ReneSola Ltd (SOL) Q2 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 Chen Ke - Shah Capital

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

Hello, everyone. And welcome to the company's earnings conference call. ReneSola's second quarter results were released earlier today and are 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 U.S. dollars. I will begin an overview of our second quarter business highlights and project update. We continue to make measurable progress on our strategy to shift our business into downstream project and services while scaling back our module business. Our accomplishment range from the successful development of sales of various projects in the UK. To the signing of new project development agreement in developed markets like Japan. And also include our recently announced joint venture in the US which has been formed to help accelerate US project development. Before diving into our project updates, I'd like to point out that we have included more information regarding our project pipeline in our earnings press release and earnings presentation. Both of which you can find out on our Investor Relations website. Now let me provide more details regarding our project within specific markets. We currently have a total of more than 77 megawatts of existing projects in our sales pipeline including 51.1 megawatts in the UK, 1.2 megawatts in Japan, 9.7 megawatts in Bulgaria and 15.4 megawatts in Romania. In addition, we have a pipeline of more than 200 megawatts of late stage project in development across the UK, US and Japan. In the UK, the second quarter we closed the sale of our 6.4 megawatts Field House solar power plant and 13.5 megawatts Wedgehill utility scale project. We are also in the process of selling two additional projects totaling 51.1 megawatts. In addition, during Q2 we add 28 megawatts to our UK project pipeline with all of these projects expected to be connected to the grid before March 2016. In the US, we've recently announced a new joint venture with leading US based solar project developer Pristine Sun, the joint venture named Baynergy, will develop, build and operate over 300 megawatts of solar projects across the country. The first phase includes 82 projects totaling 151.8 megawatts, most of which are distributed generation projects. Currently Baynergy has 88 megawatts accepted in California, Minnesota and North Carolina, with expected completion by the end of 2016. In Japan, we have nine projects in our pipeline totaling 32.4 megawatts with two projects totaling 1.2 megawatts already completed. In the second half of 2015, we will continue to monetize our existing project portfolio while taking out additional opportunity to expand our project pipeline across key markets. We are establishing a solid track record in the downstream segment and we believe our execution capabilities as well as our well-known brand name will help us deepen our penetration into global solar project markets, and expand our project portfolio in coming quarters. We aim to have over 300 megawatts of solar projects in operation in 2016. Once again we are excited by our rapid progress we've made in the transitioning our business into the downstream segment. We believe this is an area that offers better profitability and better long-term business module. We remain confident that our track record global business platform, established customer relationships, strategic partnerships and experienced team will help us to capitalize on opportunities in this segment of the value chain. I will now turn the call over to our CFO, Daniel Lee, who will provide details regarding our product shipment and financials.

