ReneSola Ltd (SOL) Q1 2015 Earnings Call Transcript

Juliet Yang - Investor Relations Director Xianshou Li - Chief Executive Officer Daniel Lee - Chief Financial Officer

Philip Shen - ROTH Capital Maheep Mandloi - Credit Suisse Dan Reese - Analyst Wei Feng - Luminus Management

Hello, ladies and gentlemen. Thank you for standing by for ReneSola Limited's First Quarter 2015 Earnings Conference Call. At this time, all participants are in listen-only-mode. After management's prepared remarks, there will be a question-and-session. Please note that today's conference call is being recorded. I will now turn the call to Ms. Juliet Yang, ReneSola Investor Relations Director. Please go ahead, Ms. Yang.

Hello, everyone, and welcome to the company's earnings conference call. ReneSola's first quarter results were released earlier today and available on the company's website, as well as from 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. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results maybe materially different from the views expressed today. Further information regarding these 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 figures mentioned during the conference call are in U.S. dollars. I will now begin with an overview of our first quarter business highlights. Although, the first quarter was marked by our ongoing macro headwinds, including foreign exchange fluctuation and impact -- that impacted ASPs and margin, we continue to make progress on our strategy to transition our business into downstream services, retail and projects. These are segments that we believe offer better profitable in the long run. We believe we are particularly well-equipped to move quickly to take advantage of these opportunities in these areas by leveraging the flexibility of our asset like international business platform, our well-known brand name and our extensive and deep relationship across the industry. We have already achieved initial success in downstream project segment. In the first quarter, we expanded our U.K. project portfolio to 71-megawatt by completing and connecting three utility-scale projects totaling 57.5-megawatt, including the 25.1-megawatt for our Eastern Europe projects, we now have our total project sales pipeline of 96.1-megawatt, which we expect to sell incoming quarters. In the second half of the year, we have planned to continue to scale back our OEM capacity, while focusing on expanding to our larger portfolio of downstream projects. In the first quarter, we gained 221 new customers and increased our customer base to 2,767 as we have provided more renewable energy products and service to smaller size customers. We believe this is a client pool for which we will be able to create new cross-selling opportunities for our products and services. Regarding our poly production, the company's total output of polysilicon for Q1 2015 was 1,522 metric tons, down slightly from the previous quarter due to our annual maintenance, which is normally scheduled in Q1. Our polysilicon factory is currently running at full capacity and generating positive cash flow. Looking at our project updates in more detail. As I mentioned earlier, we currently have a total of approximately 96.1-megawatt in existing projects. This includes four utility-scale projects totaling 71-megawatt in the U.K. and four utility-scale projects totaling 25.1-megawatt in the Eastern Europe. In Q1, we successfully completed and connected to the grid three utility-scale projects in the U.K. We have identified our potential buyer for all three projects. We also have signed agreement to sell our 13.5-megawatt utility-scale project in the U.K., for which we expect to complete the sale within coming months. While we have already start -- started to monetize our existing projects in the U.K., we are also actively exploring other downstream opportunity in developed markets, such as Europe, the United States and Japan. We plan to announce our more detail pipeline later this year. In terms of research and development, in Q1 we continued to invest in the development of new technologies and to increase the efficiency of our current solar and other clean energy products. Our innovative A+++ wafer reached 100% mass production and we are now working on develop a new A4+ wafer, which has concentrated efficiency distribution and 0.1% higher cell average efficiency than the 17.8% averaged cell efficiency attained by our A+++ wafer. The company's double-glass module, which features 1500 volts maximum system voltage has received 1500 volts maximum system voltage and Class-A fire rating certification by TUV. Also receiving TUV certification with our Four Bus-Bar Cell module product, which has around 5 volts output improvement over Three Bus-Bar products. Both the double-glass module and Four Bus-Bar Cell module products entered mass production in May. Within our Inverter business, our innovative 5-kilowatt hybrid inverter has now received applicable certification and we have started promotions in Australia. The company's TLE-series inverters have received related certifications in the U.K and Ireland, and scale shipments have begun in these markets. And our first generation micro-inverters have achieved elevated stability following software and hardware upgrades and six months of testing. For our LED, we launched our T8 LED replacement series products in North America. This series serves as a replacement for traditional fluorescent bulbs and works with magnetic and electronic ballast and access the electronic power supply directly, eliminating the need for clients to change wires in old fixtures. The series includes a 5-year warranty and with a number of product and services features that appeal to clients. I will now turn the call over to our CFO, Daniel Lee, who will provide detail regarding our product shipments and financials.

