ReneSola Ltd (SOL) Q4 2016 Earnings Call Transcript

Gary Dvorchak - MD, Bushhead Group Asia Rebecca Shen - Director, IR Xianshou Li - CEO Maggie Ma - CFO

Justin Clare - ROTH Capital Partners Maheep Mandloi - Credit Suisse

Hello, ladies and gentlemen. Thank you for standing by for ReneSola's Fourth Quarter and Full Year 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] Please note that we're recording today's conference call. I will now turn over the call to Mr. Gary Dvorchak, Managing Director of the Bushhead Group Asia. Please go ahead, Mr. Dvorchak.

Thanks. Hello, everyone. Thank you for joining us on ReneSola's conference call to discuss four quarter and full year 2016 results. We released the results a little bit 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 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 then review our fourth quarter and full year of 2016 financial results in detail. Before we continue, on Slide 2, please note 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 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. 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 important strategic comments about business and our performance, then Maggie Ma, our CFO, will present operating and financial details for the fourth quarter and full year 2016 and provide 2017 guidance. We will then open the call to Q&A. Now let me quickly recap our Q4 and full year 2016 results. Please turn to Slide 3. We've reported revenue of $232.1 million for the fourth quarter of 2016, in line with our expectations. We shipped approximately 655 megawatts of solar products, a 30% sequentially and essentially flat compared to the fourth quarter of 2015. The LED distribution business was solid, recording 31% sequential revenue increase. The company's overall loss margin was 2.1% below our guidance. On the bottom line, we reported a net loss of $25.5 million. For the full year 2016, we reported revenue of $929.8 million and shipped 2.6 gigawatts of solar products. This compares to revenue of $1.28 billion and total shipments of 2.75 gigawatts of solar products in 2015. LED sales were $30.4 million. Loss margin was 11.8%, growth of 14.7% in 2015. We reported a net loss of $34.7 million, which compares to a net loss of $5.1 million a year ago. EBITDA declined 30% year-over-year. Although market conditions were challenging in 2016, we continue to execute on a strategy that we'll detail in the second half of 2015, shifting our focus toward the downstream project development business and away from manufacturing. Additionally, we're committed to establishing the LED distribution business, improving our balance sheet and reducing our cost structure with the goal of delivering consistent profitability. Now, let me update you on downstream project development, which is at the corner of our transformation. As we communicated to you in prior earnings calls, downstream projects remain a favorable opportunity global and equipment manufacturers like this have a natural advantage of designing and developing projects. I am proud that we continue to gain traction in developing the builder's pipeline of future projects across different geographies. We now have over 1-gigawatt projects in various stages of development. Our shovel-ready pipeline features 707 megawatts in the U.S., the UK, Turkey, China, Japan, Canada, France and Poland. In addition, we have approximately 335 megawatt project under construction and over 550 megawatts. We expect to be built in 2017. This gives you a sense of advice of upcoming monetization opportunity of project assets. The UK remains an excellent market for us. A recent activity continues to highlight all comparative advantage there. Recognized revenues in six utilities growth projects in the United Kingdom sold in the fourth quarter. This project had approximately 26 megawatts of generating capacity. In addition, we intend to sell approximately 40 megawatts project this year, of which 10 megawatts are under the block 1.2 program and should connect to the grid by the end of March. The U.S. is also a large and robust market for us. We plan to construct around 108 megawatt projects in 2017, of which 70 megawatt on community solar projects, which had higher PPA price than utility projects. Our U.S. projects are located in California, North Carolina and Minnesota. In January 17, we won 13 utility projects in Southern Poland, each with an install capacity of 1 megawatt. The projects are eligible for guaranteed tariff and a 15-year power purchase agreement and are expected to be connected to the grid by December 2017. In Canada, we intend to construct approximately 9 megawatts of small scale utility projects under the FIT program in the current calendar year. In Turkey, we expect to construct 13 megawatts of projects this year. All of the projects are unlicensed, thus qualifying for FIT of 134 per megawatt hour. In our domestic market of China, we continue to see an opportunity for smaller projects with more attractive economics. Smaller installations on commercial, industrial and residential buildings can be cost-comparative for the building owners, provide good IRRs and gets the support of the Chinese government. According to China's 13 five-year plan for the development of the power industry, this country is targeting an install capacity of distributed generation of solar power of 60 gigawatt by 2020. China has 10 gigawatt install capacity of distributed generation solar power at the end of 2016, according to the National Energy Administration. As of March 20, the company had approximately 392 megawatt of solar rooftop projects and some of it already staged in China. All of the projects are on file with