ReneSola Ltd (SOL) Q3 2014 Earnings Call Transcript

Juliet Yang - Senior IR Manager Xianshou Li - Chief Executive Officer Daniel Lee - Chief Financial Officer

Maheep Mandloi - Credit Suisse Philip Shen - Roth Capital Partners, LLC Vincent Yu - SWS Research

Hello, ladies and gentlemen. Thank you for standing by for ReneSola Limited Third Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I will now turn over the call to Ms. Juliet Yang, ReneSola's Senior IR Manager. Please go ahead, Ms. Yang.

Hello, everyone, and welcome to the company's earnings conference call. ReneSola's third quarter results were released earlier today and are available on the company's website as well as newswire services. You can also follow along with today's call by downloading a short presentation available on the company's website at www.renesola.com. Joining the call today are Mr. Xianshou Li, our Chief Executive Officer; and Mr. Daniel Lee, our Chief Financial Officer. I will read Mr. Li's prepared remarks regarding ReneSola's operational highlights and strategy, and Daniel will then review our shipments and financials, after which our team will be available to answer your questions. 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 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 US 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 figures mentioned during the conference call are in US dollars. I will now begin with an overview of our third quarter business. Our results in Q3 were mainly impacted by a foreign exchange loss of 13.7 million and a delay in shipments due to the anticipation of lower minimum importer in Europe which were announced towards end of Q3. However, our fully integrated Class I of international sales support and logistics along with our global manufacturing footprint and focus on retail oriented and downstream opportunities continue to keep us in advantageously competitive position. Our global platform gives us the versatility to adjust to changes in demand across all of our major markets while maintaining operating efficiency and as in Q3 improving our growth margin to 15.3%. At the same time we continue to move away from low ASP markets and are directing more of our resources toward higher margin commercial and residential projects as well as total solution opportunities. In Q3, the company continued to expand its diversified customer base. Over 500 new customers successfully closed deals with ReneSola in Q3. And as of October of this year, the company has built a customer base of 2,314 across 87 countries. We expect these numbers to continue to grow as our retail and commercial business generates larger portion of our total revenue. While we remain focused on our retail and residential oriented business development, we selectively pursue high quality, low-risk downstream project opportunity in developed countries such as the United Kingdom. As of this month, we have started construction of our second downstream project of 6.4 megawatt in the UK which is expected to connect to the grid in February 2015. The first 13.4 megawatt project is expected to connect to the grid in December of this year. We expect to sell both of the projects in the coming quarters. We are also in the process of conducting late stage due diligence on other quality project in the UK. Currently, we have a total of 62 megawatt in existing projects including a 25 megawatt in utility skill project in Bulgaria and Romania, and 37 megawatt in distributed generation Golden Sun projects in mainland China. All of our existing projects are completed and connected to their respective grids. While collecting income from power generation we are actively evaluating the sale of these assets. Regarding our polysilicon production, total output of polysilicon in Q3 was 1694.3 metric tons compared to an output of 1815.6 metric tons in Q2. Currently our polysilicon plant is running at a full capacity and continues to generate positive cash flow. As for our R&D development. In Q3, we invested 13.3 million in research and development compared to 13.9 million in Q2 and 14.2 million in the year ago period. We will continue to invest in R&D to enhance our technical capabilities and expand our green energy product portfolio. I will now turn the call over to Mr. Daniel Lee, our CFO, who will provide details regarding our shipments and financials.

