ReneSola Ltd (SOL) Q3 2016 Earnings Call Transcript

Ralph Fong - Investor Relations, The Blueshirt Group Xianshou Li - Chief Executive Officer Maggie Ma - Chief Financial Officer Rebecca Shen - Director of Investor Relations

Justin Clare - Roth Capital Partners, LLC Maheep Mandloi - Credit Suisse

Ladies and gentlemen, thank you for standing by and welcome to the ReneSola Limited Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be presentation followed by a question-and-answer session [Operator Instructions]. I must advice that this conference is being recorded today, Tuesday 29, November, 2016. I will like to hand the conference over to our speaker today to Mr. Ralph Fong. Thank you. Please go ahead, sir.

Hello, everyone. Thank you for joining us on ReneSola’s conference call to discuss third quarter results. We released third quarter 2016 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 a short presentation available on the 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 the 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 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 provision 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 out 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, 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 the business and our performance. Then, Maggie Ma, our CFO, will present operating and financial details for the third quarter and our updated guidance. We will then open the call to Q&A. I would like to start with a recap of the third quarter. Please turn to Slide 3. We experienced a noticeable decline in revenue due to challenging market conditions especially in China. As you are all aware, the solar industry is cyclical and we are again in the midst of the downturn. Demand has slowed in most regions of the world for a variety of reasons. In China, the FIT reduction that occurred mid-summer poured a significant amount of activity into the first half. Project constructions slowed even as more equipment capacity [Indiscernible] across the industry. In the U.S., there is uncertainty around the status as investors have credit, which normally support the IR solar project. Of course, we must operate prudently during down cycles; our strategy is to keep the Company stable every time and striding good times. We will continue to focus on project development in mature stable market while incubating interest in few opportunities such as LED where we seek to maintain a stable business in wafer sales and models. Meaning we will run our business as a cash with little capital needs and no capacity expansions this should enabled us to continue our three year plus paying down debts. Looking at specifics of the quarter revenue of a 187 million was down 49 year-over-year and 25% sequentially. This was below our guidance of approximately 200 million. The miss was due to a decrease in solar product shipments coupled with significant pricing pressures. The LED business was also a bit soft, recording an 8.9% sequential revenue decline. Gross margin of 10.1% was down from 16.1% in a same period last year and from 16.5% in Q2 and was in line with our guidance. Increasing poly silicon prices, combined results wafer module selling prices accounted for most of the gross margin pressure. On the bottom line, we recorded a net loss of 20.5 million, which compares to a net income of 8.6 million a year ago. EBITDA declined 84% year-over-year, although the financial results we discontinued to execute on key strategic goals in downstream project developments. We continued to gain traction in developing robust pipeline of future projects across different geographies. We now have over 1-gigawatts of projects in various stages of development. Our shovel-ready pipeline features 428 megawatt in the U.S., UK, Turkey, China, Japan, Canada and France. This gives you a sense of the size of the upcoming monetization opportunity of project assets. The UK remains an excellent market for us and the recent activity highlight our competitor advantage is there. We recently signed an agreement to sell six utility scale projects there to an European investor. The projects have the combined capacity of approximately 26-megawatts; those show slowdown those four utility scale projects we sold in Q2. The 20-megawatts sales generated 27.8 million of revenue, which we recognized in Q3. North America is also a large and robust market for us. Our U.S. shovel-ready pipeline is approximately 105-megawatts project and we intend to commence construction of these projects in 2017. As we discussed last quarter, we began developing rooftop projects in China we see an opportunity domestically for smaller projects with more attractive economics, smaller installations on commercial, industrial and residential dividends can be cost [Indiscernible] for the building owners and can provide good [Indiscernible]. We now have about the 187-megawatts these types of projects in our shovel-ready pipeline. We expect to build all of those in 2017. In general, the outlook is boldest for all of our project development efforts in 2017. We intend to construct approximately a 130-megawatts project in Q4 and Q1 next year and monetize projects starting from Q2. Furthermore, in the domestic China market our targets will have more than 200-megawatts for generation projects in parallel with the government by the end of 2016. In closing while we are now satisfied with our results. We are managing the Company prudently. We are positioning ourselves to return to growth and profitability in the coming quarters. Probably it remains our focus while we also continue to deliver high quality solar equipments; we believe this will strengthen our competitive advantage. Meanwhile, we retain our focus on tight cost control and cash generations. We intend to continue to strengthen our balance sheet even during the down cycles. Let me now turn the call over to Maggie for details on our financial performance. Maggie.

