ReneSola Ltd (SOL) Q3 2015 Earnings Call Transcript

Kerrie Zhang - Investor Relations Rebecca Shen - Director, Investor Relations Xianshou Li - CEO Maggie Ma - Interim CFO

Philip Shen - ROTH Capital Jennifer Ky - Credit Suisse Ke Chen - Shah Capital

Ladies and gentlemen, thank you all for standing by and welcome to the Q3 2015 ReneSola Ltd. Earnings Conference Call. At this time, all participants are in listen-only-mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today 17th of November 2015. I’d now like to hand over the conference over to your speaker for today Ms. Kerrie Zhang. Thank you. Please go ahead.

Thank you. Hello, everyone. Thank you for joining ReneSola's conference call to discuss third quarter results. We released the quarter results earlier today and are available on the Company's Web site, 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 Web site at www.renesola.com. On the call with me today are Mr. Xianshou Li, our Chief Executive Officer; Ms. Maggie Ma, our Interim Chief Financial Officer and Ms. Rebecca Shen, our Director of Investor Relations. Rebecca will read Mr. Li's prepared remarks regarding ReneSola's operational highlights and strategy, and Maggie will then review our third quarter financial results in detail. Before we continue, please note on Slide 2 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. Let me now turn the call to Rebecca, who will translate Mr. Li's prepared remarks. Rebecca.

Thank you, Kerrie. The following are Mr. Li's prepared remarks. Thank you everyone for joining our call this morning. We appreciate your interest in ReneSola. I will begin our call with some comments about how our new strategic direction is translating into near-term performance. Then we will turn the call over to Maggie for details about our operating and financial performance in the third quarter. Please turn to Slide 3. We started of this quarter by second year of recovery for the solar industry. Our industry had its opportunities and challenges. In the context of those challenges, ReneSola is proud to be not only the survivor, but to have emerged as a recognized Tier 1 supplier with its presence around the globe. We successfully executed our strategy. We specifically design our business to be nimble and flexible. With the ability to pursue new opportunities rapidly in the business that is changing as rapidly as solar energy, this flexibility serves us well. We are able to adjust to evolving conditions and position ourselves for success in the most enticing new opportunities. Our results this quarter reflect accelerating business in strategic decisions we made in 2014, but only disclosed this year the anticipated changing industry conditions. The downstream project business continues as a substantial opportunity worldwide and equipment manufacturers like us have a natural advantage in designing and construction projects. You’ve seen many of our equipment producing peers and their project business. Leveraging in-house technical expertise and the preexisting global infrastructure, a couple of years ago we’ve recognized the opportunity on our natural advantages and began laying the foundation for this business. In 2014, we started building the pipeline of projects and executing EPC activity. Now in 2015, we’re seeing early payoff to this effort. Since we initiated this strategy, we’ve sold 71 megawatt in the U.K. as of the end of October, of which 75 megawatt of project were sold in the third quarter. We are operating four projects with 25 megawatt of annual capacity. By the way, we like those operating assets, because they produce a steady stream of high margin recurring revenue. Our pipeline of future project is robust. We have 5,050 megawatts one-off projects under development. Keep in mind that at this time last year, we had just started building our downstream business in OEC countries. The asset was in the early development stage and we keep it confidential of the competitive event. We are very proud from a standing start; we’re now competitive with most of the large equipment manufacturing peers, as well as many ITT alternative energy developers. We were able to build this business so quickly due to our technical knowledge and global distribution footprint by geography or early project success tracks our global footprint. We are especially active in Europe where we have been manufacturing and selling for some time. Certain European markets, especially the U.K., are