ReneSola Ltd (SOL) Q2 2012 Earnings Call Transcript

Tony Hung - VP, International Corporate Finance and Corporate Communications Xianshou Li - CEO Henry Wang - CFO

Rob Stone - Cowen & Company Mark Bachman - Avian Securities Pranab Sarmah - Daiwa Capital

Hello, ladies and gentlemen. Thank you for standing by for ReneSola Ltd. second quarter 2012 earnings conference call. (Operator Instructions) As a reminder, today’s conference is being recorded. I would now like to turn the call over to your host for today, Mr. Tony Hung, ReneSola’s Vice President of International Corporate Finance and Corporate Communications. Please proceed, Mr. Hung.

Hello everyone and welcome to ReneSola's second quarter 2012 earnings conference call. ReneSola's second quarter 2012 earnings results were released earlier today and are available on the company’s website as well as on Newswire Services. You can follow along for today’s call by downloading a short presentation available under the company's website at www.renesola.com. On the call today are Mr. Xianshou Li, our Chief Executive Officer and Mr. Henry Wang our Chief Financial Officer. Mr. Li will discuss ReneSola's business highlights and strategy and Mr. Wang will go to the financials and guidance. They will both be available to answer your questions during the Q&A session. Before we continue please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such the company's results maybe materially different from the views expressed today. Further information regarding these inherent risks and uncertainties included in the company's annual report on Form 20-F and other documents filed with the US Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statements except as required under applicable law. Before I turn the call over to Mr. Li please be reminded that unless otherwise noted, all figures mentioned during this conference call are in US dollars. It is now my pleasure to introduce Mr. Xianshou Li, CEO of ReneSola. Mr. Li will give us remarks in Mandarin and I will read a translation. Please go ahead, Mr. Li.

