Hello and thank you for standing by for JA Solar’s third quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
I’d now like to turn the call over to your host for today's conference, Mr. Nick Beswick of Brunswick Group. Please go ahead.
Thank you. Welcome to JA Solar’s third quarter 2012 earnings conference call. Joining us from the company today are Dr. Peng Fang, CEO; Mr. Min Cao, CFO; and Dr. Christoph Flinck, Head of Strategic Planning and Corporate Development.
As stated in the press release, the oversimplified translation of CNY into US dollars, which is set at 6.343 RMBs to the dollar, is made solely for the convenience of the audience. References to dollars are the lawful currency of the USA.
The press release published today provides detailed financial tables for the conversion from CNY to USD. On this call, Dr. Fang will begin with an overview of the company's Q3 2012 results covering the business and market developments and outlook. Following that, Christoph will provide details of the company’s financial performance.
After the prepared remarks, we will open up for questions for the remainder of the call. We expect the entire call to last approximately one hour.
Before we begin the formal remarks, I’d like to remind you that certain statements on today’s call, including statements regarding expected future financial and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ into general, business and economic conditions in the solar industry; governmental support for the development of solar power; future shortage or availability of the supply of high purity silicon; demand for end-user products by consumers and inventory levels of such products in the supply chain; changes in demand from significant customers; changes in demand for our major markets; changes in product mix, capacity utilization, level of competition, pricing pressures, and declines in average selling prices; delays in the introduction of new product lines; continued success in technological innovations; shortage in supply of raw materials; availability of financing; exchange rate fluctuation, litigation and other risks as described in the company’s SEC filings including its annual report on Form 20-F filed with the SEC.
Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. You should not place undue reliance on these forward-looking statements. All information provided on today’s conference call speaks as of today’s date unless otherwise stated and the company undertakes no duty to update such information except as required under applicable law.
I will now turn the call over to Dr. Peng Fang, CEO of JA Solar.
Dr. Peng Fang
Thank you, Nick and thank you everyone for joining today’s call. We continued to see significant industry wide over capacity and we expected this pattern to continue for a few quarters before the market returns to a more normal balance of supply demand. In spite of this challenging condition, we posted a shipment of 418 MW, above the high end of our guidance. Thanks to a solid performance across our key growth markets, in Q3 modules constituted about 60% of our total shipments of volume and about 70% of the revenue. This is a testament to JA Solar’s successful transform into the module company over the last three years.
Despite our negative gross margin this quarter, we continued to manage our cash position well, positioning a positive operating cash flow and as part of our effort to maintaining a competitive balance sheet, we bought back a significant portion of our outstanding convertible notes and continued to explore potential channels to meet our long term financial needs.
Taking the right balance between maintaining a solid financial footing and a strong position in key growth market remains controlled to our long term success and we will continue to expand our market share in key regions in the coming quarters.
On the technology side, we maintained a strong progress we have made in increasing the quality, efficiency and reliability of our product offering. We’ve remained confident that we were emerging from the current industry environment as a market leader.
Let’s take a look at some key metrics for the quarter. We posted a shipment of 418 MW this quarter which was above the high end of our guidance. This comes on the back of a strong performance across key growth markets with partnerships and several utility share projects in China playing an important role.
Gross margin declined to negative 5.9% in this quarter. This was largely a consequence of the continued ASP pressure across the industry as well as the high proportion of our modules shipments that went to ASD markets like China and Germany. Gross margin was also negatively impacted by an inventory provision which was partly offset by reverse of AD quality provision in the US. Excluding this impact, gross margin would have been negative 3.7%.
Operating margin was negative 38.5%. We were impacted by an increase in operating expense largely due to a long list asset impairment of $39.9 million and a prepayment of the impairment of $12.0 million. Excluding this impairment, operating margin would have been negative 18.6%.
We recorded a net loss in the third quarter of $59.1 million as compared with $72.8 million in the second quarter. We maintained a solid cash position through the third quarter with cash and cash equivalents and restricted cash at the end of Q3 of $606.1 million. Total short term and the long term bank borrowing due within one year and the convertible notes due May 2013 combined were $568.8 million compared to $628.2 million in the second quarter. Operating cash flow in the third quarter was positive $86.8 million.
