Emeren Group Ltd (SOL) 2009 Q3 法說會逐字稿

Hello, ladies and gentlemen. And thank you for standing by for the ReneSola Limited third quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. As a reminder, today's conference is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Julia Xu, ReneSola's Vice President in International Corporate Finance and Corporate Communications. Please proceed.

Thank you. Hello, everyone, and welcome to ReneSola's third quarter 2009 earnings conference call. Our third quarter 2009 earnings results were released earlier today and are available on Company's website as well as on newswire services. You can follow along with today's call by downloading a short presentation, which can also be found on our website at www.renesola.com.

With me today are Mr. Xianshou Li, Chief Executive Officer and Mr. Charles Bai, Chief Financial Officer. Mr. Li and Charles will discuss our business and financial highlights and guidance updates. And we will all be available to answer your questions during the question and answer session that follows.

Before we continue, please note that today's discussions will contain forward-looking statements made under the Safe Harbor provisions of the US 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 US Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statement except as required under the applicable law.

Before I turn the call over to Mr. Li, please be reminded that unless otherwise noted, all figures mentioned during this conference call are in US dollars.

It is now my pleasure to introduce Mr. Xianshou Li, CEO of ReneSola. Mr. Li will give his remarks in Mandarin and I will translate into English. Please go ahead, Mr. Li.

(Interpreted). Hello to everyone participating in today's call. The third quarter of 2009 was another historical quarter for ReneSola, as we leveraged our fully integrated cost-competitive operations to capitalize on a strong return in customer demand for our quality products. Along with increased overall market demand, as global economic conditions continued to improve, we reached a record quarterly shipment of solar products, exceeding our previous guidance while maintaining positive gross profit margins.

These results validate the efficacy of strategies we laid out earlier in the year. These strategies can be found on page four to six of our presentation and included first, to enhance our corporate competitiveness in an increasingly competitive industry through further solar value chain integration, leveraging our leading wafer platform. As such we have become one of the very few solar companies that provides end to end solar manufacturing capabilities, spanning from polysilicon to module production. This strategy allows us to better control costs in each segment of our operation, differentiating ReneSola from its peers, and uniquely positioning the Company to gain greater market share.

The second strategy we have been vigorously pursuing is to continuously drive down production costs through various cost reduction initiatives and technological advancements. We are pleased with the progress we have made on cost reduction. Polysilicon production cash costs from Phase 1 manufacturing in our Sichuan polysilicon facility has been continuously declining, and fell to below $50 per kilogram as of October this year. Our wafer conversion cost decreased from $0.40 per watt in Q2 to approximately $0.38 per watt in Q3. And we expect an additional reduction of 5% to 10% in fourth quarter this year.

Through technological advancement and further supply chain integration, we target to drive down the wafer conversion cost to below $0.30 per watt by the end of 2010. We also target to reduce total conversion cost from a previously planned $1.15 per watt to a range of $1 per watt to $1.10 per watt by the end of 2010.

Now let's move to slide seven for a look at our operating results for the quarter. Total solar product shipments in the third quarter of 2009 were a record 146.9 megawatts, an increase of 71% from 85.9 megawatts in the second quarter of 2009.

Wafer ASP reduction slowed and ASP remained relatively stable in the quarter, declining from $0.93 per watt in the second quarter in 2009 to $0.86 per watt in the third quarter of 2009. We expect a moderate reduction in wafer ASP in fourth quarter and the module ASPs are expected to be in the range of $1.80 per watt to $1.90 per watt in the fourth quarter.

We are also pleased to report another quarter of positive gross profit margin of 3.4%. Our inventories carrying cost was reduced to $74 per kilogram at the end of Q3 from $78 per kilogram at the end of Q2. And it's expected to reach approximately $61 per kilogram by the end of Q4, which will bring our inventory carrying costs closer to the spot market prices.

Please now turn to slide number eight for a look at our production update. As of September 30, 2009 our wafer manufacturing capacity was 825 megawatts. We are now operating at full capacity. We intend to increase the wafer capacity with an additional 175 megawatts in 2010 to reach 1 gigawatt of installed capacity by the end of 2010, if market demand warrants such a condition. Please note these numbers do not include wafer capacities from Jiawei.