[Foreign Language] Hello and thank you for joining today's 2012 second quarter earnings call. If you have downloaded our presentation, please turn to slide four for our company highlights. [Foreign Language] Despite challenging market conditions in the second quarter of 2012, we made significant progress in our module business, while at the same time lowering our overall costs and investing in R&D. We have increasingly focused on a relatively better margin module business and the second quarter we delivered record module shipments. While further ASP declines put pressure on our margins, improvements in our manufacturing processes helped lead to decreases in the manufacturing cost of modules, wafers and polysilicon in the second quarter. At the same time we continue to invest in R&D to improve our Virtus technology and develop horizontal products such as micro inverters. We will remain committed to R&D while simultaneously expanding our sales and marketing reach to grow our market share and position ReneSola favorably once market conditions improve. [Foreign Language] I will now quickly review our shipments. Please turn to slide six for a snapshot of our shipments and financial progress. [Foreign Language] Total solar product shipments in the second quarter of 2012 were a record 503.7 megawatts, an increase of 8.1% from 466 megawatts in the first quarter. Module shipments rose over 75% quarter over quarter largely due to the success of our new regional sales teams plus relatively strong demand from Europe particularly from Germany as well as demand from Australia. Wafer shipments decreased 8.3% as a result of a strong demand for our modules as we use of our own wafers in house. [Foreign Language] ASPs continued to decline in the second quarter with module ASPs dropping to 0.75 per watt and wafer ASPs dropping to $0.31 per watt in the second quarter compared to $0.84 per watt and $0.33 per watt respectively in the first quarter. Second quarter revenues were $233 million up 10.2% from $211.5 million in the first quarter as a result of higher module shipments. [Foreign Language] Please turn to slide 7 for update on our research and developments. [Foreign Language] R&D remained the central focus in the second quarter. During the quarter, we made progress in the development of our Virtus wafer and modules. We developed a second generation of our Virtus wafer, which uses our newly developed and proprietary in-house manufacturing process, the Virtus A++ process which reduces wafers without the use of monocrystalline seeds. This new manufacturing process results in lower light induced degradation and lower processing costs, which in turn results in a production of more distributed ingots with a greater percentage of high efficiency products. At present, our Virtus A++ processing cost is close to $0.12 per watt, significantly lower than our overall processing cost of $0.17 per watt. We are confident, we can lower this to $0.11 per watt by the end of the year and we’ll continue to invest in Virtus A++ to improve its efficiency. At present, the Virtus A++ method produces wafers with average cell efficiency of 17.5% and Virtus II modules that generate 250 watts to 260 watts of power based on 60 solar cells with a potential to generate as much as 300 watts to 310 watts of power based on 72 solar cells. [Foreign Language] In the second quarter, we also developed a new microinverter, which we called Replus to be used specifically with ReneSola modules and solar systems for power conversion. In addition to investing in R&D associated with our modules and wafers, we have also invested in relative products like carbon composite materials. We'll continue to develop these products as we advance our technology and manufacturing methods in order to capitalize on current market opportunity. [Foreign Language] Please turn to slide eight for an overview of our module business results for the quarter. We placed enormous emphasis on building up our module business this year. We substantially increased our international sales and marketing efforts strategically placing on the ground sales teams in markets where we see strong potential for solar power growth. At the same time, we continue to invest in improving our modular technology and have developed highly efficient Virtus modules based on our Virtus wafer technology. Our strong product line and effective sales teams enabled us to deliver record module shipments of 159.7 megawatts in the second quarter, up 75.7% quarter-over-quarter and 145.7% year-over-year. Although, the market remains over supplied, we are operating at 100% capacity utilization as we continue to win new business. In the second quarter, we hired over 400 additional staff to support our module manufacturing and expanded our capacity to 1.2 gigawatts to meet growing demand. We also decreased our modular processing costs in the second quarter by 10% compared to the last quarter. We believe we can continue to drive down costs and capitalize on the relatively high margins in the modular business once market conditions improve. We expect to ship 150 megawatts or 170 megawatts of solar modules in the third quarter of 2012 and approximately 600 megawatts for the full year. [Foreign Language] Please turn to slide nine for an overview of our wafer business results for the quarter. We continue to be a leader in the wafer space and our wafer processing cost is among the lowest in the industry. In the second quarter, wafer processing cost decreased to $0.17 per watt down from $0.19 per watt in the first quarter of 2012. We expect to further lower our wafer processing cost in the third quarter and to reach $0.15 per watt by the end of this quarter through additional improvements in our manufacturing process. Despite our success in decreasing our wafer processing costs, declining ASPs have substantially hurt our margins therefore until macro conditions improve, we do not expect to achieve high margins in our wafer business. [Foreign Language] Nevertheless, we see our wafer business as our core competitive strength; wafers are the key determinant of module efficiency. As such, we will continue to invest in our wafer business to develop superior technology like our Virtus technology and to improve the efficiency of our products. [Foreign Language] Please turn to slide 10 for an update on our polysilicon production. Our polysilicon plant progress is still on schedule. Its costs continue to decrease and it remains essential to our long-term manufacturing and cost reduction strategies. In the second quarter, we produced approximately 1,119 metric tonnes of polysilicon compared to 900 metric tonnes in the first quarter. Production costs were $25.80 per kilogram in the second quarter compared to $33 per kilogram in the first quarter which were higher than usual due to upgrades and maintenance on the state-owned power grid connected to our plant at the start of 2012. We expect our production costs to decrease further this year reaching approximately $24 per kilogram by the end of the third quarter and $22 per kilogram by the end of the year, lower than our previous guidance. Also upon completion of Phase II of our polysilicon plant, we expect to expand polysilicon production capacity to 10,000 metric tonnes by the end of the year. We expect our Phase II polysilicon production costs to be $18 per kilogram. [Foreign Language] Please turn to slide 11 for an update on our Systems and Project business. [Foreign Language] In the second quarter 2012, we further expanded our projects portfolio with a successful completion of a 9.7 megawatt project in Bulgaria. The project is already connected to the grid and is generating an internal rate of return in excess of 25%. This is in addition to our 20 megawatt power facility in Qinghai China, which was connected to the grid earlier this year and is generating a high internal rate of return. Our Qinghai project has also successfully obtained RMB220 million in financing from the China Development Bank. At present we have an additional 60 megawatts to 70 megawatts of projects in the pipeline for the remainder of the year. We'll remain highly selective in how we choose power projects and continue to focus on due diligence when evaluating project opportunities. [Foreign Language] I will now turn the call over to Henry who will discuss our financial results for the quarter.

