ReneSola Ltd (SOL) Q3 2013 Earnings Call Transcript

Laura Chen Henry Wang - Chief Financial officer Xianshou Li - Chief Executive Officer and Director

Philip Shen - Roth Capital Partners, LLC, Research Division Brandon Heiken - Crédit Suisse AG, Research Division

Hello, ladies and gentlemen. Thank you for standing by for ReneSola Limited's Third 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. Laura Chen, ReneSola Investor Relations Director. Please proceed, Ms. Chen.

Hello, everyone, and welcome to ReneSola's third quarter earnings conference call. ReneSola's earnings results were released earlier today and are available on the company's website, as well as on Newswire services. 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 Mr. Wang will go through the financials and guidance. All of us will 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 United States 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 for -- except as required under applicable law. Please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars. I should now begin with our business highlights from this quarter. Our results from Q3 marked the second consecutive quarter of record shipments and revenue. We exceeded guidance in delivering total shipments of 851 megawatts and expanded our gross margin to over 8%. These returns were driven by growth in overall demand for our modules as well as expansion in our module shipment volume to market with comparatively higher average selling prices. We also expanded our global OEM module capacity in the third quarter after first implementing our OEM strategy at the end of last year. Our OEM module capacity is currently 950 megawatts on top of our internal module capacity of 1.2 gigawatts. Our OEM strategy enables us to grow our top line revenue and market share in our target market, while minimizing capital expenditures. It also provides a number of distinct advantages, including the avoidance of price loss, volume limits and anti-dumping tariffs in markets like the EU. We've been actively building OEM partnerships around the world and currently have OEM capacity in Poland, South Africa, South Korea, Malaysia and Turkey. We expect to expand our OEM capacity to more markets, including Japan. Our globalization strategy also lies in our international sales distribution network. Currently, we have 3 sales offices and 8 warehouses in U.S. We also have sales offices across other regions, including Europe, Asia and Australia. We've been trying to penetrate into emerging markets, and our efforts are fruiting. More sales distribution offices are in set-up process in existing markets and new markets like South America. With the lease, our globalization strategy, including global OEM and global sales, will position us for sustainable long-term growth. Building on our technological innovations, we are continuing to invest in R&D to improve the performance and cost effectiveness of our modules. In addition, certification for our newer products, such as our micro-inverter, string inverter and storage system is now complete across most of our target markets. As such, these products are now available for order. While competition in the solar market remains fierce, we're confident that our ability to innovate and enhance our brand image globally will drive our long-term growth. I will now start reviewing our shipments. Total solar product shipments in this quarter were 851 megawatts, an increase of 0.2% from -- our module shipments increased 6.6% quarter-over-quarter to a record high of 462.9 megawatts, while our wafer shipments decreased 6.5% quarter-over-quarter to 388.1 megawatts. This reflects our focus on growing sales from our module business, while shifting from selling the wafers externally to using them internally for module production. Moreover, we grew our module sales across a number of key markets in the third quarter, particularly in the United States. Our module ASPs continue to increase in the third quarter from $0.63 to $0.66 per watt, while wafer ASPs decreased slightly from $0.23 to $0.22 per watt. The 6% increase in module ASPs and 6.6% increase in module shipments drove top line growth of 11.1%. In the third quarter, we achieved almost balanced shipments across 3 major global markets, namely U.S., Europe and Asia Pacific. Our Q3 shipments data highlights our success in expanding shipment volumes to more profitable markets. We shipped 143 megawatts to United States, a quarter-over-quarter increase of over 150%. For Japan, another one of our priority markets, we shipped 23 megawatts this quarter, up from 10 megawatts in Q2. We also shipped 180 megawatts to Europe. Our ability to penetrate foreign markets is based on our world-class products and leading technology, along with the effectiveness of our international sales and the marketing teams in building our global brand. We expect that as market conditions stabilize and our global sales diversify, our shipment volumes will continue to rise. I will now review our R&D developments. We continue to invest in R&D in the third quarter to support innovation in our technology, products and in manufacturing processes. Upon launching, we believe our Virtus II module product line became highly successful in the U.S. domestic PV market because of its outstanding performance, specifically in low light conditions and best in class temperature coefficients of minus 0.4% per degree Celsius. We believe we outperformed our competition in terms of power output as our 60 cell and 72 cell lines are generally about 5 watts ahead of our competitors offering greater power density. In the third quarter, we obtained more certification for Replus micro-inverters and string converters across our target markets and are now preparing to market these products extensively. In addition, the monitoring system, the Replus inverters, is now online. Our grid-tied and off-grid storage systems received numerous certifications, including CE, SAA and TUV in this quarter. Our 70 models of Euro-line LED products received SAA and C-TICK certificates and 9 models of our U.S. line products received UL and CUL certificates, all entering into marketing process. Moreover, our tile-roof and pitched-roof systems received Australia and TUV certification. All of these products are now available for order. I will now turn the call over to Henry, who will discuss our financial results in more detail.

