Emeren Group Ltd (SOL) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you all for standing by and welcome to the Q3 2015 ReneSola Ltd earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, November 17, 2015. I would now like to hand over the conference over to your speaker for today, Miss Kerrie Zhang. Thank you. Please go ahead.

Thank you. Hello, everyone. Thank you for joining ReneSola's conference call to discuss third-quarter results. We released the third-quarter results earlier today and they are available on the Company's website as well as from newswire services. You can also follow along with today's call by downloading a short presentation available on the Company's website at www.renesola.com.

On the call with me today are Mr. Xianshou Li, our Chief Executive Officer; Miss Maggie Ma, our Interim Chief Financial Officer; and Miss Rebecca Shen, our 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 third-quarter financial results in detail.

Before we continue, please note on slide 2 that today's discussion will contain forward-looking statements made under the Safe Harbor 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.

Please note that unless otherwise stated, all figures mentioned during the conference call are in US dollars.

Let me now turn the call to Rebecca, who will translate Mr. Li's prepared remarks. Rebecca?

Thank you, Kerrie. 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 some comments about how our new strategic direction is translating into near-term performance. Then we will turn the call over to Maggie for details about our operating and financial performance in the third quarter.

Please turn to slide 3. The start of this quarter marked second year of recovery for the solar industry. Our industry had its opportunities and challenges. In the context of those challenges, ReneSola is proud to be not only the survivor, but to have emerged as the recognized tier-one supplier with a presence around the globe.

We successfully executed our strategy. We specifically designed our business to be nimble and flexible. With the ability to pursue new opportunities rapidly in a business that is changing as rapidly as solar energy, this flexibility served us well. We're able to adjust to evolving conditions and position ourselves for success in the most enticing new opportunities.

Our results this quarter reflect accelerating business and strategic decisions we made in 2014 but only disclosed this year to anticipated changing industry conditions. The downstream project business has emerged as a substantial opportunity worldwide and equipment manufacturers like us have a natural advantage in designing and constructing projects.

We're seeing many of our equipment-producing peers enter the project business, leveraging in-house technical expertise and a pre-existing global infrastructure. A couple of years ago, we recognized the opportunity and our natural advantages and began laying the foundation for this business.

In 2014 we started building a pipeline of projects and executing EPC activity. Now in 2015, we're seeing the early pay-off to these efforts. Since we initiated this strategy, we have sold 71 megawatts in the UK as of the end of October, of which 35 megawatt of projects were sold in the third quarter.

We're operating four projects with 25 megawatt of annual capacity. By the way, we like those operating assets because they produce a steady stream of high-margin recurring revenue.

Our pipeline of future projects is robust. We have 515 megawatts more of projects under the development. Keep in mind that at this time last year, we had just started building our downstream business in OECD countries. The effort was in the early development stage and we keep it confidential for competitive reasons.

We're very proud, from a standing start, we're now competitive with most of our large equipment manufacturing peers as well many IPP alternative energy developers. We were able to grow this business so quickly due to our technical knowledge and global distribution footprint.

By geography, our early project success tracks our global footprint. We are especially active in Europe, where we have been manufacturing and selling for some time. Certain European markets, especially the UK, are attractive for project work due to the incentives programs in place.

The majority of our completed solar projects are in the UK and Eastern Europe. We sold 71 megawatts in the UK alone, yet have another 75 megawatts that we expect to complete and connect by first half of 2016.

We're just beginning to penetrate the Japanese market, which has been very attractive since the Fukushima disaster. The Japanese market has very good incentives in place and connecting to the grid and collecting feed-in tariff payments is administratively easy, relatively speaking. We expect our project activity in Japan to grow rapidly over the two years.

We already have 31 megawatts planned, with multiple projects underway and, of course, more in early stage of development. We sold our first project in Japan this quarter, a total of 300 kilowatts of rooftop DG.

The US is a very large and robust market as well, and we took important strategic actions to enter that market. In July we announced the formation of the JV named Baynergy, which we're forming with the US alternative energy company Pristine Sun.

