Emeren Group Ltd (SOL) 2013 Q3 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for ReneSola Limited's third quarter 2013 earnings conference call. (Operator Instructions). At this time, all participants are in 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 call over to your host for today, Miss Laura Chen, ReneSola Investor Relations Director. Please proceed, Miss Chen.

Hello, everyone and welcome to ReneSola's third quarter earnings conference call. ReneSola's 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 on the Company's website at www.renesola.com.

On the call today are Mr. Li Xianshou, our Chief Executive Officer; Mr. Henry Wang, our Chief Financial Officer and myself. I will discuss ReneSola's business highlights and Mr. Wang will go through the financials and guidance. All of us will 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 United States 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 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 this conference call are in US dollars.

I shall now begin with our business highlights from this quarter. Our results from Q3 mark the second consecutive quarter of record shipments and revenue. We exceeded guidance in delivering total shipments of 851 megawatts and expanded our gross margin to over 8%. These returns were driven by growth in overall demand for our modules as well as expansion in our module shipment volumes to market with comparatively higher average selling prices.

We also expanded our global OEM module capacity in the third quarter after first implementing our OEM strategy at the end of last year. Our OEM module capacity is currently 950 megawatts, on top of our internal module capacity of 1.2 gigawatts.

Our OEM strategy enables us to grow our top-line revenue and market share in our target markets while minimizing capital expenditures. It also provides a number of distinct advantages including the avoidance of price falls, volume limits and anti-dumping tariffs in markets like the EU. We've been active building OEM partnerships around the world and currently have OEM capacity in Poland, South Africa, South Korea, Malaysia and Turkey. We expect to expand our OEM capacity to more markets including Japan.

Our globalization strategy also lies in our international sales distribution network. Currently, we have three sales offices and eight warehouses in the US. We also have sales offices across other regions including Europe, Asia and Australia. We've been trying to penetrate into emerging markets and our efforts are fruiting. More sales distribution offices are in setup process in existing markets and new markets like South America. We believe our globalization strategy including global OEM and global sales will position us for sustainable long term-growth.

Building on our technological innovations, we are continuing to invest in R&D to improve the performance and cost effectiveness of our modules. In addition, certification of our newer products such as our micro inverter, string inverter, and storage system is now complete across most of our target market. As such, these products are now available for order.

While competition in the solar market remains fierce, we are confident that our ability to innovate and enhance our brand image globally will drive our long-term growth.

I will now start reviewing our shipments. Total solar product shipments in this quarter were 851 megawatts, an increase of 0.2% from 849.3 megawatts in the second quarter.

Our module shipments increased 6.6% quarter-over-quarter to a record high of 462.9 megawatts, while wafer shipments decreased 6.5% quarter-over-quarter to 388.1 megawatts. This reflects our focus on growing sales from our module business, while shifting from selling our wafers externally to using them internally for module production. Moreover, we grew our module sales across a number of key markets in the third quarter particularly in the United States.

Our module ASPs continued to increase in the third quarter from $0.63 to $0.66 per watt while wafer ASPs decreased slightly from $0.23 to $0.22 per watt. The 6% increase in module ASPs and 6.6% increase in module shipments drove top line growth of 11.1%.

In the third quarter, we achieved almost balanced shipments across three major global markets, namely US, Europe and Asia Pacific. Our Q3 shipments data highlights our success in expanding shipment volumes to more profitable markets. We shipped 143 megawatts to the United States, a quarter-over-quarter increase of over 150%. For Japan, another one of our priority markets we shipped 23 megawatts this quarter, up from 10 megawatts in Q2. We also shipped 180 megawatts to Europe.

Our ability to penetrate foreign markets is based on our world-class products and leading technology along with the effectiveness of our international sales and marketing teams in building our global brand. We expect that as market conditions stabilize and our global sales diversify, our shipment volumes will continue to rise.

I will now review our R&D development. We continued to invest in R&D in the third quarter to support innovation in our technology, products and manufacturing processes. Upon launching, we believe our Virtus II module product line became highly successful in the US domestic PV market because of its outstanding performance specifically in low light conditions and best-in-class temperature coefficients of minus 0.4% per degree Celsius.

