ReneSola Ltd (SOL) Q2 2013 Earnings Call Transcript

Juliet Yang Henry Wang - Chief Financial officer Xianshou Li - Chief Executive Officer and Director

Brandon Heiken - Crédit Suisse AG, Research Division Timothy Lam - Citigroup Inc, Research Division Philip Shen - Roth Capital Partners, LLC, Research Division

Hello, ladies and gentlemen. Thank you for standing by for ReneSola Ltd. Second Quarter 2013 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, Ms. Juliet Yang, ReneSola's Investor Relations manager. Please proceed, Ms. Yang.

Hello, everyone, and welcome to ReneSola's second quarter earnings conference call. ReneSola's earnings results were released earlier today and are available on the company's website as well as our newswire service. You can follow along with today's call by downloading a short presentation available on the company's website at www.renesola.com. On the call today are Mr. Xianshou Li, our Chief Executive Officer; Mr. Henry Wang, our Chief Financial Officer; and myself. I will discuss ReneSola's business highlights and strategy, and Mr. Wang will go through with the financials and guidance. We will all 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 U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statements except as required under applicable law. Please be reminded, unless otherwise noted, all figures mentioned during this conference are in U.S. dollars. If you have downloaded our presentation, please turn to Slide 4 for our company highlights and see Slide 10 for a snapshot of our financial progress. We are thrilled to report that, in addition to achieving our gross margins of more than 7% in the second quarter, we delivered record total shipments of 849 megawatts as ASPs have steadily improved overall. We have continued to stress our higher-margin module business as well as our long-standing expertise in wafer production. By leveraging our proprietary wafer technology and expanding our sales and marketing efforts, we have transformed our company into a global solar brand and technology leader. Furthermore, we continue to invest in downstream products like microinverter, string inverter, off-grid small-scale storage systems and mounting systems, which may become our future growth drivers. Coming out of what was a challenging 2012, we're starting to see positive indicators showing that the global solar market is stabilizing. As such, we will continue to invest in our proprietary technology to reduce our cost and improve efficiencies so that we are poised for growth as the market improves. I will now quickly review our shipments. Total solar shipments in the second quarter of 2013 were 849.3 megawatts, an increase of 28.3% from 662.1 megawatts in the first quarter. Wafer shipments increased 23.8% quarter-over-quarter to 415.2 megawatts, while module shipments increased significantly quarter-over-quarter to a record high of 434.1 megawatts as a result of increased global demand for ReneSola products, especially in the U.S., in Europe as well as in Japan. ASPs continue to increase in the second quarter of 2013, with wafer ASP increasing to $0.23 per watt and module ASP increasing to $0.63 per watt in the second quarter. This compares to $0.22 per watt and $0.61 per watt in the first quarter of 2013. Such price stability, combined with our low cost structure and increased module shipments, should position us well as conditions continue to rebound. If you turn to Slide 7, you will see a breakdown of our module sales by geographic region, along with data regarding ASP trends. We achieved tremendous growth in the U.S. market, with module shipments more than tripling sequentially from approximately 40 megawatts in Q1 of this year to more than 56 megawatts in Q2. In the EU, despite an extended period of regulatory uncertainty, we managed a sequential growth in the module shipments from 195 megawatts in Q1 to 214 megawatts in Q2. At the same time, the EU, as a whole, showed significant increase in module ASP, up to $0.64 per watt overall in Q2. For Japan, one of our newest priority markets, we shipped 10 megawatts in Q2, up from 3 megawatts in Q1 of this year. India, another of our newer markets, achieved more than 45 megawatts in Q2, up from 17 megawatts in Q1. Our strong international sales performance in Q2 have reinforced our belief in the value of our global network of regional sales and marketing teams and the benefit of our target brand-building efforts. Furthermore, we are confident in overall upward trends of module ASP and expect to see prices of $0.66 and $0.68 per watt in Q3 and Q4, respectively. Please turn to Slide 6 for an update of our R&D efforts. We increased our R&D spending in Q2 2013 to improve our -- the technology behind our brands, products and manufacturing process. Also, we continued to invest in the technology and production of the module and wafer as well as second-generation Micro Replus microinverter, string inverter, off-grid small-scale energy storage systems and mounting systems, which are key elements of our downstream strategy. With regard to solar wafers, our next-generation Virtus A+++ wafer, with an average efficiency of 0.15% to 0.20% higher than that of Virtus A++, achieved mass production in Q2 2013. With the new technology, the Virtus A+++ wafer has shown highly concentrated cell efficiency distribution and an improved efficiency rate. As for solar modules, our ZEP-compatible modules, which is easy to install and handle, achieved mass production. We have also invested in the development of light PV panels with strengthened frame structures as well as black-color modules with low working temperatures, which can significantly increase their efficiency. We continue to invest in our second-generation Micro Replus microinverter, while optimizing the first generation of the module based on firsthand data from our worldwide network of microinverter plants. During the second quarter, the Micro Replus microinverter and string inverter received numerous certificates, including ETL, TUV SUD, VED and CE in many key markets. At the same time, over 70 modules of our LED products have received TUV certification. We have also developed a tile roof system and a pitched tin roof system that are expected to receive Australia AS/NZS 1170 certification and TUV certification and that are already available for order. Additionally, our first off-grid small-scale energy storage system model has been complete and is now available for order. As you may have heard, large section of China experienced heavy rainfall and flooding this summer. In July, our polysilicon production was temporarily affected as a result of the flooding in Sichuan province. However, our third quarter polysilicon production outlook is expected to be in the range of 1,100 metric tons to 1,700 metric tons. Please turn to Slide 8 for an update on our cash and debt position. As of June 30, 2013, we have debt of $909.9 million, excluding $111.6 million in convertible notes. Total debt borrowing decreased by $48.7 million sequentially as of the end of second quarter. Our net cash and cash equivalent positions plus restricted cash was $405.8 million as of the end of second quarter, a decrease from $442.7 million as of the end of the first quarter. Our net cash inflow in Q2 2013 from operation activities was $65.5 million compared to a net cash inflow of $4.5 million -- $4.2 million in Q1 2013. I will now turn the call over to Henry, who will discuss our financial results in more detail.