the National Development and Reform Commission and the company has obtained legal rights to develop these projects. The projects are located in the eastern and central part of China. We intend to commence construction of all of these projects within the current calendar year. We continue to leverage our global footprint and brand equity to develop an LED distribution business. This remains an exciting new opportunity for us, which will expect will create a next-later of growth and total product development. As I mentioned earlier, the LED business delivered encouraging financial performance in the fourth quarter. We saw over 30% sequential revenue growth with the gross margin of approximately 26% and had approximately 4,200 customers at year-end. The energy efficiency market remains a very large and growing market and LED lighting is a critical element. We continue to expect this market to expand substantially as energy efficiency matches its growth as a trend around the world. We continue to position ourselves to capture this opportunity in the years ahead. Now let's turn to another key strategic objective. We remain committed to generating cash and paying all debts. I am proud that we strengthened our balance sheet in 2016 by paying on debts and repurchasing all of the remaining convertible notes. We have retired notes in the first quarter to improve our financial flexibility. In the fourth quarter, we further reduced total debt by approximately $775 million to $624 million. We'll continue to streamline operations with high cost control during the down cycles times. While we take the cautious approach to spending in a number of areas, we do plan to invest $50 million this year to replace our current manufacturing equipment with Simon-wide [ph] cutting technology, we believe this will increase wafer capacity by 200 megawatts and reduce silicon usage, thus lowering our overall production cost. Finally, let me reiterate our commitments to the shareholders who are the owners of the company and our partners, operating efficiently and profitably is our primary goal, which we believe can drive a high evaluation for the company all the time. In addition, a prudent return of capital often reflects our commitment to shareholders, which this is again in the fourth quarter while we repurchase 725,850 ADS before the rebirth were at a cost of approximately $0.5 million. I will close my comments by noting while our Q4 and full year financial results were mixed, we are optimistic about our opportunities in 2017 and beyond. We're working diligently to create what we believe is the path to sustained profitability. Project development remains our focus while we also continue to deliver high quality solar products. In the meantime, we will focus on high cost control, cash generation for the strengthening of our balance sheet. [Indiscernible] solar team for their ongoing hard work, passion and dedication as we work together towards executing on our strategy to transform ReneSolar from the TV product manufacturers and into a multi-faceted provider across the solar value chain. Now, let me 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 on the review of our operations and the financial performance for the fourth quarter and the full year of 2016 and then discuss our outlook. Let's begin with Slide 4. Revenue of $232 million for the fourth quarter was up 24% sequentially and down 22% year-over-year. Q4 revenue was in line with our guidance for $220 million to $240 million. The year-over-year decline was largely due to low solar product pricing and the fewer product shipment to external customers. Revenue for the full year was approximately $930 million, down 27.5% when compared to last year. Growth profit are $5 million, a decline of 74% sequentially and 90% year-over-year, falling short of our expectations. Q4 growth margin was 2.1%, down from 10.1% in Q3 2016 and 16% in Q4 2015. The sharp decline in growth margin resulted from an inventory provision, coupled with lower water and module AFPs. The gross margin in 2016 was $109.5 million, down 42% year-over-year. Gross margin for 2016 were 11.8%, which compares to 14.7% last year. Operating loss for the fourth quarter was $21.8 million, compared to operation loss of $11.9 million last quarter and our operating income of $16.9 million in the prior quarter. Operating expense for the fourth quarter of 2016 was $26.8 million, down 3.7% sequentially and down 3.1% year-over-year. The decrease in operating expense in the quarter was largely attributable to tight cost controlling initiatives, coupled with the reversal of the warranty expense, sequentially as G&A expense decreased at 29% and R&D expense decreased 44% when compared to the same period last year. Operating loss for full year 2016 was $15.1 million, compared to an operating income of $29.3 million last year. We'll continue to take a more cautious approach to spending in a number of arrows. In particular we remain prudent in managing our discretionary expenses across the company. As discussed, we plan to remain a healthy company during the down cycle and be ready for the higher growth and the better profit as the industry recovers. Below the operating lines, non-operating expense of $0.2 million include net interest expense of $7.1 million, offset by foreign exchange gain of $4.9 million and gains on derivatives of $2 million. Net loss for the fourth quarter was $25.5 million, which compares to a net loss of $20.5 million in Q3 of 2016 and a net income of $6.7 million in the same quarter last year. Loss per ADS were $1.26 in the quarter and compared to loss per ADS of $1.01 in Q3 of 2016 and earnings per ADS of $0.33 in the prior quarter. We've