Emeren Group Ltd (SOL) 2012 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for ReneSola Ltd.'s second-quarter 2012 earnings conference call. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the call over to your host for today, Mr. Tony Hung, ReneSola's Vice President of International Corporate Finance and Corporate Communications. Please proceed, Mr. Hung.

Hello, everyone, and welcome to ReneSola's second-quarter 2012 earnings conference call.

ReneSola's second-quarter 2012 earnings results were released earlier today and are available on the Company's website, as well as on newswire services. You can follow along with today's call by downloading a short presentation available under the Company's website at www.ReneSola.com.

On the call today are Mr. Xianshou Li, our Chief Executive Officer, and Mr. Henry Wang, our Chief Financial Officer. Mr. Li will discuss ReneSola's business highlights and strategy and Mr. Wang will go through the financials and guidance. They will both be available to answer your questions during the Q&A session.

Before we continue, please note that today's discussion 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 statements, except as required under applicable law.

Before I turn the call over to Mr. Li, please be reminded that unless otherwise noted, all figures mentioned during this conference calls 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 read a translation. Please go ahead, Mr. Li.

(Interpreted). Hello, and thank you for joining today's 2012 second-quarter earnings call. If you have downloaded our presentation, please turn to slide four for our Company highlights.

Despite challenging market conditions in the second quarter of 2012, we made significant progress in our module business, while at the same time lowering our overall costs and investing in R&D. We have increasingly focused on our relatively better-margin module business, and in the second quarter we delivered record module shipments. While further ASP declines put pressure on our margins, improvements in our manufacturing processes help lead to decreases in the manufacturing cost of modules, wafers, and polysilicon in the second quarter.

At the same time, we continue to invest in R&D to improve our Virtus technology and develop horizontal products, such as microinverters. We will remain committed to R&D, while simultaneously expanding our sales and marketing reach, to grow our market share and position ReneSola favorably once market conditions improve.

I will now quickly review our shipments. Please turn to slide six for a snapshot of our shipments and financial progress.

Total solar product shipments in the second quarter of 2012 were a record 503.7 MW, an increase of 8.1% from 466 MW in the first quarter. Module shipments rose over 75% quarter over quarter, largely due to the success of our new regional sales teams, plus relatively strong demands from Europe, particularly from Germany, as well as demand from Australia. Wafer shipments decreased 8.3% as a result of strong demand for our modules as we use more of our own wafers in house.

ASPs continued to decline in the second quarter with module ASPs dropping to $0.75 per watt and wafer ASPs dropping to $0.31 per watt in the second quarter, compared to $0.84 per watt and $0.33 per watt, respectively, in the first quarter.

Second-quarter revenues were $233 million, up 10.2% from $211.5 million in the first quarter as a result of higher module shipments.

Please turn to slide seven for an update on our research and development. R&D remained a central focus in the second quarter. During the quarter, we made progress in the development of our Virtus wafer and modules. We developed a second generation of our Virtus wafer, which uses our newly-developed and proprietary in-house manufacturing process, the Virtus A++ process, which produces wafers without the use of monocrystalline seeds. This new manufacturing process results in lower light-induced degradation and lower processing costs, which in turn results in the production of more distributed ingots with greater percentage of high-efficiency products.

At present, our Virtus A++ processing cost is close to $0.12 per watt, significantly lower than our overall processing cost of $0.17 per watt. We are confident we can lower this to $0.11 per watt by the end of the year and we'll continue to invest in Virtus A++ to improve its efficiency.

At present, the Virtus A++ method produces wafers with average cell efficiency of 17.5% and Virtus II modules that generate 250 watts to 260 watts of power, based on 60 solar cells, with the potential to generate as much as 300 watts to 310 watts of power, based on 72 solar cells.

In the second quarter, we also developed a new microinverter, which we call Replus, to be used specifically with ReneSola modules in solar systems for power conversion.

In addition to investing in R&D associated with our modules and wafers, we have also invested in related products by carbon composite materials. We'll continue to develop these products as we advance our technology and manufacturing methods in order to capitalize on current market opportunities.

