Paul Combs - VP, IR
Ki-Joon Hong - Chairman and CEO
Min-Su Kim - President
Jay Seo - Chief Financial Officer
D.K. Kim - Chief Strategy Officer
Jeong Eui Hong - CTO
Cheol Park - Shinhan
Hanwha SolarOne Co., Ltd. (HSOL) Q4 2012 Earnings Call March 18, 2013 8:00 AM ET
Ladies and gentlemen, thank you for standing by and welcome to the Hanwha SolarOne 2012 fourth quarter and full year earnings conference call. At this point in time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference is being recorded today Monday 18, March, 2013.
I would now like to hand the conference over to your first speaker for today, Mr. Paul Combs. Thank you, sir. Please go ahead.
Good morning everyone. Thank you, operator. Welcome to our call. Joining me today are our Chairman and CEO, Ki-Joon Hong; our President, Min-Su Kim; our CFO, Jay Seo; and D.K. Kim, our Chief Strategy Officer.
First of all, I owe you an apology. We have been notified by the newswire if they had some technical difficulty posting our earnings release. We just received a call and it should be out momentarily. So please pay attention to that again and our apologies in advance.
Chairman Hong will open with some general comments followed by Jay with a brief review of fourth quarter financial highlights. To save time, Jay will not formally review the full year numbers and trust you can obtain that information from the formal press release.
Min-Su will offer some brief comments focusing primarily on our commercial opportunities going forward and our cost structure. D.K will then conclude with some broad corporate priorities for 2013 as well as some comments on our new product and technology roadmap. We will then be happy to answer any questions you may have.
I need to remind you of our Safe Harbor policy which is included in the earnings release and posted in its entirety on slide two of the slide package. I need to remind you that our comments today will contain forward-looking statements
that are subject to both risks and uncertainties. Please review our filings with the SEC for a complete rundown of these risks.
Now it is my pleasure to turn the call over to our Chairman Mr. Hong.
Thank you, Paul, and good morning everyone. The year 2012 will be remembered as one of the most challenging in the solar industry. And now, we see many of the factors that contributed to the turmoil subsiding (inaudible) but through market growth and company tradition it will move toward a more normalized balance during 2013.
Leading players with scale are taking measured and regional approach through new competitive conditions. Manufacturer inventories have been reduced. Demand has picked up overall. Factory utilization are improved and prices have stabilized.
Emerging markets are creating significant new demand opportunities and through reduced module price and balance of system costs, PV system can now be competitive without subsidizing some regions. Financial institutions particularly in China are tightening credit standards leading to more rapid consolidation.
We also see a growing number of funding options for solar development flow into the market helping to overcome the capital constraints resulting from the remnant of the financial crisis. The difficult operating environment is reflected in our 2012 fourth quarter and full year financials which Jay will review.
The results were also negatively impacted by some non-cash charges as outlined in our earning release. We entered the year 2013 with an increased level of optimism. Demand is clearly on the upswing as reflected in our first quarter and full year volume guidance.
Our cost structure has been reduced to the level of other top-tier companies in China. Our factories will be operating at near full utilization. We have aggressively diversified our geographic penetration to reflect the decline market in part of Europe and to capture opportunity in new emerging markets such as Japan and South Africa.
And we're making good progress in securing the necessary funding for the year of 2013. (By default) [ph] synergies have been exploited with our parent including the recent acquisition of now Hanwha Q Cells. Financial results should be improving through 2013 as we build path toward the return to the product stability.
The year 2013 will clearly be better than the last but with some remaining challenges. It should put us in a position however to prosper during 2014 to 2015 and beyond, which we believe offer a bright future for our company and the solar industry.
Now, Jay Seo, our CFO will touch on some financial highlights for the fourth quarter.
Thank you, Chairman and good morning everyone. My comments are summarized on slide four through eight. As chairman Hong mentioned, PV module shipments including module processing services were approximately 200 megawatt in the Q4, totalling 830 megawatt for the year.
The decrease in shipment this quarter was a strategic decision to take orders at a decent margin and improve our cost structure. The pricing environment remained very competitive and as a result we saw our ASP declined to $0.60 from $0.67 the preceding quarter.
Currently, we can see that ASPs have bottomed out. Lower shipment volumes and decline of ASPs resulted in a quarter-over-quarter revenue decline over 13.4% to $134.3 million. We shipped to some 23 countries during the first quarter with the largest region being the Asia Pacific with 49% of total shipments.
The momentum in the region was aided by a 20% contribution of total shipment from Japan, a 15% contribution from the domestic market in China and notable volumes to Thailand and India totalling 14%.