Thanks, Juliet and thank you everyone for joining us. As we shift our business strategy into the downstream segments and begin to monetize our project portfolio, we will continue to closely manage our balance sheet. This prudent financial approach has allowed us to reduce our inventory levels and long-term liabilities as we transition our module business and concentrate on downstream products and services. I will now walk you through our product shipments. Total solar module shipments in the first quarter were 496 megawatts, compared to 488 megawatts in Q4 2014 and 521 megawatts in Q1 2014. Our wafer shipments totaled 195 megawatts in the first quarter, compared to 256 megawatts in Q4 2014 and 189 megawatts in Q1 2014. The sequential increase in module shipments was mainly due to strong demand in Europe, particularly in the United Kingdom. The sequential decrease in wafer shipments reflects our strategy of shifting away from lower margin wafer business and towards the high margin module and downstream project business. The geographic breakdown of module shipments in the first quarter was as follows. Europe represented 44% of our total shipments, Japan 30%, China 5%, U.S. 3% and the rest of world 17%. We saw an increase in number of shipments into other countries in Q1, including India, Australia and Asia-Pacific regions. Our module ASP went from $0.64 per watt in Q4 2014 to $0.60 per watt in Q1, mainly due to decrease in module ASP in local currency in Europe, as well as depreciation of euro against the U.S. dollar. I will now review our financial results for the first quarter. Net revenues were $349 million, compared to $387 million in Q4 2014. Gross profit was $36.7 million compared to $51.2 million in the previous quarter. Gross margin was 10.5% compared to $13.2% in Q4 2014. Gross margin was lower than previous guidance mainly due to a decrease in module ASPs, as well as a delay in recognizing revenue of a U.K. project as we await for the final certifications of the project. Our first quarter total operating expenses was $46.2 million, representing 13.2% of total revenues, compared to a $53.4 million and 13.8% in Q4 2014. The sequential decrease in operating expenses was mainly due to lower SG&A expenses as a result of improved cost control and lower bad debt provisions during the quarter. Operating loss was $9.5 million, compared to operating loss of $2.2 million in Q4 2014. Operating margin was negative 2.7%, compared to a negative 0.6% in Q4 2014. Foreign exchange loss in the first quarter was $16.1 million, primarily due to depreciation of the euro, pound and yen against the U.S. dollar and this negatively impacted our bottom line. Net loss attributable to holders of ordinary shares was $18 million, representing basic and diluted loss per common share of $0.09 and diluted loss per ADS of $0.18. As for our cash and debt positions, our total debt was $723 million as of March 31, 2015, compared to $691.1 -- I’m sorry, $698.1 million as of December 31, 2014, excluding the $62.9 million of convertible notes due March 15, 2018, which has a put option on March 15, 2015. During the quarter, we reduced our convertible notes by $31.7 million and reduced inventory by $88.8 million as part of our strategy to manage our balance sheet and improve our financial position. Our net cash position, including cash and cash equivalents, plus restricted cash was $228.1 million as of the end of first quarter, compared to $221.7 million as of the end of Q4 2014. Lastly, net cash outflow from operating activities was $9.0 million in the first quarter, compared to net cash outflow and net cash inflow of $41.9 million in Q4 2014. Turning now to our guidance. For Q2 2015, the company expects its net revenue to be in the range of $250 million to $300 million and gross margin to be in the range of 16% to 18%. We will now open the call to questions. Operator, please go ahead.

Thank you. [Operator Instructions] Your first question comes from the line of Philip Shen from ROTH Capital. Please ask your question.

Everyone, thank you for taking my questions.

Hi, Phil.

Hi, Juliet. You’ve shifted your strategy around over the past year, initially embracing an OEM manufacturing footprint and now shifting away. Do you continue to focus on the DG segment downstream or do you expect to focus more on the utility scale projects downstream? And then in general, can you speak to how you expect your business to look a year from now? Thank you.

