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China Hydroelectric Corporation (NYSE:CHC)

Q2 2013 Results - Earnings Call Transcript

August 16, 2013 09:00 AM ET

Executives

Scott Powell - Investor Relations and Corporate Communications

Amit Gupta - Chairman

You-Su Lin - Interim Chief Executive Officer

Liya Chen - Chief Financial Officer

Analysts

Andrew Bose - High Valley Capital

Operator

Good day, everyone, and welcome to the China Hydroelectric Corporation second quarter 2013 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Scott Powell, Investor Relations and Corporate Communications. Please go ahead, sir.

Scott Powell

Thank you. We appreciate everyone who has taken the time to join today’s China Hydroelectric Corporation second 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 underlying 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. Amit, you may begin.

Amit Gupta

Thanks, Scott, and welcome everybody to China Hydroelectric’s first half and second quarter 2013 earnings. I think the company continues to focus on operating -- declaring good numbers. Rainfall has been modest this year compared to last year, below the normal year average. Having said that, I think the company is focused on reducing G&A and holding the operating cost constant has resulted in good EBITDA margins and their efforts to decrease the interest expense through continuous restructuring of debt has resulted in bottom line improvements also.

I think there is lot of work still needs to be done in terms of our current operations, but I see that company is getting into a phase where it can kind of stabilize the operations which we had started for last year and then look to see how it can grow maybe next year or so.

Without taking much more time I’d now like to turn over the call to Dr. Lin, Interim CEO of China Hydroelectric who will discuss the company’s operational performance in further details. Dr. Lin, please?

You-Su Lin

Thank you, Amit, and thank you everyone for joining our conference call. I am Dr. You-Su Lin, Interim CEO of China Hydroelectric Corporation. Precipitation last quarter was 13%, below the long-term historical average during the same quarter. Despite this dryer condition, we sold 563.2 million kWh of electricity which was only 7.6% decline year-over-year. We operated very efficiently during the quarter which is in line with our focus of reducing our plant downtime and other maintenance in Q2.

Our repair and maintenance cost actually increased 43% in the quarter from the year ago period as a result of this focus. Labor cost is increased 25% or [$0.2] because we operated the Dazhaihe project in Yunnan province with our own employees in the first half of the year 2013.

Labor, there was [all] resources in year 2012. Also we implemented the slight salary increase to key start certain projects this quarter.

We are proud to have increase in non-GAAP net income by over 18% in the quarter despite a very tough comparison with the second quarter of year 2012 because the second quarter of last year was a wet quarter, with precipitation 10% above the long-term average. While in [contrast] it was a 13% below the average this quarter. We are focused on what we can control such as operating efficiency and reconstructing our debt in order to lower the interest expense burden.

We continue to sustain [low] general and administrative cost as well. The result was a better earnings and a stronger balance sheet with more cash and less debt. We intend to deliver similar outstanding performance in the quarter and the years ahead. As of today, rainfall in the third quarter has been below, that of the same period in year 2012.

We are pleased that our cost cutting measures are reducing the impact of rainfall variation on our financial results and improving our balance sheet. Before turning the call over to Liya, I would like to mention that on July 18, we experienced a severe large damage in our Liyuan project which is located in Sichuan province.

Thankfully, we had no injuries. However, we did incur damages to our tailrace concrete apron, spillway gates, power generation plant, auxiliary equipment and the 35KV substation. At this time, we do not know the cost of the repair or the damages. So we can't predict whether our insurance coverage is sufficient to cover all the costs.

We do not expect the Liyuan to generate electricity for the remaining of year 2013, but since the contributed less than $0.5 million in revenue in the second half of the year 2012. It's impact on year 2013 revenue should not be that big.

I will now turn over to the call to Ms. Liya Chen, our CFO, who will review the second quarter year 2013 financial results in more detail.

Liya Chen

Thank you, Dr. Lin and thank you everyone for joining our conference call. I'm Liya Chen, CFO of China Hydroelectric Corporation.

I will first discuss unaudited financial results for the second quarter ended June 30, 2013, before briefly giving an overall review of our six months financial results. To ease our discussion, all figures to refer to US dollars, unless as specified otherwise.

