Emeren Group Ltd (SOL) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the ReneSola Limited third-quarter 2016 earnings conference call. (Operator Instructions).

I must advise that this conference is being recorded today, Tuesday, November 29, 2016.

I would like to hand the conference over to your speaker today, Mr. Ralph Fong. Thank you. Please go ahead, sir.

Hello, everyone. Thank you for joining us on ReneSola's conference call to discuss third-quarter results. We released third-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 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. Maggie will then review our third-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 provisions 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 view 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 over to Rebecca, who will translate Mr. Li's prepared remarks. Rebecca?

Thank you, Ron. 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 the business and our performance. Then Maggie Ma, our CFO, will present operating and financial details for the third quarter and our updated guidance. We will then open the call to Q&A.

I would like to start with a recap of the third quarter. Please turn to slide 3.

We experienced a noticeable decline in revenue, due to challenging market conditions, especially in China. As you are all aware, the solar industry is cyclical and we're again in a midst of the downturn. Demand has slowed in most regions of the world for a variety of reasons.

In China, the FIT reduction that occurred mid-summer pulled a significant amount of activity into the first half. Project construction slowed even as more equipment capacity came online across the industry.

In the US, there is uncertainty around the status of the investment-type credit, which normally supports the IRR of solar projects.

Of course, we must operate prudently during down cycles. Our strategy is to keep the Company stable in tougher times and thrive in good times.

We will continue to focus on project development in mature, stable markets, while incubating interest in new opportunities, such as LED.

We will seek to maintain a stable business in wafers, cells and modules. Meaning, we will run that business as a cash cow, with little capital needs and no capacity expansion. This should enable us to continue our three-year [cost sustained] on that.

Looking at specifics of the quarter, revenue of $187 million was down 49% year over year and 25% sequentially. This was below our guidance of approximately $200 million. The miss was due to a decrease in solar product shipments, coupled with significant pricing pressure.

The LED business was also a bit soft, recording an 8.9% sequential revenue decline.

Gross margin of 10.1% was down from 16.1% in the same period last year, and from 16.5% in Q2, and it was in line with our guidance. Increasing polysilicon prices, combined with soft wafer module selling prices accounted for most of the gross margin pressure.

On the bottom line, we recorded a net loss of $20.5 million, which compares to a net income of $8.6 million a year ago. EBITDA decline 84% year over year.

Although the financial results were poor, we did continue to execute on key strategic goals. In downstream project development, we continue to gain traction in developing a robust pipeline of future projects across different geographies.

We now have 1-gigawatt of projects in various stages of development. Our shovel-ready pipeline features 448 megawatts in the US, the UK, Turkey, China, Japan, Canada and France. This gives you a sense of the size of the upcoming monetization opportunity of project assets.

The UK remains an excellent market for us, and the recent activity highlights our competitive advantages there. We recently signed agreements to sell six utility-scale projects there to a European investor. The projects have a combined capacity of approximately 26 megawatts. They also [slow down] the four utility-scale projects we sold in Q2. The 20 megawatts sold generated $27.8 million of revenue, which we recognized in Q3.

North America is also a large and robust market for us. Our US shovel-ready pipeline is approximately 105 megawatts project and we intend to commence construction of these projects in 2017.

As we discussed last quarter, we began developing rooftop projects in China. We see an opportunity domestically for smaller projects. With more attractive economics, smaller installations on commercial, industrial and residential buildings can be cost competitive for the building owners and can provide good IRR.

We now have around the 187 megawatts of these types of projects in our shovel-ready pipeline. We expect to build all of those in 2017.

In general, all those (inaudible) for all of our project development efforts in 2017. We intend to construct approximately 130-megawatt projects in Q4 and Q1 next year, and monetize projects starting from Q2.

Furthermore, in the domestic China market, our target is to have more than 200 megawatts distribution generation projects filed with the government by the end of 2016.

