ReneSola Ltd (SOL) Q1 2014 Earnings Call Transcript

Laura Chen – Investor Relations Director Xianshou Li – Director and Chief Executive Officer Daniel K. Lee – Chief Financial Officer

Brandon D. Heiken – Credit Suisse Securities Tyler C. Frank – Robert W. Baird & Co., Inc. Vishal Shah – Deutsche Bank Securities, Inc. Philip Shen – ROTH Capital Partners LLC

Hello, everyone. Thank you for standing by for ReneSola Limited’s First Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. As a reminder, today’s conference is being recorded. I will now turn the call over to Ms. Laura Chen, ReneSola’s Investor Relations Director. Please go ahead, Ms. Chen.

Thanks, Victor. Hello, everyone. Welcome to our earnings conference call. ReneSola’s first quarter results were released earlier today and are available on the company’s website, as well as from 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. Daniel Lee, our Chief Financial Officer, and myself. So first of all let me take this opportunity to welcome Mr. Daniel Lee on board. I’m sure he will have lots to bring to ReneSola going forward. I will first discuss ReneSola’s operational highlights and strategy, and Daniel will go through the financials and guidance. After our prepared remarks, we will be available to answer your questions. Before we continue, please note that today’s discussions 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 note that unless otherwise stated, all the figures mentioned today during this conference call are in U.S. dollars. I will now begin with our first quarter business highlights. Our OEM strategy continues to be the core of our global sales and distribution strategy. Our overseas OEM module capacity now exceeds 1.1 gigawatt, with a total of 11 facilities in Europe, Africa, South Asia, and the Asia-Pacific region. This approach allows us to grow our business with minimal capital expenditure. Furthermore, as we recognize regulatory uncertainties regarding trade frictions across the number of major solar markets, including the U.S and possibly India and Australia, we continue to be well positioned compared to our peers by virtue of our OEM facilities around the world. Moreover, we may even be able to gain market share from the expected market changes. At the same time the potential for higher ASPs in those markets served by our OEM capacity will also boost our profitability. Our OEM manufacturing network will continue to play a key role in our business model for becoming a brand and technology provider with sales channels spread across multiple continents. Additionally, we continue to grow our sales network across the globe with 22 offices and 37 warehouses overseas. Our ever-growing local sales teams provide us with greater adaptability in dealing with changing market conditions and meeting client needs as they emerge. We are gradually switching our business development focus from big-scale utility projects to small-scale projects, specifically commercial and residential rooftop projects. We are seeing stronger and more sustainable growth in this retail and the market across different continents and are able to sell at a higher price to these type of smaller projects. With our recognized brands, local warehouses and on-site technical support, we are providing retail customers with integrated solar services and solutions, which could not only allow us to charge a premium, but also positions us as a stronger brand and higher-profile technology provider in the industry. We expect that by the end of this year, retail market sales will account for nearly half of our module shipments. One of our biggest Q1 highlights was a tremendous sales pick-up in Japan. We expect our sales volume will continue through the rest of this year, providing another example of our strong sales and marketing capabilities across international markets. Our first polysilicon factory, after a brief period of maintenance, has been back to full production since the end of March, and we expect it will contribute positively to our overall profitability from Q2 onwards. We have made a reduction of our module production cost one of our priorities for year 2014. We have a detailed plan in place and we’ll implement it gradually throughout the whole year. We expect the cost of our in-house polysilicon will further decline as we are approaching the lowest electricity price season, which will help to reduce our internal module production cost. We also expect module cost to be further reduced primarily from increased product efficiency and more efficient sourcing of other materials among other factors. We are aiming to be a cost-leading module supplier in the industry, while maintaining the same high level of product quality that the market has come to expect from us. I’ll now review our shipments. Total solar module shipments in the first quarter were 521 megawatts, up from 505 megawatts in Q4, and 327 megawatts in the year-ago period. Our wafer shipments totaled 189 megawatts in Q1 compared to 279 megawatts in Q4, and 336 megawatts a year ago. This again reflects our focus on growing sales from our module business, while using our wafers internally to support our module production. Our module ASPs continues to increase from $0.67 per watts in Q4 to $0.69 per watts in Q1. At the same time, Wafer ASPs rose from $0.21 per watt to approximately $0.23 per watt. In Q1, our Japan sales jumped substantially to account for 23% of our total module shipments. We expect to maintain a high level of shipment to Japan through the rest of the year. We also manage strong module sales growth in Europe, especially in the UK. Our Q1 shipments data reflects and continue to push to expand our shipment volumes to more profitable markets. We shift 205 megawatts to Europe in Q1, representing a quarter-over-quarter increase of more than 53%. For Japan, we shift 117 megawatts in Q1 compared to 26 megawatts last quarter, representing a quarter-over-quarter increase of 346%. As brand awareness of our world class products in leading technology continues to rise and our international sales and the marketing teams established even stronger local networks. We expect that as global market conditions continue to stabilize, our overall shipment volumes will continue to rise. I will now give you an update on our polysilicon