China Hydroelectric Corporation (NYSE:CHC)
Q1 2013 Results Earnings Call
June 21, 2013 9:00 AM ET
Scott Powell - Investor Relations and Corporate Communications
Amit Gupta - Chairman
Dr. You-Su Lin - Interim Chief Executive Officer
Liya Chen - Chief Financial Officer
John Sheehy - Private Investor
Andrew Bose - High Valley Capital
Good day. And welcome to the China Hydroelectric Corporation First Quarter 2013 Earnings Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Scott Powell, Investor Relations and Corporate Communications. Please go ahead, sir.
Thank you. And we appreciate everyone who has taken the time to join today’s China Hydroelectric Corporation’s first quarter 2013 earnings conference call. Also joining us today are Mr. Amit Gupta, Chairman of China Hydroelectric Corporation; Dr. You-Su Lin, the company’s Interim CEO; and Ms. Liya Chen, the company’s CFO.
Before management’s presentation, I would like to refer to the Safe Harbor Statement in conjunction with today’s conference call. This call will contain certain statements that address operating results, performance, events or developments that we expect or anticipate will occur in the future.
These forward-looking statements include among other things statements relating to our business strategies and plan of operations, our ability to acquire Hydroelectric assets, our capital expenditure and funding plans, our operations and business prospects, projects under development, construction or planning and the regulatory environment.
The forward-looking statements are based on our current expectations and involve a number of risks, uncertainties and contingencies many of which are beyond our control which may cause actual results, performance or achievements to differ materially from those anticipated.
Should one or more of these risks or uncertainties materialize or should underline assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Among the factors that could cause actual results to materially differ include supply and demand changes in the electric markets, changes in electricity tariffs, hydrological conditions, our relationship with and other conditions affecting the power grids we service, our production and transmission capabilities, availability of sufficient and reliable transmission resources, our plans and objectives for future operations and expansion or consolidation, interest rate and exchange rate changes, the effectiveness of our cost-control measures, our liquidity and financial condition, environmental laws and changes in political, economic, legal and social conditions in China and other factors affecting our operations that are set forth in the company’s Form 20-F for the fiscal year ended December 31, 2012 and filed with the Securities and Exchange Commission on April 18, 2013 and in our future filings with the SEC.
Unless required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Following management’s discussion, you will have the opportunity to ask questions.
I would now like to turn the call over to Mr. Amit Gupta, Chairman of China Hydroelectric Corporation. Mr. Gupta you may begin.
Thanks Scott. Good morning and good evening everybody who has joined the call today with us. It’s been a great start of the year for us. And as expected, as we said the revenues which may look a little bit declined based on quarter-on-quarter but was in line with company’s budgets.
The rainfall as we had indicated, in Zhejiang province was above normal, Fujian close to normal and Yunnan continues to be in a drought-like situation. I think more importantly what I like to highlight is the efforts this management has made and this is for the first time the company has been able to generate positive cash -- operation cash flows in quarter one.
And I think that’s what the management has set out its objective for this year that it will reduce its cash SG&A and interest expense. And then I’m very pleased to note that the management has been able to achieve more than 35% quarter-on-quarter cash G&A expense reduction and significant interest expenses also.
I think although the precipitation would continue to affect the revenues we generate but I think the cash flow situation of the company has improved significantly over the last six to nine months. And I think once we are into these cash flow situations, I see that liquidity and other situations which company was in 2011 and ‘12 is expected to resolve pretty quickly.
With that, now I would like to turn over the call to Dr. Lin, the Interim CEO at CHC, who will discuss the company’s operational performance in further details. Dr. Lin, please take us through the operational performance.
Dr. You-Su Lin
Thank you, Amit. And thank you everyone for joining our conference call. I’m Dr. You-Su Lin, Interim CEO of China Hydroelectric Corporation. I’m pleased with the company’s performance in the first quarter of this year, yes, 2013. We experienced below average rainfall in Yunnan and the Fujian provinces in the first quarter compared to above average precipitation in Zhejiang and Fujian provinces in the previous year quarter.