Now I want to take you through our view of global markets. Overall, there are continued signs that consolidating is underway in the solar industry. This is the nature consequence of the overcapacity that has caused the sustained ASP pressures we’ve seen in the recent quarter in this environment customers increasingly value the security provided by PV manufacture with solid financial position and JA Solar is an excellent example. With customers demanding more than ever in terms of quality and reliability of cells and modules, JA Solar’s strength in this area gives us confidence we were emerging from the current downturn as an industry leader.
Looking now at our performance across key markets. Firstly, demand in Europe is adversely affected by shifting government incentives. As a consequence, our shipments to this region saw a sequential decline this quarter. We are cautiously optimistic about earlier indications that prices are stabilizing in Europe as the market adjusted to the shift away from a subsidy based model towards a more market driven one. Europe will continue to play an important role in the global market during this transition and we will continue to supporting our customers there. In Japan, high demand and a favorable market environment both point to sustainable growth.
This quarter we saw an increasing number of PV players entered the Japan market which impacted ASP. However, JA Solar’s strong partnerships and reputation for the products that makes this the high demand of the Japanese customers, positioned us to make record shipments to Japan in the third quarter. With our new Tokyo office up and running, we slowly expect to maintain our leading position in Japan.
We are also making good progress in China where we continue to benefit from a strong pipeline of utility share projects. JA Solar’s positive relationship with project developers combined with regulatory support for distributed generation means we are well positioned to benefit from the long term growth potential in the China market. However, ASP pressure in China is greater than many other markets and we expect this to continue in the near term.
Looking to the North America market, our shipments to US exceeded Q1 and Q2 shipments combined. Now that we have greater regulatory visibility in the US, we will continue to work with our manufacturer partners to increase our share of the market there. Given the current challenging conditions in traditional markets, we are focusing our energy on developing new growth markets.
During the third quarter, we continued to explore opportunities in a range of America’s solar market, including Australia, Southeast Asia, notably Thailand and South America. Our team has made encouraging progress in developing potential customers and we are excited by the long term potential of this market.
Looking into Q4, we expect quarterly shipments to be in the range of 380 MW to 420 MW. For the full year, we are modeling our shipment guidance to between 1.55 GW to 1.65 GW. This compares to our previous provided range of 1.5 to 1.8 GW.
In summary, we firmly believe that solid financial position is essential to long term success in the solar market. Our focus remains on maintaining a robust balance sheet, prudently managing our cash position. At the same time, JA Solar’s worldwide reputation for market leading high quality, high efficiency products has allowed us to maintain a strong position in key markets and to build experiences in a newer locality. We remain as confident as ever that we will be a long term winner in this industry.
With that, I will turn the call over to Christoph for a more detailed look at our operating and finances.
Thank you, Dr. Fang and welcome everyone to today’s call. I would like to quickly update you on our technological progress and financial results for the third quarter 2012. As Dr. Fang mentioned, customer demand for product efficiency and reliability are now stronger than ever and that’s why our continued R&D efforts have positioned us well.
In Q3 we launched our new 6-inch full-square mono module series for the maximum power output of 275 watts and a mainstream power output of 217 watts in 60 cell products. As a result of our focus on R&D efforts, we were also able to increase the output of our conventional 6 inch mono modules to 265 watts, and increased that of our conventional 5-inch mono to 210 watts. In the current market, customers are more demanding than ever and we are confident that we can continue to strengthen our leadership position in technology.
Looking now at our key financial indicators for the quarter. We shipped a total of 418 MW of solar power products in the third quarter, which was above the high end of our guidance. This is roughly the same level as in Q2 and a 6.1% decrease from 445 MW in the third quarter of 2011. Within these shipments, modules accounted for 59.0%, cells 59.1% and cells tooling for 1.9%.
As Dr. Fang mentioned, our product mixed continues to shift with modules accounting for increasing proportion of overall shipments. We accelerated our annual target for module shipments and we are very encouraged by how the size of the business is developing.
