Emeren Group Ltd (SOL) 2016 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for ReneSola's first-quarter 2016 earnings conference call. (Operator Instructions). Please note that we are recording today's conference call. I will now turn over the call to Mr. Ralph Fong, Director of the Blueshirt Group Asia. Please go ahead, Mr. Fong.

Hello, everyone. Thank you for joining us on ReneSola's conference call to discuss first-quarter results.

We released first-quarter 2016 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, Chief Executive Officer; Ms. Maggie Ma, Chief Financial Officer; and Ms. Rebecca Shen, Director of Investor Relations. Rebecca will read Mr. Li's prepared remarks regarding ReneSola's operational highlights and strategy, and Maggie will review our first-quarter 2016 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 provision of 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.

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

Thank you, Ralph. The following are Mr. Li's prepared remarks.

Thank you, everyone, for joining our call this morning. We appreciate your interest in ReneSola. I will begin our call with important strategic comments about business and our performance. And Maggie Ma, our CFO, will present operating and financial details for the first quarter and our guidance for 2016. We will conclude the call with a Q&A session.

I'd like to start with a recap of the first quarter. Please turn to slide 3.

The quarter played out largely as we had anticipated. It was marked by solid growth in the downstream project pipeline, margin improvement and in-line revenue performance. Overall, we are pleased with our first-quarter results and the momentum that we generated for the remainder of 2016.

Revenue came in as expected. Sales of $260.7m were down 25% from the same quarter last year and down 12% sequentially. The revenue decline was mainly due to lower module ASP and reduced shipments to external customers as we strategically continue to scale back OEM and directed more shipments to our own downstream projects.

Gross profit grew 21% year over year, and gross margin came in at 17.1% in the first quarter, in line with our guidance communicated to you during our last call. This compares to gross margin of 16% and 10.5% in Q4 2015 and Q1 2015, respectively.

We also almost tripled EBITDA from the same quarter last year and reduced operating expenses by approximately 30% year over year. Net income was $5.7m in the quarter, compared to net loss of $18m a year ago.

Our solid P&L performance drove an improved balance sheet. As announced during the quarter, we repurchased all of the remaining $26.1m of convertible bonds due March 15, 2018.

Conditions in the solar industry are challenging now, so we're executing on our strategy to remain a global leader across the value chain. We are profitable, with over 700 megawatts of projects under development and a flourishing business in LED distribution. Our first-quarter results demonstrated the continuation of the successful execution of our new strategy in the last year.

Let me now briefly update you on downstream project development, which is at the core of our transformation. Downstream projects remain a substantial opportunity worldwide, and equipment manufacturers like us have a natural advantage in designing the construction projects. Our downstream efforts continued to yield positive momentum as we expand our footprint of activity around the globe.

In the first quarter, we sold two utility projects in Bulgaria, with capacity of 9.7 megawatts. Because these projects will carry on on the balance sheet as long-term assets, the sale was booked as disposal of assets and contributed to the operating income. However, the transaction generated cash and reduced debt, which are our most important priorities.

The sales in Bulgaria sustain our solid momentum and we're positive on all the project sales for the rest of the year. In the near term, we expect to monetize the sale of solar energy projects representing over 20 megawatts of generating capacity as early as in the second quarter.

Looking at development activity during the quarter, we completed construction and connected four utility-scale projects and one [Blue Star] project in the UK, with a combined capacity of 24.3 megawatts. These projects demonstrate our ongoing commitment to the clean energy business in the UK. They also demonstrate our strong competitive advantages in developing downstream projects in the region.

North America continues to be a large and robust market and most attractive for us to start up activity. In the US, we currently have 121 megawatts of projects in our pipeline.

As we communicated to all of you on our last call, regarding the dispute with Pristine Sun, on March 25, 2016, we entered into a binding term sheet with Pristine and certain of its affiliates to resolve our dispute, dismiss the action that we previously filed against Pristine and transfer to us 88 megawatts of projects under development in California, North Carolina and Minnesota. Upon completion of the transfer, we will be 100% owner of the 88 megawatt portfolio of solar projects. We believe we can better drive development in the US and expect to start construction on a good portion of our pipeline in the near future.

Additionally, we announced last week that we have recently formed a partnership with UCK Group, a leading Turkish solar energy solution provider, to develop a pipeline of solar power projects in Turkey with a total installed capacity of 116 megawatts. We're excited about the partnership, as it enables us to gain traction on attractive Turkish PV market while also demonstrating our technology leadership and competitive position in developing downstream projects in the region.