Please turn to slide eight for an overview of our module business results for the quarter. We've placed enormous emphasis on building up our module business this year. We've substantially increased our international sales and marketing efforts, strategically placing on the ground sales teams in markets where we see strong potential for solar power growth.

At the same time, we continue to invest in improving our module technology and have developed highly efficient Virtus modules based on our Virtus wafer technology. Our strong product line and effective sales teams enabled us to deliver record module shipments of 159.7 MW in the second quarter, up 75.7% quarter over quarter and 145.7% year over year. Although the market remains oversupplied, we are operating at 100% capacity utilization as we continue to win new business.

In the second quarter, we hired over 400 additional staff to support our module manufacturing and expanded our capacity to 1.2 GW to meet growing demand. We also decreased our module processing costs in the second quarter by 10%, compared to the last quarter. We believe we can continue to drive down costs and capitalize on the relatively high margins of the module business once market conditions improve.

We expect to ship 150 MW to 170 MW of solar modules in the third quarter of 2012 and approximately 600 MW for the full year.

Please turn to slide nine for an overview of our wafer business results for the quarter. We continue to be a leader in the wafer space, and our wafer processing cost is among the lowest in the industry.

In the second quarter, wafer processing costs decreased to $0.17 per watt, down from $0.19 per watt in the first quarter of 2012. We expect to further lower our wafer processing costs in the third quarter and to reach $0.15 per watt by the end of this quarter through additional improvements in our manufacturing process.

Despite our success in decreasing our wafer processing costs, declining ASPs have substantially hurt our margins. Therefore, until macro conditions improve, we do not expect to achieve high margins through our wafer business.

Nevertheless, we see our wafer business as our core competitive strength since wafers are the key determinant of modular efficiency. As such, we will continue to invest in our wafer business to develop superior technology, like our Virtus technology, and to improve the efficiencies of our products.

Please turn to slide 10 for an update on our polysilicon production. Our polysilicon plant's progress is still on schedule. Its costs continue to decrease, and they remain central to our long-term manufacturing and cost-reduction strategies.

In the second quarter, we produced approximately 1,119 metric tons of polysilicon, compared to 900 metric tons in the first quarter. Production costs were $25.80 per kilogram in the second quarter, compared to $33 per kilogram in the first quarter, which were higher than usual due to upgrades and maintenance on the state-owned power grid connected to our plant at the start of 2012.

We expect our production costs to decrease further this year, reaching approximately $24 per kilogram by the end of the third quarter and $22 per kilogram by the end of the year, lower than our previous guidance. Also, upon completion of Phase II of our polysilicon plant, we expect to expand polysilicon production capacity to 10,000 metric tons by the end of the year. We expect our Phase II polysilicon production costs to be $18 per kilogram.

Please turn to slide 11 for an update on our systems and project business. In the second quarter of 2012, we further expanded our projects portfolio with the successful completion of a 9.7 MW project in Bulgaria. The project is already connected to the grid and is generating an internal rate of return in excess of 25%.

This is in addition to our 20 MW power facility in Qinghai, China, which was connected to the grid earlier this year and is generating a high internal rate of return. Our Qinghai project has also successfully obtained RMB220 million in financing from the China Development Bank.

At present, we have an additional 16 MW to 70 MW of projects in the pipeline for the remainder of the year. We will remain highly selective in how we choose power projects and continue to focus on due diligence when evaluating project opportunities.

I will now turn the call over to Henry who will discuss our financial results for the quarter.

Thank you, Mr. Li. Please turn to slides 13 through 16 for a look at our financial progress.

As Mr. Li mentioned, our revenue and margins where again impacted by a decline in solar wafer and module ASPs. We also took an inventory write-down of $15.5 million in the first quarter, primarily to reflect the decline in the price of polysilicon.

However, through the successful execution of our cost-reduction strategies, we were able to achieve positive gross profit in the second quarter, a goal we set for ourselves at the beginning of the year.