We believe we outperform our competition in terms of power output as our 60-cell and 72-cell lines are generally about 5 watts ahead of our competitors offering greater power density.

In the third quarter, we obtained more certification for Replus micro-inverters and string inverters across our target markets, and are now preparing to market these products extensively. In addition, the monitoring system for Replus inverters is now online.

Our grid-tied and off-grid storage systems received numerous certifications, including CE, SAA and TUV in the third quarter. Our 70 models of Euro-line LED products received SAA and C-TICK certificates, and nine models of our US-line products received UL and CUL certificates, all entering into marketing process. Moreover, our tile-roof and pitched-roof systems received Australia and TUV certification. All of these products are now available for order.

I will now turn the call over to Henry, who will discuss our financial results in more detail.

Thanks, Laura, hello, everyone. I will walk you through our financial progress for this quarter . In the third quarter, we achieved record shipments and 11.1% revenue growth. We met our target for gross margin and realized an increase in gross profit of close to 20%. We did, however, incur a significant operating loss in this quarter due to a non-cash impairment charge of $202.8 million. The impairment charge mainly reflects a write-down of Phase I production facility of our polysilicon factory, which I will discuss later.

I will now review details of our financial results of this quarter. Net revenues were [$419.3 million] (corrected by company after the call), which exceeded our guidance and represents a sequential increase of 11.1% from $377.4 million, mainly due to an increase in demand for our solar modules across a number of geographic regions, particularly in the United States.

Gross profit was $34.1 million, compared to a gross profit of $27.4 million in the second quarter, primarily due to an increase in the average selling prices of solar modules from $0.63 per watt to $0.66 per watt along with an increase in module shipments.

Gross margin was 8.1%, compared to a gross margin of 7.3% in the second quarter.

Operating loss was $180.3 million. Total operating expenses were $214.3 million, compared to $44 million in the second quarter. The sequential increase in operating expenses was primarily due to an impairment charge of $202.8 million, including a $194.7 million impairment charge on long-lived assets associated with the Phase I facility of our polysilicon plant.

In this quarter, we also recognized a gain of $34.7 million on the forfeiture by a customer of a deposit received in connection with a long-term supply contract, which offset a portion of the increase in operating expenses.

Operating expenses represented 51.1% of total revenues. Excluding the non-cash impairment charge and the non-recurring gain, operating expenses would have been $46.2 million, which represents 11% of total revenues compared to 11.7% in the second quarter.

Operating margin was negative 43%. Excluding the non-cash impairment charge and the non-recurring gain, the operating loss would have been $12.2 million representing an operating margin of negative 2.9% compared to an operating margin of negative 4.4% in the second quarter.

Net loss attributable to holders of ordinary shares was $200.3 million. This represents basic and diluted loss per share of $1.12 and basic and diluted loss per ADS of $2.23.

I will now provide an update on our cash and debt position. As of September 30, 2013, we had debt of $831.2 million, excluding $111.6 million in convertible notes. Total bank borrowings decreased by $78.7m sequentially as at the end of the third quarter.

Our net cash position including cash and cash equivalents plus restricted cash, was $438.5 million as of the end of the third quarter, $32.7 million increased from $405.8 million as of the end of the second quarter.

Lastly, our net cash flow from operating activities was $79.6 million compared to $65.5 million in the second quarter.

I will now provide you an update on our polysilicon factory. In the [third quarter] (corrected by company after the call), we recognized a $202.8 million non-cash impairment charge including $194.7 million associated with the long-lived assets of our Phase I Sichuan polysilicon factory. The impairment charge was recognized as the amount by which the carrying amount exceeds the fair value of the idled assets.

In October 2012, we began a process of upgrading the Phase I factory and integrating the operations with those of Phase II in an effort to realize production efficiencies and reduce the cost to produce polysilicon utilizing the Phase I production lines. From July to September of this year, we conducted trial productions of the integrated production lines of Phase I and Phase II. At the end of September 2013, management concluded that our efforts to sufficiently reduce the cost of production, compared to the prevailing market price of polysilicon, were not successful.