attractive for project work due to the incentive programs in place, the majority of our completed solar projects are in the U.K. and Eastern Europe. We sold 71 megawatt in the U.K. alone, yet have another 75 megawatts that we expect to complete and connect by first half of 2016. We are just beginning to penetrate the Japanese market, which has been very attractive since the Fukushima disaster. The Japanese market has very good incentives in place and connecting to the grid and collecting feed-in tariffs payments is administratively easily, relatively speaking. We expect our project activity in Japan to grow rapidly over the two years. We already have 31 megawatts planned with multiple projects underway and, of course, more of -- more in early stage of development. We sold our first project in Japan this quarter, a total of 300 kilowatts of rooftop DG. The U.S is a very large and robust market as well and we took important strategic actions to enter that market. In July, we announced the formation of a JV named Baynergy, which we’re forming with the U.S alternative energy company, Pristine Sun. The ramp up of the project business is a function of infrastructure we already have in place for our module and wafer business. Our global presence and reliable modules will enable us to develop portfolio high-quality projects around the world. As we further go to our project portfolio, we will continue to sell industry leading wafer cells and modules to our existing customer base, as well as new customers. I believe we can be more selective to whom we sell and more firm on pricing that reflects the value of our project -- of our product deliver. With the project business layering on top of third-party cells, we see high demand and are running our plants at full utilization. We are constantly working to be a low cost producer with the focus on improving our efficiency in bringing every penny out of our supply chain. Maggie will offer details on shipments and cells. Our flexibility and nimbleness expands beyond our pivot into project development. We are also leveraging our existing manufacturing capability, global footprint and brand names to develop an LED lighting business. We are still very clear in that effort. So we will not offer too much detail yet, but I do want to emphasize that it is an important strategic initiative for us. The so-called energy efficient market is a very large and growing market, and LED lighting is a critical element. We expect this market to expand substantially as energy efficiency retrofits grow as a trend around the world, because we have a natural advantage, we want to position ourselves to capture this opportunity in the years ahead. At this point, in 2015, I’m really excited about our process for last year and beyond. Our project business has emerged from an internal trend a year-ago, so rapidly growing and globally recognized business in just one short year. We are transitioning the overall business away from lower margin contract manufacturing to higher margin projects, equipments, and LED sales. We are maintaining our reputation for high-quality as well as high cost controls with a focus on cash generation that will strengthen our balance sheet over time. I’m proud of the hard work of ReneSola’s dedicated employees and have high expectations for continued success in the quarters ahead. Before I turn the call over to Maggie, I’d like to provide an update on our R&D efforts. Our team keeps investing in developing new technologies and enhancing the efficiency of our current solar and other clean energy products. The A++++ wafers, which we had previously announced delivered a cell efficiency of 18.4% and are now in mass production. We are currently working on improved cell efficiency to 18.5% with narrow efficiency distribution by optimizing the wafer process. Additionally, both our double-glass modules and four bus bar cell module products are now in mass production. Regarding the double-glass module product, we have received positive feedback from our customers in terms of module quality and power generation or the R&D team is developing a 72-cell double-glass module which will be introduced in the coming quarters. Our new module product, Virtus III, has already been certified by TUV with around 15 watt output improvement compared to the current Virtus II module. Let me now turn the call over to Maggie for details on our project operations and financial performance. Maggie?