Margins for our module business remain particularly healthy at about 12.2%. We also achieved positive operating cash flow during the quarter, as a result of improving margin and a strong cash flow management.

We continue to maintain a strong balance sheet relative to our peers. I believe we are in good shape to overcome the solar market's current challenges and to capitalize on opportunities that may present themselves when conditions improve.

Now, I'd like to run through the details of our financial results. Net revenues for the second quarter of 2012 were $233 million, exceeding our guidance and representing a sequential increase of 10.2% from $211.5 million, primarily due to a decrease in ASPs of solar wafers and modules, offset by a significant increase in solar module shipments.

Gross profit for the second quarter of 2012 was $1.3 million, compared to a gross loss of $8 million in the first quarter of 2012, primarily due to lower costs and the increased shipments of our solar modules, which achieved higher margins relating to solar wafers as we realized a reversal in our total warranty reserve expenses of $7.8 million due to decrease in ASPs of modules. This was offset by an inventory write-down of $15.5 million, primarily as a result of the decline in the price of polysilicon.

Gross margin for the second quarter of 2012 was 0.6%, compared to a gross margin of negative 3.8% in the first quarter. Gross margin, excluding the reversal of our product warranty reserve expenses and the inventory write-down, would have been 3.9%.

Operating loss for the second quarter of 2012 was $34.6 million, compared to an operating loss of $37.8 million in the first quarter of 2012. Total operating expenses for the second quarter were $35.9 million, up 20.8% from $29.8 million in the first quarter. The sequential increase in operating expenses was primarily due to an increase in sales and marketing expenses, an increase in research and development expenses to improve the technology at our Sichuan polysilicon plant and a significant increase in other general expenses as a result of a $1.8 million provision for a lawsuit resulting in a primary judgment against ReneSola and fees related to trial production at our Sichuan steel wire plant.

Operating expenses represented 15.4% of total revenue in the second quarter, an increase from 14.1% in the first quarter of 2012.

Operating margin for the second quarter of 2012 was negative 14.9%, compared to an operating margin of negative 17.9% in the first quarter of 2012.

We recognized a tax benefit of $16.3 million for the second quarter, compared with a tax benefit of $6.2 million in the first quarter of 2012.

Net loss attributable to holders of ordinary shares for the second quarter of 2012 was $34.8 million, compared to a net loss of $40.2 million for the first quarter of 2012. This represents basic and diluted loss per share of [$0.20] (Company corrected after the conference call) and basic and diluted loss per ADS of $0.40.

On the balance sheet, as of June 30 we had increased our overall debt to $821.3 million, excluding $111.6 million due in convertible notes.

Total bank borrowings increased by about $20.5 million sequentially, with short-term borrowings increased from $662.6 million at the end of the first quarter to $691.1 million at the end of the second quarter.

Our net cash and cash equivalent provisions was $314.2 million, and total cash, including restricted cash, was $394.2 million at the end of the second quarter of 2012, compared to a net cash and cash equivalent provision of $338.9 million and a total cash, including restricted cash, of $388.3 million at the end of first quarter.

Our CapEx plan remains conservative for the year. We expect to spend $59 million in the third quarter to expand our polysilicon production capacity, as well as to improve our manufacturing processes.

Please turn to our guidance, which can be found on slide 17. We expect the overall solar market to remain challenging in the third quarter. We expect total shipments to be in the range of 510 MW to 530 MW with module shipments in the range of 150 MW to 170 MW. Revenues are expected to be in the range of $200 million to $220 million.

For the full year of 2012, we maintain our previously-announced guidance of 2.2 GW to 2.4 GW of total solar wafer and module shipments.

At this time, we are happy to take your questions. Operator, please.

(Operator Instructions). Rob Stone, Cowen and Company.

My first question is with respect to polysilicon prices. It sounds like you expect your Phase II expansion to get to a pretty decent cost. Where do you see poly prices over the next couple of quarters? Thank you.

(Spoken in Mandarin).

Mr. Li says currently, as you probably know, Rob, the polysilicon pricing is at $20. Now this has actually been fairly stable for about half a month.

