ReneSola Ltd (SOL) Q4 2015 Earnings Call Transcript

Gary Dvorchak - Investor Relations, Blueshirt Group Asia Xianshou Li - Director and Chief Executive Officer Maggie Ma - Chief Financial Officer and Vice President of Financial Control Rebecca Shen - Director, Investor Relations

Philip Shen - ROTH Capital

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and financial year 2015 ReneSola Limited earnings conference call. [Operator Instructions] I would now like to turn the call over to your speaker today, Mr. Gary Dvorchak. Please go ahead, sir.

Hello, everyone, and thank you for joining us on ReneSola's conference call to discuss the fourth quarter results. We released the fourth quarter and full year 2015 results earlier today and they are available on the company's website, as well as from Newswire services. You can also follow along with today's call by downloading the short presentation available on the company's website at www.renesola.com. On the call today with me are Mr. Xianshou Li, Chief Executive Officer; Ms. Maggie Ma, Chief Financial Officer; and Ms. Rebecca Shen, 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 fourth quarter and full year 2015 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 the 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, Gary. 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 key important, strategic comments and an update on how our new strategic direction continues to translate into near-term performance. Then we will turn the call over to Maggie for details about our operating and financial performance in the fourth quarter and the full year 2015. Please turn to Slide 3. Year 2015 was a pivotal year for ReneSola. We enter the year actively working through the capital strategy away from being a solar product manufacturer and towards being a multi-faceted participant across the value chain. We unveiled this effort in midyear, which included a control access from the OEM business and aggressive pace of project development. Our result in 2015 demonstrated the wisdom of our strategy. We increased gross margin for the third straight year and reduced operating expenses on an absolute basis for the second straight year. This resulted in operating profit tripling from last year and a significantly reduced net loss. Revenue declined somewhat, but this was mainly due to reduced shipments to external customers, as we strategically directed more shipments to our own downstream projects. Our solid P&L performance enabled us to reduce total debt by $59 million. We entered 2016 on the high note as a global leader across the solar value chain. We are profitable with over the 600 megawatts of projects under development and a burgeoning new business in LED distribution. Our fourth quarter results continued a successful execution of the new strategy unveiled this year. Let me now elaborate on our downstream project development, which is at core of our transformation. Downstream projects are a substantial opportunity worldwide, and equipment manufacturers like us have the natural advantage in designing and constructing projects. We have only just begun to tap this opportunity geographically. We have the visibility on years of growth, as we expand our footprint of activity around the globe. We initially focused on two attractive markets, the U.K. and Japan. In the short run and in half year since initiating our downstream strategy, we have already sold a total of 71 megawatts in the U.K. and 1.8 megawatt in Japan. We sold 18 megawatt in the fourth quarter, which Maggie will detail shortly. We now have 54 megawatt under construction in U.K. and 29 megawatt in Japan, which we expect to complete and connect during 2016. Those two regions plus the 5 megawatt under construction in Canada represent a solid near-term pipeline of 88 megawatts, which we expect to monetize in the near future. Our long-term horizon host even more promise. Beyond the 88 megawatt under construction, we have another 553 megawatt in early-stage development around the world. These new markets track our historical manufacturing footprint, thus leveraging the staff and infrastructure we have in place already. North America is a large and oldest market, and most attractive to us with steps of activity. In the U.S., we currently have 103 megawatt of projects in our pipeline, all of that preconstruction. We did hit a speed bump during the year. However, due to issue around our previously announced joint venture with Pristine Sun, we cannot comment specifically on details, since we are in litigations. But I can say that both parties are interested in resolving the dispute quickly via mediation. We believe we can resolve our issue and move on in a reasonable amount of time. Meanwhile, we will continue to drive development in the U.S. and expect to start construction on a good portion of our pipeline in the near future. Meanwhile, we are ramping up in Canada. In addition to the 5 megawatt, I mentioned, that is already under construction, we have another 27 megawatt in early-stage development. Looking to Europe. We are accelerating progress there. In addition to the 54 megawatt under construction in the U.K., we have another 70 early-stage