Thank you, Julie. Please turn to Slide 11 to look at our financial progress. An increase in the demand of our solar modules across a number of geography regions, particularly in the U.S., European and Japan, along with our improvement in ASPs, contributed to the increase in revenues and margins for 2013. Moreover, we are confident we can continue to lower costs and improve our high-margin module business to deliver a positive gross margin in the third quarter while capitalizing an improvement in the solar market. I will now review details of our financial results. Net revenue for the second quarter was $377.4 million, which exceeded our guidance and that represents a sequential increase of 32.8% from $284.2 million, mainly due to an increase in ASPs and to greater module shipments. Gross profit for the second quarter was $27.4 million compared to a gross loss of $5.6 million in the first quarter, primarily due to an increase in ASPs, as well as an increase in solar module sales. Gross margin for the second quarter was 7.3% compared to gross margin of negative 2% in the first quarter. Operating loss for the second quarter of 2013 was $16.6 million compared to an operating loss of $33.4 million in the first quarter. Total operating expenses for the second quarter were $44 million, up 83% from $27.8 million in the first quarter. The sequential increase in operating expenses was primarily due to a significant increase in the R&D investment for the production of module wafers and downstream products as well as an increase in sales and marketing expenses as a result of an increase in shipping fees and logistic expenses, which were consistent with the increase in our solar module shipments. Operating expenses represented 11.7% of total revenues in the third quarter of 2013 compared to 9.8% in the first quarter. Operating margin for the second quarter of 2013 was negative 4.4% compared to an operating margin of negative 11.8% in the first quarter. Net loss attributable to holders of ordinary shares for the second quarter of 2013 was $21.1 million compared to a net loss of $39 million for the first quarter. This represents basic and diluted loss per share of $0.12 and basic and diluted loss per ADS of $0.24. Now please turn to our guidance, which could be found on Slide 14. For the third quarter, we expect total solar wafer and module shipment to be in the range of 730 megawatts to 750 megawatts. The solar module shipments are expected to be in the range of 430 megawatts to 450 megawatts. Revenues are expected to be in the range of $360 million to $380 million. And gross margin is expected to be in the range of 7% to 9%. For the whole year 2013, we expect the total solar wafer and module shipments to be in the range of 2.8 gigawatts to 3 gigawatts, with solar module shipments expected to be in the range of 1.6 gigawatts to 1.8 gigawatts. At this time, we would like to take any questions that you may have. Operator, please.