Overall, we have a robust pipeline of future projects across different geographies in various stages of development. Specifically, we have late-stage project pipeline with total capacity of approximately 323 megawatts in the United States, the United Kingdom, Turkey, Japan and Canada. We have early to mid solar power and wind projects in various geographies, including the US, the UK, France, Spain, Poland and Canada. The early to mid-stage pipeline has a combined capacity of approximately 462 megawatts.

Because we are highly focused on cash flow and balance sheet improvement, we are pursuing a BOT model, and over time we expect to sell all of the pipeline. Having said this, occasionally we will retain projects when economics are particularly attractive. For instance, we continue to own and operate two projects in Romania. These operating assets produce a steady stream of recurring revenue from the sale of electricity.

As previously discussed, the project business is key component of the enterprise value we have built at ReneSola. It is our growth driver and layers on top of the PV manufacturing. It is our solid and stable foundation. An important strategic goal for us through the remainder of 2016 is to drive higher profitability and cash flow, so that we can continue to pay down debt and thus shift enterprise value from creditors to shareholders.

Let me reiterate how we expect to improve financial performance in 2016. Please turn to slide 4.

The first is to continue to scale back the OEM business. The ramp up of project business enables us to gradually exit the OEM business, as we replace the OEM revenue and redirect module production to our own use. This is in line with our strategy to build a project business. We will continue to scale back our OEM business for the rest of 2016, to drive down cost and shift our focus toward downstream project business, away from manufacturing business.

Second initiative is to use R&D strategically to reduce cost and improve product performance, which can result in better prices and higher margins. The R&D milestones we achieved in 2015 demonstrate the power of this approach. Our A4+ wafers, which deliver cell efficiency of 18.4%, can be improved to 18.5% with narrower distribution by optimizing the wafer process. Customers are raving about our double-glass modules, noting quality and power generation.

The third initiative is to look beyond solar-related products and position ourselves more broadly as a producer and distributor of green energy products. Specifically, we're leveraging our global footprint and brand equity to further develop the LED distribution business. This remains an exciting opportunity for us, which we expect will create the next layer of growth on top of project development.

The LED business continues to deliver encouraging financial performance. In the first quarter we saw over 25% sequential revenue growth, with a gross margin north of 30%. We now have over 4,100 customers as of March 31 and continue to expect to grow our distribution and add SKUs, although it takes a little bit of work and time to set up distribution channels. Gross margins are at approximately 30% today, so our long-term target model for this business is gross margin over 40%.

The fourth initiative is to continue to operate profitably, generating cash and paying down debt. As I mentioned earlier, we retired all of our convertible notes in the first quarter, improving our financial flexibility. We're also funding capacity expansion creatively.

For instance, we expect to expand our wafer manufacturing capacity through technology improvement rather than equipment purchases or other capital expenditure. Using our R&D capability, by midyear we expect to have capacity of 2.9 gigawatts, up from 2.4 gigawatts now, with minimal capital expenditure.

We expect all of these steps to result in better financial performance again in 2016, with better margins, cash flow generation and further debt retirement. Maggie will offer specific guidance for the coming year in a moment.

I remain excited about our prospects for 2016 and beyond. We are transitioning the overall business away from lower-margin contract manufacturing to higher-margin projects, equipment and LED sales. The disciplined execution of strategic plan remains the focus of the entire ReneSola team. We will maintain our commitment to delivering higher quality, with a focus on tight cost control and cash generation that will strengthen our balance sheet over time.

I'm very proud of the hard work of the entire ReneSola team and have high expectations for continued success in the quarters ahead.

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 the financial performance for the first quarter 2016 and then discuss our outlook.

Let's begin with slide 5. As Mr. Li highlighted during his comments, our financial performance during the first quarter was solid. It keeps us on track to deliver 2016 results in line with our guidance.

Revenue of $260.7m for the first quarter was within our guidance range of $260m to $270m. Q1 revenue was down 12% sequentially and down 25% year over year. The revenue decline on both sequential and year-over-year basis reflects the continued - redirection of OEM module production away from external sales and towards the Company's project development, coupled with the decline in ASP of our modules.

Gross profit of $44.5m declined 6% sequentially, but increased 21% year over year. Q1 gross margin was 17.1%, up from 16% in Q4 2015 and from 10.5% in the same quarter last year. The sequential margin improvement in the quarter was due in part to wafer margin improvement in Q1 of 2016 and the growth of LED business.

Note that the gross margin in Q1 2016 was in line with guidance of about 17%.

Operating expenses for the first quarter 2016 were $32.3m or 12.4% of revenue, up from $30.5m or 10.3% of revenue in the prior quarter, but down from $46.2m or 13.2% of revenue in the prior-year period. The year-over-year decline in operating expense in the quarter reflects the cost control initiatives and actions we continued to take during the quarter.