As of September 30, 2009 we have annual solar cell and module manufacturing capacity of 25 megawatts and 50 megawatts. We expect cell and module manufacturing capacity to increase to 120 megawatts and 135 megawatts respectively by the end of 2009. We intend to increase cell and module manufacturing capacity to 360 megawatts and 375 megawatts respectively by the end of 2010. Please note again these numbers do not include cell and module capacities from Jiawei.

We announced late last year that one of our key goals was to diversify our key market from domestic China focused to an improved balance between China and international sales. We have made good progress in this regard. Our international business increased by 8 percentage points to approximately 46% of our sales in Q3, compared to approximately 38% in Q2. We will continue to execute on all of these strategies going forward. And we believe they will ensure long-term growth and profitability for our business.

Let me now go through some of our recent business updates in more detail. Please turn to slide number nine. First, Phase 1 of our 3,000 metric ton polysilicon manufacturing facility in Sichuan province started trial production in July this year and has been ramping smoothly with 200 metric tons to 250 metric tons of output expected in Q4.

As I mentioned earlier, production cash costs have been steadily decreasing and have been significantly reduced to approximately $55 per kilogram in October. The production costs are expected to reach approximately $50 per kilogram by the end of Q4 and continue to be reduced in 2010. We expect production costs to reach $40 per kilogram by the end of 2010.

Meanwhile, the development of Phase 2 is on schedule, with mechanical completion and commencement of trial production towards the end of this year.

Secondly, we have successfully completed the integration of JC Solar. We shipped 10.8 megawatts of products in Q3 from JC Solar with a gross profit margin of over 20%. We continue to make improvements in converting efficiencies and we have increased cell efficiencies to 17.5% in Q3 from 17.2% last quarter.

Thirdly, in the third quarter we also signed a share purchase agreement with Dynamic Green Energy Limited, or DGE to acquire 100% of the shares in DGE which owns Jiawei Solar China. Jiawei manufactures solar products ranging from PV ingots to modules and provides OEM services for leading solar manufacturers. We have been working very closely with DGE to meet the conditions precedent for the closing of the acquisition which is expected to be completed by the end of 2009.

After the acquisition is completed, Jiawei will continue to emphasize its tolling business with larger solar customers globally while JC Solar will focus on executing and delivering low cost, high quality modules to smaller system integrators and distributors.

Lastly, as previously announced, Zhejiang Yuhui, ReneSola's subsidiary, has been granted with exclusive development rights of various solar projects in China. We are pleased to announce that the company has made an important step and has received approval from China's central government to begin development of a 1.45 megawatt rooftop project in Zhejiang -- in Jiashan, Zhejiang province.

Finally, let's turn to page 10 of our presentation for a look at the current market conditions. There has been some degree of stabilization in upstream pricing which we believe will lead to increasing profitability next year, as we expect to work through our higher cost of inventories by year end and start using raw materials with carrying values closely resembling spot polysilicon prices. Our strategy of leveraging our wafer manufacturing strengths and moving strategically downstream via our OEM strategy should position us well to capitalize on improving macro trends.

We are also encouraged by the optimism shown by the government in major economies who continue to hold great expectations and visions for solar power. We remain confident that government-backed stimulus plans and subsidies, continued macroeconomic recovery and increasing affordability for solar products will spur continued growth in our industry.

We expect 2010 volumes to be very strong. And indications show China, the US and the emerging European markets will witness increased demand. We feel especially confident in the future of PV industry in China, as the central government is providing significant solar policy support, and commercial banks are willing to deploy lines of credit to fund the solar projects. In addition, China's central government has set a target to generate 15% of its total power from renewable energy by 2010.

Now I would like to turn the call to Charles Bai who will discuss our financial results for the quarter. Please go ahead, Charles.

Thanks, Mr. Li. Good morning and good afternoon to everyone on the call. Before I go into details, please turn to slide page 11 to 12 of our presentation. Net revenues for the third quarter of 2009 exceeded revenue guidance and were $140.9m, an increase of 71% sequentially. The increase in net revenues was primarily driven by shipment volume increase.

Operating loss for the third quarter was $7.8m. This compares to the operating loss of $4m in the second quarter.