plant. Our total output of polysilicon in Q1 was 175 metric tons, compared to an output of 1,768 metric tons in Q4 2013, and nil in a year-ago period. Operations of our Sichuan polysilicon plant were temporarily halted in the first quarter for maintenance and technical improvement, which negatively impacted our Q1 net income and gross margin. Full operations of the plant resumed in late March and are currently at 100% capacity. With the recent rise and overall stability in polysilicon prices, and further productions cost reduction coming from seasonally lower electricity prices, the company expects to benefit from its in-house polysilicon production capabilities going forward. I will now review our R&D developments. In the first quarter, we maintained our level of R&D investment to support continued innovation in our technology products and manufacturing. Regarding our wafers and modules, we expect to start manufacturing our A+++ wafer 100% in June. This wafer has a conversion efficiency rate of 17.8%. We have also begun the process of optimizing our module structure, while ensuring the carrying capacity and reliability. Such structural improvements will help reduce packing and transportation cost going forward. Our glass-glass module is now in certification process. With a differentiated design, the glass-glass module will enjoy a cost advantage and a higher ready-for-sale product rate. I’ll now move to inverter products. Our second generation micro-inverter, Micro-Replus II, has received ETL certification in the U.S. and is undergoing pilot-scale experimentation now. We have also launched our second-generation string inverter in Australia, ranging from 3 kilowatts to 5 kilowatts in power output, featuring higher efficiency, lighter weight, and longer working life. Our 18 kilowatts and 20 kilowatts string inverters have achieved BDEW certification in Germany. We have also launched new string inverter products in India and South Africa. In a category of energy storage systems, we have launched its off-grid, all-in-one storage system product that incorporates a controller, MPPT battery charger, inverter and fast power switch in one system and supports both acid and lithium batteries. We have also introduced a lithium battery pack, and will provide customized products ranging from 10AH to 500AH and 12V to 360V in power requirements. For mounting systems, we have completed research and development phase of a 30 degree tripod system, which is now in trial production and awaiting patent approval. We have also completed research and development of AE Clamp Group products, which can hold in position solar panels with a thickness ranging from 35 millimeters to 50 millimeters. The program now is in trial production and awaiting patent approval. Regarding our LED business, currently we have 600 models of LED products and have obtained 125 UL certificates for North America, 118 CUL certificates for Canada, 150 TUV-CE certificates for EU, 203 TUV-CB certificates for IECEE member countries, and four SAA & RCM certificates for Australia. We expect to obtain more certifications for different models of LED products across these regions, as well as certification for other regions like Japan, Russia, and Mexico. The specification process is expected to be completed by June 2014. I will now turn the call over to our CFO, Daniel Lee, who will provide additional details regarding our financials. Daniel K. Lee: Thank you, Laura, and thank you, everyone, for joining us. Before I begin, please note that as of Q1 2014, the company has changed its accounting classification regarding its gross margin in order to better reflect our global OEM business operations into last fall, actually comparison to our industry peers. Our warranty expense is now recognized as a selling expense and not as a cost of goods sold, as it previously been the case. This is a kind of practice in China’s solar industry, and we decided to adapt this accounting classification mainly, because nearly half of our current module production is from our OEM network, which effectively transferred to warranty, obligations into our OEM partners. All the figures I will reference today from previous quarters that are impacted by the adoption of the new accounting classification specifically gross profit, gross margin, and operating expenses have been adjusted accordingly for the sake of comparison. I will now walk you through our financial results for Q1. Net revenues were $415 million, compared to $439 million in Q4 of last year. Gross profit was $44 million, compared to gross profit of $49.7 million in Q4. Gross margin was 10%, compared to gross margin of 11.3% in Q4. The contraction was largely related to the temporary maintenance shutdown of our polysilicon factory in Q1, which is now back at 100% production. Total operating expenses were $52.8 million, representing 12.7% of total revenues, compared to $40.9 million and 9.3% in Q4. The sequential increase in operating expenses was primarily due to a reversal of accrued expenses in Q4 2013, as well as higher shipping costs due to increased overseas shipments and a provision of accounts receivable in Q1 2014. Operating loss was $8.7 million. Operating margin was negative 2%, compared to operating margin of 2% in Q4. Net loss attributable to holders of ordinary shares was $40.6 million, which represented basic and diluted loss per share of $0.07 and basic and diluted loss per ADS of $0.14. As of March 31, we had total debt of $723.9 million, compared to $742.6 million as of the end of Q4, and excluding $111.6 million in convertible note. Our net cash position, including cash and cash equivalents plus restricted cash was $214.9 million as of the end of Q1, compared to $348.9 million at the end of Q4. Lastly, net cash outflow from operating activities was $112.3 million in Q1, compared to a net cash outflow of $30.8 million in Q4 2013, mainly to payoff accounts payable. Turning now to our guidance for Q2, we expect our total module shipments into the – in the range of 480 megawatts to 500 megawatts and overall gross margin to be in the range of 12% to 14%. For full-year 2014, we expect our total solar module shipments to be in the range of 2.3 gigawatts to 2.5 gigawatts. We will now open the line for questions. Operator, please go ahead.