The ramp-up of the project business is a function of the infrastructure we already have in place for our module and wafer business. Our global presence and reliable modules will enable us to develop a portfolio of high quality projects around the world.

As we further build our project portfolio, we'll continue to sell industry-leading wafer cells and modules to our existing customer base as well as new customers. Happily we can be more selective to whom we sell and more firm on pricing that reflects the value our products deliver.

With the project business layering on top of third party sales, we see high demand and are running our plants at full utilization. We're constantly working to be a low-cost producer, with a focus on improving our efficiency and ringing every penny out of our supply chain. Maggie will offer details on shipments and sales.

Our flexibility and nimbleness extends beyond our pivot into project development. We're also leveraging our existing manufacturing capability, global footprint and brand name to develop an LED lighting business. We're still very early in that effort so will not offer too much detail yet but I do want to emphasize that it is an important strategic initiative for us.

The so-called energy-efficient market is a very large and growing market, and LED lighting is a critical element. We expect this market to expand substantially as energy efficiency retrofits grow as a trend around the world. Because we have a natural advantage, we want to position ourselves to capture this opportunity in the years ahead.

At this point in 2015, I'm very excited about the prospects for next year and beyond. Our project business has emerged from an internal plan a year ago to a rapidly growing and globally recognized business in just one short year. We're transitioning the overall business away from lower-margin contract manufacturing to higher-margin projects, equipment and LED sales.

We're maintaining our reputation for high quality as well as tight cost control, with a focus on cash generation that will strengthen our balance sheet over time. I'm proud of the hard work of ReneSola's dedicated employees and have high expectations for continued success in the quarters ahead.

Before I turn the call over to Maggie, I would like to provide an update on our R&D efforts. Our team keeps investing in developing new technologies and enhancing the efficiency of our current solar and other clean energy products. The A4+ wafers, which we had previously announced, delivered a cell efficiency of 18.4% and are now in mass production. We're currently working on improving cell efficiency to 18.5%, with narrower efficiency distribution by optimizing the wafer process.

Additionally, both of our double-glass modules and four bus-bar cell module products are now in mass production. Regarding the double-glass module products, we have received positive feedback from our customers in terms of module quality and power generation. While the R&D team is developing 72-cell double-glass module which will be introduced in the coming quarters, our new module product, Virtus III, has already been certified by TUV with around 15-watt output improvement compared to the current Virtus II module.

Let me now turn the call over to Maggie for details on our project operations and financial performance. Maggie?

Thank you, Mr. Li and Rebecca, and thank you, everyone, for joining us on the call today. I will review our operations and financial performance for the quarter and then discuss our outlook. To keep our remarks concise, all figures will refer to the third quarter ended September 30, 2015, unless noted otherwise.

Let's begin with slide 4, which highlights our financial performance in the third quarter. Revenue of $368.2m was up 37% sequentially but declined 1% year on year. The sequential growth was due to solid performance across our whole product line, including the contribution from the project sales.

Gross profit of $59.3m grew 33.6% sequentially. Gross margin of 16.1% was relatively stable sequentially and higher than the year-earlier period. Our project sales generated gross margin above the corporate average, so were a positive contributor to our growth in profitability.

Operating expenses were $47.9m, containing one-off expense of $6m which related to a provision for purchase commitment, change in provision for doubtful accounts, etc.. Excluding the one-off expenses, the Company's operating expenses represent 11.3% of the revenue.

Operating income was $11.4m, an increase of 8.9% sequentially and 34% year over year.

Non-operating expenses of $2.6m include net interest expense of $10.4m, offset by foreign exchange gains of $5.7m and gains on the repurchase of convertible bonds of $1.9m.

Net income was $8.6m which compares to a net loss of $2.3m in Q2 2015 and a net loss of $11.7m in the same quarter last year. Earnings per ADS were $0.08.

Slide 5 provides a summary of the key components of our income statement over the last several quarters.

Please turn now to slides 6 and 7, which highlight the significant improvement to our balance sheet achieved during the quarter. Cash and equivalents, which include restricted cash, increased to $233m from $185.1m at the start of the quarter. We generated cash by reducing our working capital usage.

