in the press release for full details on how we arrived at these calculations. Finally, our balance sheet remains healthy. We remain EBITDA positive and we look forward to updating you without overall outlook as we undertake key strategy initiatives to unlock shareholder value. Now I will return the call over to the operator for the question-and-answer session. Operator? Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] We will now take our first question it comes from the line of Philip Shen from ROTH Capital. Please go ahead your line is now open. Philip Shen Good morning, guys. What are the strategic options on the table to unlock shareholder value at the upcoming Board meeting? Are we talking about JVs or partnership or new sources of capital? Can you just give us some color as to what you guys are exploring? Sanjay Shrestha Hey Philip, how are you? This is Sanjay. Again, I think it’s a little bit of all of the above but again I think getting into too many specific at this point in time is bit premature that is really what going to be the topic of discussion here in the month of April, right. And I just want to point out few things to you however one we’ve been talking about building the team here in the U.S. which we have done, we’ve been talking about realigning our resources in the Americas region we have done that we feel very good about our platform as it stands today, we see a lot of opportunity and I recognize that we obviously have had any incremental announcement yet but we feel pretty good about what we are that’s number one. Number two, second thing I would like to highlight here is we have sizable amount of operating assets in Japan now and the amount of the debt on those operating assets remains very low right. So that’s something I just want to point out, but again totally appreciate the question, but give us a month or two here before we can give you a concrete answer on exactly what it’s going to look like, but it is fair to say that all the options are on the table right now. Philip Shen Okay. Great, in terms of where we’re winding down Q1 today. Can you talk about the connections you might expect or we could see from this quarter in Q1 from you guys? Sanjay Shrestha Andrew, do you want to take that real quick. Andrew Wang Right, as we mentioning previously that we have 28 megawatts working progress basically expected to be connected during the quarter and all these projects are in Japan. Philip Shen [Indiscernible] Andrew Wang I think that’s the key region that we have expected I mean this major connection during the first quarter. Philip Shen Okay, cool. With – I think Sanjay you mentioned some of the challenges in Chile. I was wondering if you might be able to provide some more color there I am guessing given some of the issues with commodity exposed industries it seems like the merchant power pricing levels are quite low there. And so is there a scenario where a – what is the outlook for the Chile and projects for you guys. And then you also mentioned that there was some or more constructive outlook for the DG market in Chile perhaps you can sketch out the opportunities there? Thanks. Sanjay Shrestha Happy to do so. So first of all as you know we have 44 megawatt shovel-ready project in Chile right and we are pretty happy with the project, location of the project and it’s a good project. And another thing we’ve also gotten is extension of the timeline in terms of one, we can actually connect the project, we’ve actually got an incremental 18 month extension. So which allows us to really be opportunistic in terms of when we break the ground and when we connect the project to the grid number one? Number two, there is also going to be a sort of the PPA auction if you would in the third quarter of this year and that is something we’re watching closely as well. But as you know price sort of the merchant price in Chile tends to be tied to the price of oil because its tied to the price of LNG and needless to say given what the price of oil has done, what the price of commodity has done, all the consultants that work for our debt financing provider have continued to reduce their expectation for the spot prices especially in 2016 and 2017, right, that has actually led to basically this becoming – the structure of the debt is becoming a little bit complicated. We haven’t again made a final decision here. We’ve actually been in a constant dialogue with our lending institution about it, but that’s the reality of the situation as to our comments here about how the market dynamics have gone from Chile a grid parity market 12 months ago to on a short-term basis or some other larger project economics in the near-term aren’t looking as attractive. However, we think this is a good project, there is an opportunity for us to one, lower the CapEx, two, potentially get some sort of a PPA, so we are obviously working on both of those. And fortunately for us, we have got on the land extension to be able to do that. Now on the distributed generation side, our team has been very active in that market as you know and we have actually been able to identify which again by the way is not in our backlog as we tend to be conservative in terms of what we put in our backlog. There is about 21 megawatt of potential near-term opportunity, and since this is a DG project, typical size of this projects were about 3 megawatt plus. So it’s really a small scale utility project if you would and most of this projects aren’t subject to your day time spot prices. They actually are allowed to basically capture the average spot price during the day. And as you probably know in Chile, the prices tend to be much higher during the night time, but that doesn’t benefit your day time spot price for the solar, right. But for the distributed generation since you are looking at an average price, there is a meaningful uplift in the price, you can actually capture for the cash flow and the return. So, again we are obviously going through a detailed evaluation of this, but we think that the returns on some of this DG projects should be substantially higher. So in short, there is two paths, right. One, monitor the 44 megawatt, see what we can do to make sure that the return is attractive. And two, continue to sort of work on this DG opportunity because the return is clearly higher, which one we move on first at this point in time I can’t give you that answer, which is what we are also trying to figure out, so that’s what we do. Philip Shen Okay, great. I’ll pass it on. Thanks. Sanjay Shrestha Of course. Thank you, Phil. Operator Our next question comes from the line of Mr. Colin Rusch from Oppenheimer. Please go ahead. Your line is now open. Colin Rusch Thanks so much. Can you guys talk a little bit about how close you are, how much diligence you’ve done to doing an AVS in Japan, the persistent that’s been set for 85% loan-to-value, 1.4% coupon over 20 years would suggest that there’s an awful lot of capital that could come into the Company just through refinancing those assets in Japan that you’ve got done? Sanjay Shrestha Hey, Colin, how are you? Thanks for that question. So look quite well noted, we are obviously well aware of that option and again as I said, right I mean I think there is a – in a multiple different ways there is a lot