Thanks, Laura. Hello, everyone. I will explore our financials [indiscernible]. In the third quarter, we achieved record strength and a 11.1% revenue growth. We made our target for gross margin and then realized an increase in gross profit of close to 20%. We did, however, incur significant operating loss in this quarter due to noncash impairment charge of USD 202.8 million. The impairment charge [indiscernible] a write-down of Phase 1 production facility for our polysilicon factory, which I will discuss later. I will now review details of our financial results of this quarter. Net revenues were $319.3 million, which exceeded our guidance and represents a sequential increase of 11.1% from $377.4 million, mainly due to an increase in demand for our solar module across a number of geographic regions, particularly in the United States. Gross profit was $34.1 million compared to a gross profit of $27.4 million in the second quarter, primarily due to an increase in the average selling prices of solar modules from $0.63 per watt to $0.66 per watt, along with an increase in module shipments. Gross margin was 8.1% compared to a gross margin of 7.3% in the second quarter. Operating loss was USD 180.3 million. Total operating expenses were $214.3 million compared to a $44 million in the second quarter. The sequential increase in operating expenses was primarily due to an impairment charge of $202.8 million, including a $194.7 million impairment charge on long-lived assets associated with the Phase I facility of our polysilicon plant. In the quarter, we also recognized a gain of $34.7 million on the forfeiture by a customer of a deposit who received it in connection with a long-term supply contract, which offset a portion of the increase in operating expenses. Operating expenses represented 51.1% of total revenues, including -- excluding the noncash impairment charge. And at the nonrecurring gain, operating expenses would have been $46.2 million, which represents 11% of total revenues compared to 11.7% in the second quarter. Operating margin was negative 43%. Excluding the noncash impairment charge and the nonrecurring gain, the operating loss would have been $0.2 million, representing operating margin of negative 2.9% compared to operating margin of negative 4.4% in the same quarter. Net loss attributable to holders of ordinary shares were $200.3 million. This represents basic and diluted loss per share of $1.12, and basic and the diluted loss per ADS of $2.23. I will now provide an update on our cash and the debt position. As of September 30, 2013, we have debt of $831.2 million, excluding $111.6 million in convertible notes. Total bank borrowings decreased by $78.7 million sequentially as of the end of the second quarter. Our net cash position, including cash and cash equivalents, plus restricted cash, was $438.5 million as of the end of the third quarter, $32.7 million increased from $405.8 million as of the end of the same quarter. Lastly, our net cash flow from operating activities was $79.6 million compared to $65.5 million in the second quarter. I will now provide you an update on our polysilicon factory. In the second quarter, we recognized the $202.8 million noncash impairment charge, including $194.7 million associated with the long-lived assets of our Phase I Sichuan polysilicon factory. The impairment charge was recognized as the amount by which the carrying amount exceeding the fair value of the idled assets. In October 2012, we began the process of upgrading the Phase I factory and the integrating the operations with those of Phase II in an effort to realize production efficiencies and to reduce the cost to reduce polysilicon utilizing the Phase I production line. From July to September this year, we conducted trial productions of the integrated production line of Phase I and Phase II. At the end of September 2013, management concluded that our efforts to sufficiently reduce the cost of production compared to the prevailing market price of polysilicon were not successful. After conducting a further internal assessment, management determined that it was no longer feasible to operate the Phase I facility without a loss and to recognize the impairment charge accordingly. Production at the Phase I facility was permanently discontinued in October 2013. The fair value of the idled assets used to determine the impairment charge was then determined by -- determined with the assistance of an independent professional third party appraiser and completed in November this year. We expect to have an annual polysilicon manufacturing capacity of 6,000 metric tons after the permanent discontinuation of the Phase I facility. We believe that the decrease of internal supply of polysilicon can be offset through the purchasing from the external supplies at a market price. We also expect to operate the remaining production line of the Phase II facility in the full production and benefit from the lower power consumption and depreciating -- depreciation going forward as a result of the discontinuation of the Phase I facility to be able to keeping the production cost or below its target level, which would make our in-house production cost efficient based on the market price of polysilicon. Therefore, we expect to see improved results from our Sichuan polysilicon facility, which will enhance our gross margin going forward. Now, please turn to our guidance. For the fourth quarter of this year, we expect total module shipments to be in the range of 490 megawatts to 510 megawatts and overall gross margin to be in the range of 9% to 11%. For the full year 2013, we expect the total solar wafer and module shipments to be in the range of 3 gigawatts to 3.1 gigawatts with solar module shipments expected to be in the range of 1.7 gigawatts to 1.75 gigawatts. We will now open the line for questions. Operator, please.