Despite the dry weather, the company had to maintain its labor cost flat year-over-year and our highly skilled operational team ensured that all our projects operated as efficiently as possible. Because precipitation fluctuation unpredictable from quarter-to-quarter and year-to-year so our management continues to focus on its efforts on ensuring that the company’s liquidity position can adequately handle annual precipitation variation. We remain committed to maintaining and improving up on the effective cost management practices we [employ phase] [ph] in year 2012 and during the first quarter of year 2013.
I will now turn over the call to Ms. Liya Chen, our CFO, who will discuss this quarter’s financial results in more detail number.
Thank you Dr. Lin and thank you everyone for joining our conference call. I am Liya Chen, CFO of the China Hydroelectric Corporation.
I will discuss our first quarter ended March 31, 2013 unaudited financial results. And for greater detail on these results, I encourage you to refer to our press release filed on Wednesday, June 19. Before we go further to the details, let us go through some financial highlights.
For this quarter today, we have lower revenue. We have reduced the G&A expenses. We have lower interest expenses and also the net loss was mainly caused by the change in fair value of warrant outstanding amount to $1.8 million, which was resulted from the rise of the stock price of the company.
Now, let’s move to the details. Due to lower precipitation levels, Q1 2013 net revenue was $18.3 million, a decrease of 13% year-over-year. And the company’s consolidated effective utilization rate from continuing operations for first quarter of 2013 was 29.4% compared to the 36.5% in the first quarter of 2012. And our gross profit decreased $2.9 million from $13 million in the first quarter of 2012 to $10.1 million in the first quarter of 2013 and primarily due to decreased revenues and the fixed nature of the certain expenses included in the cost of revenues.
Now, our G&A expenses for the first quarter was $2.7 million, a decrease of $1.5 million from the prior year period mainly due to the closure of the U.S. office and the reduction of the professional service expenses.
And our adjusted EBITDA, a non-GAAP measures which excluding interest and taxes, depreciation and amortization and certain non-cash charges decreased by 24% year-over-year to $12.8 million for the first quarter ended March 31, 2013. If removing the effect of discontinued operations, our adjusted EBITDA decreased 9% or $1.2 million to $12.8 million in the first quarter from $14 million in the same period of 2012.
And our GAAP net loss for the first quarter of 2013 was $1.6 million compared to a net income of $0.8 million in the comparable prior year period. Like I’ve mentioned before, the net loss was mainly caused by the change in the fair value of warrant liability which amounted to $1.8 million. And then non-GAAP net income for this quarter was $0.2 million, compared to the net income of $1.8 million in the comparable prior year period.
Now, I will turn to our balance sheet. As of March 31, 2013, we had cash and cash equivalents of $9.2 million, compared with $8 million at December 31, 2012. The accounts receivable were $8.7 million and total current assets were $36.4 million. We had $58.1 million in short-term and current portion of long-term loans. Before the quarter ended March 31, 2013 our net cash used in operating activities was $0.2 million.
So, with that, on behalf of China Hydroelectric Corporation’s entire management team, I would like to thank all of our listeners this morning for your participation on this earnings call. I will now open the call for Q&A from the audience. Operator?
Yeah. (Operator Instructions) We will take our first question from [Kyle Maury].
Good morning. My question is on the situation with the tariffs, could you just give us more granularity on the tariff outlook going forward?
Hey, Kyle. This is Amit. How are you doing?
Yeah. Thanks. On the tariffs, as you would see we have a little better realization in quarter one this year. It keeps varying depending upon, as you know tariffs are different for different plants and different, and these moves in a range within different provinces. So depending upon how -- what’s the composition of our productions between these plants and between these provinces, our realizations vary.
Having said that, I think, we have seen, last year we have seen tariff hikes on some of our plants ranging between 5% and 18% range. We see, historically we have seen that we see tariff hikes very three to five year on these plants.
Having that -- having said that, it has been really difficult to predict when these tariff hikes would happen. We -- as we hear from, our discussions with the regulator, we do hear noises about some tariff hikes being proposed in Yunnan over next 12 months. Zhejiang I think already has quite high tariff, so I don’t think there is more room for increase in anytime soon, and on Fujian I think we had some increases last year, hopefully we should have increases sometime next year.