[Operator Instructions] Your first question comes from the line of Brandon Heiken from Crédit Suisse. Brandon Heiken - Crédit Suisse AG, Research Division: I was wondering if you could talk about your expectations for the ASP to improve through the rest of the year. Is that due to mix or what else are you seeing in the market?

I'm sorry, Brandon, you are saying the ASP due to what? Brandon Heiken - Crédit Suisse AG, Research Division: Is it due to geographical mix or are there other reasons that you expect the ASP to improve through the year?

Okay. [Chinese]

[Chinese]

Okay, Brandon. Mr. Li was saying that the ASP increased due to 2 reasons. One that the profit distribution that we have been working on is definitely a reason that we have increased shipments to U.S. and Japan, which are the higher ASP regions, and decreased our shipments to China and India, which were the traditional lower ASP region. Another reason, as we were seeing the demand is picking up, and we are willing to raise our ASPs. Brandon Heiken - Crédit Suisse AG, Research Division: Okay. And can you talk about your costs in the second quarter and expectations for the rest of the year, please?

The cost of wafer and module or... Brandon Heiken - Crédit Suisse AG, Research Division: Yes, please.

[Chinese]

[Chinese]

Okay, Brandon. For the modules, we have our in-house total cost of $0.52 to $0.53 and our in-house wafer cost is $0.20. And we expect to remain the same level throughout the year.

Your next question comes from the line of Timothy Lam from Citigroup. Timothy Lam - Citigroup Inc, Research Division: [Chinese] This is Timothy from Citi. I have a couple of questions. Firstly, about the polysilicon plant. I understand that the company has said that it is looking to be producing polysilicon of 1,100 to 1,300 in third quarter. Can you kindly give [Audio Gap] company and what's the kind of a selling price the company can expect from the polysilicon or is it going to be used mostly for in-house at this point? Now the second question I have is regarding company's plan to reduce the wafer cost. I understand many competitors have lowered their cost further with some of the equipment changes and changing using a diamond wire, for example. What is the company's plan in terms of lowering its wafer cost going forward?

Okay. [Chinese]

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Okay. Tim, I think you understand that. For everybody else on the line, Mr. Li says the poly we produced are 100% used internally. And as for the wafer production cost, how to lower the wafer production cost, it is really -- it's getting more and more difficult to reduce the cost since the demand is picking up and as best case scenario, just to keep the current level. Timothy Lam - Citigroup Inc, Research Division: Just as a follow-up on these 2 questions. What's the production cost right now for your poly? And whether the company will look to use larger ingots produced, I would just say, the larger ingot equipments at this point in time?

Okay. [Chinese]

[Chinese]

Okay. Tim, I think you understand that. For -- Mr. Li was saying that as of this moment, our production cost is still relatively high. With the 20 metric tons per daily, that our cost is still above $20, and that's the main reason that's being -- affecting our gross margin. We'll get back to you on that at the next month, maybe we'll have a clear view on the cost. And for the -- your second question on the ingot, where we think we have enough capacity right now, and we do not plan to extend any capacity on wafer or ingot. So no to that question.

Your next question comes from the line of Philip Shen from Roth Capital. Philip Shen - Roth Capital Partners, LLC, Research Division: I'd like to start off by asking about lead times and how they are -- what they are today? Perhaps you could tell us what they are by region. And so what are the lead times for module orders today? And how have they changed versus Q2?

I'm sorry, Philip, what do you mean by lead times? What is that? Could you repeat it? Philip Shen - Roth Capital Partners, LLC, Research Division: Sure. So how have -- how long do your customers have to wait before they receive their modules? And is that -- how is that changing, as well?