[Operator Instructions] Your first question comes from the line of Mr. Philip Shen. Philip Shen - Roth Capital Partners, LLC, Research Division: So I'd like to explore the polysilicon situation. I know it sounds like you have the remaining 6,000 metric tons of Phase II, which likely is at a lower cost structure than Phase I. But can you talk to us about what happened with Phase I? What, in particular, led you to conclude that it was no longer feasible to upgrade the facility and lower the cost?

Okay. So let me just translate for Mr. Li. [Chinese]

[Chinese]

So Mr. Li just said, we've been trying to integrate Phase I and Phase II facility of our polysilicon factory. The project was really big. And in the process of operating the facilities, we recognized that the Phase I facility was actually a burden for our Phase II facility, because we still use the thermal hydrogenation technology for Phase I. And Phase II, the technology we used is hydrochlorination. So the technology was different. After all the operating, testing and also running an operation, we feel that it's not very feasible to still continue the Phase I facility. And we would like now to put our efforts to operate Phase II facility very well. Philip Shen - Roth Capital Partners, LLC, Research Division: Okay. So what are the all-in production costs of the Phase II facility today, and what do you expect them to be as we go through 2014? And then if you can also tell us what the cash costs of the Phase II facility are today as well. That would be helpful.

Yes. [Chinese]

[Chinese]

So Mr. Li said, currently, our cash cost for the past week, actually, it's USD 19 to USD 19.5 because now we are entering into a dry flow water period. That's why the cost is relatively higher. Entering to next year, probably around May to June, we would reach cash cost of $15 to $16, plus depreciation of $2.8 after the impairment. Philip Shen - Roth Capital Partners, LLC, Research Division: Okay. And what is the confidence level that you think that you can hit the $15 per kilogram? Let's take seasonality out. Let's say in a year from now, if cash costs today are $19.50, how much lower could it be 1 year from today?

[Chinese]

[Chinese]

So Mr. Li said, we still have 10% of room for cost improvement, cost reduction in 1 year time. Philip Shen - Roth Capital Partners, LLC, Research Division: Great. Let's move on to the OEM strategy. Can you -- I think I heard in your prepared remarks that you're thinking about expanding the OEM partnership to -- or have a partner in Japan. Can you talk to us about what the potential megawatts are for Japan?

Yes. [Chinese]

[Chinese]

We will probably sign 8 megawatts of OEM in Japan.

[Chinese]

80, sorry, 80 megawatts. Philip Shen - Roth Capital Partners, LLC, Research Division: Okay. And what's the timing of that?