Gains can also be seen in emerging European markets with Greece being one of few examples result in total European shipments remaining constant at 45% from the previous quarter. The full geographic mix of shipment is illustrated on slide six.
In spite of continued progress in reducing our processing cost, we were unable to maintain gross profitability in the face of continued selling price pressure. Gross loss for the quarter was $42 million and gross margin was negative 31.3%. This number is heavily skewed by provision of $39 million for the advanced payments and inventory.
Gross margin excluding these provisions would have been negative 2.6% in the last quarter of 2012. Due primarily to the decline in prices and the aforementioned accounting for provisions, we saw our operating loss widen from $40 million the prior quarter to $100 million this quarter. As a percent of revenues, operating expenses at 44% were significantly higher than the 20% we have recorded during the third quarter.
We continue to hold a tight rein on operating expenses but near-term we will continue to face a challenging pricing environment. Interest expense decreased by almost $1 million from the previous quarter, as we shift the balance of our borrowing more towards long-term loans and we recorded a $3 million gain from the combined effect of our foreign exchange gain with the loss from the change in the fair value of derivatives.
On a GAAP basis, we recorded a net loss of $107.6 million or $1.27 per basic ADS, as compared to a net loss of $0.61 the previous quarter. On a non-GAAP basis, we recorded a net loss of $104 million or $1.24 per basic ADS. This figure was not significantly impacted by the change in fair value of our convertible bonds this quarter as it has some periods in the past, which is largely influenced by the movement of our stock price, but it’s greatly affected by the provisions recorded in this quarter.
Now, let's turn our attention to the balance sheet. As of December 31, 2012 our cash and cash equivalent balance stood at $109 million and we closed the quarter with a net working capital of $7.1 million. The lower cash position was the result of the payment of short term bank borrowing due this quarter. These payments are non-recurring events and subsequently our cash position is said to regularly improve in the following quarter.
Net cash used in operating activities increased during the quarter to a little over $71 million. Total short term bank debt including the current portion of long term borrowings declined to just over $261 million. Our outstanding long term debt which includes the non-current portion of long term bank borrowings and our convertible bonds declined about $30 million to $426 million.
Access to credit continues to tighten in China broadly speaking, but we continue to have access to necessary funding through combined sources from China and Korea. Accounts receivables decreased by $30 million to $154 million due primarily to lower achievements and [AR] provision.
Day sales outstanding reflected more lenient credit terms and increased from 126 days in Q3 2012 to 164 days this quarter. Inventories increased around $14 million from the prior quarter to $135 million and days inventory outstanding stayed fairly stable at 65 days. Capital expenditures in the fourth quarter remained relatively slow at only $11 million.
Our capacity remained unchanged at 800 megawatt for ingot and wafer, 1.3 gigawatt for cell and 1.5 gigawatt for module. We have no specific plans to add capacity near-term and will continue to evaluate our needs as the operating environment evolves.
We anticipate spending around $50 million in capital in 2013. Min-Su will now make some brief comments on our current industry conditions and as well as some commentary on our strategic positioning going forward.
Thank you Jay and good morning everyone. As the Chairman Hong mentioned in his earlier remarks we have seen a noticeable improvement in the operating environment and expecting full year similar gain of 50% or more. Our first quarter ASP will be improved and we expect more regional price environment for the remainder of the year. Some improvements in ASPs comes from our geographic mix with a sizeable deliveries to Japan and South Africa during the first half of this year, positively impacting our average ASP.
On the surface, our full-year estimate guidance may appear aggressive. So I would like to briefly outlay where we see the gains coming from as shown on slide 9. First, we don’t think it's unreasonable to assume we can develop the base of 800 megawatt, (inaudible) achievements we recorded last year in a very difficult and price competitive operating environment, particularly in the light of our diversification in to new emerging market.
We see incremental volume round of about 400 megawatts in (inaudible) business with (inaudible). 150 megawatts in contracted volumes from South Africa and additional contract in Japan adding another 100 megawatts. So, this combines total of over 650 megawatts highly visible business, gives us reason to be realistic. In addition, we believe that we have the potential to grow our China business, report to something (inaudible) 200 megawatts.
The markets in North America are also improving for us. Our pipeline is growing, as we forecast volumes sales to exceed 250 megawatts during 2013. So hopefully, this background gives you some ability to show our optimism for volume growth potential this year.