In closing, while we are not satisfied with our results, we're managing the Company prudently. We're positioning ourselves for return to growth and profitability in the coming quarters.

Profit development remains our focus, while we also continue to deliver high-quality solar equipment. We believe this will strengthen our competitive advantage.

Meanwhile, we retain our focus on tight cost control and cash generation. We intend to continue to strengthen our balance sheet, even during a down cycle.

Let me now turn the call over to Maggie for details on our financial performance, Maggie.

Thank you, Mr. Li and Rebecca. Thank you, everyone, for joining us on the call today. I will review our operations and financial performance for the third quarter of 2016, and then discuss our outlook. Let's begin with slide 4.

Revenue of $187 million for the third quarter was down 25% sequentially and down 49% year over year, falling short of our guidance of $200 million. As Mr. Li discussed, the shortfall was due to the unfavorable market conditions, which negatively affected solar product pricing and product shipments to external customers.

Gross profit of $18.9 million declined 54% sequentially and 68% year over year, but was in line with our guidance. Q3 gross margin was 10.1%, down from 16.5% in Q2 2016 and 16.1% in Q3 2015. The sequential reduction resulted from lower wafer and module ASP, coupled with an increase in raw material costs.

Our operating loss for the third quarter was $11.9 million compared to operating income of $6.4 million last quarter.

Operating expenses for the third quarter of 2016 were $30.7 million, down 11.6% sequentially and down 35.9% year over year. The decrease in operating expenses in this quarter was largely attributable to tight cost control initiatives.

Sequentially, SG&A expense decreased 16.5% and R&D expense decreased 15%. We are taking a more cautious approach to spending in a number of areas. In particular, we are prudently managing our discretionary expense across the Company.

As Mr. Li noted, we intend to remain a healthy Company during the down cycle and be ready for higher growth and a better profit as the industry recovers.

Below the operating line, non-operating expense of $10.6 million includes net interest expense of $7.7 million and a foreign exchange loss of $3.3 million, offset by gains on derivatives of $0.3 million.

Net loss for the third quarter was $20.5 million, which compares to a net income of $5.5 million in Q2 of 2016 and $8.6 million in the same quarter last year.

Loss per ADS was $0.20 in the quarter, compared to earnings per ADS of $0.05 in Q2 of 2016.

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

Please turn now to slide 6, which highlights the importance of our balance sheet. Cash and equivalents, including the restricted cash, was $139.4 million at the end of the third quarter, down $24 million during the period. The decrease is primarily due to the repayment of our fully pledged loan.

Total debt was $699 million, down from $717 million, as of June 30, 2016. Total borrowings decreased by $17.5 million in the quarter, as the Company paid down short-term debt in the third quarter.

Our long-term objective remains to reduce debt substantially. We have built significant enterprise value in ReneSola. We strongly believe that each dollar of debt reduction will yield a similar increase in the value of the Company's equity.

Now, let's move on to the details of the project pipeline. Slide 7 shows our recent history of sales including the two projects in Japan this quarter.

Slide 8 shows our geographic footprint. Slide 9 breaks out the shovel-ready pipeline by country.

Our aggregated pipeline now stands at approximately 1 gigawatt of projects in various stages of development. Of which, 448 megawatts are projects that are shovel-ready. We intend to construct 130 megawatts of the shovel-ready projects in Q1 2017.

Slide 10 summarizes the result for the LED business. After several consecutive quarters of top-line growth, we experienced a decrease in revenue in the third quarter. Revenue came in at $7.1 million, down 9% (sic - see slide 10, "8.3%") sequentially. Our gross margin was nearly 30% in the quarter.

We still have an optimistic outlook for growth in the LED business, because market penetration around the world is ongoing. As of the end of September, we had over 4,050 active customers.

Furthermore, we recently began working in partnership with sales agents in the US and Europe. Based on early results, the new sales channel is effective in capturing new sales opportunities for us, which we believe should drive sequential top-line growth in Q4.