Okay, thanks to Mr. Li. Please turn to slide 13 through 16 for a look at our financial progress. As Mr. Li mentioned, our revenue and margins were again impacted by declining solar wafer and module ASPs. We also took an inventory write down of 50.75 million in the first quarter primarily to reflect the decline in the price of this income. However through the successful execution of our cost reduction strategies, we were able to achieve positive growth prospects in the second quarter, a goal we set for our sales at the beginning of the year, margins for our module business remaining particularly (inaudible). And about 2.2% we also achieved positive operating cash flow during the quarter as a result of improving margin and a strong cash flow management. We continue to maintain a strong balance sheet related to our peers. I believe we are in good shape to overcome the solar module recurring challenges and to capitalize on opportunities that may present in themselves when conditions improve. Now I would like to advance through the details of our financial results. Better revenues for the same quarter of 2012 were $233 million exceeding our guidance and representing the sequential increase of 10.2% from $211.5 million primarily due to decrease in ASPs, our solar wafers and modules up by a significant increase in solar module shipments. Gross profit for the second quarter of 2012 was $1.3 million compared to a gross loss of 80 million in the first quarter of 2012 primarily due to lower costs and the increased shipments of our solar modules which achieve higher margins relating to solar wafers as well as a reversal in our product warranty reserve expenses of 10.8 million due to decrease in ASPs and modules. This was offset by an inventory write-down of 15.5 million primarily as a result of the decline in the price of polysilicon. Gross margin for the second quarter of 2012 was 0.6% compared to a gross margin of (inaudible) 3.8% in the first quarter. Gross margin excluding the reversal of our product warranty reserve expenses and even the write down would have been 3.9%. Operating loss for the second quarter of 2012 was $34.6 million compared to an operating loss of $37.8 million in the first quarter of 2012. Total operating expenses for the second quarter were $35.9 million, up 20.8% from $29.8 million in the first quarter. The sequential increase in operating expenses was primarily due to an increase in sales and marketing expenses, an increase in research and development expenses to improve the technology at our Sichuan polysilicon plant and a significant increase in other general expenses as a result of $1.8 million provision for a lawsuit resulting in a primary judgment against ReneSola and fees related to trial production at Sichuan steel wire plants. Operating expenses represented 15.4% of total revenues in the second quarter, an increase 14.1% in the first quarter of 2012. Operating margin for the second quarter of 2012 was negative 14.9% compared to an operating margin of relatively 17.9% in the first quarter of 2012. We recognized a tax benefit of $16.3 million for the second quarter compared with a tax benefit of $6.2 million in the first quarter of 2012. Net loss attributable to holders of ordinary shares in the second quarter of 2012 was $34.8 million compared to a net loss of $14.2 million for the first quarter of 2012. This representing basic and diluted loss per share of $0.20 and basic and diluted loss for ADS of $0.40. On the balance sheet, as of June 30 we had increased our overall debt to $821.3 million excluding $111.6 million due in convertible notes. Total bank borrowings increased about 20.5 million sequentially with short-term borrowing increasing from $662.6 million at the end of first quarter to $691.1 million at the end of second quarter. Our net-cash and cash equivalent provisions was $314.2 million and total cash, including restricted cash was $394.2 million at the end of the second quarter of 2012 compared to a net cash and cash equivalent provision of $338.9 million and a total cash including restricted cash was $388.3 million at the end of first quarter. Our CapEx plans remains conservative for the year. We expect to spend $59 million in the third quarter to expand our polysilicon production capacity as well as to improve our manufacturing processes. Please turn to our guidance which can be found on slide 17. We expect the overall solar market to remain challenging in the third quarter. We expect total shipments to be in the range of 510 megawatts to 530 megawatts with module shipments in the range of 150 megawatts to 170 megawatt. Revenues are expected to be in the range of $200 million to $220 million. For the full-year of 2012, we maintain our previously announced guidance of 2.2 gigawatts to 2.4 gigawatts on total solar wafer and module shipments. At this time, we are happy to take your questions. Operator please?