Some specific market trends and sale strategies as follows. You can see slide 10; for the PA [reason], until second quarter 2013 strong demand will continue with the market tight due to demand in UK, Greece, Romania and Germany, with some benefit to pricing. Starting from third quarter 2013 European demand could be negatively-impacted due to anti-dumping ruling. Developed and new markets such as Turkey, Africa and build on 150 megawatt in South Africa.
For North America, there is a 25% market growth potential released over our customer base. Pipeline doubled to 400 megawatt and value-added offerings to increase margin and depreciation. And our Asia Pacific market, China market could reach 10 gigawatt this year. Japan seeing less market growth due to pull-in demand from April tariff reduction, expanded share in C&I market and begin penetration of residential market.
Emerging market in Southeast Asia like Malaysia, Thailand and Indonesia combine for 600 megawatt demand. The Chinese market will no doubt be largely and [reap] benefit from this growth selectively. As I mentioned before, we see an opportunity to increase our estimates by three-fourth in 2013 to around 200 megawatt as we remain cautious of a price payment terms risk, credit risk and ultimately profitability.
We have created a separated EPC business in China and will focus much of our efforts here in order to increase market share and profitability. Impact of our 20% of our first quarter revenues were generated from EPC business in China, this was a single project not recurring in nature but illustrates our potential.
One of the obvious benefits of higher volume is a better [best] utilization which is to improve cost production. We are currently approaching full utilization in our (inaudible) manufacturing rights and we starts to remain there for the remained of the share. Our (inaudible) cost of a goods sold, (inaudible) faired 9.9% during the first quarter to $0.64 per watts. The brand (inaudible) factors in the production cost using primary source to wafers cost and (inaudible) to wafer and stats.
The $0.64 excludes $0.70 in non cash charge. Production cost (inaudible) consists of approximately 65% materials, 20% depreciation and 50% internal cost for labor and (inaudible). Of course policy level in the significant from the portion of the material cost and we have made a steady progress in driving down our averages total cost from $0.07 per kilogram in the third quarter of 2012 to under $20 per kilogram in the first quarter 2012. We estimate $70.5 estimate either per kilogram for the first quarter of 2013. We have made good progress in automating some of our production which are automatic from lamination port and plant automatic transfer surging in the future.
Land cost continues to rise and hiring and retaining workers is more challenging. Our cross labor force is approximately one half of what it was in 2011 and we are producing the same volume through automation and implementation of other manufacturing efficiencies.
We obviously improved product quality through automation. Leadership cost further is our agenda not only for 2013 but also in the longer sustainability. Now D.K. Kim will offer some additional comments related to specific corporate product and technology initiatives.
Thank you Min-Su and good morning everyone. As a general comment, our overall key goal in 2013 is to focus on growing revenue, improve cash flow and begin a return towards a path to profitability. We now have the brand, the products, the cost structure as well as the financial backing to accomplish this goal.
As Min-Su just outlined, we have good visibility on increasing shipments, combined with a more rationale pricing environment which should allow us to see improved revenues. We begin the year with continued focus on operational excellence including a much reduced and competitive cost structure and improved product quality.
The operating environment remains intensely competitive and margins can only be achieved through a strict cost discipline. In broad terms, there are three primary avenues to cost reduction as shown on slide 11. Cutting unit consumption of materials which is process related purchasing power should be related to scale and multiple vendors and value creation of a disrupted technology.
Specifically near-term, we will accomplish the following. E-Star Plus module launch, a light weight module designed with maximum efficiency further automation including tabbing and packing, raw material purchase price reduction, tighter SG&A management and accountability and opportunities for freight, expense reduction.
Currently, the technology differentiation between most solar companies is negligible as are the product offerings. We have a unique opportunity to exchange technology on a commercial basis with one of Hanwha’s portfolio companies, Hanwha Q Cells. They are one of the most respected and long standing solar cell technology leaders with solid cell efficiencies and quality achieved in manufacturing know how, process technology and automation.
We see potentials to drive next generation multi-cell efficiencies beyond 18% near-term and over 20% longer term with anti-mono silicone. We are developing a two pronged product pack.
First, a quality, high quality low cost bankable modules sold to EPC and downstream customers, our large scale projects like E-Star + incorporating anti-PID, anti-glare and anti-hotspot features. We also benefit from Hanwha’s corporate downstream activities as an outlet for our products.
We also are developing a line of more specialty products designed for specific applications for operating environment where product differentiation is important and pricing is more attractive. These include Desert modules for high temperature environment like the Middle East. Both AC and DC smart modules incorporating optimizers and micro inverters, four corner modules for extreme climate, [lightweight] [ph] module with ETFE, module using a ZEP frame, BIPV modules glass-to-glass and polyolefin incorporating Hanwha L&C encapsulant.