Thank you, Mr. Li and Rebecca, and thank you, everyone, for joining us on the call today. I will review our operations and the financial performance for the third quarter 2016, and then discuss our outlook. Let's begin with Slide 4, revenue of 187 million for the third quarter was down 25% sequentially and down [Indiscernible] year-over-year, falling short of our guidance of 200 million as Mr. Li discussed, the shortfall was due to the unfavorable market conditions, which negatively affected solar product pricing and product shipments to external. Gross profit of 18.9 million declined to 54% sequentially and 68% year-over-year, but was in line with our guidance. Q3 gross margin was 10.1%, down from 16.5% in Q2 2016 and 16.1% in Q3 2015. The sequential reductions resulted from a lower wafer and major ASPs, coupled with an increase in raw material cost. Operating loss for the third quarter was 11.9 million compared to operating income of 6.4 million last quarter. Operating expense for the third quarter of 2016 was 30.7 million down 11.6% sequentially and down 35.9% year-over-year. The decrease in operating expenses in this quarter was largely attribute to tight cost control initiatives. Sequentially SG&A expense decreased 16.5% and R&D expense decreased 15%. We are taking a more cautious approach suspending a number of arrows in particular; we are prudently managing our discretionary expense across the company. As Mr. Li noted we intend to remain a healthy company during the time cycle and be ready for higher growth and a better profit as the industry recovers. Below the operating lines now operating expense of 10.6 million includes net interest expense of 7.7 million and a foreign exchange loss of 3.3 million offset by gains on derivatives of 0.3 million. Net loss for the third quarter was 20.5 million, which compares to a net income of 5.5 million in Q2 of 2016 and 8.6 million in the same quarter last year. Loss per ADS was $0.20 in the quarter, compared to earnings per ADS $0.05 in Q2 of 2016. Slide 5, provides a summary of the key line items of our income statement over the last several quarters. Please turn now to Slide 6, which highlights portions of our balance sheet. Cash and equivalents including the restricted cash 139.4 million at the end of third quarter, down 24 million during the period. The decrease is primarily due to the repayment of our fully pledge loan. Total debt was 699 million, down from 717 million as of June 30, 2016. Total borrowings decrease by 17.5 million in the quarter, as a company pay down short-term debt in the third quarter. Our long-term objective remains to reduce debt substantially we have built significant enterprise value in Venezuela and that we strongly believe that each dollar of debt reduction will yield a similar increase in the value of the company’s equity. Now, let’s move on to the details on the project pipeline. Slide 7 shows our recent history of sales including the two projects in Japan this quarter. Slide eight shows our geographic footprint. And slide nine breaks out to the shovel-ready pipeline by country. Our aggregated pipeline now sent at approximately 1-gigawatt of project in various stage of development of which 448-megawatts are project that are shovel-ready. We intend to construct to 130-megawatt of the shovel-ready project in Q1, 2017. Slide 10, summarize the results for the LED business. After several conceptive quarters of top line growth, we experienced a decrease in revenue in the third quarter. Revenue came in at 7.1 million down 9% sequentially. Gross margin was nearly 38% in the quarter. We still have an optimistic outlook for growth in LED business, because market penetration around the world is ongoing. As of the end of September, we had over 4,050 active customers. Furthermore, we recently begin working in partnership with sales agents in the U.S. and the Europe. Based on early results, the new sales channel is effective in capturing new sales opportunities for us, which we believe should drive sequential top line growth in Q4. Next, let me touch on our module and wafer product shipments in the quarter shown on Slide 11. Our module and wafer business is still receptive. Given the cost reduction initiatives, we put in place. Our in-house manufacturing cost per watt in Q3 was in high 30s due to production reduction and high material cost, and we expect the in-house cost per watt in Q4 will be controlled in mid 30s and should be further decreased to 2017. Total solar module shipments in the third quarter were 191-megawatts compared to 282-megawatt in Q2 of 2016 and 405-megawatt in Q3 of 2015. The year-over-year decrease of 100 reflect our gradual exit from OEM business as we successfully transition our business model to focus on project development, but on the other hand the decrease was aggravated due to some sales order that were performed to Q4 of 2016. Before we see that the module shipment in Q4 will be recovered through largely over 300-megawatt, wafer shipments in Q3 was 291-megawatt compared to 423-megawatts of Q2, 2016, and 342-megawatts in Q3 of 2015. The pie chart on the right highlights the geographic breakout module shipments in the third quarter while demand in China showed as expected. China represents 56% of our total shipments in the quarter. Japan is an important market for us, representing 9%. India has emerged as another important growth market for us representing 21% in Q3 U.S. represented 2%; and the rest of the world 12%. Our module ASP decreased meaningfully to $0.45 per watt in Q3 2016 from $0.53 per watt in the second quarter of 2016. We cannot ship much to the U.S., which typically commands higher pricing. Finally, we will conclude with guidance, which is on Slide 12. In the fourth quarter of 2016, we expect revenue to be in the range of 220 million to 240 million and gross margin in the high single-digits. Before we go to the question-and-answer segment of our call I would like to take a minutes to address the continued Listing Standards notice from the NYC. On November 7th the company received the notice from the NYC saying that it do not meet the NYC’s price question [Indiscernible] for continued listing for a constructive 30 trading days periods. The average closing price of our ADS was less than $1 and the NYC growth. We have six months to regain compliance physically by getting our price about $1. We do expect security efficiency within the [Indiscernible]. We are actively considering several possible action to gain compliance including a reverse split and the share buyback. With that, we would now open to take your questions. Operator, please go ahead.