After conducting a further internal assessment, management determined that it was no longer feasible to operate the Phase I facility without a loss and to recognize the impairment charge accordingly. Production at the Phase I facility was permanently discontinued in October 2013. The fair value of the idled assets used to determine the impairment charge was then determined with the assistance of an independent professional third party appraiser and completed in November 2013.

We expect to have an annual polysilicon manufacturing capacity of 6,000 metric tons after the permanent discontinuation of the Phase I facility. We believe that the decrease of internal supply of polysilicon with the discontinuation can be offset through purchasing from external suppliers at the market price.

We also expect to operate the remaining production lines of the Phase II facility in full production and, benefit from the lower power consumption and depreciation going forward as a result of the discontinuation of the Phase I facility, to be able to keep its production cost at or below its target level, which would make its in-house production cost-efficient based on the market price of polysilicon. Therefore, we expect to see improved results from our Sichuan polysilicon facility, which will enhance our gross margin going forward.

Now please turn to our guidance. For the fourth quarter of this year, we expect total module shipments to be in the range of 490 megawatts to 510 megawatts, and overall gross margin to be in the range of 9% to 11%.

For the full year 2013, we expect total solar wafer and module shipments to be in the range of 3 gigawatts to 3.1 gigawatts, with solar module shipments expected to be in the range of 1.7 gigawatts to 1.75 gigawatts.

We will now open the line for questions. Operator, please.

Thank you. (Operator Instructions). Philip Shen.

Hi, everyone, thank you for taking my questions.

Hi Phil.

Hi. So I'd like to explore the polysilicon situation. I know it sounds like you have the remaining 6,000 metric tons of Phase II, which likely is at a lower cost structure than Phase I. But can you talk to us about what happened with Phase I? And what in particular led you to conclude that it was no longer feasible to upgrade the facility and lower the costs?

Okay, so let me just translate for Mr. Li.

(Spoken in Chinese).

Phil, Mr. Li just said we've been trying to integrate Phase I and Phase II facility of our polysilicon factory. The project was really big. And in the process of operating the facilities, we recognized that the Phase I facility was actually a burden for our Phase II facility because we still use the thermal hydrogenation technology for Phase I and Phase II, the technology we used is hydrochlorination. So the technology was different.

After all the operating, testing and also running and operations, we feel that it's not very feasible to still continue the Phase I facility. And we would like now to put our efforts to operate Phase II facilities very well.

Okay, thank you, Mr. Li and Laura. So what are the all-in production costs of the Phase II facility today and what do you expect them to be as we go through 2014? And then if you can also tell us what the cash costs of the Phase II facility are today as well, that'll be helpful.

(Spoken in Chinese).

So Mr. Li said that currently our cash cost, for the past week actually is $19 to $19.5 because now we are entering into a dry slow water period. That's why the cost is relatively higher. Entering into next year, probably around May to June, we would reach cash cost of $15 to $16 plus the depreciation of $2.8 after the impairment.

Okay, thank you. So -- and what is the confidence level that you think you can hit the $15 per kilogram? Let's take seasonality out. Let's say in a year from now, if cash costs today are $19.5, how much lower could it be one year from today?

(Spoken in Chinese).

Phil, Mr. Li said we still have 10% of room for cost improvement, cost reduction in one year time.

Great. Let's move on to the OEM strategy. Can you -- I think I heard in your prepared remarks that you're thinking about expanding the OEM partnership or to have a partner in Japan. Can you talk to us about what the potential megawatts are for Japan?

(Interpreted). We will probably sign 8 megawatts of OEM in Japan. 80, sorry. 80 megawatts.

Okay. And what's the timing of that?

(Interpreted). We'll start production in April next year.

Great. Moving on to ASPs, what are you seeing in Japan and China? And how do you expect that to trend -- and the US for that matter? And how do you expect those regional ASPs to trend in 2014?

(Interpreted). So for the United States it's going to be $0.70. For Japan, it's $0.67 to $0.68. For China, it's $0.63 to $0.64.