In terms of the geographical breakdown of these shipments, China accounts for approximately 56% with the rest of the world collectively accounting for 44%. To break this down further, Europe accounts for approximately 29% of shipments while the rest of the world, including the US and Japan accounts for around 15%.
Total revenue in Q3 was $260.9 million, a decrease of 9.2% sequentially and a decrease of 32.7% year on year.
Gross loss in the third quarter was $15.4 million, compared with a gross profit of $13.7 million in the second quarter of 2012 and a gross loss of $16.9 million in Q3 2011. Gross margin was negative 5.9% in the third quarter of 2012, compared with positive 4.8% in the second quarter of 2012 and negative 4.3% in the third quarter of 2011. Excluding an inventory provision of $8.2 million and a reversal of prior provisions for anti-dumping and countervailing duties in the United States of $2.5 million, gross margin would have been negative 3.7%.
Total operating expenses in the third quarter were $85.1 million, compared with $38.5 million in the second quarter of 2012 and $27.1 million in the third quarter of 2011. The sequential increase was primarily due to a long-lived asset impairment of $39.9 million related to the Company's multi-crystalline wafer manufacturing facilities in Donghai and a prepayment impairment of $12.0 million.
Operating loss in Q3 was $100.4 million, compared with an operating loss of $24.8 million in the Q2 2012 and an operating loss of $44.0 million in the third quarter of 2011. Excluding the aforementioned long-lived asset impairment and prepayment impairment, operating loss would have been $48.5 million. Operating margin was negative 38.5% in the third quarter of 2012, compared with a negative operating margin of 8.6% in the second quarter of 2012 and a negative operating margin of 11.2% in the third quarter of 2011.
Interest expenses in the third quarter was $206 million, which marked a slight decrease from $21.2 million in Q2 2012.
Other income in the third quarter was $57.9 million, compared with other loss of $7.7 million in Q2 2012 and other loss of $2.1 million in the third quarter of 2011. Included in other income in the third quarter was a one-time gain of $58.7 million from sales proceeds of certain rights pertaining to a claim against Lehman Brothers International Europe Limited, originating from an American Depository Share lending agreement dated May 13, 2008 entered into between the Company and LBIE.
Tax benefit in the third quarter of 2012 was $4.0 million, compared with tax expense of $19.1 million) in the second quarter of 2012 and a tax benefit of $4.6 million in the third quarter of 2011.
Net loss in the third quarter was $59.1 million, compared to a net loss of $72.8 million in Q2 2012.
In the third quarter of 2012, the Company had a positive operating cash flow of $86.8 million.
On the balance sheet side, our cash and cash equivalents at the end of Q3 stood at $543.7 million compared to $595.5 million at the end of Q2 and $514.0 million at the end of the third quarter last year. Accounts receivable at the end of Q3 were $246.1 million compared with $243.7 million at the end of Q2 and $242.1 million at the end of Q3 2011.
Date of sales outstanding at the end of Q3 were 85 days compared with 76 days in Q2. Total inventories at the end of Q3 were $230.9 million compared to $265.3 million at the end of Q2 and $193.4 million at the end of the third quarter 2011.
Inventory turnover days in Q3 was 70 days compared with 87 days in Q2. Total prepayment to suppliers were $232 million compared with $260.3 million in Q2 2012 and $351.9 million at the end of Q3 2011. We expect to utilize $36.4 million of prepayments of 15.7% over the next 12 months.
Total working capital at September 30, 2012 was $312.6 million compared with $320.0 million on June 30, 2012. Total short-term bank borrowings and convertible notes due May 2013 were $253.2 million. Total long-term bank borrowings were $720.1 million), among which $315.6 million were due in one year. The total face value of our outstanding convertible notes due 2013 was $128.0 million at September 30, 2012.
Before we move on to the Q&A, I want to briefly explain the situation with NASDAQ. As announced in October, we received a notice from NASDAQ stating that JA Solar no longer met the Exchanges’ listing requirements due to the fact that our stock had traded at below $1 for over 30 consecutive trading days. The company was given a period of 180 calendar days, or until April 9, 2013, to regain compliance with NASDAQ rules.