Now, Jay will close with some specific comments on our outlook for the first quarter and the full-year.
Thank you, D.K. As shown on slide 13, for the first quarter 2013, shipments will be 300 megawatt or above. For the full-year 2013 as shown on slide 13, we established a shipment of that from 1.3 gigawatt to 1.5 gigawatt. Capital expenditures will be approximately $50 million. We're now happy to answer any questions you may have.
Operator, please open the call for the questions.
Thank you very much sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Cheol Park from Shinhan. Please ask your question.
Cheol Park - Shinhan
I just have three questions. The first one is what sort of utilization rate for SolarOne and Q Cells each, are you seeing so far this quarter? Then I guess the follow on to that is a synergy between SolarOne and Q Cells, could you please elaborate on it?
Thank you for the question. Actually, the utilization rate of the last quarter was around 58% to 68% but this first quarter, we have raised the utilization rate around to 75%. In another words, 300 megawatt per quarter, and we are expecting to increase the utilization rate, to around full rate in the second quarter of this year, around 400 megawatt.
So regarding the Q Cells utilization rates, we cannot answer about that and the second question was maybe the synergy effect between Hanwha SolarOne and Q Cells. There are many synergies we are expecting now, then first of all our R&D side, so our CTO can answer about R&D side.
Jeong Eui Hong
Yes, so synergy between Q Cells - Hanwha Q Cells and Hanwha SolarOne we see basically three different aspects. So first one is BOM [material] [ph] making (inaudible) modules on that we are working on making one unification of BOM materials that is one and the other one is of course Q Cells have the as we mentioned the technology and brand their quality measure is industry top, so quality standards should be transferred to the Hanwha SolarOne and the other one of course technology leadership, so they do already we mentioned, they do already develop 18% multicrystalline silicon solar cell technologies and now they are developing more than 21% anti silicon monocrystalline silicon solar cells.
So on this one we are transferring multi technology to Hanwha SolarOne, so technology efficiency and BOM and the quality standards, these are the main synergy platforms.
Additionally there is another synergy in quality side. So Q Cells as you know has higher quality then any other competitors then, so Hanwha SolarOne get high quality schemes from Q Cells, and additionally in cells so as you may have heard from our President so we are expecting 1.3 to 1.5 gigawatt cells achievement this year and so we are expecting around 400 to 500 megawatt [total] [ph] business with Q Cells (inaudible) see another side of synergy effect and the next one is SG&A part. So we are working very closely so we don't have to use unnecessary SG&A expense, and so totally so we can co-work for the cost reduction. And so (inaudible) some other synergies but so tonight or this morning so I'm going to touch base with you about this.
Cheol Park - Shinhan
Thank you and just one final one. What was the non-poly processing cost in Q4 and if possible target number for year 2013.
Our non-poly processing cost of last year was around 52 to 53 and this year the target at the end of this year will be in the middle of 40s.
(Operator Instructions) Your next question comes from Kristine (inaudible) Capital.
I was wondering if you could describe the ASPs for modules that you are seeing in different regions right now and also if you could talk about what impact if any the requirement to register modules in the EU ahead of an anticipated tariff had on pricing so far. Thanks.
Let me briefly explain our ASP performance in first quarter. Actually our ASP was a bit less than the ASP in Q3. There are two main reasons for that; we moved our slow moving inventory in Q4 to improve the cash flow. Also we sold in presales in China market and despite the competitive low price; we still need to turn out our presence in this huge expansion market.
And briefly our ASP for each market in Q4 is for Europe it’s around $0.58, while we sold we also made some market and more than $0.17 and the most popular market we enjoyed in the first quarter was the Japan market. We sold more than $0.76 and in China market it was very competitive environment in terms of ASP. So it was below $0.16.
Thank you very much. Is there any further question from [Ms. Hershey]?
Yes, I guess so the other part of the question is have you seen any impact on pricing in Europe since they’ve asked for registration of modules coming in from China?
Yes, as you said, the registration for the Chinese (inaudible) modules are starting from the beginning of March, but we have not seen any significant price change after that (inaudible).
Thank you very much. (Operator Instructions) And if there are no further questions at this point in time, I would like to hand the conference back to your presenter for today. Thank you, sir. Please go ahead.
Okay, thank you all for turning in to the call. I appreciate your interest and support. Again an apology for the delay on the earnings release. I know it did hit the take a little after 8 o’clock. Thanks again, and as you know, we're always accessible if you have any further questions. Have a good day. Thank you.
Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.
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