Thanks, Juliet. And thank you everyone for joining us. Our strategic business shift into the downstream segment and active management of our business -- of our balance sheet and long-term liabilities are beginning to show promising results. For example, we’ve successfully completed 71 megawatts of UK projects, they are in various monetization stages. We expect to generate about $100 million in cash flow from some of these projects in the second half of this year. We aim to build on the success of our existing solar portfolio and expand more rapidly in developing and building new high quality global projects. In addition, our improved balance sheet will make us a more attractive partner for global downstream project management, project development. We will continue to develop and monetize downstream projects across geographies in the coming quarters while maintaining a prudent approach in our balance sheet management. I will now walk you through our product shipments. Total solar module shipments in the second quarter were 322 megawatts, compared to 496 megawatts in Q1, 2015 and 499 megawatts in Q2, 2014. Our wafer shipments totaled 282 megawatts in the second quarter, compared to 195 megawatts in Q1 of this year. And 200 megawatts in Q2, 2014. Sequential and year-over-year decrease in module shipments were mainly due to a strategic shift to our downstream project business and the quarter-over-quarter increase in wafer shipments was due to temporary business opportunities. The geographic breakdown of module shipments in the second quarter was as follows. Japan represented 36% of our total shipments, China 25%, Europe almost 14% and the US nearly 6% and the rest of the world about 19%. Our module ASP remains stable at $0.59 per watt in Q2, 2015, compared to $0.60 per watt in the first quarter. I will now review our financial results for the second quarter. Net revenues were $268 million, compared to $349 million in the first quarter of this year. Gross profit was $44.4 million compared to $36.7 million in the previous quarter. Gross margin was 16.5% compared to 10.5% in first quarter of 2015. Gross margin increased mainly as a result of material and processing cost reduction and positive contribution from the revenue recognition of the sale of solar project. Our second quarter total operating expenses were $33.9 million, representing 12.6% of total revenues, compared to $46.2 million and 13.2% in Q1, 2015. The sequential decrease in operating expenses were primarily due to lower sales and marketing expenses associated with lower module shipments as well as discounts obtained in connection with the settlement of certain payables. Operating income was $10.5 million, compared to operating loss of $9.5 million in the first quarter of this year. Operating margin was 3.9%, compared to a negative 2.7% in the first quarter of this year. Net foreign exchange loss was $2.6 million, which include a loss of $8.8 million from foreign exchange forward contracts. Net loss attributable to holders of ordinary shares was $2.9 million (sic) [$2.3 million], representing basic and diluted loss per common share of $0.01 and diluted loss per ADS of $0.02, compared to a net loss per ADS of $0.18 in the first quarter of this year. As for our cash and debt positions, total debt was $694.7 million as of June 30, 2015, compared to $723 million as of March 31, 2015, excluding $62.2 million of convertible notes due March 15, 2018, with a put option on March 15, 2016. During the quarter, we repurchased $0.7 million notional amount of our convertible notes. Our net cash position, including cash and cash equivalents, plus restricted cash was $185.1 million as of the end of second quarter, compared to $228.1 million as of the end of Q1, 2015. Lastly, net cash outflow from operating activities was $11.6 million in the second quarter, compared to net cash outflow of $9 million in the first quarter of 2015. Turning now to our guidance. For Q3, 2015, the company expects its net revenue to be in the range of $330 million to $340 million and gross margin to be in the range of 15% to 16%. We will now open the call to questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from Philip Shen of ROTH Capital Partners. Please ask the question.

Hi, everyone. Thank you for taking my questions. Hi, Daniel. In recent quarters you have indicated that you wanted to focus on DG and residential markets with the distribution strategy. And now sounds like you are focusing more on developing your downstream utility scale business. Are you going to try to do all of it or are you de-emphasizing distribution? Can you expand on how your strategy is evolving?

Yes. That's a good question. And so Phil we are doing both. If you look at -- I mean retail and the DG is our long-term strategy, going forward I mean the industry as a whole there is no doubt I mean the focus will be more and more towards smaller projects and also DG and residential projects. And we were building every quarter we’re building retail and small - channels through these small projects. That said we are simultaneously building utility scale projects along with the DG type projects. For example, the joint venture we have with Pristine Sun, big chunk of that, more than 100 megawatts of that are DG project. So we are really focusing on both building utility and also working on DG projects, both in terms of -- on the module side and also on the downstream project side.

Okay. How do you expect to see your balance sheet evolve as you grow your downstream projects business? I know it sounds like you are selling a lot of projects but do you have any intention of keeping any of the projects on your balance sheet?

Yes, right now we have been managing our balance sheet and cash flow very carefully. For the 70 megawatts that we have developed so far we pretty much financed everything internally. So going forward we with new even bigger portfolio that we are building, we will be little more aggressive in terms of getting financing such as for example [indiscernible] project financing. So that's the first part. Second part is that we can -- we want to maintain the flexibility by first maintaining -- try to maintain these projects for as long as possible. And it really depends on the market next year. If the market does well we'll most likely we can hold on to the project for a longer period. But we have options either selling the project portfolio as a whole as we did with 70 megawatts or we can hold it and try to monetize in some other manners.