Okay. And then, Mr. Li, what do you see as the trend in 2014 by region?

You mean the demand?

No, the (multiple speakers).

Oh, you mean the ASP.

The ASP trend.

(Spoken in Chinese).

Okay, so Mr. Li says for US markets for the next three years, it's going to be really good and the ASP is going to stabilized and probably go up a little bit. For the Japan market for the next two years, the ASP is going to be stabilized and also maybe increased a little bit. And for Europe markets, the ASP is going back and stabilized. And also Mr. Li said UK, the demand for UK is looking very, very strong. And for China it's not very clear at this moment because the policies for distribution and generation is still not very clear.

Thank you (technical difficulty).

Sorry, I didn't get you. The signal was not very good.

All I said was thank you, everyone, and I'll join back in the queue.

Yes, sure. Thank you.

Brandon Heiken.

Hi, team, thanks for taking the question. It looks like the guidance for wafer --

Hi, Brandon.

Hi. It looks like the guidance for wafer shipments in the fourth quarter is a bit down from the third quarter. Can you explain the reason for that please?

(Spoken in Chinese).

Yes, Brandon. So Mr. Li said our module shipment for Q4 would be increasing substantially and some more very good increase in Q1 next year as well. So we are trying to preparing more wafer internally to be produced into cell. And we also cancelled some long-term contracts with our wafer customers. So this is actually our strategy to just reduce the wafer shipments to focus on our module business.

Okay. But it looks like the module shipments, the guidance is up about 37 megawatts. But the wafer shipment is down about -- correct me if I'm wrong -- about 200 plus megawatts. So just trying to reconcile where the extra wafer shipments are going. Is it basically just that you cancelled some contracts?

(Spoken in Chinese).

Yes, Brandon, Mr. Li said because there's a time lapse, a time difference actually -- time lagging. So for the shipment in Q4 we actually shipped our capacity in September, October and November. So in December we will have an increase in the shipments in module, and also an increase in shipments in module next quarter -- sorry, in Q1 2014.

Okay, okay. Thanks. And then for the lending environment in China, you know that LDK recently received financing from 11 banks, a few weeks ago. I was wondering, do you see a change in the credit environment within China? And do you think that the write-down of this poly facility will have any bearing on your relationships with the China banks?

Okay, let me take this question, Brendan. Actually in China the lending environment is largely changing significantly, where before -- actually before we -- we also -- I think we can explain -- actually this is a non-cash items write-down.

And we -- after today, this conference call, I will also maybe do some road show with the banks. I trust this will be -- the relationship will not change any and the bank will still only support our business. And it will give us not a big impact there, I think.

Okay, thanks. And the last question on outsource production, is that capacity that you mentioned, is it module-only capacity, or is it cell and module? And can you talk about the cost structure for that OEM production, please?

I'm sure OEMs -- well, I answer your first question. It's all for module.

All module, okay.

(Interpreted). So for different reasons, actually, the cost would be different. Generally it's around $0.05 to $0.07 for these module processing costs. For Japan it's probably a little bit higher than that.

$0.05 to $0.07 the extra cents is what you mean -- beyond -- above China costs, is that what you mean?

(Spoken in Chinese).

Hi, Brendan, it's actually not on top of the Chinese processing costs; it's the processing costs by the OEM factory. So for Chinese module processing cost -- in Chinese factories it's $0.445.

I see, okay. Okay, thank you, guys.

Thank you.

Gordon Johnson.

Thanks for taking my question. I just -- I guess I had a general question. It looks like the Chinese government is targeting 4.2 gigawatts of utility-scale projects next year, 2014. However, when I look at the plans of the biggest -- the largest eight vendors in solar with respect to utility and, again, these guys are a small set of the total; you are talking about 10 gigawatts of planned utility projects. Can you give us a little color on your views on the puts and takes around this, and what could potentially happen? I know there's roughly 8 gigawatts of distributed, but it seems like everybody's focused on utility.