development. Poland is our most robust market with 140 megawatt in development. In Asia, we have 65 megawatt in development in Thailand. In addition to the construction in Japan, I mentioned, also note that unlike most of our peers, we are avoiding development in China. Although China is quite a large market, FIT collections can be challenging. And we want to focus on more stable market, which make our projects more rentable and more easily sold. Finally, we are excited to the stepping of activity in the sunny Middle East. We have 80 megawatt of project, scheduled to start in Egypt and Turkey. All in, we have a very robust pipeline of future projects with 641 megawatts in various stage of development, because we are highly focused on cash flow and balance sheet improvement. We are generally pursuing the build and transfer model, and overtime we expect to sell the entire pipeline. We do retain assets where economics are particularly attractive. In particular, we own and operate four projects in Eastern Europe, with 25 megawatt of annual capacity, with two each in Bulgaria and Romania. While we are holding them, those operating assets produce a steady stream of high margin recurring revenue from the sale of electricity. We still intent to sell them. However, to fully monetize their values, we are in the late stages of negotiation to sell our two projects in Bulgaria. We expect to announce the deal in the very near future. The project business is the key component of the enterprise value we have built at ReneSola. It is our growth driver and layers on top of the TV manufacturing that is our solid and stable foundation. An important strategic goal for us in 2016 is to drive higher profitability and cash flow, so that we can continue to pay down debt and shift enterprise value from creditors to shareholders. Let me elaborate on how we expect, again, to improve financial performance in 2016. Please turn to Slide 4. The first step is to continue to scale back the OEM business. As communicated in prior conference calls, the ramp of the project business is enabling us to gradually access the OEM business. We will continue to scale back our OEM business again in 2016 to drive some cost and shift our focus towards downstream project business away from manufacturing business. The second step is to continue to reduce manufacturing costs. In 2016, we expect to expand our wafer capacity through technology improvements, rather than equipment purchase into other CapEx. By next year we expect to have capacity of 2.9 gigawatt, up from 2.4 gigawatt now with minimal CapEx. The third step is to use R&D strategically to reduced cost and improve product performance, which can result in better pricing and higher margins. Consider the R&D milestones we achieved in 2015. The previously announced A4+ wafers deliver cells efficiency of 18.4% and are now in mass production. We are working on improving cell efficiency to 18.5% with narrower distribution by optimizing the wafer process. Additionally, both our double-glass module and four bus bar cell module products are now in mass production. Customers are [ph] writing about double-glass modules, noting the quality and power generation. Our new Virtus III module product is certified by TUV and also has a 15 watt output improvement compared to the Virtus II module. Meanwhile, our R&D team is developing a 72-cell double-glass module that we will introduce in the near future. The fourth element to improve financial performance is to look beyond solar-related products. Specifically, we are leveraging our global footprint and brand equity to develop LED distribution business. This is an exciting new opportunity for us, which we expect will create a mass player of growth on top of project development. The LED business is really delivering encouraging financial performance. In the fourth quarter, we saw over 35% sequential revenue growth with the gross margin north of 30%. We now have over 3,270 customers as of December 31. The energy efficiency 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 retrofit growth as a trend around the world, because we have a natural advantage. We want to position ourselves to capture this opportunity in years ahead. We expect to deliver 30% to 50% sequential growth of LED revenue in 2016, as we grow our distribution and add SKUs. Gross margins are at 30% today, but we are looking at higher margins in the long-term. We expect all of these steps to rebuild a better financial performance again in 2016, with better margin, cash flow generation and further debt retirement. Maggie, will also give specific guidance for the coming year in a moment. I'm very excited about our prospect for 2016 and beyond. Our project business has emerged from an internal trend more than a year ago to a rapidly growing and a globally recognized business now. 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 control, with a focus on cash generation that will strengthen our balance sheet overtime. I am very proud of the hard work of the entire ReneSola team, and have high expectations for continued success in the quarters ahead. Let me now turn the call over to Maggie for details on our project operation and financial performance. Maggie?