Okay, great. And can you help us understand in your guidance how many megawatts of modules are embedded in that guidance in Q3?

Yes, right now it is going to be more than second half mainly because the China market has been picking up. Although we've been relatively cautious about getting too much of exposure into the China market. But right now we see some good opportunities and we've been taking selective orders and expanding our module business expanding in China next quarter. So it is going to be around 400 megawatts.

Okay, that's helpful. Thank you. And then in your release you talked about other project opportunities in several developed markets that you are exploring. Does this imply that you could similar to the Pristine Sun announcement in joint ventures with other partners in other markets?

We are definitely reaching out to many different type of stakeholders in this industry, but at this point Pristine Sun is a very big partnership. But most of the other project right now they are -- we look at them on a individually basis, but we keep our eyes open and there could be a possibility for other projects - partnership of same size as the Pristine Sun.

Your next question comes from Patrick Jobin from Credit Suisse. Please kindly ask the question.

Hello, this Maheep here on behalf of Patrick. Guys good question on the guidance for Q3. Does it include system sales the ones you expect from UK in Q3 or all of that is in Q4?

So are we talking about module sales?

And project sales.

Yes. We are going to sell at least one project of the remaining 70 megawatts; we are going to sell at least one in the third quarter and at least another one in the fourth quarter.

Thanks. And on the module part what geographic mix are you seeing in Q3 and Q4? As in you said that will be more of China, so can we expect China to increase beyond their current share right now?

Let's just go back a little bit because we are scaling back our module business so we've been -- our internal capacity is about 1.2 G so basically we want to keep it around that level so any increase in modules will be from some either domestic or internal OEM, so we may increase it but it won't be whole lot. For example, Q3 we will utilize some domestic OEM and expand our China business.

Thanks. And the geographic split, will it be more domestic or more international?

Over the third quarter it will be divided relatively 50:50 between OECD type countries and emerging countries including China. So on the international side and the mature country side most likely around 25% from Japan, maybe 15% to 16% from UK, another 10% or low teens from the US. And China will be probably between 30% to 35%.

Okay, thanks. Yes, that's helpful. And last question from my side. What's your outlook for the whole year as 4Q for 2015? Have you updated that or it still remains same?

Yes. We are just focusing on the downstream, as we expand our pipeline the downstream we'll make more announcement in the third quarter.

[Operator Instructions] Your next question comes from the line of Chen Ke of Shah Capital. Please can you ask the question.

Yes. First of all congratulation on your operating income. My question is regarding the foreign derivative loss, is this just one time thing or what's the status going forward? Foreign exchange loss.

Well, it really depends on the foreign exchange market and we try to make hedges but sometime hedging instruments are double edge sword and right now we expect the foreign exchange to be relatively stable comparing to the previous few quarters. So we are expecting less volatility in the foreign exchange going forward.

Okay. My next question about your LED and convertible list. Could you talk about those two businesses?

Okay. Mr. Chen, I think you understand that but for everyone else on the line Mr. Li says for the LED business we are still expanding our channel and try to get more retail partners, it is going under our schedule and compare to solar the volume is still quite low at this point. But we've already seized over 3,000 retail store as our customers and we expect to have good sales volume by next year around this time.

Okay. My last question way the China just announced cutting interest rate, how that gone off your -- I mean bottom line?

I am sorry. Can your repeat that?

Yes. China just announced cutting interest rate like this evening, how that will help your income statement helping your bottom line?

So the interest rate reduction is definitely a positive for us and not just only our interest expense will reduce but there are financing -- our financing environment will become more flexible, the banks will have more credit and facility to provide. It is positive news for us.

[Operator Instructions] We have no further question at this time. I'll now turn the call over to your host Ms Yang. Please continue.

Thank you. On behalf of our 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.