Do you think the Chinese government will stick to their stated goal of 4.2 gigawatts of utility? Or do you think they'll actually go over that? And then I have a follow up.

Okay, just -- let me just translate for Mr. Li.

Sure.

(Spoken in Chinese).

Okay, let me translate for you, Gordon. So currently Mr. Li thinks that it's still -- the projects, the solar farms are still an important area for the investors. For this year, actually, China still has this 4.6 gigawatts of Golden Sun projects, and next year it looks like the distribution generation is going to take its place.

But Mr. Li said -- he thinks it's still very -- it's still not a mature market for the distribution generation to go there extensively in China. And as far as he knows that there is still no big-scale installation for its distribution generation currently happening in China. And also the policies are still not very clear and not very detailed. And also the IRR for distribution generation is not very high, and also there's a problem with the -- with how to -- with a fee. And also he thinks that if the distribution generation is going to expand, it's probably going to be very late next year.

Okay.

And he thinks that it's not going to reach that 8 gigawatts, which China government set.

Okay. So does he feel then that there may be risk to the 10 gigawatts from the eight largest guys, and likely much larger aspirations for utility projects next year, given the Chinese government has stated their focus is 4.2?

Sorry, can you repeat that?

So, if you look at the 10 biggest publically-traded companies in China, in aggregate they are targeting roughly 10 gigawatts of utility next year. The Chinese government has stated --

Uh, huh, right.

-- that they are going to fund 4.2 gigawatts. If distributed doesn't take off next year, does he think then that there may be risk to the targets of the big solar companies in China, with respect to utility?

Yes, okay.

(Spoken in Chinese).

Okay. Gordon, Mr. Lee just said -- there are a lot of projects under application right now -- it's really huge -- by those utility group and state-owned enterprises, the total amounts would exceed 10 gigawatts. So it's all in the planning process right now, but there will be a limit in the final approvals of all these projects. So it's -- it maybe posed a problem that people will have an over higher expectation for the Chinese market.

So maybe this year Chinese market, the demand for Chinese market probably will reach 10 gigawatts, but next year he thinks that it's going to be -- maybe go down a little bit.

For distribution -- for distributed generation to go really further in the market in China, it's probably going to be 2015 to 2016. Generally speaking, in the whole world it looks like the United States and Japan, and emerging markets, are looking very strong in demand, probably 10% increase from this year. And the price is also going back a little bit.

Okay, that's very helpful. And then we are trying to figure out here in the US what's going on with projects in China, with respect to actual FITs being paid. I think that last year there were some issues with FITs being paid on time.

Two questions. One, do you guys have projects that you've developed connected to the grid this year that have not received FIT payments yet, even though they may be receiving energy payments?

And then secondly, have you heard of any projects in China that are connected to the grid that are not -- that have not received FIT payments yet? Any view there would be helpful. Thank you.

(Spoken in Chinese).

It's a no to your first question. We --

(Spoken in Chinese).

-- haven't received any subsidy for our two projects this year.

Are those projects connected to the grid?

Yes.

So, I just want to be clear. They are connected to the grid, yet you haven't received the subsidy yet?

No.

Correct.

Okay, thank you. And do you know if there's any other -- this is a broader issue throughout China that maybe there's some projects that are connected to the grid that haven't received the payments? And is there an expectation on when you are going to get that payment, and also if you can give us some details on maybe why that payment is delayed?

Let me explain a little bit about this subsidy. Actually, in July, China government initial policy said they want to try to have the grid companies to pay the subsidies through the grid company on a monthly basis. But I think this policy will be happen, but I think it will take a little bit of time.

Okay, thank you. That's extremely helpful. Thanks for the questions, guys. Good luck.

Paul Strigler.

Hey guys. So, just following up on Gordon's questions, I think you may have suggested that Q1 2014 shipments are likely to be up from Q4 2013. Is that correct?

You mean for us?

For ReneSola, correct, yes.

Yes, it's correct.

Okay. And so, obviously you guys aren't nearly as bullish on the Chinese market as some of your peers. But overall, for 2014, what's -- if you think Q4 is going to be up sequentially from -- sorry, Q1 from Q4, what's your view in general for 2014; the market, not just for ReneSola, but for your core-end markets and just maybe the aggregation of all those markets?

