ReneSola Ltd (SOL) Q1 2016 Earnings Call Transcript

Xianshou Li - CEO Maggie Ma - CFO Rebecca Shen - IR Ralph Fong - Director of Blueshirt Group Asia

Maheep Mandloi - Credit Suisse Justin Clare - Roth Capital Partners Paul Strigler - Esplanade

Hello ladies and gentlemen, thank you for standing by ReneSola’s First Quarter 2016 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]. Please note that we are recording today’s conference call. I’ll now turn over the call to Mr. Ralph Fong, Director of The Blueshirt Group Asia. Please go ahead Mr. Fong

Hello, everyone. Thank you for joining us on ReneSola’s conference call to discuss first quarter results. We released first quarter 2016 results 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. On the call with me today 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 review our first quarter 2016 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 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 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. With that let me now turn the call to Rebecca, who will translate Mr. Li’s prepared remarks. Rebecca.

Thank you, Ralph. 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 important strategic comments about business and our performance and Maggie Ma, our CFO will present operating financial details for the first quarter and our guidance for 2016. We will conclude our with the Q&A session. I’d like to start with the recap of first quarter. Please turn to Slide 3. The quarter played out largely as we had anticipated. It was marked by solid growth in the downstream project pipeline, margin improvement, and in-line revenue performance. Overall, we are pleased with our first quarter results and the momentum that we generated for the remainder of 2016. Revenue came in as expected sales of 260.7 million were down 25% from same quarter last year and down 12% sequentially. Revenue decline was mainly due to lower module ASP reduced shipments to external customers. As we strategically continue to scale back OEM and drive more shipments to our own downstream project. Gross profit grew 21% year-over-year and gross margin came in at 17.1% in the first quarter in line with our guidance communicated to you during our last call. This compares to gross margin of 16% and 10.5% in Q4 2015 and Q1 2016 respectively. We also almost triple EBITDA from the same quarter last year and reduce operating expenses by approximately 13% year-over-year. Net income was 5.7 million in the quarter compared to net loss of $18 million a year ago. Our solid P&L performance drove an improved balance sheet, as announced during the quarter we repurchased all of the remaining 26.1 million of convertible bonds, due March 15, 2018. Commissions in the solar industry are challenging now so we're executing on our strategy to remain a global leader across the value chain. We're profitable with over 700 megawatt projects under development and a flourishing business in our LED distribution. Our first quarter results demonstrated the continuation of the successful execution of our new strategy end of last year. Let me now briefly update you on downstream project development which is at the core of our transformation. Downstream projects remain a substantial opportunity worldwide and equipment manufacturers like us have the natural advantage in designing the construction projects. Our downstream assets continue to yield positive momentum as we expand our footprint of activity around the globe. In the first quarter we sold two utility projects in Bulgaria with capacity of 9.7 megawatt, because these projects will carry on our balance sheet as long term assets. The sale was booked as disposal of assets and contributed to the operating income. However the transaction generated cash and reduced that which are most important priorities. The sales in Bulgaria sustain our solid momentum and we're positive on outlook for projects for the rest of the year. In the near term we expect to monetize the sale of solar energy projects, representing over 20 megawatt generating capacity as early as in the same quarter -- as early as in the second quarter. Looking at development activity during the quarter we completed construction and connected four utilities scale projects and one rooftop project in the UK with a combined capacity of 24.3 megawatts. These projects demonstrate our ongoing commitment to the clean energy business in the UK. They also demonstrate our strong competitive advantages in developing downstream projects in the region. North America continues to be a larger global market and the most attractive for us to startup activity. In the U.S. we currently have a 121 megawatt projects in our pipeline. As we communicated to all of you on our last call, regarding the dispute with Pristine Sun, on March the 25, 2016 we entered into a binding term sheet with Pristine and certain of its affiliates to resolve our dispute, dismiss the action that we previously filed against Pristine and transfer to a 88 megawatt project under development in California, North Carolina and Minnesota. Upon completion of the transfer we'll be a 100% owner of the 88 megawatt portfolio of solar projects. We believe we can better drive development in the U.S. and expect to start construction on a good portion of our pipeline in the near future. Additionally, we announced last week that we have mutually formed a partnership with UCK group, a leading Turkish solar energy