recorded a wider loss for the year of $34.7 million; this compares to a net loss of $5.1 million last year. Slide 5 provides a summary of key applied elements of our income statement over the last several quarters. Please turn to Slide 6, which highlights portions of our balance sheet. Cash on equivalent improving the restrictive cash ended the year at $133.2 million. During the quarter, the company further reduced that total debt by approximately $75 million. As we paid our short term debt, our long term objectives remains to reduced debts substantially and the we strongly believe that each dollar of debt reduction were here to a similar increase in the value of the company's equity. Slide 7 highlights the recent trend of working capital efficiency. Days of sales outstanding in Q4, declined to 59 days from 86 days in Q3. Days of inventory decreased to 51 days in Q4 from 94 days in Q3. Before I move on to our product sales in the quarter, I want to reiterate that, the entire finance team remains focused on improving our balance sheets and we are happy with the continued progress the team made in the past year. Now, let's move on to the details of our project pipeline. Slide 8 shows our recent history of sales including the six utility projects in the UK in the fourth quarter. Slide 8 shows our geographic footprint and Slide 9 breaks down our project pipeline by country. As Mr. Li mentioned, we now have a pipeline of 1 gigawatt of projects in various stage of development. Our shovel-ready pipeline features 707 megawatts across different geographic regions as shown here on Slide 10. In addition, we have approximately 335 megawatts of project under construction. Slide 11 summarizes results for the LED business. After one quarter, top line decline. In Q3 we again experienced solid growth in LED revenue in the fourth quarter; revenue coming at $9.3 million in Q4, up nearly 31% from $7.1 million in the third quarter. This increase in revenue reflects higher demands from the U.S., Europe and India. Growth margin was approximately 26% in Q4, down from 27% in the prior quarter. We remain optimistic about the growth prospect from the LED business. At the end of December, we have about 4,200 active customers. We believe we can leverage our brand name and the global distribution footprint to build in our accessed high margin business, while the LED business accounted for approximately 3% of total revenue in 2016, respected to grow into a meaningful financial contributor in the year ahead. Next, let me summarize our module and wafer production meant in the quarter shown on Slide 12. Our module and the wafer business remains an attractive business segment, given the cost reduction in each initiatives we're putting in place. As anticipated, our in house manufacturing cost four launch in Q4 was in the $0.35 due to declines in processing and [indiscernible] cost, with that in-house cost per watt in 2016 to further decrease. Total solar module shipment in the fourth quarter was 331 megawatts, compared to 191 megawatts in Q3 of 2015 and 373 megawatts in Q4 of 2015. The year-over-year decrease reflects our gradual exit from the OEM business as we successfully transition our business module to focus on project development. The sequential increase was due to higher demand from the domestic market. Wafer shipment was 306 megawatts in Q4 of 2016, compared to 291 megawatts in the previous quarter and the 270 megawatts in the same quarter last year. The pie chart highlights the geographic breakdown of module shipment in the fourth quarter, demanding China rebounded in Q4, which represent 59% of our total shipments in the quarter. Japan remains an important market for us, representing 7% of total shipment in Q4. India continues to be a growth market for us, representing 6% in Q4. The U.S. accounting for less than 1% and the rest of the ward was about 18%. Our module AFP declined to $0.40 per watt in Q4 2016 from $0.45 per watt in the third quarter of 2016 compared to prior to the quarter within now ship March to the U.S. in Q4 which typically commands higher pricing. Finally, we concluded guidance which is on Slide 13. In the first quarter of 2017, we expect revenue to be in the range of $130 million to $150 million external wafer shipment in the range of $240 million to $260 million and external module shipment in the range of 250 megawatts to 260 megawatts. The Q1 revenue guidance reflects our expectations that we will be redirecting more external module shipments to the downstream project. For the full year 2017, we expect revenue in the range of $900 million to $1 billion. Before we go to the question-and-answer segment of our call, I would like to take a minute to cover two other updates. First is our compliance with the New York Stock Exchange listing requirements. On March 1, 2017, the NYC informed us that the company has retained compliance with their continued listing requirement of minimum average of closing price of $1 per share over the previous consecutive 30 trading day's period. The second updates regarding anti-dumping duties being imposed from us in the European Union. I will cross relate detailed demand notes from the UK and the Dutch custom authorities relating to shipments into those countries several years back. These shipments came from our India OEM partners. We believe the authorities are mistaken in their conclusion and we intend to appeal the decision that appears we are up-thought over the course of this year and that we'll update you as we make progress. We would now like to open up the call for any questions that you may have. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Justin Clare from Roth Capital. Please go ahead.