Sure, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Brandon Heiken from Credit Suisse. Please go ahead. Brandon D. Heiken – Credit Suisse Securities: Thanks for taking the question, and welcome and congratulations Daniel Lee on the new position there. Daniel K. Lee: Thank you, Brandon. Brandon D. Heiken – Credit Suisse Securities: You guys have the comment in press release and in the prepared remarks of a mix shift of 50% of retail sales, what have retail sales been recently? And then there is also this new focus, it sounds like on doing smaller projects like residential and commercial at higher prices, will you be doing the project development for those projects, or is it selling panels only into the project? Thanks

Yes, Brandon, so let me translate this for Mr. Li. [Foreign language]

[Foreign language]

Yes, Brandon, so let me translate that for you. So, we actually started doing the smaller project business in Australia already, because Australia has a lot of land, but they don’t have a lot of big scale projects there. And we are currently the number one module supplier for Australian market. So we have accumulated hundreds of customers there. And we have also accumulated a lot of experience development in these smaller projects. So we believe that the smaller project business, I mean, the retail market is a sustainable market. And now we are doing the retail business in Japan and UK with actually very good gross margin. Currently, the gross margin for Australia, the retail market is around 20%, and we not only sell module to them, but also we can sell inverter and mounting system. So we believe the retail market, the residential commercial rooftop are the direction of the solar industry development. So with a trend that there will be less and less big-scale utility projects available in EU, we believe that’s the commercial and residential rooftops will grow substantially and there are lots of potential for making profits. Brandon D. Heiken – Credit Suisse Securities: Okay. And there were a couple of press releases in the quarter about the U.S. trade investigation. Are there any comments or any updates that you can offer us about the investigation?

[Foreign language]

[Foreign language]

Yes. So, Mr. Li said you should know that some, next week there will be a preliminary ruling for the anti-countervailing investigation. We’re very well prepared right now and are getting ready with our Korea, India, and Turkey modules to ship to U.S. Brandon D. Heiken – Credit Suisse Securities: Okay, great. Thank you very much.

Okay. Thank you.

The next question comes from the line of Tyler Frank from Robert W. Baird. Please go ahead. Tyler C. Frank – Robert W. Baird & Co., Inc.: Hi, guys, thanks for taking the question. I was wondering, if you can discuss what took place that interruption probably looking me factoring, and what are you seeing there in the market in terms of pricing and how you view that both in Q2, as well as throughout the remainder of the year?

You mean the price across different regions? Tyler C. Frank – Robert W. Baird & Co., Inc.: Correct.

[Foreign Language]

[Foreign language]

So generally speaking, there is some pressure for a price drop in the module ASP. So in Q2 because of this anti-dumping and the countervailing investigation process in America, the U.S. ASP is going up. And Mr. Li just said the ASP in the Japanese market is going down. Tyler C. Frank – Robert W. Baird & Co., Inc.: Okay, great. Can you discuss what you are seeing in terms of polysilicon prices as well?