[Chinese]

We will start production in April next year. Philip Shen - Roth Capital Partners, LLC, Research Division: Great. Moving onto ASPs. What are -- what are you seeing in Japan and China? And how do you expect that to trend -- and the U.S. for that matter. And how do you expect those regional ASPs to trend in 2014?

[Chinese]

[Chinese]

So for United States, it's going to be $0.70. For Japan, it's $0.67 to $0.68; for China, $0.63 to $0.64. Philip Shen - Roth Capital Partners, LLC, Research Division: Okay. And then Mr. Li, what will you see the trend in 2014 by region?

You mean the demand? Or you mean the ASP? Philip Shen - Roth Capital Partners, LLC, Research Division: No, the ASP trend.

[Chinese]

[Chinese]

Okay. So Mr. Li said, for U.S. market for the next 3 years, it's going to be really good. And the ASP is going to be stabilized and probably go up a little bit. For the Japan market, for the next 2 years, the ASP is going to be stabilized and also maybe increase a little bit. And for Europe markets, the ASP is going back and stabilize. And also Mr. Li said, U.K., the demand for U.K. is looking very, very strong. And for China, it's not very clear at this moment because the policies for our distribution generation is still not very clear.

Your next question comes from the line of Brandon Heiken. Brandon Heiken - Crédit Suisse AG, Research Division: It looks like the guidance for wafer shipments in the fourth quarter is a bit down from the third quarter. Can you explain the reason for that, please?

[Chinese]

[Chinese]

Yes, Brandon. So Mr. Li said, our module shipments for Q4 would be increasing substantially and some more very good increase in Q1 next year as well. So we are trying to preparing more wafer internally to be producing to sell. And we also canceled some long-term contract with our wafer customers. So this is actually our strategy to just reduce the wafer shipments to focus on our module business. Brandon Heiken - Crédit Suisse AG, Research Division: Okay. But it looks like the module shipments, the guidance is up about 37 megawatts, but the wafer shipment is down about, correct me if I'm wrong, about 200 plus megawatts. So just trying to reconcile where the extra wafer shipments are going to -- is it basically just that they're -- you canceled some contracts?

[Chinese]

[Chinese]

Yes, Brandon, Mr. Li said because there's a time difference, actually, time lagging, so for the shipment in Q4, we actually shipped our capacity in September, October, and November. So in December, we will have an increase in the shipments in module and also an increase in shipments in module next quarter -- sorry, in Q1 2014. Brandon Heiken - Crédit Suisse AG, Research Division: Okay, okay, thanks. And for the lending environment in China, you know that LDK recently received financing from 11 banks a few weeks ago. I was wondering, do you see a change in the credit environment within China? And do you think that the write-down of this poly facility will have any bearing on your relationships with China banks?

Okay let me take this question, Brandon. Actually, in China, the lending environment is slightly changed significantly where before -- actually, before we were also -- I think we can explain -- actually, this is a noncash item for write-down. And we, after this conference call, I will also maybe do some [indiscernible] with the bank. I trust there will be the relationship will not change any, and the bank will still support our business. And it won't give us a lot -- not a big impact there, I think. Brandon Heiken - Crédit Suisse AG, Research Division: Okay. And the last question on the outsourced production. Is that capacity that you mentioned, is it module-only capacity, or is it sell-in module? And can you talk about the cost structure for that OEM production, please?

[Chinese] I answer your first question, it's all for module. [Chinese]

[Chinese]

So for different regions, actually, the cost would be different. Generally, it's around $0.05 to $0.07 for these module processing costs. For Japan, it's probably a little bit higher than that. Brandon Heiken - Crédit Suisse AG, Research Division: $0.05 to $0.07, extra cents is what you mean beyond -- above the China cost, is that what you mean?

[Chinese]

[Chinese]

Brandon, it's actually not on top of the Chinese processing cost. It's the processing cost by the OEM factory. So for Chinese module processing cost -- I mean in Chinese factories, it's 0.445.

Your next question comes from the line of Gordon Johnson.