Total operating expenses in the third quarter were $12.5m, up from $8.2m in the second quarter. The sequential increase was mainly attributable to $1.2m from a one-off government subsidy granted in Q2 and increased selling, general and administrative expenses associated with the large increase in the shipment volume and recent expansions and acquisitions.

Our R&D expenses grew to $4.8m in the third quarter from $3.4m in the previous quarter due to an establishment of a lab to improve cell efficiency at JC Solar, and added equipment at our wafer lab at Yuhui. As some of the expenses items are upfront onetime costs, we expect operating expenses in Q4 to be similar to that of Q3 and around 5% to 6% of the revenue in 2010.

Third quarter operating margin was a negative 5.5% compared to operating margin of negative 4.8% in the second quarter.

We recognized a tax benefit of $1.4m for the third quarter as a result of deferred tax assets realized, compared with a tax expense of $0.7m for the second quarter of 2009. We expect a tax benefit of approximately $3.5m for the fourth quarter for the same reason.

Net loss attributable to holders of ordinary shares for the third quarter of 2009 was $10.2m compared to a net loss of $3.6m for the second quarter of 2009. This translates into losses of $0.07 per ordinary share and $0.14 per ADS for the third quarter.

Let's turn to page 13 to take a closer look at our balance sheet. As of September 30, 2009 the Company's bank debt comprised of approximately $312.6m in short term borrowings, a decrease from $347.9m in Q2 and approximately $170.7m in long term bank borrowings, an increase from $159.6m in Q2. The total bank borrowings were decreased by approximately $24m.

At the end of Q3 we had $99.3m in the convertible bonds and a cash balance of approximately $95m on our books. With the equity follow-on financing, as of today we have a cash balance of approximately $150m. Our liquidity was improved as we continue to achieve a better balanced repayment profile of our bank borrowing debt through recapitalizing of short term obligations to long term obligations. As of today we have approximately $655m in committed credit lines, of which approximately $475m is drawn and approximately $180m undrawn.

On the topic of CapEx please turn to slide page 14. For the first three quarters of 2009 our capital expenditure cash spending totaled $157m. This was mainly due to investments made in capacity expansion at our Jiashan wafer manufacturing facility, Phase 1 and Phase 2 of our polysilicon manufacturing plant in Sichuan province, and capacity expansion costs at JC Solar.

Capital expenditure spending for the year is expected to be approximately $210m with $50m for the fourth quarter. And we estimate 2010 CapEx to be approximately $110m to -- I'm sorry, $100m to $110m without taking Jiawei into consideration.

Now I will turn the call back over to Mr. Li who will discuss our guidance for the fourth quarter of 2009 and the full year of 2010. Mr. Li.

Thank you, Charles. (Interpreted) We are encouraged by strong volume growth witnessed in the second half of 2009 and expect such resilience to continue into 2010. I am very happy to announce that we expect total product shipments for the fourth quarter of 2009 to be in the range of 175 megawatts to 200 megawatts. And we revise up our full year product shipment guidance from the previous 450 megawatts to 500 megawatts to 490 megawatts to 520 megawatts.

While the ASPs of solar products are expected to trend down in 2010, we expect full year 2010 total product shipment, without taking into account potential contributions from Jiawei, to be in the range of 900 megawatts to 950 megawatts. We also expect to return to profitability in the first quarter of 2010, while achieving an average gross profit margin of 15% for the full year of 2010.

As previously mentioned, without taking contributions from Jiawei, we also aim to reach capacities of 1 gigawatt of wafer, 360 megawatts of cell and 375 megawatts of module manufacturing capacity by the end of 2010.

At this time we are happy -- this concludes our presentation. And at this time we are happy to take your questions. Operator?

Thank you. (Operator Instructions). The first question comes from the line of Jesse Pichel with Piper Jaffray. Please proceed.

Hi. Good evening. Last quarter in Q2 in the question and answer portion of the conference call you guided to margin improvement for Q3. Clearly that was not met. I assume that's because ASPs fell more than expected. But today you're guiding to mid-teens gross margin for 2010, can you tell me what your ASP and cost assumptions are under this guidance? And then I have a follow up question.

Thank you, Jesse.