of capital recycling opportunity remains in Japan. And again we feel like we are one of the few companies in the space with a very sizeable operating asset as well as the very sizeable pipeline both FIT 1 and FIT 2 and even some FIT 3 which frankly I didn’t even mention on this call. So, again please give us few months here before we can come back to you with some concrete answers. So we are – we are putting all the options on the table right and we fully recognized that, we’re sitting with a very valuable asset here probably somewhat unique to us than anybody else in the sector. And we feel like it is also not being fully recognized with the market as well, but again give us at least few months here so that we can give you [four months] or rather than giving a lot of different hypothetical scenario of what path we might end up picking. Is that fair? Colin Rusch Yes. That’s totally fair. Can you walk through just the two impairment charges, what those were in the quarter? Sanjay Shrestha Impairment charges in the quarter. Can you tell… Andrew Wang So, basically that as you know that we do the primary developments in most of the markets including mainly the Canada and also North America. And when we are doing the – I mean the primary developments, we will capitalize some of the direct cost for example to develop legal or interconnection study. As well as we eventually will find some project will not be either commercially works or technically be able to connect it. And then we will basically impair these permits, if the permits will eventually materialize and we will view the projects and then these costs of the permits will be continuously capitalized in on the balance sheet as part of the IPP solar parks assets. During the quarter, we have recorded certain impairment losses for the permits which mostly are primarily development permits we have in Canada FIT 2 projects as well as some of the projects in the Latin America. Colin Rusch Okay, perfect guys. And just a final one from me is the sense that there is a lot of deal flow out there, how active can you be at this point in that bidding process and looking at that given kind of some of the strategic things that you are talking about doing? Sanjay Shrestha So Colin let me make sure, so you are specifically talking about sort of the U.S. market from a deal flow standpoint, right? Colin Rusch Yes, exactly. Sanjay Shrestha Sure. So again, I mean in light of what we just mentioned here about undertaking the sort of the strategic review, right, because there is potential to recycle capital, we are sitting with a lot of valuable assets and we have now – we feel now pretty good about the team that we have in place for the Americas Region, right. We feel like we have very strong legal and financial underwriting capabilities and we are – I want to say is very disciplined about what we go after, right. Our focus is not just to add megawatt, but add right megawatt that is going to give us the returns that we look for. So we are fairly active and we are looking at a lot of opportunities and I think the pipeline of the prospect have gone up substantially for us and I will be the first one to say that obviously we haven’t had any confident announcements yet, but it is fair to say that we are active with parties ranging from various different sizes. And we are not looking for larger utility scale project. We are mostly focused on sort of smaller utility scale type opportunity. We are willing to look at 25 megawatt portfolio made out of number of different projects in just 125 megawatt portfolio or a 10 megawatt block. We are willing to do that led work which I think allows us to actually even get the better return than maybe some others. So short answer to your question is we are fairly active, we are looking at a lot of things and hopefully we can come back and report to you guys with some incremental update again during the coming months. Colin Rusch All right. Thanks a lot guys. I’ll take the rest of that one. Sanjay Shrestha Thank you. Operator [Operator Instructions] Our next question comes from the line of Jesse Pichel from ROTH Capital. Please go ahead. Your line is now open. Jesse Pichel I’m sorry ma’am that was mistake. I hit the button by mistake. Thank you. Sanjay Shrestha Good morning Jesse, how are you? Jesse Pichel Good, I don’t have a question, but thank you very much. Sanjay Shrestha Thanks Jesse. Operator Okay. Our next question comes from the line of Philip Shen from Roth Capital. Please go ahead. Your line is now open. Philip Shen Hey guys. Hey, just a quick follow-up here, in terms of non-solar opportunities, you touched on that in your prepared remarks. Can you provide some color on the type of non-solar assets, you may consider either developing or owning and can we – could we see any non-solar assets added to the balance sheet in 2016, and I know a lot depends on what you guys decide in the next month or so, but and so far as you give us some color as to your activity there, that would be great? Thanks. Sanjay Shrestha Right, happy to do so. So again that we touched on this a little bit on our last earnings call as well, so not a whole lot different than that, so – but again let me sort of give you some more color here, right so the things that we would be interested in. Number one, what we are not going to do is take a technology risk. We are definitely not going to do that, right. It has to be a renewable asset class where technology has been around for a long time and it’s proven. Second, the return that we get on this projects have to be meaningfully higher than the returns we are getting it on the solar side, right, because we are – at the end of the day we’ve been a developing Company that actually owns asset on a global basis in the solar space. We know that market pretty well so to do non-solar assets the return has to be meaningfully higher, but to add a little bit more to that there will be probably more likely there will be three buckets of things we would be very interested in, one would be combined heat and power, second would be potentially energy efficiency and third that we are looking at obviously very closely and I think this is something a lot of people are looking at as well in the energy storage, right. Now, in terms of a specific questions surrounding should you all expect something to be on the balance sheet or something we owned during 2016. I would really say this is more 2017 and beyond, if we end up having anything in 2016 it will be really more small scale and really sort of test of water to demonstrate that. There is a value proposition here and it is the right thing to do, but other than that I would say this is really more 2017 and beyond. Philip Shen Okay. That’s fair. Thanks Sanjay. Sanjay Shrestha Thank you. Operator There appear to be no further questions. I would like now to turn the call back over to the management for any closing remarks. Sanjay Shrestha Thank you, operator. One again everyone thank you for being on the call. We look forward to updating you all here in the coming months both for our upcoming quarter as well as for all the strategic initiatives we are undertaking here in order to unlock shareholder value. Thank you again and have a good day. 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