I just -- I guess I had a general question. It looks like the Chinese government is targeting 4.2 gigawatts of utility scale projects next year, 2014. However, when I look at the plans of the biggest, the largest 8 vendors in solar with respect to utility, again, these guys are a small subset of the total. You're talking about 10 gigawatts of planned utility projects. Can you give us a little, I guess, color on your views on the puts and takes around this, and what could potentially happen? I know there's roughly 8 gigawatts of distributed, but it seems like everybody's focused on utility. Do you think the Chinese government will stick to their stated goal of 4.2 gigawatts of utility, or do you think they'll actually go over that? Then I have a follow-up.

Okay. Just -- let me just translate for Mr. Li. [Chinese]

[Chinese]

Okay, let me translate for you, Gordon. So currently, Mr. Li thinks that it's still -- the projects, the projects, the solar farms are still an important area for the investors. For this year, actually, the China still has this 4.6 gigawatts of [indiscernible] Projects. And next year, it looks like the distribution generation is going to take its place. But Mr. Li said, he thinks that it's still very -- it's still not a mature market for the distribution generation to go very extensively in China. And as far as he knows, that there's still no big scale installation for this distribution generation currently happening in China. And also, the policies are still not very clear and not very detailed. And also, the IRR for distribution generation is not very high. And also, there's a problem with the, with how to -- with the fee. And also, he thinks that if the distribution generation is going to expand, it's probably going to be very late next year. And he think that it's not going to reap that 8 gigawatts, which China government set.

Okay. So does he feel then that there may be risk to the 10 gigawatts from the 8 largest guys and likely much larger aspirations for utility projects next year given the Chinese government has stated their focus is 4.2?

Sorry, can you repeat that?

So, if you look at the 10 biggest publicly traded companies in China, in aggregate, they're targeting roughly 10 gigawatts of utility next year. Chinese government has stated they're going to fund 4.2 gigawatts. If distributed doesn't take off next year, does he think then that there may be risk to the targets of the big solar companies in China with respect to utility?

Yes, okay. [Chinese]

[Chinese]

Okay. Gordon, Mr. Li just said there are a lot of projects under application right now. It's really huge. By those utility group and the state owned enterprises, the total amount would exceed 10 gigawatts. So it's all in the planning process right now. But there will be a limit in the final approvals of these projects. So it maybe pose a problem that people will have a over higher expectation for the Chinese market. So maybe this year, Chinese market, the demand for Chinese market probably will reach 10 gigawatts. But next year, he thinks that it's going to be -- maybe go down a little bit. For distribution -- for distributed generation to go really further in the market in China, it's probably going to be 2015 to 2016. Generally speaking, in the whole world, it looks like the United States and Japan and emerging markets are looking very strong in demand, probably 10% increase from this year. And the price is also going back a little bit.

Okay, that's very helpful. And then we're trying to figure out here in the U.S. what's going on with projects in China with respect to actual FITs being paid. I think that last year there were some issues with FITs being paid on time. Two questions, 1, do guys have projects that you've developed, connected to the grid this year that have not received FIT payments yet even though they may be receiving energy payments? And then secondly, have you heard of any projects in China that are connected to the grid that are not -- that have not received FIT payments yet? Any view there would be helpful.

Okay. [Chinese]

[Chinese]

It's a no to your first question. We...

[Chinese]

We haven't received any subsidy for our 2 projects this year.

Are those projects connected to the grid?

Yes.

So I just want to be clear. They're connected to the grid yet you haven't received a subsidy yet?

No.

Correct.

Okay. And do you know if there's any other -- if this is a broader issue throughout China that maybe there's some projects that are connected to the grid that haven't received the payments? And is there an expectation on when you're going to get that payment? And also if you can give us some details on maybe why that payment is delayed?

Let me explain a little bit about this subsidy. Actually, in July, China government issued a policy that said they want to try to have the grid company to pay the subsidiary through the grid company on monthly basis. But I think this policy will be happen, but I think it will take a little bit time.

Your next question comes from the line of Paul Strigler [ph].

So just following up on Gordon's questions, I think sort of I think you may have suggested that Q1 2014 shipments are likely to be up from 20 -- Q4 2013, is that correct?

You mean for us?

For ReneSola, correct, yes.

Yes, it's correct.