Do you mean the Chinese market?

Well, I think -- well, China, if you could maybe --

Overall?

Overall, but also maybe talking about China, Japan, US, South Africa --

Okay.

-- for people like you.

Yes. Yes, I think we just answered the question before, but let me just ask Mr. Li again.

(Spoken in Chinese).

Mr. Li thinks that generally speaking he thinks the total demand worldwide for next year is around 40 to 42 gigawatts, 10% increase from this year.

And that includes a flat China, or down China, I guess?

Yes, it's included, the Chinese demand.

(Spoken in Chinese).

Yes, Mr. Li thinks that the total demand for the Chinese market, actually, will decrease from this year.

And so what milestones are you looking for in the Chinese market? It seems like you guys are certainly more realistic about your-- obviously you're not getting paid on some of your projects; the rules aren't quite clear. Are there any milestones we can look for as investors that the Chinese market -- that the rules -- there's more formalized rules that you guys will be getting paid.

It just seems like there's a new announcement every week, but they are just announcements without any sort of formalization, of payments and/or structures to get paid. Are there any milestones you guys are looking for that would give you more or less confidence in the Chinese market?

(Spoken in Chinese).

Okay, Paul, Mr. Li says -- if China is going to do something as what Europe would do. He specifically mentions, for example the subsidy policy that the China -- the distribution -- distributed generation network can recognized revenue directly with the grid company, rather than to sell the electricity to end-users. Because the credit for this way of recognizing the revenue is not very stable.

And also currently the process -- the procedures are not very smooth right now. There are too many limitations and restrictions around. And also the way -- how the distributed -- the generation ReneSola can collect their money is not very clear. It will probably take two to three years for distributed generation to really go up in China.

(Spoken in Chinese).

And also, yes -- and also the financing is difficult, for distributed net generation.

It makes complete sense. All right, guys, thanks a lot.

Thank you.

Brandon Heiken.

Thanks for the follow-up question, guys. I just wanted to clarify one of your comments. So we know that there's a draft circulating for comments about the mix next year, between distributor generation and utility-scale projects. And you mentioned that demand may be down a bit next year. I just wanted to clarify, do you mean down for utility-scale projects, or overall demand? And do you view the 4-gigawatt, roughly, target of utility scale? I know that that's still under a comment period, but do you think that that is effectively a cap, or do you think that utility-scale inflation can be higher than that? Thanks.

(Spoken in Chinese).

Okay, Brandon. Mr. Li said -- he thinks that -- because he thinks that the distributor generation will not be as good as -- people are claiming. So that will affect total demand in the Chinese market. Like he mentioned before, the application for distributor next-generation projects for really much more than the 4.2 gigawatts. And currently the solar farm -- there's a subsidy.

And also you can recognize some revenue from the electricity. So there are two ways of collecting money by the solar farm. So the credit ranking is really high. That will also attract the -- the banks will be willing to support these solar farms.

And for distributed generation, like he mentioned before there are too many uncertainties -- because there's -- there would be a delay in the development of distributed generation. That's why he thinks that the total demand is going down next year.

So, I guess my question is do you think that utility-scale installations will be higher than the 4-gigawatt target next year?

(Spoken in Chinese).

So, generally speaking, Brandon, it's hard to say. There are some projects which are not be able -- are not being able to install for this year. And next year, as he mentioned several times that there are lots of applications for solar farms for next year -- much higher than the 4.2 gigawatts. But all these applications -- these applications probably raised by the local government, but all these applications will need to go through the central government. So it's really hard to say how the central government is going to coordinate between these applications and how much volume they would like to install.

So, yes, it's really hard to say. They probably will change this figure to higher. It's hard to say.

Okay, thank you.

Thank you. There are no other questions on the line. I would now like to hand the conference back to today's presenters.

Okay, so thanks, everybody, and so I'll see you next time.

This concludes today's conference call. Thank you for your participation. You may now disconnect the lines.