Thank you Ms. Kerrie and Rebecca, and thank you everyone for joining us on the call today. I will review our operations and financial performance for the quarter and then discuss our outlook. To keep our remarks concise, all figures were referred to the third quarter ended September 30, 2015 unless noticed otherwise. Let’s begin with Slide 4, which highlights our financial performance in the third quarter. Revenue of $368.2 million was up 37% sequentially, but declined 1% year-over-year. The sequential growth was due to solid performance across our four product line, including the contribution from the project sales. Gross profit of $59.3 million, grew 33.6% sequentially. Gross margin of 61% was relatively stable sequentially and higher than the year earlier period. Our project sales generated gross margin about the corporate average, so positive contributor to our growth in profitability. Operating expenses were $47.9 million, containing one-off expense of $6 million, which related to a provision for purchase commitment, change in provision for doubtful accounts [indiscernible].Excluding the one-off expenses; the Company’s operating expense represents 11.3% of the revenue. Operating income was $11.4 million, an increase of 8.9% sequentially and 34% year-over-year. Non-operating expenses of $2.6 million include net interest expense of $10.4 million, offset by foreign exchange gains of $5.7 million and gains on the repurchase of convertible bonds of $1.9 million. Net income was $8.6 million, which compares to a net loss of $2.3 million in Q2 of 2015 and a net loss of $11.7 million in the same quarter last year. Earnings per ADS were $0.08. Slide 5, provides a summary of the key components of our income statement over the last several quarters. Please turn now to Slide 6 and 7, which highlights the significant improvement to our balance sheet achieved during the quarter. Cash and equivalents, which includes restricted cash, increased to $233 million from $185.1 million at the start of the quarter. We generated cash by reducing our working capital usage. We reduced inventory by $78.8 million via holding DSO steady at around 30 days. The cash generated enabled the Company to reduce accounts payable and debt. We paid down $84.6 million of payables and the total debt declined to $750.4 million from $756.9 million. During the quarter, we repurchased $36 million notional amount of the convertible notes due on March 15, 2018. We’ve only $26.1 million of convert remaining outstanding. Before I move on to our project sales in the quarter, I want to reiterate that the entire finance team is very focused on improving our balance sheet and we’re very proud of the progress we’re making. Now let me provide the details of our project sales in the quarter, starting on Slide 8. We recognized $64.6 million from the sales of the project in the quarter, representing 35 megawatts of generating capacity. Sales include one utility scale projects in the U.K. and the rooftop DG project in Japan. In the U.K., we closed the sales of our 33.7 megawatt Port Farm utility project. Also note that, following the quarter end, we announced the sales of another 16.5 megawatt utility scale project in the U.K. We also expect another sales of 0.9 megawatt project in Japan. Slide 9 shows our operating assets. First starting our development strategy, we’ve decided to keep the -- keep and operate several projects that we believe can produce very attractive IRR for the life of the project. We currently operated 25.1 megawatt of IPP projects, two each in Bulgaria and Romania. We are always interested in building high margin recurring revenue stream, so you can expect that over time to build our operating portfolio alongside the projects intended for sale. Now turning to Slide 10, which summarizes the size and the geographic distribution of our project pipeline. As of September 30, we had 550 megawatt of projects in various stages of development, of which 483 megawatt are solar projects and the 32 megawatt wind related projects. Out of 550 megawatt of projects, 104 megawatts of project are under construction. Slide 11 details the size, status and the location of the current pipeline. As Mr. Li mentioned, we’re excited about our early results in our new LED distribution business, but are also cautious as our effort is just getting underway. Slide 12 summarize the results for LED, with revenue of $3.6 million and a gross margin of over 30%. As of the end of October, we have accumulated over 2,600 customers in the LED business. We are starting to get significant penetrating around the world with distribution channels being build on every continent, but Africa. Next, let me quickly summarize our module and the wafer production shipment in the quarter shown in Slide 13. Our module and wafer business is still attractive given the cost reduction initiative we put in place. Our in-house manufacturing cost per watt at the end of Q3, 2015 was about to fit $0.40 and we expect the cost per watt to further decrease in the coming quarters. Total solar module shipment of 405.5 megawatt compared to 322 megawatt in Q2 of 2015 and 462 megawatt in Q3 of 2014. The year-over-year decrease reflects our withdrawal from the OEM business as we essentially transitioned our business model to focus on project development. Wafer shipments were 342 megawatt compared to 282 megawatt in Q2 of this year and 202 megawatts in Q3 of 2014. The sequential increase was due to short-term opportunistic sales that we encountered in the quarter. The pie chart on the right highlights the geographic breakdown of module shipment in the third quarter. China represents around 28% of our total shipments. Japan was around 23%. Europe was approximately 25%. The U.S was nearly 9% and the rest of the world about 15%. Our module ASP decreased slightly to 57 per watt -- $0.57 per watt from $0.59 per watt in the second quarter. Finally, we can conclude with guidance, which is on Slide 14. In the fourth quarter, we expect revenue in the range of $275 million to $295 million and the gross margin in the range of 17% to 18%. The expected sequential decline in revenue reflects two factors. As we communicated to you earlier on the call, we have a robust pipeline of additional projects under development and expect to see growth in project revenue next year. Secondly, we expect a sequential decline in our module and wafer product line, since we expect to move aggressively with direct our production to our own project this quarter. Despite our sequential decline in revenue, we intend to secure higher profitability, generate high healthy cash flow and build up downstream with higher gross margin going forward. From a balance sheet perspective, our simple goal is again to generate cash from project sales and good working capital management and to pay down debt. We do not guide to the balance sheet on a quarterly basis, but we can say that our goal for 2016 is to maintain healthy cash flow. We’d like to open up the call for any questions that you may have for us. Operator, please go ahead.