As Mr. Li mentioned, we remain committed to R&D spending for new technologies, enhancing the efficiency of our current solar and other clean energy products. However, we are taking a more cautious and conservative approach to spending in other areas. We are managing our discretionary expense across the Company in a smart and prudent manner.

Sales and marketing expense decreased 38% year over year. General and administrative expense was down 3% in the quarter from last year.

Operating income for the first quarter was $12.2m, down 28% sequentially. Operating margin for Q1 was 4.7%.

Non-operating expense of $6.1m includes net interest expense of $9.1m and losses on derivatives of $0.6m, offset by foreign exchange gain of $2.9m.

Net income for the first quarter was $5.7m, which compares to $6.7m in Q4 2015 and a net loss of $18m in the same quarter last year. Earnings per ADS in the quarter was $0.06.

Slide 6 provides a summary of the key components of our income statement over the last several quarters. Please turn now to slides 7 and 8, which highlight portions of our balance sheet.

We continue to maintain a substantial amount of liquidity. Cash and equivalents including restricted cash were $190m at the end of first quarter, up from $178m in Q4 2015.

Total debt was $737m, largely in line with the debt balance in Q4 2015. Short-term borrowings increased $66.8m in the quarter due to an increase of working capital loans and bill discount, coupled with the fact that $31m of the current portion of long-term borrowings were reclassified as short-term borrowings.

Total long-term borrowings decreased in the quarter, as the long-term loan associated with the Bulgaria project was transferred to the buyer. And as mentioned above, a portion of the long-term borrowings were reclassified as short-term borrowings.

During the quarter, the Company repurchased all of the remaining convertible notes of $26.1m.

Before I move on to our downstream business in the quarter, I want to reiterate that the entire finance team remains focused on improving our balance sheet, and we are happy with the continued progress the team has made.

Now let me provide the details of our project sales in the quarter, starting on slide 9. As Mr. Li highlighted in his comments earlier, we sold two projects in Bulgaria in the quarter. The projects are utility-scale systems with a combined generating capacity of 9.7 megawatts. Since these projects were carried as long-term assets on the balance sheet, and the sales were booked as a disposal of assets, with no direct impact to our revenue in the first quarter.

Now please turn to slide 11, which summarizes the size and geographic distribution of our project pipeline. We currently have 785 megawatts of projects in various stages of development, of which 765 megawatts are solar projects and 20 megawatts are wind-related projects.

As Mr. Li mentioned, 323 megawatts of projects are in the late-stage project pipeline. Slide 12 details the size, status and location of the current pipeline.

Slide 13 summarizes the results for LED. With revenue of $6.2m and gross margin of over 30%, as of the end of March we have accumulated over 4,100 LED customers. 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 product shipments in the quarter, shown on slide 14. 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 Q1 2016 was about $0.39 and we expect the cost per watt to further decrease in the coming quarters.

Total solar module shipment in the first quarter was 351 megawatts, compared to 373 megawatts in Q4 of 2015 and 496 megawatts in Q1 of 2015. The year-over-year decrease reflects our gradual exit from the OEM business as we successfully transition our business model to focus on project development. Wafer shipments were 351 megawatts, compared to 270 megawatts in Q4 of 2015 and 195 megawatts in Q1 of 2015.

The pie chart on the right highlights the geographic breakdown of module shipments in the first quarter. China represents around 24% of our total shipments. Japan was about 13%. Europe was about 7%. And the US was approximately 3% and the rest of the world about 53%.

Our module ASP decreased slightly, to $0.52 per watt in Q1 2016 from $0.54 per watt in the fourth quarter of 2015.

Finally, we conclude with guidance, which is on slide 15. The revenue outlook reflects continued shift of OEM production from external sales and towards proprietary project development. We believe that the shift will also improve gross margin and overall profitability.

In the second quarter of 2016, we expect revenue in the range of $280m to $290m and gross margin to be approximately 18%. For the full year, we continue to expect revenue in the range of $1b to $1.2b.

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

(Operator Instructions). Patrick Jobin, Credit Suisse.

Hi. This is [Maheep] on behalf of Patrick. Thanks for taking the question. On Q4, could you just help us understand the geography split? The rest of the world was a big portion, around 53% in the quarter versus just 30% in the last quarter. So can you help us understand where that's coming from?

And as a follow-up, can you also help us understand the challenges in the quarter you have been talking about in the press release, and how do you see that developing in Q2 and second half? Thanks.

Okay. For the geographic mix, I think for the rest of the world about 53%, which is mainly -- the big part of that is from India, which accounts for about 38%. And the others are from the rest of the world, like from Asia and South Africa.