Thank you, Ms. Rebecca, and thank you everyone for joining us on the call today. I will review our operations and financial performance for the fourth quarter and full year 2015, and then discuss our outlook. Let's begin with Slide 5, which highlights our financial performance in the fourth quarter. Revenue of $296.4 million for the fourth quarter exceeded our guidance range of $275 million to $295 million. Our revenue was down 20% sequentially and down 23% year-over-year. The revenue decline on both sequential and year-over-year basis reflects the continued redirection of OEM module productions away from external sales and towards the company's project development, coupled with a decline in the ASP of our modules. Revenue for the full year was $1.3 billion, down 18% when compared to last year. Gross profit of $47.5 million declined 20% sequentially and 7% year-over-year. Q4 gross margin was relatively stable sequentially and higher than the prior-year period. Gross margin declined due to the cost associated with annual maintenance in our polysilicon plant, partially offset by lower production cost and the above-corporate average gross margin generated from our project sales in the quarter. Gross margin in Q4 2015 was below guidance of 17% to 18% due to the change in the timing of annual maintenance in our polysilicon plant, which moved to Q4 2015 from Q1 2016. Note that, excluding the unexpected costs associated with the maintenance work in our poly plant, gross margin in the fourth quarter would have been at the high-end of our guidance. We are encouraged that our project business continues to be a positive contributor to our growth and profitability. Gross margin for 2015 was 14.7%, which compares to 13.4% last year. Operating expenses for the fourth quarter of 2015 were $13.5 million or 10.3% of revenue, significantly down from $47.9 million or 13% of revenue in the prior quarter and down from $53.4 million or 13.8% of revenue in the prior-year period. The decline in operating expense in the quarter reflects the cost control initiatives and actions we took during the quarter. As Mr. Li mentioned, we remain committed to R&D spending for new technologies, enhancing the efficiency of our current solar and other clean energy products. However, we are taking a more cautious and conservative approach for spending in other areas. We are managing our expenses across the company in a smart and prudent manner. General and administrative expense was down 5% in the quarter from last year. Operating income for the fourth quarter was $16.9 million, which represented impressive growth of 48% sequentially. Operating margin for Q4 was 5.7%, up from 3.1% in Q3. Operating income for full year 2015 was $29.3 million compared to $8.2 million. Operating margin increased to 2.3% in 2015 from 0.5% in 2014. Non-operating expense of $9.2 million include net interest expense of $9.1 million and the losses on derivative of $1.2 million, offset by foreign exchange gains of $2 million. Net income for the fourth quarter was $6.7 million, which compares to $8.6 million in Q3 2015 and a net loss of $8.1 million in the same quarter last year. Earnings per ADS in the quarter were $0.07. We significantly narrowed our net loss for the year to $5.1 million from $33.6 million last year. Slide 6 provides a summary of the key components of our income statements over the last several quarters. Please turn now to Slide 7 and 8, which highlight portions of our balance sheet. We continue to maintain a substantial amount of liquidity, cash and equivalents, including the restricted cash as of the year at $178 million. During the quarter, the company further reduced a total debt of $16.8 million to $734 million. The company has approximately $26.1 million in convertible bonds outstanding as of December 31, but retired $20.5 million more subsequent to the end of the quarter. As of today, the company has $5.6 million in convertible bonds outstanding. We want to remind you that the holders of the convertible bonds can exercise the put option until they expire on March 15, 2016. Before I move on to our project sales in the quarter, I want to reiterate that the entire finance team remains focused on improving our balance sheet and we are happy with the continuous progress the team has made. Now, let me provide the details of our project sales in the quarter on Slide 9 and 10. We recognized $33.8 million from the sales of the project in the quarter, representing 18 megawatts of generating capacity. Sales include one utility scale projects in the U.K. and two small utility scale projects in Japan. In the U.K., we closed the sales of our 16.5 megawatt Membury utility scale. In Japan, we sold two projects located in Tochigi Prefecture, both the utility scale system with capacity of 920 kilowatt and 590 kilowatt, respectively, and both are qualified for Japan's 32 Yen FIT scheme. The transaction closed in December and we have received all proceeds from the sales. Now, turning to Slide 11, which summarizes size and geographic distribution of our project pipeline. We currently have 641 megawatts of projects in various stage of development, of which 621 megawatt are solar projects and the 20 megawatt are wind-related projects. As Mr. Li mentioned, 88 megawatt of projects are under construction. Slide 12 details the size, status and location of the current pipeline. Slide 13 summarizes the result of LED, with revenue of $4.9 million and gross margin of over 30%. As of the end of December, we have accumulated over 3,270 LED customers. We are starting to get significant penetration around the world, building distribution channels on every continent, but Africa. Next, let me quickly summarize our module and wafer product shipment in the quarter shown on Slide 14. 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 Q4 2015 was about $0.40, down from $0.43 in Q3, and we expect the cost per watt to further decrease in the coming quarters. Total solar module shipments in the fourth quarter were 373 megawatt compared to 405 megawatt in Q3 of 2015 and 488 megawatt in Q4 of 2014. The year-over-year decrease reflects our gradual exit from the OEM business, as we successfully transition our business model to focus on project development. Wafer shipments were 270 megawatt compared to 342 megawatt in Q3 of this year and 256 megawatt in Q4 of 2014. Total solar module shipments for the year decreased 19% to 1.6 gigawatts when compared to the prior year. Wafer shipment for the year was 1.1 gigawatt, up 29% year-over-year. The pie chart on the right highlights the geographic breakdown of module shipments in the fourth quarter. China represented around 32% of our total shipments, Japan was around 20%, Europe was approximately 8%, the U.S. was over 3%, and the rest of the world was about 37%. Our module ASP decreased slightly to $0.54 per watt in Q4 from $0.57 per watt in the third quarter. Finally, we'll conclude it with guidance, which is on Slide 15. The revenue outlook reflects continued shift of our OEM module production from external sales and towards proprietary project development. We believe that should shift. We also improved gross margin and overall profitability. During the first quarter of 2016, we expect revenue in the range of $260 million to $270 million and gross margin around 17%. For the full year, we expect revenue in the range of $1 billion to $1.2 billion. We would now like to open up the call for any questions that you may have for us. Operator, please go ahead.