Okay. And so obviously you guys aren't nearly as bullish on the Chinese market as some of your peers. But overall for 2014, what's -- if you think Q4 is going to be up sequentially from Q1 from Q4, what's your view in general for 2014? The market, not just for ReneSola, but for, I guess, your core end markets and just maybe the sub -- the aggregation of all those markets.

You mean the Chinese markets?

Well, I think -- well China, I guess, if you could maybe. . .

Overall?

Overall, but also maybe talking about China, Japan, U.S., South Africa for people like you?

Okay, yes. I think we just answered the question before, but let me just ask Mr. Li again. [Chinese]

[Chinese]

Mr. Li thinks that generally speaking, he thinks the total demand worldwide for next year is around 40 to 42 gigawatts, a 10% increase from this year.

And that includes a flat China or down China, I guess?

[Chinese] Yes, it's included, the Chinese demand. [Chinese]

[Chinese]

Yes, Mr. Li thinks that the total demand for the Chinese market actually will decrease from this year.

And so what milestones are you looking for in the Chinese market? It seems like you guys are certainly more realistic about -- honestly, you're not getting paid on some of your projects. The rules aren't quite clear. Are there any milestones we can look for as investors that the Chinese market -- that the rules, there's more formalized rules that you guys will be getting paid? It just seems like there's a new announcement every week, but they're just announcements without any sort of formalization of payments and/or sort of structures to get paid? Are there any milestones you guys are looking for that would give you more or less confidence on the Chinese market?

Okay. [Chinese]

[Chinese]

Okay, Paul. Mr. Li says, if China is going to do something as what Europe would do, he specifically mentioned, for example, the subsidy policy, that the China -- the distribution -- distributed generation network can recognize revenue directly with the grid company rather than to sell the electricity to end users because the credits for this way of recognizing the revenue is not very stable. And also, currently, the process, the procedures are not very smooth right now. There are too many limitations, restrictions around. And also, the way how the distributed next generation, that solar can collect their money is not very clear. It would probably take 2 to 3 years for distributed generation to really go up in China. And also the financing is difficult for distributed next generation.

Your next question comes again from the line of Brandon Heiken. Brandon Heiken - Crédit Suisse AG, Research Division: I just wanted to clarify one of your comments. So we know that there's a draft circulating for comments about the mix next year between distributed generation and utility scale projects. And you mentioned that demand may be down a bit next year. I just wanted to clarify, do you mean down for utility scale projects or overall demand? And do you view the 4 gigawatt roughly target of utility scale? I know that, that's still under a comment period, but do you think that that's effectively a cap? Or do you think that utility scale inflations can be higher than that?

Okay. [Chinese]

[Chinese]

[Chinese]

[Chinese]

Okay, Brandon. Mr. Li says he thinks that because he thinks that the distributed generation will not be as good as people are claiming, so that will affect the total demand in the Chinese market. Like he mentioned before, the application for distributed next-generation projects are really much more than the 4.2 gigawatts. And currently, the solar farm, there's a subsidy. And also, you can recognize some revenue from the electricity. So there are 2 ways of collecting money by the solar farm. So the credit renting is really high. That will also attract the banks who will be willing to support these solar farms. And for distributed generation, like he mentioned before, there are too many uncertainties because there would be a delay in development of distributed generation, that's why he thinks that the total demand is going down next year. Brandon Heiken - Crédit Suisse AG, Research Division: So I guess my question is, do you think that utility scale installations will be higher than the 4 gigawatt target next year?

[Chinese]

[Chinese]

So generally speaking, Brandon, it's hard to say. There are some projects, which are not being able to install for this year. And next year, as he mentioned several times, that there are lots of applications for the solar farms for next year, much higher than the 4.2 gigawatts. But all these applications, these applications probably raised by the local government. But all these applications will need to go through the central government, so it's really hard to say how the central government is going to coordinate between these applications and how much volume they would like to install. So yes, it's really hard to say. They probably will change this figure to higher, it's hard to say.

There are no other questions on the line. I would now like to hand the conference back to today's presenters.

Okay. So thanks, everybody, and I'll see you next time.

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