And for the Q2 and beyond, we expect that in Q2 actually a bigger part will come from China, which accounts about 40% to 50%. But in the second half, I think the from Asia requirement will grow compared to Q2.

Thanks. And just on the downstream side of the business, can you help us with your target for the whole year? Are you still on track for shipping more than 100 megawatts, or are you selling more than 100 megawatts in the year? And how should we think about the split between wafer and module this year? Thanks.

Yes. I think for the project side, we remain the outlook about 100 megawatts to be sold this year because we will construct more, but we estimate the selling will remain the same.

And for the module and wafer, the wafer -- the external selling of wafer will increase as we expanded our capacity. And for the module selling, it will remain almost at the same level.

Thank you. I'll get back in the queue.

Philip Shen, Roth Capital Partners.

Hi, everyone. This is Justin. I'm on for Phil today. So the module ASP in Q1 --

Hi, Justin.

Hi. So the module ASP in Q1 dropped a bit versus Q2. I just wanted to understand the reason for this decline. Is a big part of it because of increased shipments to India? And then could you give us a sense for what blended ASPs could be in Q2?

(Spoken in Chinese).

Okay. So Mr. Li is saying that he expects a stable market in the first half of this year, and he expects that there will be a demand from the -- some demand in China as China -- as projects -- as people are rushing to complete a project in China before the first half of the year. And the decrease -- the decline of ASP is because we reduced our shipment to the US market.

Okay. Great. So if there's a rush in Q2 in China, what can you say about your visibility into demand into the second half? You expect a decline in China because of that pull-in effect?

(Spoken in Chinese).

Well, he expects that there will be flat season from the month of July, but he expects there will be a bump in demand in Q4. But generally speaking, he expects a lower demand for the second half of this year than first half of the year.

Okay. Got it. And then maybe one on the LED business. From a bigger picture perspective, I just want to know how large could the LED business be? And then as the business grows, do you continue to expect margins of greater than 30%?

(Spoken in Chinese).

We now have customers of 4,140 as of the end of March, and generally speaking we have 400 to -- 300 to 400 new customers every month. So, now the gross margin is above 30%, and -- because the business is currently new. But he expects $20m of revenue per quarter by the end of this year, and he expects the gross margin to decline too, with the increase of a purchase. Now he expects a gross margin of over 40% in the future.

Okay. That's great. That's all from me. Thank you.

Paul Strigler, Esplanade Capital.

Hi, guys. Nice quarter. I'm just trying to understand the gross margin guidance. So you guys, I understand you're expanding into LED and you intend to sell some projects downstream, but you guys are still big consumers of polysilicon and module pricing continues to fade a little bit. How are you -- I guess can you just help me understand why gross margins would be up Q over Q?

And then my other question related to that, are you recognizing revenue and profit on electricity sales for projects you intend to sell?

Your second question is if we recognize revenue from the electricity sales, right?

On projects you intend to sell. I thought you were supposed to reduce the carrying basis on your balance sheet and then when you sell the project you'll recognize a higher gross profit, but that you weren't recognizing the electricity revenue and margin on projects you intend to sell.

I'll answer your second question. We only recognize electricity revenue for Romania project, which we take it as a fixed asset. For other projects already developed, we are going to sell them and don't recognize the revenue of electricity.

Let us answer your first question about the gross margin, right? Let us answer your first question. Okay?

(Spoken in Chinese).

Well, Mr. Li said that the increase of gross margin is due to the structural change in our business model, with our focus in the higher business segments, such as solar project sales which has a gross margin of over 20%, and LED business which has a gross margin of over 30%. That was the main driver to the gross margin incline in the future.

Okay. It just seems like those are still very small percents of your total revenue and that -- I guess even if those numbers were true, just given the percent in Q4 that you -- sorry, Q1, you would basically be expecting relatively flat gross margins from your module and wafer business. Is that a fair statement?

(Spoken in Chinese).

Well, we expect a relatively stable gross margin in wafer and module sales. We expect a decline in ASP, but we also expect a decline in the cost too.

All right, guys. Thanks so much.

(Operator Instructions). I'm seeing no more questions in the queue. Let me turn the call back to Rebecca Shen for closing remarks.

Thank you, operator. Let me make some closing remarks on behalf of Mr. Li. We are pleased with our first-quarter performance and the direction of the Company. Our strategic shift to the project business continues to gain traction. We're developing a global pipeline of projects around the world and expect to further monetize our downstream effort. This will in turn provide a crucial capital infusion, enabling us to strengthen our balance sheet.

As we look to the remainder of 2016, we will maintain our commitment to growing profitably, prudently managing our operations and remaining financially strong. We believe we're in a position to execute well and build a great foundation to increase shareholder value in 2016 and beyond.

That concludes our call today. You may all disconnect.