Having said that, as we keep telling our investors and shareholders that, for being conservative purposes you should assume that there would be marginal tariff hikes every two to three years and should not depend upon tariff hikes as something to look forward to.
Sure. Okay. Great. And then flipping over and discussing the short-term liquidity needs to the company. There was a comment in the press release regarding wider forms of financing being considered. I’m just wondering if you might have any more granularity on that item?
Sure. I think what the company has done over past, Liya can mention some details also is that, we need for first four, five years of our operation, I think our two common source of funding was equity and debt. And this debt essentially were in two forms, one is a debt we will generally takeover when we acquire these plants and when we acquire these plants, these debt typically would be three to five years of remaining maturity.
And the whole idea was that we should be able to finance it with some of the bank lines which we had signed up with some of the bigger banks in China for 10 to 18 years and should match our cash flow. But as you know in 2011, there was a slowdown in lending from the bigger banks. I think since then we have realized, the company has realized that it needs to diversify its lending base. So there are multiple ways in which we are diversifying it. We are now, for example, sale and lease back. We are considering some plants on sale and lease back. I think there is one plant which we have financed that way.
We are talking to smaller banks which - provincial or regional banks, which are much more interested in this asset class because given that big bank always wanted to fund this asset class because of the secure nature of cash flows it provided to them compared to high-growth industries which tend to have volatile cash flows, I think this is the time when smaller banks, provisional regional banks are looking.
In fact, I was in Zhejiang yesterday to sign small loan agreement with the credit union and this was the largest loan. It was a small loan from China Hydro’s perspective but I think we need to appreciate that it was the largest loan that credit union has ever given to one firm. And they had given us a small loan last year. They have increased it four-fold this year. So there are all these financings.
We are also looking to -- we've also approached some DFIs. I think the key there would be once we get into our next level of growth, we should be able to access to those offshore DFI kind of financings where they would look forward to work - they are looking forward to work with us on growing the company as part of their mandate.
I think they have restricted ability to just refinance some of the loans. So I think overall talking about various forms of financing these are accessible in this part of the world which includes as I said loans, leasebacks, longer-term finances from development financial institutions et cetera.
Okay. That makes lot of sense. Thank you for that. And then last one for me and I’ll cede the line, obviously, very commendable job on expense management on the SG&A side. Are we basically at a run rate of where we might be long term, [borrowing] [ph] growth or is there perhaps anymore to go because 35% quarter-on-quarter that’s substantial?
I think quarter one frankly, I think the numbers we have shown are to my mind -- this probably excludes some of the one-time expenses which we will incur in quarter four. I think management has given a guidance of about 25% for this year compared to last year. I’m sure they are going to beat that. That’s a budget which we had given to management but whether it will be exact 35% or somewhere between 25% and 35%. I think we will -- it is too early to tell in the year.
Okay. Thanks for taking my questions.
(Operator Instructions) And we will go next to John Sheehy, a private investor.
John Sheehy - Private Investor
Hi everybody. Thank you for taking my question. I’ll be grateful if you could share some comments about the long-term outlook for the regulation of power turfs in China. What you think will happen, when will it happen and what could be the implications for China Hydro?
Sure, John. Thanks a lot. I’ll answer part of it and then I’ll request Dr. Lin to kind of update you on his latest discussions in Beijing. I think about -- we have been talking about deregulation in China for roughly half a decade now, more than half a decade. I think there are steps being taken towards it.
I think the new regime does wants to get to a power deregulation phase but I think given the state of economy that China is in, it will probably be still in foreseeable future. It may or may not happen in next three, four five years. Having said that, I’ll request Dr. Lin to give us some of the very recent updates which he maybe hearing after the change in thought that at national level in China.
Dr. You-Su Lin
Okay. Thank you. I think after this new government come to power, since last March, in this March. I think that they proposed a new round of economical -- they start a new sort of round of economic reform in different levels and deregulation and improve efficiency to one of the main focus. I think this is positive for our utility and power industry.
For example, a big debate is going on in Beijing about to change and then reorganize the national grid which is the monopoly of the whole industry. I think that about this debate I think that more people prefer to have a certain reform and establish what U.K. and (inaudible) since 1980s and then afterwards I believe some European countries and the U.S. also follow that habits.