(Interpreted) Firstly, that's partly contributed by the faster than expected decline in the module ASPs. In second quarter we had recorded a module ASP of over $2.30 and this quarter it's $2.04 and we expect this to continue to drop to $1.80 to $1.90 in Q4. And the second reason for the margin decline is also in Q3 versus Q2 ASPs declined $0.02 more than what we had expected.

Obviously, looking into 2010, we are very optimistic in terms of volume shipment, however we are also very conservative in estimating the ASPs in 2010. We expect wafer price will decline by 5% to 10% while module prices will probably decline by 10% to 20%. However, our cost is expected to decline faster than the ASP declines.

As I mentioned earlier, we will work through our high cost inventories by the end of Q4. By the end of Q4 the inventory carrying cost will be reduced to $61 per kilogram and secondly, our production cost will also fall faster in the same period.

So that's -- maybe I'll just switch to a different question for Charles. Charles, in your press release you mentioned that you're working to meet the conditions precedent to close Dynamic Green, and I'm wondering what are those conditions for the closing?

And a follow-up to that, you have $582m of borrowings plus convert, and the interest expense is only $4m a quarter, which is pretty low interest percentage. Can you help reconcile that? Will that $4m go up to about $6m over the next quarter or two or will it stay at that level? Thanks, Charles.

Thanks, Jesse. As we mentioned, we are working closely with the DG Group for them to meet the CTs and we have many CTs put in place, including some of the things that government approvals for permit, etc. And the progress has been good.

As to the second question, on the interest expense, when you look at the third quarter that was [swimming] in dollars, you are right, Jesse, going forward in the next few quarters we are looking at $6m to $6.5m in our financing costs or interest expenses.

And it seems like your strategy of going downstream has been successful, rather than building a lot of poly capacity and I'm just wondering, you've obviously been winning share here, I would think, can you tell us who your top customers are this quarter, or your new customers? Specifically the international customers increased significantly.

Well, we have, amazing actually, we increased international sales in our sales mix. Our top five customers constitute about 45% of our total sales, and out of these top five, two of them are international and we are in negotiation with additional number of potential customers who are all international for 2010 sales.

Great. Well, thank you very much and good luck with your strategy going forward of downstream integration.

Thank you, Jesse.

The next question comes from the line of Sam Dubinsky with Oppenheimer. Please proceed.

Hi guys, a couple of quick ones. It seems like wafering is the only portion of solar supply chain which has not returned to more normalized levels of profitability. Why is it taking wafer companies so long to catch up since even the cell vendors and the poly vendors and every module company's already at a double-digit gross margin? Maybe you can comment on that?

(Interpreted) To answer your question, the wafer company's profitability has been largely impacted by the polysilicon inventory's carrying cost, especially for our Company, we use FIFO as accounting standard, as such in the market environment when the polysilicon continues to decline, it is negative to the Company. But as soon as we work through high cost inventories and the polysilicon price reach a level of stableness we shall return to normalized margins.

Okay, and just to be clear, that 15% gross margin target for next year, that does not include the Jiawei acquisition?

(Interpreted) You are right.

Okay, so once Jiawei is closed theoretically the gross margin could be higher than that?

(Interpreted) It will be very similar.

It will be similar even with the Jiawei acquisition?

(Interpreted) Correct.

Okay and what geography did those 11 megawatts in modules sell into and where do you think those modules sell into next year for JC Solar?

(Interpreted) Geographically speaking, for the third quarter, we continued to sell into the European markets, especially Spain, Italy and Germany. But during the same time we have done quite a bit of a promotion in the US market, so we do expect to sell a significant portion of our modules into the US market. For 2010 we expect full year of module shipment, about 150 megawatts to 200 megawatts just from JC Solar.

Great, thank you very much.

The next question comes from the line of Vishal Shah from Barclays Capital. Please proceed.

Yes, thanks for taking my question. Can you maybe help us understand how your seasonality looks like in the module business, what is Q1 looking like right now? Thank you.

(Interpreted) Typically December and January are two slow months for the solar world, however this year we have witnessed a very strong fourth quarter, and as such all indications point to a similar quarter for Q1 in 2010.

Can you comment on pricing in Q1?