I'll refer to this quarter of Q2 2013 and the year ago quarter of Q2 2012, I will refer to the first quarter of this year as Q1 2013 also we will only discuss results from continuing operations.

As you may recall, we previously announced that the sale of the Yuheng project later last year, in order to give clarity to the comparison, the continuing operations in the financial contribution of Yuheng from [applied full period].

Our GAAP results which include the contributions from Yuheng, there are applicable providing our earnings (inaudible).

Before we go into further details, let’s discuss through some financial highlights, our have lower revenue, reduced G&A, lower interest expenses, higher GAAP and non-GAAP net income and the higher EBITDA margin.

Now let’s move to the details. Net revenue for Q2 2013 was $29.8 million a decrease of 6.3% from Q2 2012. The lower revenue was due mainly to 7.6% decline in electricity sold. And the gross profit was $20.6 million a decrease of 8.8% from Q2 2012, as it translate into our gross margin of 69.1% which compares to our gross margin of 71.1% in the year ago quarter.

Our cost of revenue is generally a fixed cost. So the lower gross profit and margin was a result of the lower revenue. We exercised a good cost control in the quarter taking our cost of revenue unchanged from Q2 2012. Within our cost of revenue our labor cost and depreciation expense were nominally higher than last year but this was offset by lower repair costs.

Our cost continued displaying extended through G&A expenses, which has been a fine (inaudible) area for us in rationalizing our overheads. As G&A expenses was $3.7 million a 17.8% decrease compared with Q2 2012 the lower G&A reflects the closure of our U.S. office and a reduction of other professional service expenses, going forward our intent to continue to reduce G&A for the rest of the year.

The other element of our cost reduction effort is to readjusting our debt, reduce interest expense this effort is been [recent tool] as our interest expense of $5.5 million declined and 19% when it is compared to Q2, 2012. We paid down certain loans onto third party individual and the lower balance resulted in a lower interest payment.

Our non-GAAP net income was $6.5 million or $0.12 per diluted EPS, which is up 18% from Q2, 2012 a, reducing interest expense by over $1 million load [fleet] to the bottom line and that is why we were able to grow net income despite a decline revenue.

And adjusted EBITDA on non-GAAP measures was $23 million and decrease of 10.5% compared to Q2, 2012. And Q2, 2013 adjusted EBITDA margin was 77% an increase of 100 basis points compared to Q2, 2012.

And the GAAP net income attributed those to shareholders was $7.5 million and increased of 10% compared to the same period of last year. Please be sure to see our press release for full details and a reconciliation provided for GAAP to non-GAAP net income.

Again keep in mind that [our reported] quarterly and six months figures I discussed during (inaudible) are fore continuing operations only. Please review our price release dated August 15, 2013 the full disclosure of our GAAP result which includes the contribution of income.

I will now like to briefly highlight our six months ended June 30, 2013 financial results, from continued operations.

Net revenue for the first six months were $14.1 million a decrease of 5.1% year-over-year, principally due to lower [precipitation] in our spending operation regions. We actually sold 892.4 million kWh of electricity in the period, a decrease of 11.9% from the six months of 2012 and our effective tariffs increased slightly to RMB0.36/kWh compared to RMB0.35/kWh in the first six months of 2012.

And gross profit for first six months decreased 13.5% year-over-year to $30.8 million is primarily due to a lower revenues and the fixed nature of certain expenses including our cost revenue. We continued to streamline and reduce our operating expenses during the six months and SG&A expenses declined 26% year-over-year from $8.7 million to $6.4 million.

Our interest expense also decline during the six months and to $12 million versus $14.3 million in the year ago period. The decline is primarily as due to a decrease in the balance of the loan to third party. And GAAP net income attributable to our China Hydroelectric shareholders for the six months were $6.8 million or $0.12% per diluted ADS, an increase of 23.6% and 33.3% respectively compared to the year ago period. It is clear that our success in reducing operating and interest expenses have directly contributed to our bottom line throughout 2013 and our books for the second half of 2013 were beyond further reduction in those expenses.