Thank you, ma’am. [Operator Instructions] We have our first question from the line of Philip Shen from ROTH Capital. Please ask your question.

Hi. Thanks for taking my questions and Maggie welcome as the interim CFO.

Thank you. Hello, Philip.

Hi. My first question is on your expectations for project development in 2016. How many megawatts could you develop in 2016 and how much of that do you expect to sell?

You mean in next year, 2016?

That’s right.

Or in this year?

Next year.

Okay. We have sold 71 megawatts this year and we target to sell 130 to 150 megawatts for next year. And for the next year we will further develop another 200 megawatts to 300 megawatts for next year’s pipeline.

Great. Thank you.

Pardon me; we believe the line has been dropped. We’ll move on to the next question from the line of Patrick Jobin from Credit Suisse. Please ask your question.

Hi. This is Jennifer Ky on the line for Patrick. Thanks for taking the question. I see you’ve expanded into wind project development and you have a wind project in your pipeline. Could you give me some color on how this fits in with the rest of your strategy, and how much wind should we expect going forward?

As for our wind project, we have been tendering wind projects to small scale wind projects in Poland and we are still in an early development stage. And since we’re in an early development stage we would prefer to be low profile here and -- but it doesn’t hurt that we make more trials first.

Great. And how much of your pipeline going forward do you think would be wind?

32 megawatts for wind related projects.

Right. How do you expect ASPs to trend in Q4 and into next year?

For the ASP, we think that it will slightly decline later in Q4.

And do you have any thoughts or insight into how 2016 will look?

Sorry, for 2016 …

2016 ASPs?

Okay, yes. That in Q4, the ASP will slightly decline, but I think in 2016, it will further decline slightly. But as you know that in the first half of -- in the first half of next year the demand is very strong and we think that the decline should be very slight.

Great. And on that, how do you expect margins and gross to trend for 2016, and what geographies are you planning on targeting?

Our gross margin will keep in a high level like, from 17% to 18% as we keep on -- say, keep on to reduce our in-house manufacturing cost and for the sales of modules we are -- our target on the regions like the -- the China, Japan and India. For the U.S. and the Europe we mainly focus on the downstream projects.

Okay, great. Thank you.

Welcome.

[Operator Instructions] We have our next question from the line of Ke Chen from Shah Capital. Please ask your question.

Just wondering, could you talk about your outlook for LED business in fourth quarter?

So for the LED business as this is the first quarter that we launch our LED business, we expect the LED business to grow really fast. We would say the quarterly gross rate of LED business is expected to be 60% to 70% and the revenue is expected to be $6 million to $7 million for the next quarter. And for our LED customers, we expect new addition of 2000 LED customers for the next quarter.

Okay. Based on your gross margin in first quarter and controlled cost, I think we expect profitability in fourth quarter, is that right?

Yes, I think so. But I think in -- it will show clearly in -- I think in the second quarter, because normally in the season for spring festival the cost -- the labor cost will go up.

Well, my question is, the fourth quarter -- the last quarter of this year.

Yes, in the -- yes.

Okay. Thank you.

Welcome.

[Operator Instructions] Pardon me; we don’t have any more questions from the audio line. Please continue. Thank you.

Okay. Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. We are satisfied with our performance this quarter and pleased to report that our strategic shift to the project business is gaining real traction. In a couple of years since we initiated the transition we’re already developing the robust pipeline of projects around the world. Further more in a short period since we disclosed it off publicly, we already started to monetize our work. This will provide capital strengthen our balance sheet and grow our business. Balance sheet strength is a long-term commitment we have made to our shareholders and we’re especially proud to see our key metrics improving. You should expect to see us continue to pay down debt in the quarters ahead. We are very positive our downstream strategy and optimistic about our business outlook in the quarters ahead. We believe ReneSola can achieve attractive growth rate by developing solar projects in the transit [ph] market. We intend to follow through on these strategic initiatives and build a great foundation to increase shareholder value in 2016 and beyond. That concludes our call today. You may all disconnect.

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