Now depending on the situation with regards to restricting imports, but also based on the fact that several Chinese polysilicon plants are no longer operating, it's quite likely that this price is relatively stable and can hold for at least a little while.

Great. Thank you.

Stephen Zhang, CICC.

It is Chen from CICC on behalf of Stephen. Well, first question is on your solar project business. I mean, you said before that you're in talks with several potential buyers with regards to your Qinghai project. Could you guys give us an update on the current situation?

And also, GCL yesterday was talking about selling their projects before major construction work started. So I'm just wondering, for the remaining 60 MW to 70 MW projects in your pipeline, what was your strategy going forward? Thanks. And I also have a follow-up. Thanks.

(Spoken in Mandarin).

Yes, actually for our Qinghai power plant, we will either have to negotiate with some investors, which is from domestic China and also from the US. This kind of negotiation is still on the processing. We -- until now, we don't get finalized, the negotiations.

(Spoken in Mandarin).

So Mr. Li indicated that projects are inherently a difficult and challenging business with a lot of competitors. There's a lot of companies out there that are now doing projects in a lot of different countries.

And hence, we have to be very, very careful, just like we were with our polysilicon project, and we have to choose and pick our shots very, very wisely.

We might only be doing one or maybe two projects in each country per year. In fact, we might do another 20 MW in China. We might do another 20 MW to 30 MW in, say, Romania. But there's definitely no plans to do what GCL mentioned, as I say, selling some of the pipeline beforehand. I think that, in fact, could actually be somewhat difficult to do. And you might not get the best pricing.

All right, thanks. That's very helpful.

And the second question is on your wafer business. Before you said in terms to your product mix, you said 1% would be the mono -- one-third would be mono and one-third would be a high-efficiency mounting and one-third would be Virtus. So going forward, how do you see your product mix going forward, especially in third quarter and fourth quarter? Thank you.

(Spoken in Mandarin).

Okay. As Mr. Li just mentioned, I think you understood that, there is actually likely to be substantial changes coming to the product mix now that we have the Virtus II modules, which is actually based off of the Virtus A++ wafers, using the Virtus A++ manufacturing method.

And essentially, at the rate that things are going and given all the advantages of these wafers, we believe that sooner rather than later not only will we be replacing all the normal multi, but also, in fact, most of the normal multi in the market will start to really fade away or fall away.

And in fact, it is also possible that people will start to move away quickly from mono, as well. So in terms of (technical difficulty) mono, it only make up a quarter in the third quarter and maybe in the fourth quarter only a fifth of our wafer production.

All right. Thanks, guys. That's very helpful. I'll jump back to the queue. Thank you.

(Operator Instructions). Ahmar Zaman, Piper Jaffray.

This is Shawn Lockman for Ahmar. I was wondering if you could give us a sense of what you're seeing for ASPs for wafers and modules in Q3, and then also into Q4 as well, how you see pricing shaping up?

(Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

(Spoken in Mandarin).

Okay, so Shawn, Mr. Li and Henry indicated that for the third quarter, what we think we see out there in terms of module pricing would be at around $0.65 per watt. This is primarily due to the fact that we sell primarily to Europe and Australia where pricing tends to be a little bit lower and a little bit more competitive.

But in the fourth quarter, we'll probably have more US sales, which, in fact, we haven't had until fairly recently, as well as sales in Japan and possibly some sales in China.

Now the products in the US will probably sell for a bit higher, by something like $0.05 per watt. And in Japan, it could potentially sell for even higher than that.

So as a result of that, we expect the sales actually to be up, as well as the shipments to be up substantially in the fourth quarter, and alternately the pricing, we would not be surprised if it remained the same and actually did not drop in the fourth quarter for modules.

For wafers in the third quarter, right now we're seeing something like close to $0.30, maybe high $0.29, and we think in the fourth quarter it's likely to remain about the same, on average.

Great. Thank you very much. That's very helpful. That's all for me.

Mark Bachman, Avian Securities.