Modules?

Yes.

(Interpreted) We expect $1.60 to $1.70 per watt.

From $1.80 in Q4?

(Interpreted) Yes.

Great, thank you.

Your next question comes from the line of Lu Yeung of Bank of America. Please proceed.

Thanks for taking my question. Based on your margin guidance next year, can you break it out to what you think the wafer business is going to be normalized to next year and what kind of margin you have for the sun module business?

(Interpreted) We expect about 40% to 60% volume growth from the approximately 500 megawatts expected for 2009, and that is what we expect for 2010.

And what kind of margin do you think the wafer business is going to be in 2010?

(Interpreted) We expect the wafer and the cell and module business lines to be similar margins at around 15%.

And also I have a question on the polysilicon, you expect the cash cost to be about $40 and what would be your assumption for depreciation for poly next year? What kind of production volume do you expect?

(Interpreted) We expect to produce 2400 metric tons to 2500 metric tons in 2010. Our $40 to $50 per kilogram production cost is inclusive of depreciation.

Okay, thank you very much.

Your next question comes from the line of Rob Stone with Cowen and Company. Please proceed.

Two questions if I may, one related to wafers. I wonder if you could give more specifically the wafer ASP change in percentage terms in Q3 and what you're expecting in Q4?

And related to that, why do you expect wafers to fall at a slower rate next year than modules? Thanks

(Interpreted) To answer your first question, we expect Q4 versus Q3 sequential ASP decrease around 2% to 3%. The reason why we expect slower wafer price reductions in 2010 against modules, that is because in 2009 there is virtually no additional new wafering capacity brought into the market versus there is many new capacities including many of the wafer companies that have gotten downstream to the module side. Therefore, as polysilicon prices begin to stabilize and whereas more capacities are added downstream in the module side, we expect wafer pricing to be relatively stable compared with the module prices.

What was the percentage change in wafers in Q3 versus Q2?

It was from $0.93 down to $0.86.

Okay. A question about your plans for capacity expansion. I think you, after giving the figures, said it would be subject to market demand, but if you're operating near full capacity now and Q1 is expected to be similar to Q4, when should we expect your expansion takes place? Wouldn't you need more capacity by Q2?

(Interpreted) After we better manage our balance sheet in Q1 2010.

Okay, thank you.

Your next question comes from the line of Titus Menzies with Libertas Partners. Please proceed.

Good evening, gentlemen and ladies, thank you for taking the time to answer my question. I have a couple to ask here. Firstly, in regards to the polysilicon you had, the high cost silicon you have on inventory, which is above spot price, could you give me an idea of what percentage of total inventory is that that exceeds current spot price?

We couldn't hear your question very well, can you please repeat?

Is that better, can you hear me now?

Yes.

Okay, the first question is in terms of the silicon you have on inventory currently, what percent of it is above the current spot price, i.e. that you need to deplete in Q4 to start realizing a margin recovery?

(Interpreted) When we reported the end of the quarter polysilicon carry value that is actually calculated per ton, so that applies to all of our polysilicon inventory.

Okay, so in terms of the silicon you have in the inventory, how much of it is now still -- do you recognize as being above the current spot price? Is it 10%?

No, all of it, we said about $74 at the end of Q3.

Yes, but -- okay, that's fine. And in terms of the Q4 guidance and 2010 guidance, are you seeing any contribution of solar in Q4, now that we're already halfway into November? How much of the megawatts shipment of sales have you recognized or can you account for in the Q4 period already?

And then 2010, on your guidance of 900 megawatts to 950 megawatts, is that going to be evenly distributed over the four quarters or is it going to mean more first half or second half loaded?

(Interpreted) We expect to ship about 130 megawatts by the end of November. With the Christmas season in December, perhaps December's shipment will be slightly lower. Into 2010 we expect 40%, 45% in the first half and 55%, 60% in the second half.

Wonderful, and if I may just one last question. In terms of going forward, congratulations on gaining new market share, going forward into 2010 are you targeting any new regions or any new types of companies that you want to gain traction with? Without giving any names, but can you guide to any regional penetration that you don't have currently but you're targeting going forward?