Now let me review our balance sheet, which has strengthened meaningfully during the quarter. We ended the quarter with cash and cash equivalent of 17.5 million, an increase of 8.3 million from the start of the quarter. Importantly, we would be able to cash from operating activities not financing actions. Our overall debt declined by 6.6 million during the quarter. The composition of our debt improved too, while short-term debt decline by 10.4 million and the long-term debt increased just slightly by 3.8 million. Our long-term debt now stands at 251.7 million.

Before I conclude, I want to address a change in the schedule of an ongoing legal situation. In May 2013, the Henan Lantian Group filed an arbitration claim against us in the amount of RMB25.74 million. In 2009, (inaudible) to acquire equity in to the Henan Wuyue Storage Power Generation Company Limited we paid RMB32.5 million in 2010 for our first cash of equity in the project. They were asked to – the project was at (inaudible) and we did not make a second installment. In fact the investment in the deal was (inaudible) as of December 31, 2011, Lantian has now come back to obligate to make a second (inaudible) investment project. Obviously we disagree and we intend to contest the claim and so forth no hearing day have been set yet.

That concludes my remark on financials. We will now open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you, Ma'am. (Operator Instructions). And at this time, I am showing no questions. I would like to turn the call back to management for any additional remark.

You-Su Lin

Thank you everyone for taking your time today to join China Hydroelectric. Operator think we do have a question.

Operator

You are correct, I do apologize. We will go to (inaudible).

Unidentified Analyst

Yeah could you give us an idea of what the facility that is gotten shutdown what it generated last year in way of profits towards G&A?

Amit Gupta

Andy I think you broke a little bit can you repeat your question?

Unidentified Analyst

Yeah I was wanting to get an idea of how much that facility that was shutdown because of the [floods], how much that generated last year for operating profits? Is this going to be out rest of the year anyway?

Amit Gupta

This facility is roughly about 2% of our capacity, it generates less than 2% of our revenues. So I think this 12 megawatt facility since it was bought four, five years ago has been having problems. What I understand from the operational team is that this facility all the projects on that river one belongs to us and another four or five belongs to one SOE, Datang have been kind of facing these issues. So it’s not going to materially impact our results compared to last year I think as Dr. Lin pointed out.

I think this facility was generating until middle of July and it generated about 500,000 or $0.5 million of revenues in the second half last year. I don’t think it was making any operational significant operational profits.

Unidentified Analyst

What do you estimate the cost to repair it?

You-Su Lin

This is Dr. Lin. Yes for this project [in-house] now still water is still (inaudible) underwater, so the insurance will come in it, may be like 68 plus. We are quite lucky to have the insurance this year, because three years ago we got it flat and for two years there was no insurance coming in to affect. The last year we were very lucky Bank of China insurance to come in to insure for this project. And for last week they already went to the site, but since the project is still full of water, they couldn’t evaluate. Actually this is very positive indicator they will give what they insured us. For this project we insured about RMB87 million and so far we don’t know what’s the exact damage, but I think it’s (inaudible) with machinery wet now our estimation is 80% as we have still used for this project.

Unidentified Analyst

How much, you estimate that the cost will be over and above the insurance?

You-Su Lin

Let’s see this way, they went to the side and (inaudible) said, we can provide about RMB40 million that’s about half for you, if you want to use it right now. But we said we don’t’ know the whole damage yet. We didn’t give them the answer, but we already spoke to our lawyer and the (Inaudible). They say that (Inaudible) project is very unfavorable to our side; we can cover a lot for the rate 87 million.

Unidentified Analyst

And on legal proceeding regarding the (inaudible) storage power unit, what total liability might there be, if you lost in that arbitration hearing.

Amit Gupta

Andy I think that the total loss liability is they have filed arbitration for the amount I think which is mentioned in our 20-F filings. In addition to that, there would be some more expenses which we continue to incur in kind of professional fees such as lawyer et cetera, et cetera. So at this point in time, it's hard to say, but given I think company continues to believe that there is no merit in this case and we continue to fight with the arbitration court.

Unidentified Analyst

But would they with the legal fees in the neighborhood of about $5 million is that about right.