Subsequently, we announced earlier this month that the company is initiating a change to the ratio of its ADS to ordinary shares from 1.1 to 1.5. We expect the ratio change to bring the Company back into compliance with NASDAQ listing standards.
Operator, you may now open the call to questions.
(Operator instructions). First question comes from the line of Edwin Mok from Needham. Please ask your question now.
Edwin Mok – Needham & Company
Thanks for taking my question. So first is on the gross margin. I think on your prepared remark you mentioned that part of the reason why you have negative gross margin was a higher percentage of module shipment. Was that – did I get that correctly? And what drove this negative gross margin for modules?
Yeah, let me answer the session. The negative gross margin is the primary impact that we had for a larger shipment to China and Europe which in last quarter by chance is the lowest ASP compared to Japan and the US market. So our volume is up in China and also in Europe it’s maintained. However, the ASP is lower. Also the manufacture cost we are – in the last few quarters has aggressively reduced, but it’s not able to compensating the ASP decline.
The next question comes from the line of Kelly Dougherty from Macquarie. Please ask your question.
Matt Frank – Macquarie
Hi. This is Matt Frank [ph] calling for Kelly. Just a quick question for you guys. You’ve obviously done a really good job at ramping those module sales in a quick time fashion. I’m curious, are you planning to move even further downstream into project development at all?
Dr. Peng Fang
Okay. Let me see. When I joined JA Solar in 2010, we have most of the sales come from the solar sale owner. So we decided to move to module business from that time and in the last couple of years under current management we made a very significant transition. So this quarter we claim as the transition is largely successful and completed, which is very, very, at the industry also is a milestone because many companies in this transition actually are getting heavily damaged. So JA Solar managed this transition successfully and in terms of are we going to move to downstream system business. Right now we have not announced any strategy on this front. However, we are actively working with our partners in downstream both in China and also in Japan and in other regions.
Your next question comes from the line of Pavel Molchanov from Raymond James. Please ask your question.
Pavel Molchanov – Raymond James
Thank you for taking the question. You referred to the disappointing outcome and your view of the Washington ruling on tariffs. Are you concerned about an analogous decision in Europe for next year and have you seen any reluctance by customers to accept deliveries from Chinese companies in Europe in advance of that decision by the EU?
Dr. Peng Fang
Okay. Yeah. For the antidumping in US, the outcome is clear now and based on the ruling of the finally published actually the panel manufacturer in China they could purchase these cells from Taiwan or outside of China and mixed modules in China, then shipped it to customer in US. So in that front I think US market is clear and I think we will continue supporting our customer over there. In terms of yield, I think the antidumping or countervailing is just starting and we are engaged our customers and customer right now the feedback is that they are still waiting for the transaction, but we expect that some sort of discussion or agreement will be reached however in the 18 months. Right now we haven’t seen a clearly concern or canceled order. We haven’t seen any of this. This will happen maybe after Q1 next year when the preliminary injunction getting very close. There is no clear statement. Maybe they’re starting to consider this carefully. Right now there is no timeline indicating people should stop order or stop the shipment.
Your follow up question comes from the line of Edwin Mok from Needham. Please ask your question.
Edwin Mok – Needham & Co
Hi. Thanks for taking my follow up. I guess a question on pricing trend. What are you seeing? How much does price decline to a cell price and module price decline in the third quarter and how are you seeing that in the fourth quarter right now?
Maybe I can answer this. So from quarter to quarter for margins we saw a decrease in ASP in the upper single digit percentage so minus 8% and we saw some decrease in pricing of minus 13%. At this point in the volatile market it’s probably very difficult to really make a prediction on where the prices are developing. However, we certainly hope and believe that the price will be stabilizing.
(Operator instructions). A follow up question is from the line of Kelly Dougherty from Macquarie. Please ask your question sir
Matt Frank – Macquarie
Hi, it's Matt again. Thanks again for taking the follow up. Curious on a little bit more detail on the project pipeline. I know you had mentioned China and utility projects. But I'm curious if you will be able to offer any detail on any pipeline opportunities in Europe or the US?