Ladies and gentlemen we will now begin the Question-and-Answer Session. [Operator Instructions] Our first question comes from the line of Philip Shen of Roth Capital Partners. Please go ahead, sir.

Hi. Everyone, this is Justin on for Phil today. That your modular margin was about 13% in Q3 based on your commentary. I was just wondering if you could share what actually it was for modules and for wafers in Q3 and then give us what your expectations are for each business in Q4 as we've seen our rebound in wafer pricing but modular pricing but modular pricing appears to be continuing on a downward trend. Thank you.

Okay, so I think compared to other peers that we the Q3 margin is little lower than our peers like in the mid-teens percent. That is because our the cost for the ASP of wafers decreased a lot in Q3. And when going to Q4 I think the ASP of wafer already gets recovered from Q3 so we can't expect that the margin of module selling and wafer selling will go back to like the nearly 10% marginally in wafer for Q4?

Okay, so each one will be nearly 10% module and wafer for Q4?

[Foreign Language].

Right so the major part to the gross margin will be higher and the lower for the wafer side, the margin will be lower than the average.

Okay, got it. So then looking further, ahead we are in kind of challenging environment right now. I was wondering how long do you expect that the environment to remain challenging? When should we expect to see point where supply and demand are in better balance?

[Foreign Language].

He said the over capacity will last for a long period and the supply demand situation would fluctuate with the policy. For example, he mentioned that for the China he expects Q2 or Q3 that the pricing would go up, the market will be pretty good, because there will be a deadline for another line of subsidy cut. So the pricing will be pretty good before that.