Amit Gupta

I think legal fees would be, I mean it's not going to be, I mean it's not going to be millions of US dollars. It's going to be few hundred thousand US dollars. So yes –

Unidentified Analyst

In legal fees.

Amit Gupta

Yes, the legal fees just about few $100,000, yes. Liya, why don't you update on what progresses we've made in last quarter or even this quarter in getting some of the loans restructured or new loans?

Liya Chen

Sure. We will keep working and keep talking to the different big named banks and other financial institutions. After this release date, we've already received roughly RMB45 million equal the US$7 million new loans. That's interest rate definitely lower than two digits and with the terms longer than five years.

That was progress for the refinancing and also we have double line of credit with the banks and the financial institutions, we'll keeping - working with them. So I think our target and our main job for the rest of the year try to get a longer-term loans with lower interest rate to match with our longer used assets I'm not sure that does answer your question.

Unidentified Analyst

Okay, that’s it for me. Thanks.

Liya Chen

Thank you.

Unidentified Analyst

Excellent job of controlling cost I must say.

Operator

And we'll take our next question from Andrew Bose with High Valley Capital.

Andrew Bose - High Valley Capital

Once again, great job on the expenses and balance sheet. So for the asset sale and in the last year have you received all of the cash?

Amit Gupta

Liya?

Andrew Bose - High Valley Capital

Has it closed, has that sale been closed?

Amit Gupta

Liya, this is regarding Yuheng right, Andrew?

Andrew Bose - High Valley Capital

Yes.

Liya Chen

Yes. Hi Andrew it's Liya. How are you?

Andrew Bose - High Valley Capital

Good.

Liya Chen

First the Yuheng sale, we announced that sales late October, we received over half of the net proceeds during 2012, up to this release date, we received roughly all the net proceeds for the sale.

Andrew Bose - High Valley Capital

Okay. Great and then also interest expenses coming down, is all the third party loans taken care of, or is there going to be possible further interest expense savings in the rest of the year?

Liya Chen

Good question, we're still carrying little bit of third party high interest loans, I think our top priority and also our target is to pay down those loans to this third party as much as possible. So we're expecting, we'll a lower interest expenses throughout this 2013 for the rest of the year.

Andrew Bose - High Valley Capital

Great. I think the only remaining issue is to help the stock price, so if anything the company can doing there, that would be great, thank you.

Amit Gupta

Thanks, Andrew yeah, I think Scott and the other management teams are on road shows this be in August and September. So hopefully they'll reach out to more shareholders and would be able to present the company story.

Andrew Bose - High Valley Capital

Great. Thank you.

Operator

(Operator Instructions) And we’ll turn to (inaudible).

Unidentified Analyst

Do you have any scheduled presentations that you are making at any of the security conferences in the fall?

Amit Gupta

Scott would you?

Scott Powell

Yeah in terms of conferences we are presenting at the Marcum CCG China Best Ideas Conference which is being held in Beijing on September 10th, and Liya Chen, our CFO will be the primary presenter at that conference. So that’s the next one that we have scheduled. Beyond that we don’t have anything on our calendar, beyond September. But I am sure that we will presenting at additional conference as we receive invitations and as other conference is gets scheduled in the fall.

Operator

And we will turn to (inaudible).

Unidentified Analyst

Hello. Last call you mentioned the 500 megawatt pipeline of projects is there any update on the progress on those?

You-Su Lin

Yes I think so far we still pipeline for the new project actually we depending on our financial, the new bank loan that we have had into the next six months, we have some (inaudible) our pipeline. There are some good project, for example in Fujian province actually (inaudible) China recommended a lot of the provide us with 26 megawatts, with very good project and this will provide outside the line below almost 60%, they said if we have the interest they can help us to start that project (inaudible). At the same time in Yunnan province we had several pipelines in certain area which the terrain in much higher than our existing one, so yes.

Operator

And this time it appears to be no further questions.

Scott Powell

Thank you everyone for taking the time today to join China Hydroelectric Corporation second quarter 2013 earnings conference call. The company looks forward to updating you on its progress in the near future. Good bye.

Operator

And again that does conclude today’s conference. We do thank you for your participation.

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