And they now discuss in China, we should follow this that means to break the monopoly for those big powers and make more compete that would be great, that would be beneficial for our hydro and the new entities, yeah.
John Sheehy - Private Investor
And would biggest benefit be that the both tariffs currently receive in Yunnan rise up more to like a bucket pricing?
Dr. You-Su Lin
Yeah. That will be benefit for us because if in the future that really is sort of a market for the feeding for that would be really good for us. For example, now because in south for the south grid that controls the whole Yunnan province and also five provinces about the price. Actually what they purchased from us, so let’s say in one project it’s RMB 0.22 but then they send just to Kunming, the capital of this province with much higher to the final user. Actually, if they purchase from us RMB 0.22 but if they, for the thermal power, it’s RMB 0.35 in that province, so that they got a lot of profit in between. But if this monopoly come in -- sorry.
So John, I think before we empowered deregulation, I think our Yunnan assets, there are two other factors which could potentially result in us realizing higher that is. One is that some of our plants in Yunnan are still connected to local grids which are inefficient, less than 100 KVA grids in some cases, even 33 KVA grids.
So, A, we lose some electricity and B, since these grids have capacity constraints, sometimes we’re not able to sell all our power. So as the grid situation improves in Yunnan, I think we should be able to without even getting tariff increase being able to realize more revenues from these plants. And then on top of that I think there is even without deregulation as Dr. Lin pointed out, there is a huge differential between tariffs in Yunnan and in Eastern China like Fujian and Zhejiang.
So once there is enough high voltage transmission lines which connect the middle part of China to the Eastern part of China, you would see that those provinces like Zhejiang and Fujian would be more interested in buying power from Sichuan and Yunnan and other provinces in middle part at higher prices.
So I don’t think we need to wait all the way up to deregulation for achieving those benefits. I think those are some things which will happen over next two to four years as the grid improves, as Dr. Lin pointed out, southern grid is looking to improve its operations within Yunnan. So to my mind, I think that’s a much more close, that’s a much more faster way to realize higher revenues from our Yunnan plants than wait all the way up to deregulation.
Having said that, as I said, we don’t think anything is happening, there is like anything is happening over next six to 12 months, it will I think take anyway between 24 and 48 months for these things to start planning out.
John Sheehy - Private Investor
Okay. That’s great. Thank you very much for all that detail.
(Operator Instructions) We will go next to Andrew Bose with High Valley Capital.
Andrew Bose - High Valley Capital
Hi. Good evening. Great [color] from fundamentals of the business, bringing down the absolute level of debt and interest rates, and cutting over a cost. My question is about the value of the individual assets. Could you talk about how the small hydro assets are valued by investors in the local market, is the developed revenues builds or is there any local transactions that would highlight the market value of these hydro plants today?
A very fair question, Andrew. Thanks a lot. Good morning. I think on the fair value -- I think value of the assets. We continue to see that these assets are kind of currently trading at or above the book values we have. I think company has sold two assets to solve its liquidity issues slightly above the book value of the purchase price. I think we think that again was little conservative numbers because the market knew that China Hydro was in a bit of liquidity situation last year.
I was in, as I said, in Zhejiang yesterday, speaking to general managers there. I think the assets which are being put -- being put up for sale has significantly higher prices than we had brought them. The asset prices different in different provinces.
In our view these asset prices vary from Yunnan to Zhejiang, vary between RMB8,000 and RMB14,000 per kilowatt hour and those are the prices which are higher than our kind of then the book values of our assets.
So we continue to see that these assets are being traded at higher price, even if you see the cost of replacement, it’s at or above our price -- our book value that which we are carrying. So we continue to see that there is, prices are -- the prices are high.
The question again becomes from our perspective is given the State China Hydro is in, it may or may not be able to realize all that value for us to go asset by asset sale because market kind of knows that. If we do that we would have to do it in a pretty quick time and we don’t want to sell unless and until required to manage liquidity issues which we don’t we see in foreseeable future.
We don’t want to sell assets because that just increases our SG&A which is, it is -- a lot of it is fixed as percentage of total asset. So if anything we would like to be able to use our cash flows to grow, so that we have the ability to tap in lower cost debt and increase our strength in our balance sheet.