We reduced inventory by $78.8m while holding DSO steady at around 30 days. The cash generated enabled the Company to reduce accounts payable and debt. We paid down $84.6m of payables and the total debt declined to $750.4m from $756.9m.

During the quarter we repurchased $36m notional amount of the convertible notes due on March 15, 2018. We have only $26.1m of converts remaining outstanding.

Before I move on to our project sales in the quarter, I want to reiterate that the entire finance team is very focused on improving our balance sheet and we are very proud of the progress we are making.

Now let me provide the details of our project sales in the quarter, starting on slide 8. We recognized $64.6m from the sales of the projects in the quarter, representing 35 megawatts of generating capacity.

Sales included one utility scale project in the UK and a rooftop DG project in Japan. In the UK, we closed the sales of our 34.7-megawatt Port Farm utility project. Also note that following the quarter end we announced the sales of another 16.5-megawatt utility scale project in the UK. We also expect another sales of 0.9 megawatt project in Japan.

Slide 9 shows our operating assets. Since starting our development strategy, we have decided to keep and operate several projects that we believe can produce very attractive IRRs for the life of the project. We currently operate 25.1 megawatts of IPP projects, two each in Bulgaria and Romania. We are always interested in building high-margin recurring revenue streams so you can expect us over time to build our operating portfolio alongside the projects intended for sale.

Now turning to slide 10, which summarizes the size and the geographic distribution of our project pipeline. As of September 30, we had 515 megawatts of projects in various stages of development, of which 483 megawatts are solar projects and 32 megawatts are wind-related projects. Out of the 515 megawatts of projects, 104 megawatts of projects are under construction.

Slide 11 details the size, status and the locations of the current pipeline. As Mr. Li mentioned, we are excited about our early results in our new LED distribution business, but are also cautious as the effort is just getting underway.

Slide 12 summarizes the results for LED, with revenue of $3.6m and a gross margin of over 30%. As of the end of October, we have accumulated over 2,600 customers in the LED business. We are starting to get significant penetration around the world, with distribution channels being built on every continent but Africa.

Next, let me quickly summarize our module and wafer production shipments in the quarter, shown on slide 13. Our module and wafer business is still attractive. Given the cost reduction initiatives we put in place, our in-house manufacturing cost per watt at the end of Q3 2015 was about $0.40. And we expect the cost per watt to further decrease in the coming quarters.

Total solar module shipment of 405.5 megawatts compares to 322 megawatts in Q2 of 2015 and 462 megawatts in Q3 of 2014. The year-over-year decrease reflects our withdrawal from the OEM business as we successfully transition our business model to focus on project development.

Wafer shipments were 342 megawatts compared to 282 megawatts in Q2 of this year and 202 megawatts in Q3 of 2014. The sequential increase was due to short-term opportunistic sales that we encountered in the quarter.

The pie chart on the right highlights the geographic breakdown of module shipments in the third quarter. China represents around 28% of our total shipment. Japan was around 23%. Europe was approximately 25%. The US was nearly 9% and the rest of the world about 15%.

Our module ASP decreased slightly to $0.57 per watt from $0.59 per watt in the second quarter.

Finally, we can conclude with guidance, which is on slide 14. In the fourth quarter we expect revenue in the range of $275m to $295m and a gross margin in the range of 17% to 18%. The expected sequential decline in revenue reflects two factors. As we communicated to you earlier on the call, we have a robust pipeline of additional projects under development and expect to see growth in project revenue next year.

Secondly, we expect a sequential decline in our module and wafer product lines since we expect to more aggressively redirect our production to our own projects this quarter.

Despite our sequential decline in revenue, we intend to secure higher profitability, generate a healthy cash flow and build up downstream, with higher gross margin going forward.

From a balance sheet perspective, our simple goal is again to generate cash from project sales and good working capital management and to pay down debt. We do not guide to the balance sheet on a quarterly basis, but we can say that our goal for 2016 is to maintain health cash flow.

We would like to open up the call for any questions that you may have for us. Operator, please go ahead.

(Operator Instructions). Philip Shen, Roth Capital.