[Foreign Language]

[Foreign language]

Yes. The prices for polysilicon compared to module price, it’s actually quite stabilized right now. Tyler C. Frank – Robert W. Baird & Co., Inc.: Okay. Thank you.

Thanks.

Our next question comes from the line of Vishal Shah. Please go ahead. Vishal Shah – Deutsche Bank Securities, Inc.: Yes. Hi, thanks for taking my question. Can you talk about the breakdown of shipments in the second quarter, where do you expect growth to come from? And also why there is a wide range of gross margins in the second quarter?

[Foreign language]

[Foreign language]

Yes, So, Vishal, Mr. Li said that in Q2 we are actually reducing a bit our shipments in U.S. and also Chinese shipments will be reduced as well. And for geographic breakdown, the percentage would be around same as Q1. We gave the geographic breakdown, for example, in Japan about 23, Europe about 39 to 40, and other markets remain similar. And the gross margin growth for Q2 will come from the cost reduction.

[Foreign language]

Yes, because the polysilicon production cost will be reduced in Q2. Vishal Shah – Deutsche Bank Securities, Inc.: Can you talk about why you’re reducing your shipments into China, it looks like a lot of your peers are actually expecting significant growth in the Chinese market. So what’s going on there? And how do you think the second half shipments into both China and the U.S. market looks like?

[Foreign language]

[Foreign language]

Yes, Mr. Li said, he thinks that for the bottom half of this year, the Chinese amount will be really good. For the decreased shipments in Q2, he said, because there are not too many permits right now, the approved projects these permissions are not available yet. So it’s probably, you probably have to wait until June to see the first batch of mix to go out of the government, that’s why the Chinese shipment in Q2 will be reduced a little bit. Vishal Shah – Deutsche Bank Securities, Inc.: Okay. And then just one last question in terms of policy change in China, do you expect any change at all in the first place? And what do you think happens for the distribute generation market in China. Do you expect a new policy or new tariff to be introduced sometimes in the next couple of months? Thank you.

[Foreign language]

[Foreign language]

Yes, Vishal, Mr. Li just said, he think that the total information for utility sale projects will be exceeding the target, because there were lots of other cases right now about several dozens of gigawatts right now under application. For the DG market current policy is not quite mature. But the government is making a lot of efforts to push the development of DG market. As for the policy change side, it’s very hard to predict how it will go in the future. But at least we can see that the government is very much determined about developments of DG, and we believe that DG is certainly the future of solar industry. Vishal Shah – Deutsche Bank Securities, Inc.: Okay. Thank you.

Our next question comes from the line of Mr. Philip Shen from ROTH Capital. Please go ahead, sir. Philip Shen – ROTH Capital Partners LLC: Hi, everyone, thank you for taking my questions. What kind of traction are you getting with your non-module downstream product offerings? How much revenue did you generate from that sort of offerings in Q1, and how much revenue do you expect to generate from these projects in 2014?

[Foreign language]

[Foreign language]

Yes, as you know, these business are quite new to us. We believe – we expect to make revenue of $20 million in Q3, and there will be further growth in Q4 this year. Philip Shen – ROTH Capital Partners LLC: Okay, great. With your increased focus on residential markets, how should we expect your G&A to trend, there is a large jump in this quarter, what do you see ahead?

[Foreign language]

[Foreign language]

Yes. So, yes, when we say we focus on the retail market definitely, the expenses for, let’s say, logistics and warehouse is keeping and employee salary is going to increase a little bit. But we adopted this strategy of going product diversification. So, let say, these expenses will be spreading out quite much. So, yes, we actually had such great importance to the retail market right now and it’s becoming our strategy now. Philip Shen – ROTH Capital Partners LLC: Okay, great. To drill in just a bit more on that, I mean, we saw $20 million of G&A in Q1 versus $13 million in Q4, I mean, it’s $20 million the new level we should expect by quarter going forward?

You mean $20 million for sales and the marketing expense? Philip Shen – ROTH Capital Partners LLC: For G&A?

Yes, right.

[Foreign Language] Daniel K. Lee: : Philip Shen – ROTH Capital Partners LLC: Okay, great. Thanks, everyone.

Thank you. Daniel K. Lee: .:

Next question comes from the line of [Shamil Paul] (ph) from ReneSola. Please go ahead.

Good morning, everyone. This is Shamil Paul, Private Investor. How is the business condition in Africa and Latin America?