(Interpreted) In addition to the US market that I mentioned previously, we will also pay more attention to the China domestic market, (multiple speakers) fairly large increases in volumes.

Wonderful, of course. Well, Julia, Charles and Mr. Li, thank you so much for your time and I appreciate it.

Thanks, Titus.

Your next question comes from the line of Mark Davis with Panmure Gordon. Please proceed.

Hi, everyone. Thanks for taking my questions. It's just really on Dynamic Green Energy, now I know the acquisition hasn't been completed yet, but can you give us an indication of how it's performed during Q3, perhaps give us an idea of shipments, how it improved on Q2 and also what sort of shipment levels you expect to come through in 2010, and if you're getting any interest from other potential customers ahead of the completion? That'll do for now.

(Interpreted) Well, as the deal is not yet closed, I think it's not yet very convenient for us to talk very extensively about Jiawei, but we'll provide a very timely update once the deal closes.

Okay, that would be most helpful. All right then, if there is a question you can answer maybe this is it, Charles, to you, potentially post the acquisition of Dynamic Green you'll have about 6,000 employees. I know that's not as many as some of your competitors but I'm just wondering if there are going to be any areas where you can see some cost savings coming through during the next six to 12 months?

We have done some analysis and we are continuing to find that the analysis of how we're going to achieve synergistic benefits from the acquisition, and obviously we see there is a lot of upside in terms of a supply chain integration, for example, and I think it's too early for us to talk about the details about this cost savings and integrations benefits. But we will be open to talk about it once the acquisition is closed.

Okay, thanks. And just to recap, the reasons for -- the various agreements, the need to be met before the acquisition completes, it's very much government discussions, is that right? Can you just give us a little bit of detail on that?

I'm sorry, could you repeat?

Yes, I just wondered if you could give a little bit more detail on the reasons on the various discussions that need to be completed before the acquisition goes through. Can you just give us a little bit more detail on that?

Well, to the projects we are looking to in the DGE situation, some of the projects we have are currently under development and some of the projects are still waiting for final approval from local government and we would not complete the acquisition before these conditions to be met. So we want to have a clean slate from Jiawei's side and all the government's approvals and permits are made in place.

Okay, so in that case is there any danger that this moves over into Q1 next year?

It's unlikely.

Okay, all right, thanks very much.

Thank you.

Your next question comes from the line of (inaudible), HSBC. Please proceed.

Hello, so sorry, thanks for taking the question. Some bits of my question have already been answered but it'll be helpful to have a reply in full now. Can you give a breakup of the 950 megawatts of shipments in various product types and the average realizations of this product for 2010?

(Interpreted) We expect about 750 megawatts for wafer and 150 megawatts to 200 megawatts for module.

750 megawatts for wafer and 100 megawatts to 200 megawatts for modules.

150 megawatts to 200 megawatts.

Oh, 150 megawatts to 200 megawatts, and the average realizations for these two products.

What do you mean by average realizations?

The full year realization for 2010.

What does that mean, sorry?

Price, price, the product pricing for wafer and modules and cells.

Hello.

Yes, I'm looking for the pricing.

Sir, I'm sorry, what was your question?

Could you please tell the wafer price for 2010, the average wafer price and also the module wafer price for 2010?

(Interpreted) We expect on the wafer side about 5% to 10% decline versus Q4, and module price is about $1.60 for the year.

And this decline of 5% to 10% is over the full year?

Yes.

Thank you very much.

You're welcome.

(Operator Instructions). We're showing no more questions, I would now like to turn the call over to ReneSola's Chief Financial Officer, Mr. Charles Bai, for closing remarks. Please proceed.

In summary, we expect to return to profitability in the first quarter of 2010 as the excess inventory is consumed and our cheaper in-house developed polysilicon flows through our fully integrated operating platform. With a continued focus on cost effective, vertically integrated manufacturing capability we expect JC Solar and Jiawei Solar to bring in significant revenue contributions in 2010, while our traditionally strong wafer business continues to excel steadily.

Again, thank you for joining us today. If you have any further questions please do not hesitate to contact myself, Julia or any of our Investor Relations representatives. Thank you.

Thank you.

Thank you all for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.

Portions of this transcript that are noted "interpreted" were interpreted on this call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.