Dr. Peng Fang
Okay. For the project in China, so we are, our role, JA Solar’s role is supply the modules to some leading system guys in China. So as you know since last year China published the subsidy advisory system and the solar market went up. So within past year last year shoot up for like from almost nothing to about 3 GW range and this year people expected this volume were almost double. So were around 5 or some GW and also China started some distributed solar system which accounted for significant portion, maybe 15 GW the next two or three years and largely in the East Coast area which the power consumption concentrated. So JA Solar has got the main supplier. We’re continuously supporting all these developers in this area.
So we do not have our own pipeline in large scale. We do have some, like 100 to 200 MW in West part of China, the permission. However, we haven’t taken action to implement that. We want to position ourselves as a panel supplier. In terms of US, because of antidumping early this year is unclear so we are intentionally reduced our activity here. However right now since the antidumping getting clear we’re starting to reengage the customers and to supply the modules of course to meeting the US regulation.
(Operator instructions). We have a new question from the line of Satya Kumar from Credit Suisse. Please ask your question.
Brandon Heiken – Credit Suisse
Hi. This is Brandon Heiken asking the question on behalf of Satya. I was wondering if you can provide some guidance in terms of what turns you expect across your different regional markets. Thank you.
Dr. Peng Fang
So the question is the cost of the module or cell?
Brandon Heiken – Credit Suisse
So you know across the different regional markets, like geographically what turns do you expect in fourth quarter in terms of your shipments to North America, Europe, Japan and China?
Dr. Peng Fang
I think in the geography distribution of our shipment in Q4 will be similar to Q3 and China still a positive market here and also the US is increased slightly and Europe is stabilizing. And of course in Japanese market we are one of the leading providers over there with a higher ASP. We see some growth in Japanese market and also probably next year we’ll be the major increase in Japanese market.
Brandon Heiken – Credit Suisse
Your next question comes from the line of Jeff Osborne from Stifel Nicolaus. Please ask your question.
Jeff Osborne - Stifel Nicolaus & Co.
Yes, two questions. I was wondering if you could comment on what your views of the channel inventory situation is in terms of Europe and in China. Are there a bunch of modules themselves sitting around that's also exacerbating the problem? Then the second question is just can you comment on what your production cost currently is or if it's sequentially improved.
Maybe I can answer that question. So when it comes to inventory, in Q3 we had a reduction of our inventories in the range of 20%, a little less for cells. So, 20% for modules, a little less for cells. When it comes to the manufacturing costs, so our manufacturing cost now have been in the mid 50s dollar cent range and went up a little bit compared to previous quarters due to some under utilization. This means that we see costs modules quarter to quarter flat and wafers as well. The increase comes from the cell parts.
Jeff Osborne - Stifel Nicolaus & Co.
I apologize on the inventory. I was actually asking about the inventory as a whole for the industry, not just for JA Solar. Are you seeing some of the competitive pricing due to just over capacity in the industry or is it actual finished goods inventory that's sitting in ports like Rotterdam and other parts of Europe, as well as on the ground there in China?
Dr. Peng Fang
Yeah. Actually in Q3 we see the – let me put it this way. In Q2 people have high expectations. They build a lot of inventory including JA. But in Q3 because announcement antidumping or circumstances Europe and people are starting to slow down the shipment of production and we see Europe inventory is relatively reduced right now. It’s kind of low and people are starting to order some new orders in for the volume in Europe. Overall I think in the industry is that current inventory is reducing in Q3 and the volumes there are there. The only thing is the cost and also the capacity because they still have significant capacity over there. With the demand coming up, this capacity can easily come back to produce more goods.
Jeff Osborne - Stifel Nicolaus & Co.
Very good. Thank you.
(Operator instructions). Ladies and gentlemen, we are now approaching the end of the conference call. I’ll now turn the call over to Christoph Flinck for his closing remarks.
Thank you everyone for joining us today. We appreciate your interest in and support of JA Solar. If you would like to arrange a meeting with us or if you have questions, please contact or email our IR firm, Brunswick Group and they will be happy to help you. Their contact information is in today’s press release. Thank you again for your continued support and the team looks forward to talking with you in the coming months.
Thank you for your participation in today’s conference. This concludes the presentation. You may disconnect at this time. Good day.
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