solution provider to develop a pipeline of solar power projects in Turkey with a total install capacity of a 116 megawatts. We're excited about partnership as it enables us to gain traction on attractive Turkish PV market. We're also demonstrating our technology leadership and competitive position in developing downstream projects in the region. Overall we have a robust pipeline of future projects across different geographies in various stages of development. Specifically we have late state project pipeline with solar capacity of approximately 323 megawatts in the United States, the United Kingdom, Turkey, Japan and Canada. We have early to mid solar power and wind projects in various geographies including the US, the UK, France, Spain, Poland and Canada. The early to mid stage pipeline has a combined capacity of approximately 462 megawatts. Because we are highly focused on cash for technology improvement we are pursuing a DOE [ph] model and over time we expect to sell all of the pipeline. Having said this occasionally we'll retain projects when economics happens to be attractive. For instance we continue to own and operate two projects in Romania. These operating assets produce a steady stream of recurring revenue from the flow [ph] of electricity. As previously discussed the charter business is key component of the enterprise value we have at ReneSola. It is our gross driver and layers on top of the PV manufacturing and it has a solid and stable foundation, an important strategic goal for us for the remainder of 2016 is to drive higher profitability and cash flow so that we can continue to pay down debt and thus shift enterprise value from creditors to shareholders. Let me reiterate how we expect to improve financial province in 2016. Please turn to Slide 4, the processes continue to scale back the OEM business, the ramp up of project business enables us to gradually axe the OEM business as we replace the OEM revenue and redirect module production to our own use. This is in line with the strategy to build a project business. We'll continue to scale back our OEM business for the rest of 2016 to drive down cost and shift our focus to our downstream project business away from manufacturing business. Second initiative is to use R&D strategically to reduce cost and improve product performance which can result in better pricing and higher margins. The R&D milestones we achieved in 2015 demonstrate the power of this approach. Our April 1st wafers which will deliver solid efficiency of 18.4% can be improved to 18.5% with narrower distribution by optimizing the wafer profile. Customers are raving about our double glass modules, noting quality and power generation. The third initiative is to look beyond solar related products and position ourselves for more broadly as a producer and distributor green energy product. Specifically, we are leveraging our global footprint and brand equity to further develop the LED distribution business. This remains an exciting opportunity for us, which we expect will create the next layer of growth on top of project development. The LED business continues to delivering encouraging financial performance. In the first quarter, we saw over 25 sequential revenue growth with the gross margin north of 30%. We now have over 4,900 customers as of March 31, and continues to expect to slow our distribution and add SKUs although it takes a little bit of work and time to set up distribution channels. Gross margins are approximately 30% today, but our long term target model for this business is gross margin over 40%. The fourth initiative is to continue to operate profitably, generating cash and paying down debt. As I mentioned earlier, we retire all of our conservative vote notes in the first quarter, improving our financial flexibility, we’re also funding capacity expansion creatively for instance, we expect to expand our wafer manufacturing capacity, through technology improvement, rather than equipment purchases or other types of expenditures. Using our R&D capability by mid-year, we expect to have capacity of 2.9 gigawatt up from 2.4 gigawatt now with minimal capital expenditure. We expect all of these steps to result in better financial performance again in 2016, with better margin, cash flow generation and further debt retirement. Maggie, will offer our specific guidance for the coming year in a moment. I remain excited about our prospect for 2016 and beyond. We are transitioning the overall business away from lower margin contract manufacturing to higher margin projects, equipment and LED sales. To discipline execution of strategic plan remains a focus of the entire ReneSola team. We’ll maintain our commitment to delivering higher quality with the focus on high cost control and cash generations 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 first quarter 2016, and then discuss our outlook. Let's begin with Slide 5, as Mr. Li highlighted during his comments, our financial performance during the first quarter was solid. It keeps us on track to deliver 2016 result in line with our guidance. Revenue of $260.7 million for the first quarter was within our guidance range of $260 million to $270 million. Q1 revenue was down 12% sequentially and down 25% year-over-year. The revenue decline on both sequential and year-over-year basis reflects the continued redirection of OEM business module productions away from external sales and towards the company's project development, coupled