Okay it makes sense. And then moving to your downstream business. You mentioned plans to construct the 130-megawatts in Q4 and Q1 of next year, could you share which region those projects are located in. And then for the full-year, I think you previously talked about 300-megawatts to 315-megawatts of project sales; can you update us on that plan, whether you still expect that?

[Foreign Language].

He said that we have 8-megawatt under construction in the U.S. right now, and have claim to start construction those another 27-megawatts in the U.S. for Q1 next year. And then for Turkey we planned to build 12-megawatts for Q1 next year and then 9.3-megawatts in the UK market for next Q1 and the rest are from the China domestic market.

And then for the full-year, do you still expect the 300-megawatts to 350-megawatts?

[Foreign Language].

So, Mr. Li said that we have around 448-megawatts of projects that are in the status of shovel-ready. So he expects that we plan to build a 130-megawatts to a 140-megawatt per quarter.

Okay. Thank you very much for the questions. I’ll jump back in the queue.

Sure.

Our next question comes from the line of Maheep Mandloi of Credit Suisse. Please go ahead.

Hi. Thanks for taking my question. Could start talk about 2017 margins as in your plan to achievement 30s cost by the end of Q4. How should we think about the cost and module ASP next year and the margin levels?

[Foreign Language].

Well, Maheep he said, he expect for the whole year next year overall gross margin for the company will be around 14% of which manufacturing business will be around 8% to 10%, but LED business as well as the project business will contribute higher gross margin. So that makes the overall gross margin to be around 14% and he expects the whole year revenue to be around 1 billion to 2 billion for next year.

Thanks for the color. And just looking a bit downstream business, I believe in the last question you said 130-megawatts to 140-megawatts per quarter of downstream project construction through the next year. So how do you plan to fund the projects next year and then I have a follow-up on the monetization.

[Foreign Language].

Okay. We have different strategies to cope with different countries. So actually in China, we have approached different financing institutions right now. And we can expect we get the financing starting from Q4 and Q1 for Chinese projects. And for the Turkey and the U.S. marked projects we have already identified the end buyer therefore with the support of end buyers we will get to be a project financing from various banks and various financing institutions.

And just on Turkey and U.S. could you give some more color on who the end buyers are or what the levels are they seeking on these projects.

Now in Turkey for the turkey projects we are now…

[Foreign Language].

Okay so the end buyers for Turkey projects is from the Europe and from Germany.

[Foreign Language].

He said we have to secured the buyer for the 8-megawatt projects under construction in the U.S. and then we are already looking for buyer for the 27-megawatts we plan to build next Q1.

Thanks. And just lastly on the LED business we did see a slowdown in Q3. Can you talk about what drove that slowdown and how should we think about it in Q4 in terms of just the revenue growth for LED business?

[Foreign Language].

In fact that the reason that the LED business went down in Q3, the first reason is because of the holidays in Europe countries and the second reason is that we are having an internal consolidation of the LED business, we want to control this trends and for Q4 the excess development is to hit 10 million.

That's great. Thanks.

Thank you. [Operator Instructions] There are no further questions at this time. I would like to hand the conference back to Mr. Fong. Please continue.

Hello everyone. So right now let me turn the call back to Rebecca for closing remarks.

Thank you operator. Let me make some closing remarks on behalf of Mr. Li. While Q3 financial results fell short of the expectations, we are optimistic about the overall deduction of our company. Our strategic shift to project development continues to gain traction. Our pipeline continues to grow, which has crossed the 1-gigawatt threshold. We intend to grow our project development business significantly in the quarters ahead in keeping with our plans to focus our efforts and the best opportunities for trusted and rapid return on investments. Again, I want to reiterate that our focus remains on creative long-term shareholder value with a balanced growth strategy and strong focus on profitability through operational excellence. Our business remains solid and we are committed to performing well and build in financial strength relative to industry peers in a challenging environment. That concludes our call today, you may all disconnect.