Next, let me touch on our module and wafer product shipments in the quarter, shown on slide 11.

Our module and wafer business is still attractive. Given the cost reduction initiatives we put in place, our in-house manufacturing costs per watt, in Q3, was in high $0.30-s, due to production reduction and high material costs. We expect the in-house costs per watt in Q4 will be controlled in mid-$0.30-s and it will be further decreased in 2017.

Total solar module shipment in the third quarter were 191 megawatts compared to 282 megawatts in Q2 of 2016 and 405 megawatts in Q3 of 2015. The year-over-year decrease, on one hand, reflects our gradual exit from OEM business, as we successfully transition our business model to focus on project development.

But on the other hand, the decrease was aggravated, due to some sales order that were postponed to Q4 of 2016. We foresee that the module shipment, in Q4, will be recovered to largely over 300 megawatts.

Wafer shipments in Q3 were 291 megawatts compared to 423 megawatts in Q2 of 2016 and 342 megawatts in Q3 of 2015.

The pie chart on the right highlights the geographic breakdown of module shipments in the third quarter, while demand in China showed as expected. China represents 56% of our total shipments in the quarter. Japan is an important market for us, representing 9%. India has emerged as another important growth market for us, representing 21% in Q3. US represented 2% and the rest of the world, 12%.

Our module ASP decreased meaningfully to $0.45 per watt in Q3 2016 from $0.53 per watt in the second quarter of 2016. We did not ship much to the US, which typically commands higher pricing.

Finally, we'll conclude with guidance, which is on slide 12. In the fourth quarter of 2016, we expect revenue to be in the range of $220 million to $240 million and gross margin in the high-single digits.

Before we go to the question-and-answer segment of our call, I would like to take a minute to address the continued listing standards notice from the NYSE.

On November 7, the Company received the notice from the NYSE saying that it did not meet the NYSE's price criteria for continued listing for a consecutive 30 trading days' period. The average closing price of our ADS was less than $1.

Under NYSE's rules, we have six months to regain compliance, basically by getting our price above $1. We do expect to cure this deficiency within the timeframe. We are actively considering several possible actions to gain compliance, including a reverse split and a share buyback.

With that, we will now open to take your questions. Operator, please go ahead.

(Operator Instructions). Philip Shen, ROTH Capital Partners.

This is Justin on for Phil today. So, you're estimating that your module margin was about 13% in Q3, based on your commentary. I was just wondering if you could share what it, actually, was for modules and for wafers in Q3. And then, give us what your expectations are for each business in Q4, as we've seen a rebound in wafer pricing, but module pricing appears to be continuing on a downward trend. Thank you.

Okay, so I think compared to other peers, the Q3 margin is a little lower than our peers', like in the mid-teen percent. That is because our -- the cost for the -- the ASP of wafers decreased a lot in Q3.

When going to Q4, I think the ASP of wafer already gets recovered from Q3. So, we can expect that the module margin -- the margin of module selling and wafer selling will go back to, like, the nearly 10%.

Okay, so each one will be nearly 10%, module and wafer for Q4?

For wafer, it's just like --

(Spoken in foreign language).

Right, so the module parts of the gross margin will be higher and the lower -- for the wafer side, the margin will be lower than the average.

Okay, got it. Okay, so then looking further ahead, we're in kind of a challenging environment right now. I was wondering how long do you expect to expect the environment to remain challenging. When could we expect to see a point where supply and demand are in better balance?

(Spoken in foreign language).

So he says that the over-capacity will last for a long period and it will be -- the supply and demand situation would fluctuate with the policy.

For example, he mentioned that for the China, he expects Q2 or Q3 that the pricing would go up. The market will be pretty good, because there was a deadline -- there will be a deadline for the amount of subsidy cut. So, the pricing will be pretty good before that.

Okay, makes sense. Then moving to your downstream business. You mentioned plans to construct 130 megawatts in Q4 and Q1 of next year. Could you share which regions those projects are located in?