Andrew Bose - High Valley Capital
Great. Thank you. You know like, I mean, if you liquidate an asset and that could provide cash to buyback stock or there maybe, once a decade further take care of it, just be nice to see this is the -- this equity of the cheapest opportunity actually require hydro assets, just hoping somewhere to (inaudible) negative in the market value of the stock and the market value of those assets? Thank you.
I’ll note it, Andrew. Thanks a lot.
And we’ll go next to [Andy Kravitz] with (inaudible) Securities.
Yeah. My question is, is there some variability in the SG&A, should we assume this normal level of about $2.7 million? And the other question is, could you comment, since you spent about six months since you hired someone, find the permanent CEO, where you stand on the selection of new CEO?
Sure. On the SG&A. I think as I mentioned, you should assume that company would be able to reduce at least 25% on last year. Last year, it was about $16 million. So assuming 25% we’re talking about $12 million. So it maybe little higher than the current run rate but not significantly higher than that. There are some one-time expenses which come up in end of Q3, early Q4. So we’ll be able to give you a good idea around October-November time.
In terms of hirings, I think I can say that as a shareholder, I seem pretty comfortable with the management team we have. We have a CFO which has been with us for more than two years now. As CFO, we have -- we hired a CEO. We have hired certain other professional people like company secretary, finance -- somebody -- some people in finance department, general counsel and so on and so forth.
So we have been strengthening our middle management team. On CEO, I think at this point in time, it’s -- we still are looking and speaking to people on CEO search that’s something which is high in the list of things which still needs to be finished from the Board’s perspective. And we hope to be able to come back with definitive answers soon.
Dr. You-Su Lin
I think we just now, we have a very experienced COO, just come to the (inaudible) who have 32 years experience in this utility. Before that, he has 16 years in America in a power plant from basic work and then about 16 or 15 years working in China Hydro, he came back from 1997, come back to China.
I think he joined our team, just within two, three months, it really strengthened our management on daily operations. At same time, we still look for -- we're still looking for the CEO but for time being because we’re still already in this position and also as, I mean, just not fair, we have some other people join the team. It’s already really transcend the management team but having -- but we are still looking for the CEO right now.
Do you have any league way in any of your bank lending that as you run across in bargain to acquire any additional plants?
What I’m asking for is where do you see the growth of the company?
Dr. You-Su Lin
You say some thing that I can add.
Sure. I think that’s a very fair question. I think with having solved some of the operational level concerns which shareholder had six to eight months ago. As you rightly pointed, I think the board would now be looking at considering growth opportunities. I think one thing I would like to assure everyone is that any growth which we would consider, we would not get into situations where the company again gets into similar liquidity issues which we had in the past in our plant are currently coming out of.
I think we have -- the company has experience in constructing small hydro as well as acquiring and being able to internalize them several number of times now. We have been able to do some incremental capacity add. The idea would be that we would be working with the management team now to basically see how we can grow.
But having said that, we would still like to see some more improvement on the liquidity aspect of -- on our balance sheet as well as we would like to ensure that there is enough equity, there is enough equity which then we can break it from the current operations to be able to fund any growth if at all?
Dr. You-Su Lin
Yeah. And things I know we always have I mean staff who are looking for the new development opportunities in China Hydro, actually we have about 500 megawatts potential pipeline in our hand in Yunnan and Fujian. And as I have said, there are things all accretive to further improve and also (inaudible) banking situation in China also more favorable to us operating next six months we can consider further M&A and development strategy.
All right. Thank you.
And at this time there are no further questions in the queue.
Thank you, Operator. Before we conclude I would like to mention two conference appearances. Our CFO, Ms. Liya Chen hosted one on one meetings with investors at the Standard Chartered Earth's Resources Conference yesterday in Hong Kong. On June 25th I will host one on one meetings at the Brean Capital Global Resources & Infrastructure Conference in London. The Brean Capital Conference is by invitation only, so interested investors should contact their Brean sales representative.
Again, thank you everyone for taking the time today to join China Hydroelectric Corporation’s first quarter 2013 earnings conference call. The company looks forward to updating you on its progress in the near future. Good bye.
And this does conclude today’s conference. We thank you for your participation.
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