with a decline in the ASP of our modules. Gross profit of 44.5 million declined 6% sequentially that increased 21% year-over-year. Q1 gross margin was 17.1% up from 16% in Q4 2015 and from 10.5% in the same quarter last year. The sequential margin improvements in the quarter was due in-part to wafer margin improvement in Q1 of 2016 and the growth of LED business. Now that the gross margin in Q1 2016 was in a flying with guidance of about just 17%. Operating expenses for the first quarter of 2016 were $32.3 million or 12.4% of revenue up from $30.5 or 10.3% of revenue in the prior quarter, but down from 46.3 million or 13.2% of revenue in the prior year period. The year-over-year decline in operating expense in the quarter reflects the cost control initiatives and actions we continue to take 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 discretionary expenses across the company in a smart and prudent manner. Sales and marketing expense decrease 38% year-over-year. General and administrative expense was down 3% in the quarter from last year. Operating income for the first quarter was $12.2 million then 28% sequentially. Operating margin for Q1 was 4.7%. Non-operating expense of $6.1 million includes net interest expense of $9.1 million and the losses on derivative of $1.6 million offset by foreign exchange gain of 2.9 million. Net income for the first quarter was 5.7 million, which compared to 6.7 million in Q4 2015 and a net loss of 18 million in the same quarter last year, earnings per ADS in the quarter was $0.06. 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 portion of our balance sheet. We continue to maintain substantial amount of liquidity cash and equivalents including restrict cash of 190 million at the end of first quarter, up from 178 million in Q4 2015. Total debt was 737 million, largely in line with the debt balance in Q4 2015. Short-term borrowings increased 66.8 million in the quarter due to an increase of working capital loans and field [ph] discounts coupled with the fact that 31 million of the current portion of long-term borrowings were reclassified as short-term borrowings. Total long-term borrowings decreased in the quarter as the long-term loan associated with the Bulgaria projects was transferred to the buyer, and as mentioned above, a portion of the long-term borrowings was reclassified as short-term borrowings. During the quarter, the company repurchased all of the remaining convertible notes of 26.1 million. Before I move on to our downstream business in the quarter, I want to reiterate that the entire finance team remains focused on improving our balance sheet and we’re happy with the continued progress the team has made. Now let me provide the details of our project sales in the quarter, starting on Slide 9. As Mr. Li highlighted in his comment earlier with sold two projects in Bulgaria in the quarter. The projects are utility scaled systems with the combined generating capacity of 9.7 megawatts, since these project were carried as long-term assets on the balance sheet and the sales was book at as disposal of assets with no dry impacts to our revenue in the first quarter. Now please turn to Slide 11, which summarizes the size and the geographic distribution of our project pipeline. We currently have 785 megawatt of projects in various stages of development, of which 765 megawatts our solar projects and the 20 megawatt are wind related projects. As Mr. Li mentioned, 323 megawatt of projects are in the late-stage project pipeline. Slide 12 details the size, status and the locations of the current pipeline. Slide 13 summarizes the results for LED, with revenue of 6.2 million and a gross margin of over 30%. As of the end of March, we have accumulated over 4,100 LED customers. We are starting to get significant penetration around the world with distribution channels being built on every continent from Africa. Next, let me quickly summarize our module and wafer production shipments in the quarter shown in 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 Q1, 2016 was about to $0.39 and we expect the cost per watt to further decrease in the coming quarters. Total solar module shipment in the first quarter were 351 megawatts compared to 373 megawatts in Q4 of 2015 and 496 megawatts in Q1 of 2015. The year-over-year decrease reflects our gradual exit from the OEM business as we successfully transitioned our business model to focus on project development. Wafer shipments were 351 megawatts compared to 270 megawatts in Q4 of 2015 and 195 megawatts in Q1 of 2016. The pie chart on the right highlights the geographic breakdown of module shipments in the first quarter. China represents around 24% of our total shipments. Japan was about 13%, Europe was about 7% and the U.S was approximately 3% and the rest of the world about 53%. Our module ASP decreased slightly to 52 per watt in Q1 2016 from 54 per watt in the fourth quarter of 2015. Finally, we can conclude with guidance, which is on Slide 15. The revenue outlook reflects continued shift of OEM productions from external sales and towards proprietary project investments. We believe that shift, we also improve gross margin and overall profit benefit. In the second quarter of 2016 we expect revenue in the range $280 million to $290 million and gross margins to be approximately 18%. For the full year we continue to 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 have for us. Operator, please go ahead.