Tony, microinverters here, they're not being used in utility scale projects. And so I'm wondering, can you talk to us a little bit about this product that ReneSola here has brought about and why you think it's going to help ReneSola's overall business?

Sure, I think it's probably because of some kits that we want to produce, but let me direct this also to other members of our team.

(Spoken in Mandarin).

(Spoken in Mandarin).

Mark, so we added a bit to what I was saying and expanded upon it.

First and foremost, I think it is worth pointing out that our modules are clearly among the highest in terms of a power output out there in the market out of China. This is why we are operating at 100% capacity utilization. This is why we had record module shipments. This is why we had record shipments again for the second straight quarter.

There's a lot of demand for our products because of the high power outage -- production that comes from our products.

Now because of this, our products are actually particularly well suited for smaller-scale projects where space is tight or where you might want to use it, if you will, in smaller utility scales or roof tops.

So as a result of that, something that fits naturally from this is, of course, to do these microinverters. So hence, we're doing this as an expansion of our product and also pointing to our core strengths.

Pranab Sarmah, Daiwa Capital.

Can I get a little bit of an idea about your funding requirement in the next few quarters and how you are going to satisfy those needs?

No problem. Let me direct this question to Henry.

Yes, actually, although the finances become more and more challenging currently in China, partly because of our -- what are our shipment and our revenue. On one hand, our shipments increased significantly, and on the other hand, our revenue also keep almost the same as last year. So we can keep the financing -- we can have good conditions with the local banks.

(Spoken in Mandarin)

Okay. Actually, currently, we almost have enough cash there to support our operating. And if you look at our Q2 operating cash flow, we can still have $ 15 million cash inflow . So basically, we can manage our operating cash well.

And further, if we need more financing, especially with those projects, we can get the support from the banks, whatever from the CDB or even some European banks.

And second, your wafer processing costs, you are targeting $0.15 by end of Q3. What will be by end of Q4 this number?

May be $0.14.

$0.14, okay.

Also, keep in mind this is a blended number, so it includes, say, mono and other things.

Okay, got it. So that's why it's slightly higher than [other] guys.

My last question is on your -- how comfortable you are with your 2012 -- basically, your fourth-quarter shipment now?

(Spoken in Mandarin).

(Spoken in Mandarin.

Mr. Li was very direct there. He says 80% confidence level.

Okay, got it. Thank you very much.

Mark Bachman, Avian Securities.

Tony, just a quick follow-up on that microinverter discussion. What is different about Replus that you couldn't get from an already-established microinverter that's already on the market?

That's a very good question, Mark. Let me direct that to Mr. Li.

(Spoken in Mandarin)

(Spoken in Mandarin)

Mark, so we indicated right now, actually, out there in the market, there is not too many providers of the microinverters, and it tends to be a little bit higher margin.

Now the other thing is because of the uniqueness of our Virtus product and, in general, in terms of how we want to package and market it, we think it would be a very good idea from a marketing perspective to be able to package our Virtus product with an inverter. So essentially, if you will, it's there to provide a complete kit.

Okay. Lastly, Tony, are you guys offering a 25-year warranty on that as well?

Yes. Wait, hold on.

(Spoken in Mandarin)

(Spoken in Mandarin)

Yes, confirmed. Sorry about that.

Okay, Tony, thanks so much.

Right, thank you. That was our last question. And I'll hand it back to Mr. Hung for our closing remarks.

In conclusion, difficult macro conditions continue to affect our business. Nevertheless, ReneSola continues to make progress.

Our module business has grown substantially as a result of our global sales and marketing efforts. We will continue to do well in this business and expect it to grow even further by the end of this year.

At the same time, we will develop and improve the technology behind our core wafer business, as well as place considerable R&D support behind lowering our costs and exploring related product opportunities.

While the near term remains challenging, as the industry suffers as a whole, we are confident we have the strategies in place to grow our business and to capitalize on the long-term potential of solar power.

Thank you again for joining us today. If you have additional questions, please do not hesitate to contact us. Operator, please.

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

Portion of this transcript that are marked (Interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.