Thanks Juliet, and hello everybody. I will first walk you through our product shipments. Total solar module shipments in the third quarter were 462 megawatts compared to 499 megawatts in the second quarter and 463 megawatts in the same period last year. Our wafer shipments totaled 202 megawatts in the third quarter and compared to 200 megawatts in the second quarter and 288 megawatts a year ago. Our module shipments were below our Q3 guidance as a result of some project delays. They are now scheduled for Q4 and Q1 delivery. The large decrease in wafer shipments year-over-year reflect our strategic decision to continue to use the majority of our wafers for our own module production. The geographic breakdown of module shipments in Q3 is as follows. Europe represented 47% of our total shipments, Japan 25%, China 12%, US 8%, and the rest of the world 9%. Our module ASP rose from $0.66 per watt in Q2 to $0.67 per watt in Q3 as a result of our focus targeting high ASP markets such as Europe and Japan. I will now walk you through our financial results for Q3. Net revenues were 272.5 million compared to 287.1 million in Q2. Gross profit was 57.1 million up from 56.9 million in Q2. Gross margin was 15.3% increased 60 basis points from 14.7% in Q2, and represented our second straight quarter of gross margin expansion. Our total operating expenses were 48.6 million, represented 13.1% of total revenues, compared to 46.3 million and 12% in Q2. The sequential increase in operating expenses was mainly the result of increase in sales and marketing expenses in the international markets and a bad debt provision of 1.9 million recorded in Q3 compared to a bad debt reversal of 1.7 million in Q2. Operating income was 8.5 million compared to operating income of 10.6 million in Q2. Operating margin was 2.3% compared to operating margin of 2.7% in Q2. Net loss attributable to holders of ordinary shares was 11.7 million representing basic and diluted loss per common share of $0.06. Net income loss was mainly due to a foreign exchange loss of 13.7 million during the quarter. As of September 30th, the company had debt of 749 million compared to 760 million as of the end of Q2 excluding 112 million in convertible bonds. Our net cash position, including cash and cash equivalents plus restricted cash was 197 million as of the end of Q3 compared to 290 million at the end of Q2. Lastly, net cash outflow from operating activities was 10.7 million in Q3, compared to a net cash outflow of 40.6 million in Q2. Overall we continue to follow a prudent financial approach and afterlife strategy in order to grow our margins while improving our cash flow. Turning now to our guidance. For Q4 we expect our total module shipments to be in the range of 460 megawatts to 480 megawatts and our overall gross margin to be approximately 13%. We will now open the call to questions. Operator, please go ahead. Operator?

(Operator Instructions) Your first question comes from the line of Patrick Jobin from Credit Suisse. Please ask your question, sir.

Hi. Thanks for taking my question. This is Maheep on behalf of Patrick Jobin. Can you help us understand your gross margin in Q4, why is it declining? Is it due to a mix shift in geography shipments or is it more due to foreign exchange movements? And can you just help us with how you look for gross margins in Q1?

Yeah, foreign exchange was the main reason for the drop in ASP. As you know, Europe and Japan represent a big chunk of our total revenues. And in Q3 and Q4 these two currencies have been mainly naturally impacted due to the big depreciation of these two currencies. So that's the main reason.

And Q1.

Yeah, for Q1, well our strategy is, we have been focusing more and more on the downstream because our local presence in lot of the key international markets, we were able to find some quality downstream projects. These are the projects that buyers LOI [ph] already. So we are very optimistic about working on these projects and sell them in the first half of next year; most of them would be sold in first quarter of next year. So as a result our margins show improve in Q1 of next year.

Thanks. And regarding downstream, how many shipments are you targeting in the first half or next year?

Well right we have 20 megawatts in construction. We are working on more than another -- more than 50 megawatts in late stage of due diligence right now. So we want to finish all of these by the first quarter of next year. And would have been more pipeline after that.

And can we expect these 62 megawatts you have right now operating revenue recognition on them sometime in Q4 or next year?

It will be more likely next year; first or first half of next year.

Thanks.

Thank you.

Thank you. Your next question comes from the line of Philip Shen of Roth Capital Partners. Please ask your question.

Hi everyone. Thank you for taking my questions.

Hi Philip.

Hi. So I would like to start off with just an update on your OEM strategy. Looks like you guys are still out 1.1 gigawatts of OEM capacity as of Q3. I think on the last earnings call, you indicated that you have plans to get to 1.2 gigawatts by the end of this year, and then 1.5 gigawatts by mid-2015. Can you just give us an update on this, is it still on track and are you still committed to this plan overall?

Yes, Phil, as far as the capacity goes, we want to keep it -- at this point, keep it around to the same capacity as we have now. Mainly it's because there are lot of policy changes. We are still waiting for the outcome of the US and in China discussion regarding the terrorist issues. So you have things like that. If there's a compromise, that means we should -- we do not need as much OEM capacities. So, we are going to wait and see. So for now we will keep the capacity where we have now around just over 2 gigawatts.

Okay, great. Thank you, Daniel. And then with -- I think your ASPs in quarter were $0.67. How do you expect your ASP to trend in Q4 and perhaps you can give us an update on what the ASPs are by region that you are seeing especially in Europe?

Okay, you want to see the -- you wanted the ASP for Q3 or what's happening right now?