Okay. I will get started and Li will add some comments. Basically, we are focusing on both the downstream and the DG. The DG markets for us mainly, all the projects, there are 5 megawatts or less. As you can see, we have mentioned in the PowerPoint that we’ve increased the number of clients. We have over 2,000 clients right now. So, we are going to continue that path just targeting smaller customers. On the downstream side, we definitely want to focus more in this area. Right now we have -- during the last two quarter we have completed 70 megawatts in the UK and these are very attractive projects. This is on top of 25 megawatts of projects we finished in the Easter Europe. So going forward after we monetized this existing portfolio, we are going to expand the portfolio in the second half and definitely we are going to increase the growth in the downstream this year.

Okay. With some of your competitors targeting a non -- cost structure $0.40 per watt by the end of 2015, can you talk about what you see in terms of your cost structure for your OEM footprint and how this might affect or impact your plans or capacity expansion if at all or reduction in 2015?

Well, first of all, Phil, beginning of the year we have been scaling back on our international OEM capacities, thus mainly because the macro situation, first is mainly because the uncertainty with foreign currencies and also second is the recent developments of the international trade policy. So it has becoming not so favorable to focus too much on the international OEMs. So that said, we are focusing more on the downstream. So we are scaling back on the international OEMs. That said, our average cost definitely will come down as a result. You see the comparison or just compare the comparison internally, our internal cost was about $0.49 to $0.50 in Q1. Right now we are dripping the cost down to about $0.40 to $.45. So going forward, we definitely are decreasing the cost and making cost savings.

Okay. Thanks very much. I will jump back in the queue.

Thanks, Phil.

Thank you. Your next question comes from the line of Patrick Jobin from Credit Suisse. Please ask the question.

Hi. This is Maheep on behalf of Patrick Jobin from Credit Suisse. A quick question on the downstream projects. Could you just tell us why you saw that delay in Q1? Is it more related to the permitting process? And what gives you more visibility on connections or monetization in coming quarters?

Well, first of all, I mean all 70 megawatts have been connected to the grid already, so that’s not really issue. We have active buyers looking at these projects. So economically, these are attractive projects. Yes on that we did a lot of certifications we have to go through. So right now, they are just going through the standard procedures and there is just few certifications that took longer than expected. We expect them to be completed in the short term.

Okay. And does your second quarter guidance include any downstream shipments? And a follow-up on that, if you could just help us understand the increase in gross margin? Is it driven by your internal cost reductions or ASP improvements in your markets?

There are few -- several factors. First off, we are scaling back on the module side, including the international OEM and also we are increasing the downstream. So as a percentage of revenue, the downstream plays a bigger part in gross margin contribution. And in terms of how much, right now we have estimated about half of the 70 megawatts. We expect to be able to recognize revenue in the second quarter assuming all the certifications are done by the end of the month.

Thanks. And could you just talk about your strategy for wafer versus module that you expect to scale it down? So what kind of a mix can we expect in Q2 and going forward?

Okay. Let me translate that question for Mr. Li. [Foreign Language]

[Foreign Language]

Okay. Mr. Li says we still have about little over 2 gig wafer capacity. We are going to sell portion of those wafer capacity, approximately 200 megawatt per quarter and the rest of it, we are going to use internally and for our downstream project.

Thanks. And the last question from my side. Given this new strategy, how do you think about capacity expansion internally on the wafer side or the module side going forward? Thank you.

Our strategy into the capacity expansion has been constant for last year and half or so. Yes, we don’t expect to expand capacity in any of the upstream or midstream. Actually we have been scaling back into the capacity at least on the international OEM side. So as we focus more on the downstream and same standard DG side, we are going to scale back on the manufacturing side, mainly the upstream and the midstream.

Thank you.

Thank you.

Thank you. [Operator Instructions] Your next question comes from the line of [Dan Reese] [ph] from [Indiscernible] Partners. Please ask the question.