Thank you, [Operator Instructions] our first question comes from the line of Patrick Jobin from Credit Suisse.

Hi, this is Maheep on behalf of Patrick, thanks for taking the question. On Q4 could you just help us understand the geography split, rest of the world was a big portion around 53% in the quarter versus just 30% in the last quarter, so could you help us understand where that's coming from? And as a follow up can you also help us understand the challenges in the quarter you've been talking about in the press release and how do you see that developing in Q2 and second half? Thanks.

Okay so the geographic mix, I think for the rest of the world about 53%, which mainly -- the big part of that is from India which accounts for about 38% and the other are from the rest of the world like from Asia and South Africa. And for the Q2 and beyond we expect that in Q2 actually a bigger part will come from China which accounts for about 40% to 50%, but in the second half I think the -- from Asia requirements will grow compared to Q2.

Thanks and just on the downstream side of the business can you help us with your target for the whole year, are you still on track for shipping more than 100 megawatts -- sorry selling more than 100 megawatts in the year and how should we think about the split between wafer and module this year, thanks.

Yes, I think for the project side we remain on the outlook about to a 100 megawatts to be sold this year, we will construct more, but we estimate the selling would remain the same, and for the module and wafer, the wafer -- the external selling of wafer will increase as we expanded our capacity and for the module selling it will remain almost the same level.

Thank you, I'll get back in the queue.

Thank you for the question next question comes from the line of Philip Shen from Roth Capital Partners, please go ahead.

Hi everyone this is Justin, I'm on for Philip today. So the module ASP in Q1 dropped a bit versus Q2, just wanted to understand the reasons for this decline is it -- is a big part of it because of increased shipments to India. And then could you give us a sense for what blended ASPs could be in Q2.

[Foreign Language] Okay so Mr. Li thinks that he expects the stable market in the first half of this year and he expects that there will be a demand from the -- some demand in China as projects, as people are rushing to complete a project in China before the first half of the year and the decrease -- the decline of ASP is because we reduced our shipment to the U.S. market.

Okay, great. So if there's a rush in Q2 in China what can you say about your visibility into the demand into the second half? Do you expected a decline in China because of that pull-in effect?

[Foreign Language]. Well he expect that there will be flat season from the month of July, but he expect there will be bounce in demand in Q4, but generally speaking he expect a lower demand for the second half of the year then first half of the year.

Okay got it and then may be one on the LED business from a bigger picture perspective, just want to know, how large could the LED business be and then as the business grows, do you continue to expect margins of greater than 30%?

[Foreign Language]. So we now have a customer of 4,140 at the end of March and generally speaking we’ve 300 to 400 new customers every month. So now the gross margin is about 30% and because this business is currently new, but he expects 20 million of revenue for the quarter by the end of this year and he expect the gross margin to inclined to with the increase of a purchase, now he expect gross margin of over 40% in the future.

Thank you for the question. Next question comes from the line of Paul Strigler from Esplanade.

Hey guys nice quarter, just trying to understand the gross margin guidance. So you guys I understand your expanding into LEDs and you tend to slow some projects downstream, but you guys are still [indiscernible] with polysilicon and module pricing sort of continues to fade a little bit. And two, how are you -- can you help me understand why gross margins would be up tow over two [ph] and my other question related to that, are you recognizing revenues in profit on electricity sales on projects you intend to sell?

[Foreign Language] The second question is, if we recognize the revenue from the electricity sales right?

On the profit you intend to slow, I thought you were supposed to reduce the carrying basis on your balance sheet and then when you sell the project, you’ll recognize a higher gross profit that you weren’t recognizing in the electricity revenue and margin on projects you intend to slow.

I answered your second question, we only recognized the electricity revenue for Romania project which we take it as fix asset, for other projects we under already demand, we’re going to sale them and don’t recognize the revenue of the electricity. [Foreign Language]. Let us answer your first question about the gross margin right? Well let us answer you first question. [Foreign Language]. Well, Mr. Li says there is an increase of a gross margin is due to the structural change in our business model with the focus in the higher business assessments [ph] such as solar project sales, which has a gross margin of over 20% and LED business which has gross margin of over 30% that was the main driver to the gross margin in client in the future.

Okay. It just seems like those are still very small percent of your total retail revenue and that I guess, even if those numbers were true, just given the percents [ph] in Q4 -- sorry Q1 you would basically we expecting relatively flat gross margins from your modular and wafer business. Is that a fair statement?

[Foreign Language] Well, we expect relatively stable gross margin in wafer and module services. We expect decline in ASP, but we also decline in the costs too.

Alright guys. Thanks very much.

Thank you.

Thank you for the questions. [Operator Instructions]. See no more questions in the queue. Let me turn the call back to Rebecca Shen for closing remarks.

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. We’re pleased with our first quarter performance and the direction of the company. Our strategic shift to the project business continues to gain traction, we’re developing a robust pipeline of projects around the world and expect to further monetize our downstream efforts. This will in term provide a social capital infusion enable us to strengthen our balance sheet as we look to the remainder of 2016, we’ll maintain our commitment to growing profitability, prudently managing our operations and remaining financially strong, we believe we’re in position to execute well and build a great foundation to increase shareholder value in 2016 and beyond. That concludes our call today. You may all disconnect.