Thank you. (Operator Instructions) Our first question comes from the line of Rob Stone from Cowen & Company. Please go ahead. Rob Stone - Cowen & Company: My first question is with respect polysilicon prices; it sounds like you have cracked your safe to expansion to get to a pretty decent cost; where do you see poly prices over the next couple of quarters? Thank you. [Foreign Language]

Mr. Li says, currently as you probably know the polysilicon pricing is at $20; now this has actually been fairly stable for about half a month. Now depending on situation regards to restricting imports, but also based on the fact that several Chinese polysilicon plants are no longer operating it’s quite likely that this price is relatively stable and can hold for at least a little while.

Thank you. And your next question comes from the line of Stephen Zhang from CICC [China International Capital Corporation]. Please go ahead.

It’s [Cheng] from CICC on behalf of Stephen. Well the first question is on your solar project business; you said before that you are still in talks with several potential buyers with regards to your Qinghai project. Could you guys give us an update on the current situation and also (inaudible) yesterday was talking about selling their projects before major construction work started. So I am just wondering for the remaining 60 megawatt to 70 megawatt project in your pipeline what was your strategy going forward? Thanks and I also have a follow-up. Thanks. [Foreign Language]

Yeah, actually for our Qinghai programs we do have negotiating with some investors which is from domestic China and also from US. This kind of negotiating is still on the processing; till now we did not finalize the negotiation. [Foreign Language] So Mr. Li indicated that our projects are inherently difficult and challenging business with a lot of competitors. There is a lot of companies out there that are now doing projects in a lot of different countries and hence we have to be very, very careful just like we were with our polysilicon project and we have to choose and pick our shots very, very wisely. We might only be doing one or maybe two projects in each country a year and we might do another 20 megawatts in China, we might do another 20 megawatts to 30 megawatts in say Romania, but there is definitely no plans to do what you say I mentioned say bringing some of the pipeline beforehand and that in fact could actually be somewhat difficult to do and you might not get the best pricing.

Well, the second question is on your wafer business. I mean, before you said, well in terms of your product mix, you said a 1% would be the mono -- one-third would be mono and one-third would be high efficiency multi and one-third would be Virtus. So going forward and how do you see your product mix going forward especially in the third quarter and fourth quarter. Thank you.

[Foreign Language] As first of all we just mentioned, I think you understood that there is actually likely to be substantial changes coming through the product mix now that we have the Virtus II modules which is actually based on the Virtus A++ wafers using the Virtus A++ manufacturing method and essentially at the rate that things are going and given all the advantages of these wafers, we believe that sooner rather than later, not only will we be replacing all the normal multi, but also in fact most of the normal multi in the market will start to really stay way or far way. And in fact it is also possible that people will start to move the way quickly from modules (inaudible), but in terms of (inaudible) only make a quarter in the third quarter and maybe in the fourth quarter only a fifth of our wafer production.

(Operator Instructions). Your next question comes from the line of Ahmar Zaman from Piper Jaffray. Please go ahead.

Hi, good evening gentlemen this is Sean (inaudible) for Ahmar. I was wondering if you could give us a sense of what you are seeing for ASPs for wafers and modules in 3Q and then also into 4Q as well. How you see pricing shaping up?

[Foreign Language]

[Foreign Language] Okay, so Sean, Mr. Li and Henry indicated that for the third quarter what we think we see out there in terms of module pricing would be at around $0.65 per watt. This is primarily due to the fact that we sell primarily to Europe and Australia where pricing tends to be a little bit lower and a little bit more competitive. But in the fourth quarter we will probably have more US sales which in fact we haven’t had until fairly recently as well as the sales in Japan and possibly some sales in China. Now the products in the US will probably sell probably higher by something like $0.05 per watt and in Japan it could potentially sell for even higher than that. So as a result of that, we expect the sales actually to be up as well as the shipments to be up substantially in the fourth quarter and ultimately the pricing, we would not be surprised if it remained the same and actually did not drop in the fourth quarter for modules. For wafers for the third quarter right now we are seeing something like close to $0.30, may be high $0.29 and we think in the fourth quarter it is likely to remain about the same on average.