[Foreign Language]

[Foreign Language]

Yes, just talk about on the African market right now. So, we have a setup an office in Johannesburg in South Africa. As we’re going to setup an office in Dubai and Lagos, Lagos is in Africa, Dubai is in Mideast. So, our office in South America will be right wide spread out across the whole Africa and Middle East. So in Africa, we are actually developing some off-grid projects. We try to cooperate with diesel energy it’s develop some electricity projects and we try to cooperate with the local parties, and will develop local market in Africa. [Foreign Language]

[Foreign Language]

Yes. So, for Latin America we setup an office in the Brazil. But, let say it’s still a premature market it’s probably too early to talk about the solar development boost in this market. For example in Brazil, Mr. Li believes that this year the total installation would be probably less than 100 megawatts. And let’s talk about Chile, they talk very big, but currents that we don’t see very big project for many projects going on really. So, in Latin America our business focus will be more on the lighting business and on the storage system business rather than solar industry. But because there are – it’s a very populist area in Latin America. So, we believe that it is a very big market for other emerging markets will certainly keep an eye on the solar, some solar industry opportunities as well.

Okay. Our next question comes from the line of Brandon Heiken from Credit Suisse. Please go ahead. Brandon D. Heiken – Credit Suisse Securities: Thanks for the follow up question. I just wanted to clarify on your poly costs I know that the factory is back running. Are you able to say what poly costs are or maybe a change through the year-end in poly costs price?

[Foreign Language]

[Foreign Language]

Yes, currently in May our total cost is 21.5, and the total cost in June will be reduced by $2. Actually, I can give you a cash cost, cash cost now is around 19 or 18 to 19 and cash cost in June it will be 16 to 17. Brandon D. Heiken – Credit Suisse Securities: Okay. And where do you think that might be by the end of the year?

[Foreign Language]

Yes. Let’s put it this way the total average production cost for poly for us this year is around 19 to 20. Brandon D. Heiken – Credit Suisse Securities: Average for the year? Okay.

Yes. Brandon D. Heiken – Credit Suisse Securities: Okay. And what sort of improvements do you hope for on wafer and module cost for the year?

[Foreign Language]

[Foreign Language]

: Brandon D. Heiken – Credit Suisse Securities: Okay. And that $0.50, where was it maybe in the first quarter and where do you think it might be at the end of the year?

Do you mean internal production cost? Brandon D. Heiken – Credit Suisse Securities: Sure of both.

[Foreign language]

[Foreign language]

Yes. So Q1, actually the production cost internal is $0.53, and OEM is around $0.63. So, by the end of this year, there is a potential for further cost reduction by $0.01 to $0.02. Brandon D. Heiken – Credit Suisse Securities: Okay, for both in-house and OEM?

Yes. Brandon D. Heiken – Credit Suisse Securities: And is that $0.01 to $0.02 from the June cost you mentioned or from Q1? It looks like…

[Foreign language]

[Foreign language]

Yes, June level. Brandon D. Heiken – Credit Suisse Securities: Okay. And just for cash flow for operating cash flow and CapEx, do you have any thoughts on what those could be for the year?

Yes, right. So, operating – let me just get Mr. Li. [Foreign language]

[Foreign language]

[Foreign language]

[Foreign language]

[Foreign language]

[Foreign language]

Yes, so Brandon, rest we paid off some PPE cost expense, I mean in Q1 for the previous projects. So the total CapEx this year would be around $50 million to $60 million. And for the cash flow – operating cash flow, because we’re recovering our business, it’s trending definitely upwards. So we expect the operating cash flow to actually turn better and better. So let’s say, because, let me just add some comments here, because you can see that the operating cash flow this year is, I mean this quarter is not very good, because we paid off some accounts payable. You can see we have a good level of reduction in accounts payable and it is definitely quicker than a normal speed that we’re paying off this accounts payable. So we expect to return to a normal status to pay this money. So, let’s say, this going forward, the cash flow – operating cash flow will definitely be better and better be better than this quarter definitely.

[Foreign language] Brandon D. Heiken – Credit Suisse Securities: Thank you.

Okay. So, yes, so Mr. Li add some comments here. We have $19 million depreciation and also $13 million projects that we can actually recognize as revenue that we haven’t. Brandon D. Heiken – Credit Suisse Securities: Great. Okay. Thank you very much.

(Operator Instructions) Since there are no further questions in the queue, with that we conclude our conference call for today. Thank you all for participating. You may all now disconnect.