Sure, maybe the regional breakout in Q3 and then what you see for Q4? Thank you.

Okay, for Q3, let me just give you the ASP for different regions. For the US, our ASP was $0.73. Europe was $0.70, Japan $0.67, China $0.56, and rest of the world is $0.63. What we see in Q3 is -- this can be a downtick in ASPs across the board other than China which -- where we have seen a stable low-price as it is $0.06. In the US, we have to see a penny or two decrease; but we will -- what we see as the biggest decline would be in Europe and Japan mainly to the reason we mentioned before, through the currency depreciation of these two major currencies. So we see the ASP on average for us probably would in the lower 60s, 63 -- $0.62 to $0.63.

Okay, great. That’s helpful. Thank you. And then one final question if I may. In terms of your operating expenses, we saw them tick up a bit with your asset-light strategy, you are investing in operations globally in your sales force. So how do you expect OpEx to trend in Q4 and beyond given that strategy?

Yes, I mean our goal is to keep the operating expense around 12% of revenues. In Q3 it was slightly higher at 13%. That's really because our volume wasn't up there. But we expect to keep that OpEx around that same level, 12%. As you -- as we announced earlier that we have increased our customer base by more than 500 in Q3. That shows you that we have really gained through the retail side of the solar business. And that's the trend we want to continue to get more away from the big size utility scale projects and more into commercial and the residential type of projects.

Great. Thank you Daniel. I will jump back in queue.

Thanks Phil.

Thank you. You next question comes from the line of Vincent Yu from SWS Research. Please go ahead, sir.

Okay. Hi Daniel, hi everybody. Thank you for taking my question. This is Vincent Yu from SWS Research. My question is that you have guided a 13% of gross wholesale margin in Q4. Is that the -- I mean mainly because of the higher cost of the polysilicon facility in your side or is that because of the low ASP in Q4 because you have -- saying that -- maybe there's some delay in Europe market here? So this is question one. And the question two is that for the next year, can we have kind of a higher visibility for ReneSola. What is the order book now? For next year, can we see a order book until Q2 for example? That's my question.

Yes, with Q4, like we said, I mean the ASP is mainly affected by the currencies. The Japanese yen has fallen by 7% to 8% just from beginning of Q4 to now. So that really has a big impact on us. In Japan, Europe it's represented a big chunk more than 50% of revenues. That's the main reason why. I am sorry, what was the second question?

Yes, the second question is about the -- I mean the visibility of your order backlog for example, what is your current order book -- I mean can we see a more kind of clear view next year?

Yes, going to Q1, like I said, Europe and Japan represent a big portion of the business. Japan we have several very long-term contracts. So Japan is very stable for us. And as for Europe, especially UK, therefore the build-out in solar projects leading to the March deadline of the rock subsidies. So we should have a pretty good visibility going to at least the first quarter of next year.

Okay.

That's on the module side. And on the downstream project side as we mentioned before, we're doing construction on 20 megawatts right now and we have more than 50 megawatts that we are doing late-stage DD on, and we should -- those are very high quality and high visibility projects that we intend to sell and -- in the first half of next year. And most of those should be sold in the first quarter of next year.

Okay. Is there any more projects in the coming quarters, I mean for existing pipeline. I mean is there any further updates on that?

I mean there are more projects but they are now at the late-stage there. So we don't want to talk about those at this stage yet.

Okay, cool. Thanks. Yes.

Great, thanks Vincent.

Thank you. Thanks.

(Operator Instructions) Your next question comes from the line of Patrick Jobin from Credit Suisse. Please ask your question.

Hi. This is Maheep here again on behalf of Patrick. Quick question on the wafer shipments in the quarter. Can you please tell us -- sorry, in Q4 -- how much do you expect for Q4? And regarding 2015, do you still expect the total wafer shipments to continue to go down? Thanks.

Yes, Maheep, regarding wafer, we are going to gradually decrease the volume because we have some long-term clients that we have pretty good relationship with. So we are still going to honor the contracts we have with them. But overtime we will gradually reduce the wafer shipments.

Thanks. And last question from me. What is the internal poly cost and what do you expect for the next few quarters? Thanks.

Right now we have lowered the poly cost to about 20 -- just a little bit below $20. Right now the poly's market price is above $20 to $21. So right now we're benefiting from internal production of the poly at this stage.

Thanks for taking my questions.

Great, thank you.

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