[Operator Instructions] We have the first question from the line of Philip Shen from ROTH Capital.

I'd like to start with the guidance for the year. Can you give us a sense for what the revenue mix for each of your business segments is, that you expect for 2016?

Let me take a look on our revenue mix in this way. For the wafer and the module side, we expect to have external shipments of wafer at about 1.6 gigawatts for the whole year. And for the module shipments, we expect it would be 1.2 gigawatts to 1.3 gigawatts for the full year. And for the project side, we are going to build 100 megawatt to 130 megawatt in 2016. And we expect to sell it as more as we can, so I would expect it's about 100 megawatt for sales in 2016. And for the LED, I think we will provide growth quarter-over-quarter at about 30% to 50%. That's about revenue mix.

I think last quarter you guys talked about selling maybe 130 megawatts to 150 megawatts of downstream projects in 2016, so it looks like you've taken down that a little bit. Can you talk about and touch on why the reduction there? I'm guessing there might be some impact with Pristine Sun, but to the degree there, you can talk about the reduction, that would be helpful.

Yes. I think the slight decrease for the sales of project assets has nothing related to the case. We are negotiating with Pristine Sun. Also we are -- because of the environment change in the U.K., so we are becoming more prudent in the project development.

So Mr. Li just added that the litigation with Pristine will have an impact on the reduction of our downstream projects and the schedule in some time got delayed.

Can you tell us how much or what kind of project sales do you see in Q1?

We have very small project sales in Q1, mainly from Japan, but it is only about 1 -- it's little. I think the revenue for the Q1 project sales is only 1 megawatt. So most of our projects would be from Q2 to Q4.

And speaking of Japan, can you talk about the ASP for the Japanese projects that you sold in Q4? And what kind of FiT -- which FiT was that project receiving?

For the Q4 project sales in Japan, I think we just mentioned in our call, it is about 32 Yen FiT. And regarding to the ASP let me check it with Mr. Li. It is $3.2 per watt for the Japan project.

So $3.20 per watt.

Right. For Japan.

I'll ask one more and I'll jump back in the queue. In terms of your balance sheet, can you walk us through your plan to manage your debt in the working capital needs in 2016?

In 2016, we're going to enhance our working capital, like tighten the control on our AR, as well as inventory control, especially on our module and LED products.

So Mr. Li just said, for the past two to three years we have been working closely on repaying our $200 million of convertible bonds and now there is only a little portion of $5.6 million outstanding to be repaid. So for the next few years, we will mainly rely on our own operating cash flow to generate more cash. We plan to generate over a $100 million for cash flow.

Your next question comes from the line of [indiscernible] from Deutsche Bank.

I just want to ask about the polysilicon for your facility last year, what is the production volume or utilization rate? And what is the cash or total production cost? And also, what do you see for the poly and wafer price, as well as module price going forward in 2016?

About polysilicon production in 2015, the total production volume for quarterly is about [ph] 1,600 ton for quarter, but in Q4 it decreased, because we are -- during the annual maintenance. Currently in Q1 2016, we are going to produce [ph] 1,300 ton for Q1. Currently, we're covered to be 100% utilize our production capacity. And regarding to the cost, the current cost is about $12 per kg.

Mr. Li says, that the average cost for 2016 is $15 per kilograms and cash cost is around $12.

And also the outlook for the poly and wafer and module prices?

For this year, for 2016?

Yes.

Mr. Lee said, as for the ASP for wafer, the price is very good right now. It's around $0.20 right now. And for the module ASP, he predicted $0.52 per watt for the first half of the year. And he assumes that there will be decline for the prices for the second half of the year.

And also the other competitors are expanding the production capacity, like also the value chain. And what is your strategy, because you mentioned before, you are focusing more on the downstream project development, but what's your strategy in terms of upstream business going forward?

You mean in capacity?

Yes, and also the strategy overall for the upstream business.

Manufacturing upstream; manufacturing, right?

Yes.

We don't have any plans to expand capacity. We insist that there is overcapacity in the industry in the long-term.

There are no further questions at this time. I would like to hand the call back to Rebecca. Please go ahead. End of Q&A

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. We are very pleased with our 2015 performance. And our strategic shift to the project business continues to gain traction. We are developing a robust pipeline of projects around the world. Furthermore, since we disclosed our project development efforts, we have monetized our work. This will provide a crucial capital infusion, enabling us to strengthen our balance sheet and grow our business. Let me reiterate, our balance sheet strength is a long-term commitment we have made to our shareholders. And you should expect to see us continue to pay down debt in the quarters ahead. In summary, 2015, was a breakout year for ReneSola and we have tremendous momentum in our business entering 2016. We remain positive on our downstream strategy and are excited about the business opportunities in the quarters ahead. We continue to believe ReneSola can achieve an attractive growth rate by developing solar projects in attractive markets. We intent 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.