Then for the full year, I think you previously talked about 300 to 350 megawatts of project sales. Can you update us on that plan, whether you still expect that?

(Spoken in foreign language).

Well, he said we have 8-megawatt under construction in the US right now and we plan to start construction of another 27-megawatt in the US for Q1 next year. Then, for Turkey, we plan to build 12 megawatts for Q1 next year; and then, 9.3 megawatts in the UK market for next year -- for next Q1. The rest are from China domestic market.

And then for the full year, do you still expect 300 to 350 megawatts?

(Spoken in foreign language).

So Mr. Li said that we have around 448 megawatts of projects that in the status of shovel-ready. So, he expects that we plan to build 130 to 140 megawatts per quarter.

Okay. All right. Thank you very much for the questions. I'll jump back in the queue.

Sure.

Maheep Mandloi, Credit Suisse.

Could you just talk about 2017 margins, as in you plan to achieve mid-$0.30-s cost by end of Q4. How should we think about the costs and module ASPs next year and the margin levels?

(Spoken in foreign language).

(Spoken in foreign language).

Well, Maheep, he said he expects that for the whole year next year, the overall gross margin for the Company will be around 14%. Of which, manufacturing business will be around 8% to 10%.

The LED business, as well as the projects business, will contribute higher gross margin, so that makes the overall gross margin to be around 14%. He expects the whole year revenue to be around $1 billion to $2 billion for next year.

Thanks for the color. Just looking at the downstream business, I believe in the last question, you then said 130 to 140 megawatts per quarter of downstream project construction through the next year. How do you plan to fund the projects next year? And then I have a follow-up on the monetization.

(Spoken in foreign language).

(Spoken in foreign language).

Okay. We have different strategies to cope with different countries. Actually, in China, we have approached different financing institutions right now and we can expect we get the financing in Q4 and Q -- starting from Q4 and Q1 for Chinese projects.

For the Turkey and the US projects, we've already identified the end buyer. Therefore, with the support of the end buyer, we'll get the project financing from various banks and various financing institutions.

And just on Turkey and US, could you give some more color on who the end buyers are or what deal levels are they seeking on these projects?

Now, in Turkey, for the Turkey projects, we are now --

(Spoken in foreign language).

Okay. So, the end buyer for Turkey projects is some European, from European and from Germany.

(Spoken in foreign language).

He said we have secured a buyer for the 8-megawatt of projects under construction in the US. Then, we are already looking for a buyer for the 27 megawatts we plan to build next Q1.

Thanks. And just lastly on the LED business, we did see a slowdown in Q3. Can you talk about what drove that slowdown and how should we think about it in Q4, in terms of just the revenue growth for LED business?

(Spoken in foreign language).

(Spoken in foreign language).

(Spoken in foreign language).

He said that the reason that the LED business went down in Q3 is because -- the first reason is because of the holidays in Europe countries. The second reason is that we are having an internal consolidation of the LED business; we want to control the expense.

For Q4, he expects the revenue to hit $10 million.

That's great. Thanks.

(Operator Instructions). There are no further questions at this time. I'd like to hand the conference back to Mr. Fong. Please continue.

Hello, everyone. So, right now, let me turn the call back, to Rebecca, for closing remarks.

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

While Q3 financial results fell short of expectations, we're optimistic about the overall direction of our Company.

Our strategic shift to project development continues to gain traction. Our pipeline continues to grow, which has crossed the 1-gigawatt threshold.

We intend to grow our project development business significantly in accordance with that, in keeping with our plan to focus our efforts on the best opportunities for attractive and rapid return on investment.

Again, I want to reiterate that our focus remains on creating long-term shareholder value with a balanced strategy and strong focus on profitability, and profitability through operational excellence.

Our business remains solid. We're committed to performing well and building financial strength, relative to industry peers, in a challenging environment.

That concludes our call today. 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.