Hi. Good evening, and thanks for taking my question. When I look at the R&D budget of ReneSola, it’s often two to four times larger than some of the other module companies, companies better off and much larger in terms of shipments and revenue. As you look to go downstream, does the R&D budget at some point get affected, because you’re not doing quite as much on a product front? However, you do also have an LED and Inverter division? So what -- my question is what portion of that R&D budget might be related to those non-solar, wafer or modules products? What is the rough revenue contribution from those other products and can you -- is there a margin profile that you could describe on those other products?

Okay. Thanks, Dan for the question. I’ll translate that for Mr. Li. [Foreign Language]

[Foreign Language]

Okay. Dan, Mr. Li says, as you may aware, there is a highly competitive market in the solar market and ASP is declining constantly. And as the Japanese markets and the U.S. markets and Europe markets starting to scale back in two years, it is eminent that we need to develop new product such as LED. Just because we realized that how important those new product is to me, so that’s why we invest so much R&D in the segment. Take LED for example, we are doing very great in certain markets, especially in Indonesia and those margins in the segment is up a little above 30%, so it’s very attractive.

Okay. And can you size the revenue from those other products at this point?

[Foreign Language]

[Foreign Language]

Okay. Mr. Li says, the portion of the revenue from other products is still a little bit low at this point but we can talk about in particular market such as Indonesia. In May, we have sold 230,000 lights in this market to over 1,000 customers and the revenue is US$560,000. LED products is not like solar, their unit price is slow and it really takes time and devotion into generating more revenue from this segment.

Okay. Thank you for that color, on that. I appreciate it.

You have any other questions, [Dan] [ph].

I think that’s good for me.

Thanks.

Thanks, [Dan] [ph].

Thank you. And your next question comes from the line of Philip Shen from ROTH Capital. Please ask your question.

Hi, Phil.

Hi. Can you hear me now?

Yeah. We can hear you.

Great. Thanks for taking my follow-up here. You mentioned earlier that you plan on selling 200 megawatts of wafer capacity per quarter. Can you tell us when do you expect that to start? Is that in Q2 and have you also identified a buyer and is this deal already done? Thank you.

I think, Phil, you misunderstand that. We are currently selling 200 megawatts each quarter wafers to third-parties and it’s been going on for several quarters.

I got it. That’s my mistake. As per your OEM module capacity, can you update us on what it was at the end of Q1 and then how do you expect that to trend through year? Thanks.

Okay.

Sure. Yeah. Phil, in Q1, at the end of Q1, we had about 580 megawatts of international OEM capacity. So over next two quarters, we expect to pretty aggressively scaling them back by 200 to 300 per quarter. So by year end, we pretty much are exceeding this international OEM capacity, unless there is some favorable international trade policies that will allow us to come back to the market.

Great. Thank you. I will turn back in the queue.

Thank you. Your next question comes from the line of Wei Feng from Luminus Management. Please ask the question.

Just a couple question on the poly side, can you comment on the cash cost per kilo and also total cost per kilo in poly and do you have any cost cutting target for the year?

Yes. The cash is about 14.5 right now.

Is there further room to cut?

Right now, it’s we consider pretty low, but we could reduce a little bit, but not too drastically.

Good. And for the U.K. products, can you give us some color on what is the target gross margin from those products for you?

Yes. Gross margin is pretty year from high teens to low 20s. So on average it’s north of 20%.

And on the Q2 guidance you said that include roughly 75 megawatts for U.K. product sales, right?

Yes.

And the gross margins also include the impact from the downstream product sales?

Yes. That’s true.

All right. And can you comment on the demand in China in 2Q and the 3Q. Do you see the demand picking up?

Right now, we think for the second half, I mean that probably would be some rush order in the second half, but for us we’ve been focusing more on the international market especially in the downstream. So it’s probably better to add some of the other guys who are concentrating more on the China market, actually we focus more on the India market than the China market at this point.

Thank you. That’s all my questions.

Great. Thank you.

Thank you. We have no further question at this time. Ms. Yang, please continue.

Thank you. On the behalf of the entire ReneSola management team, I want to thank you for your interest and participation on this call. If you have further questions, please feel free to contact us. Have a good day and good evening. Thank you. And good bye.

That does conclude our conference for today. Thank you for participating. You may all disconnect.