By geography? Philip Shen - Roth Capital Partners, LLC, Research Division: Yes.

What as well? Philip Shen - Roth Capital Partners, LLC, Research Division: So the question was how are your lead times changing? And perhaps you could tell us how they are changing by region.

Okay. [Chinese]

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Okay. Philip, Mr. Li was saying we have sold out throughout this year. The customer have to wait for next year to get our products. We are selling next year's capacity right now. Philip Shen - Roth Capital Partners, LLC, Research Division: Great. That's really helpful. And is that true for -- okay, I understand it. So let's move on to the next question. You may have answered this already, I was having some technical difficulties with my line, but I noticed that your U.S. mix is growing aggressively, I think at 4% U.S. shipment, that's in Q1, and 13% Q2, and you're expecting for the whole year, 38%. Talk to us about your strategy for hitting the sales goal? and what kind of investment will this require, if anything at all?

Okay. [Chinese]

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Okay. Philip, Mr. Li would like to introduce our current U.S. market situation. We have 3 local office in U.S., 1 is in San Francisco and Los Angeles, another is in Massachusetts. And we have over 40 employees in -- 50 employees in U.S., and we have 8 local warehouses. Based on the July's number, we're currently the top 2 supplier in the U.S. market. For the second half of the year, we would like to reinforce that position. So we didn't join any projects in U.S., just pure sales.

[Operator Instructions] Your next question comes from Brandon Heiken from Crédit Suisse. Brandon Heiken - Crédit Suisse AG, Research Division: Can you talk about the new products that you're starting to roll out and maybe your expectations for revenue and gross margin from some of these products? I know the microinverter you've been offering for a while, but it sounds like the energy storage system is new. And you mentioned LED products also in the press release.

Okay. [Chinese]

[Chinese]

Okay, Brandon. Mr. Li says, of these new products we are selling, setting over 20% gross margin, and the Micro Replus inverter -- microinverter is a success. For all these products, we have received numerous certificates around all the key markets, and we have seen strong growth in the U.S. and Australia market, and we also have shipped some to U.K. and Germany. And the other string inverter and small energy storage system and LED products is in the early stage of testing, and we're at the relatively early stage. As for the microinverter, we have over 10 OEM factories that have been helping us. We're looking forward to this microinverter to be one of the key drivers next year for profit. Brandon Heiken - Crédit Suisse AG, Research Division: What are your expectations on that? How much revenue do you think may come from that if it's a key driver of next year's profit?

[Chinese]

[Chinese]

As to the large-scale revenue we have right now, it will be relatively a small portion, probably a couple million. But it is a future growth point, it is a future product.

Your next question comes from the line of Brad Nickel [ph] from Nickel Capital [ph].

Just wanted to follow up on your comments about being sold out for the year. So have you gotten an allocation then for Europe in terms of what your shipments are going to be in the second half? And how long have you been sold out for the year?

What do you mean how long we sold out for the year?

Well, I mean since July or June. I think it's a new development for the industry to be sold out after a period of oversupply. So I was wondering how long you've had that visibility for.

Okay. [Chinese]

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[Chinese] Okay, Brad. Mr. Li is saying that for -- we're starting to think -- in August, we realized we have sold out until end of this year. And for the allocation in EU, we're expecting the EU shipment will take about 40% until Q3 and Q4.

Okay. And what's your expectation for supply and demand in 2014? Do you see demand growing and do you see supply growing? And what is your feeling on pricing after the fourth quarter of this year?

[Chinese]

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Okay. Mr. Li thinks that the whole market is definitely looking up and there is strong demand. We're seeing strong demand. So for next year, the ASP will definitely grow and so as the poly price. We expect the poly price to reach $25 per kilogram. And as for ReneSola, the ASP will definitely go up to $0.70 per watt.

There are no further questions at this time. I will now hand back to today's presenters. Please continue.

Thank you for joining today's conference call. You may now disconnect.

This concludes today's conference call. Thank you for your participation. You may now disconnect the lines.