And your next question comes from line of Mark Bachman from Avian Securities. Mark Bachman - Avian Securities: Tony, micro invertors here, they are not being used in utility scale projects and so I am wondering can you talk to us a little bit about this product that ReneSola here has brought about and why you think it is going to help ReneSola's overall business?

Sure I think, it is probably because of some kits that we want to produce, but let me direct this also to other members of our team. [Foreign Language]

[Foreign Language] Mark so we added a bit to what we are seeing and expanded upon. First and foremost I think it is worth pointing out that our modules are clearly among the highest in terms of power output out there in the market out of China. This is why we are operating at 100% capacity utilization, this is why we had record module shipments, this is why we had record shipments again for the second straight quarter. There is a lot of demand for our products because of the high power outage reduction that comes from our products. Now because of this, our products are actually particularly well suited for smaller scale projects where space is tight or you might want to use it if you will in smaller utility scale or rooftops. So as a result of that, something that fits naturally from this is of course to do these microinverters, so hence we are doing this as an expansion of our products and also playing to our core strengths.

Thank you. And your next question comes from the line of Pranab Sarmah from Daiwa Capital. Please go ahead. Pranab Sarmah - Daiwa Capital: Can I get a little bit of idea about your funding requirement in next few quarters and how are you going to satisfy those needs?

Let me direct this question to Henry.

Yes, actually, although the finance become more and more challenging currently in China because of whatever our shipment and our revenue, you will find that our shipment increased significantly and in that kind our revenue also peaked almost the last year, so we can kick the financing (inaudible) under this local bank. [Foreign Language] Okay. Actually currently we almost have enough cash there and it was for operating and if you look at our Q2 operating cash flow, we can still have US dollar cash flow in. So basically we can manage our operating cash way up and then if we need more finances especially we say these projects we can get the support from the banks whatever from the CBB or even some European banks. Pranab Sarmah - Daiwa Capital: And secondly your wafer processing costs, you are targeting $0.15 by end of 3Q; what will be by end of 4Q this number?

Maybe $0.14. Pranab Sarmah - Daiwa Capital: $0.14 okay.

Also keep in mind this is a blinded numbers, so to say mono and other things. Pranab Sarmah - Daiwa Capital: And my last question is on, how comfortable you are with your basically fourth quarter shipment now? [Foreign Language]

Mr. Li was very direct, he said 80% confidence level.

Thank you. And our next question comes from the line of Mark Bachman from Avian Securities. Please go ahead. Mark Bachman - Avian Securities: Hey Tony just a quick follow-up on that microinverter discussion; what’s different about Replus that you couldn’t get from an already established microinverter that’s already in the market?

That’s a very good question Mark let me direct that to Mr. Li. [Foreign Language]

Yeah Mark, so Mr. Li indicated that right now actually out there in the market there is not too many providers of the microinverters and it tends to be a little bit higher margin. Now the other thing is because of the uniqueness of our Virtus product and in general in terms of how we want to package and market it, we think it will be a very good idea from a marketing perspective to be able to package Virtus product with an inverter, so essentially if you will it’s there to provide a complete kit. Mark Bachman - Avian Securities: Lastly Tony, are you guys offering a 25 year warranty on that as well? [Foreign Language]

Yes, confirmed, sorry about that

Thank you. That was our last question and I’ll hand it back to Mr. Wang for closing remarks.

In conclusion, difficult macro conditions continue to affect our (inaudible) ReneSola continue to make progress. Our module business are growing substantially as a result of our global sales and marketing efforts. We will continue to invest in this business and expect to grow even further by the end of this year. At the same time, we will develop and improve the technology and our core wafer business, as well as with considerable R&D support besides lowering our costs and exploring related product opportunities. While the near term remains challenging, our industry suffers as a whole we are confident we have the strategies in place to grow our business and capitalize on long-term potential of solar power. Thank you again for joining us today. If you have additional questions please do not hesitate to contact us.

Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you for participating. You may all disconnect.