Everyone, thanks for taking my question. Could you share what your margins were in Q4 for module sales, wafer sales and for the projects that you sold in the UK and China?

Overall, the module sales in Q4 were generated like mid-single digits margin for module selling.

Okay. And then what did you see for the wafer sales?

Do you mean Q4?

Yes, in Q4 for the wafer business.

Okay. In Q4, I think there was a sharply decline in wafer price as also with the price of poly was still in the high position in Q4. Actually, the margin of wafer is quite small or we could say that it generate zero margin in Q4. But entering into the year 2017, along with the decline of the poly silicon price, we can't see that margin and also with our further cost reduction in the future, we can't see the margin for wafer will gradually increase in Q1 and Q2.

Okay. Could you share approximately what your expectations are in Q1 for module margins and for wafer margins?

We think that in Q1, the module margin will keep flat because you can see the price declined a little. But however, we at the same time entered into some cost reduction initiative as well as the wafer margins. But in Q1, we can see that since we'll have equipment maintenance in poly silicon plant. So there will be a slight impact to our gross margin.

Okay, great. And then moving to your project business. You have plans to construct over 550 megawatts in 2017. Can you give us a sense for how many megawatts do you put the sale in each region as we move through the year?

[Foreign Language]

For [indiscernible] regions we plan to sell over 140 megawatts this year.

[Foreign Language]

In China, we plan to sell over 300 megawatts.

And can you give us a sense for window sales should happen? Do you expect any product sales in Q1? Or should we be thinking more about Q2, Q3 and Q4?

[Foreign Language]

We don't expect much sales from the [indiscernible] in Q1. But in Q2, we expect around 120 megawatts.

Okay, great. I think that's it for me. I'll pass it on. Thank you very much.

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

Hey, good morning, or good evening over there. Thanks for taking my question. Just on the 2017 guidance, does the $900 to $1 million include those 440 megawatts of downstream sale that you just spoke about? Or does that include any other sales as well?

Right. It includes the project source and it is…

Got that. And how should investors think about cash over here like how much cash do you plan to generate in the year or how much would of that would be used for CapEx in the year? Could you provide some color on that?

[Foreign Language]

So we have invested a lot of money in the project business in the prior year, so we expect that we could balance -- we could recycle the money that we would have invested in the prior year.

[Foreign Language]

And so for other projects such as in the U.S. and China we – we would use project financing to develop those projects.

And in terms of your debt strategy, could you just help us explain how do you -- how do you plan to reduce that in 2017?

[Foreign Language]

We plan to repay -- we plan to pay down the debt the down by 5% to 10% every year. Whenever we have less than $600 million of tax excluding the fully threshold.

And of that final $600 million, how much of the current debt is project debt or project financing related debt?

[Foreign Language]

Around $30 million was project related.

Okay. And just switching gears to the LED business; could you talk about your growth expectations in 2017?

[Foreign Language]

We generated revenue of around $30 million for 2016 but we expect to generate revenue from the LED business of $60 million to $70 million for the year of 2017.

And just last question from me. In terms of module ASPs, you said its $0.40 in Q4 of 2016. How do you see that trending in Q1 of 2017 and later half of this year? Thanks.

[Foreign Language]

Mr. Li thinks that the ASPs is going to turn down in 2017.

Any color on how much that could be in -- by end of this year?

[Foreign Language]

We now see a Q1 ASP of $0.37 right now and we expect that ASP is going to decline by around $0.01 to $0.02 every quarter.

Thank you.

Alright, thank you. [Operator Instructions] Thank you. Seeing that there are no more questions in the queue, 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. We continue to believe that our strategy is the right one as our strategic shift to project development continues to gain traction. We intend to further roll out project development this year and focus on assets on the back opportunities for trusted and rapid return on investments in 2017 and beyond. I also wanted to reiterate that we are committed to creating long-term shareholder value with a balanced growth in strategy and sharp focus on profitability through operational excellence. That concludes our call today, you may all disconnect.

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