Hi. Thanks for taking my questions. And Maggie, welcome as the Interim CFO.

Thank you. Hello, Philip.

Hi. My first question is on your expectations for project development in 2016. How many megawatts could you develop in 2016 and how much of that do you expect to sell?

You mean in next year, 2016?

That's right.

Or in this year?

Next year.

(Interpreted). Okay, Philip. Mr. Li said that we have sold 71 megawatts this year and we target to sell 130 megawatts to 150 megawatts for next year. And for the next year we will further develop another 200 megawatts to 300 megawatts for next year's pipeline.

Great. Thank you.

Patrick Jobin, Credit Suisse.

Hi. This is Jennifer Ky on the line for Patrick. Thanks for taking the question. I see you've expanded into wind project development and you have a wind project in your pipeline. Could you give me some color on how this fits in with the rest of your strategy and how much wind should we expect going forward?

Please wait a moment. We'll just translate your question to Mr. Li and then let Mr. Li answer your question.

(Interpreted). As for wind projects, we have been tendering wind projects, the small-scale wind projects in Poland, and we are still in an early development stage. And since we're in an early development stage we would prefer to be low-profile here. But it doesn't hurt that we make more trials first.

Great. And how much of your pipeline going forward do you think would be wind?

(Interpreted). 32 megawatts for wind-related projects.

Right. How do you expect ASPs to trend in Q4 and into next year?

For the ASP, we think that it will slightly decline a little in Q4.

And do you have any thoughts or insight into how 2016 will look?

Sorry, for 2016?

2016 ASPs.

Okay. I got it. Okay. Yes. In Q4 the ASP will slightly decline. But I think in 2016 it will further decline slightly. But as you know that in the first half of next year the demand is very strong and we think that the decline should be very slight.

Right. And on that, how do you expect margins and growth to trend for 2016 and what geographies are you planning on targeting?

Okay. Our gross margin will keep in a high level, like from 17% to 18% as we keep on to reduce our in-house manufacturing cost. And for the sales of modules, we are -- our targets on the regions like Asia -- China, Japan and India. For the US and Europe, we're mainly focused on the downstream projects.

Okay. Great. Thank you.

You're welcome.

(Operator Instructions). Ke Chen, Shah Capital.

Yes. I'm just wondering, could you talk about your outlook for LED business in the fourth quarter.

(Interpreted). So for the LED business, as this is the first quarter that we launch our LED business, we expect the LED business to grow really fast. We would say the quarterly growth rate for LED business is expected to be 60% to 70%. And the revenue is expected to be $6m to $7m for the next quarter. And for our LED customers, we expect new addition of 2,000 LED customers for the next quarter.

Okay. Based on your gross margin in fourth quarter and controlled costs, I think we expect a profitability in fourth quarter. Is that right?

Yes, I think so. But I think in -- it will show clearly in -- I think in the second quarter because normally in the season for spring festival, the cost -- the labor cost will go up.

My question is the fourth quarter, the last quarter of this year.

Yes. In the -- yes.

Okay. Thank you.

Welcome.

(Operator Instructions). Pardon me, we don't have any more questions from the audio line. Please continue. Thank you.

Okay. Thank you, operator. Let me make some closing remarks on behalf of Mr. Li.

We're satisfied with our performance this quarter and pleased to report that our strategic shift to the project business is gaining real traction. In the couple of years since we initiated the transition, we're already developing a robust pipeline of projects around the world. Furthermore, in the short period since we disclosed this publicly, we've already started to monetize our work. This will provide capital to strengthen our balance sheet and grow our business.

Balance sheet strength is a long-term commitment we have made to our shareholders, and we're especially proud to see our key metrics improving. You should expect to see us continue to pay down debt in the quarters ahead.

We remain positive on our downstream strategy and optimistic about our business outlook in the quarters ahead. We believe ReneSola can achieve attractive growth rates by developing solar projects in the attractive markets. We intend to follow through on these strategic initiatives and build a great foundation to increase shareholder value in 2016 and beyond.

That concludes our call today. You may all disconnect.

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

Portions 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.