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JA Solar Holdings (NASDAQ:JASO)

Q1 2013 Earnings Call

May20, 2013 08:35 AM ET

Executives

Nick Beswick - Investor Relations, Brunswick Group

Jian Xie - Chief Operating Officer

Min Cao - Chief Financial Officer

Bill Chen - Vice President of Strategic Development

Analysts

Brandon Heiken - Credit Suisse

Edwin Mok - Needham & Company

Satya Kumar - Credit Suisse

Amy Song - Goldman Sachs

Operator

Hello and thank you for standing by for JA Solar’s first quarter 2013 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 would now like to turn the call over to your host for today's conference, Nick Beswick of Brunswick Group. Thank you sir, please go ahead.

Nick Beswick

Thank you. Welcome to JA Solar’s first quarter 2013 earnings conference call. Joining us from the company today are Mr. Jian Xie, COO; Mr. Min Cao, CFO; and Mr. Bill Chen, VP of Strategic Development.

As stated in the press release, the oversimplified translation of CNY into U.S. dollars, which is set at RMB6.2108 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, Mr. Xie will begin with an overview of the company's Q1 2013 results covering business and market developments and outlook. Following that, Mr. Chen will provide details of our technological progress and 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 U.S. Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ include 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 would now like to hand the call over to Mr. Jian Xie.

Jian Xie

Thank you, Nick, and thanks everyone for joining today's call. It's a real top time for the solar industry. We are encouraged by our solid performance in the first quarter as shipments exceeded the high end of our previous guidance, and that we achieved positive gross margin. In the quarter we delivered a significant proportion of shipment to regions with higher ASPs, and a result we were able to slightly increase revenue and the post rev March improved bottom line, despite our seasonal decrease in shipment of volumes.

We also made focus on managing costs and the cash to ensure, we maintained our provision as one of the most financially secure companies in the industry. Having successfully repaid our convertible notes due last week, maintaining a healthy balance sheet will remain a central focus of our strategy going forward.

As we continue to make inroads into new and growing markets, we are confident JA Solar has the components in place to achieve solid sustainable business growth while maintaining a sound financial position. Let me now briefly go through our operating highlights for Q1.

Shipments for the quarter were 442.7 megawatt, above the high end of our previous guidance of 430 megawatt. This was driven by a strong performance across key markets, most notably in Japan which I would discuss in more detail shortly.

Gross margin was a positive 6% for the quarter, which was encouraging. This was due to the large proportion of shipment to higher margin markets as we expand our global footprint. We'll continue to prioritize margins over shipment volumes. As you will know, we successfully repaid as a maturity 190 million U.S. Dollars of our convertible notes last week. This is a testament to our solid business execution and the financial strength. Going forward, we remain committed to meeting all of our debt obligations and managing our balance sheet prudentially to protect the interest of our stakeholders.

In terms of our global market, we are cautiously optimistic while there is a huge amount of regulatory uncertainty in Europe. We will continue to seek job demand across other key markets and we have also seen encouraging developments in various emerging markets in South East Asia, South America and the Middle East. And also I believe there has been a clear improvement in the supply-demand balance as a result of a steady process of industry consolidation and that this has brought about a stabilization of our ASPs in most regions.

Looking now in our performance in each of our key markets, Europe accounted for 27 of our total shipment in this quarter. As we have mentioned before we are working to gradually decrease our exposure through the European market by opening up new and the emerging markets with greater regulatory certainty. We have been actively cooperating with the EU Commission investigation team and that we will continue to monitor regulatory developments closely.

We had a strong quarter in Japan in Q1. In the past several quarters, we have been working diligently to deepen our process in the market and have built a solid position there. This allowed us to benefit immensely from an increased efficiency activity in the quarter. In fact, our Japan shipments in Q1 alone were greater than our shipment there for the whole of our 2012. Going forward, we will continue to work closely with our partners in Japan to capitalize on their growing demand for solar energy there.

Moving to China, in March the proportion of our modules went in the earliest quarter, 14% compared to nearly 50% in the previous quarter. As we have read last time, China is an important market of our industry and we are looking at the importance of maintaining as the top position here. However, right now our focus is more on margins and culpability that of our market share and as a result of which resulted lower proportion of our shipment to China this quarter. Having said that we like to see that introduction of more effective policies to support distributed generation and the ground mounted projects in China, which should benefit the industry as a whole.

Elsewhere, the North American market was relatively flat for us in Q1; however we expect an increase in our shipments to the regions starting from the Q2. Demand is strong in both the U.S. and the Canada and we will maintain the solid relationships with customers there to ensure we have a good pipeline through the rest of the year.

We also made a significant progress in other emerging markets including the Middle East and Africa. For example, we delivered more than 17 megawatts of solar modules to the UAE in Q1 and in the March we announced significant contracts wins in both Israel and the Morocco. Our success in these regions is a testament to our ability to cultivate in the emerging market.

Going forward, we will continue to shift our focus to emerging market, with growing demand, improved regulatory support and the better margins, while maintaining healthy relationships with the existing customers in established markets.

As for shipment guidance, we expect the quarterly shipments in Q2 probably in the range of 410 megawatts to 430 megawatts. For the full year, we reiterate our previous shipment guidance of between 1.7 gigawatts and 1.9 gigawatts.

Overall, while the solar industry remains tough, our penetration of key gross markets give us the flexibility necessary to survive in a dynamic situation and on side list financial prudence remains a core focus of our strategy, having successfully repaid all of our convertible notes, we are continuously assessing our financing options and closely managing our cash and cost to minimize the risk.

Demand for JA Solar’s high efficiency, high quality products remains and we will continue to invest as necessary to maintain our leadership in technology.

Customers chart, those of our products and our ability to manage our balance sheet to ensure we can be a reliable long term partner. The combination of these factors make us confident, we are retaining our industrial leading position in a long term.

With that I’ll turn the call over to Mr. Bill Chen for more detail rundown of our financial metrics and the progress in technology and R&D.

Bill Chen

Thank you, Mr. Xie, and welcome everyone to today's call. I’d like to quickly update you on our technological progress and the financial results for the first quarter 2013. First our progress on technology.

In Q1, we continue to improve cell efficiency which varies the efficiency on all model and multi-crystalline cells in mass production increasing to 19.2% and 17.6% respectively compared to 19.15% and 17.5% in the last quarter. We commenced mass production of 5-inch high efficiency model crystalline modules with the maximum power output of 215 watt. The mainstream power output of 210 watt. On annual basis the modules produce and accumulated power output 3% higher than comparable models of our competitors, allowing for cost savings in transportation, space and materials of over 2%.

JA Solar is in fact the first PV manufacture to achieve mainstream output of 210 watt in the 5-inch module crystalline format. Also this quarter, our solar module success has salt mist corrosion and sulfur dioxide corrosion test conducted by TUV NORD AG, confirming that JA Solar’s products offer exceptional reliability even in severe environments. These positive results prove that we can better address the specific needs of certain markets and reaffirm our position as a technology leader in the industry.

On the R&D side, we expect to announce the next generation of our CYPRESS series or CYPRESS II in the third quarter capitalizing on the success we’ve already had was the CYPRESS technology. CYPRESS II will feature and optimize manufacturing process that will further increase cell efficiency and improve cell reliability. Mass production should follow soon after the launch of the series. Now, I would like to walk you through our financial result for the first quarter 2013.

In Q1, we shipped 442.7 megawatt of solar power products above the high-end of our previous guidance of 430 megawatt, representing a decrease of 11.5% sequentially and an increase of 20.9% year-over-year. These shipments, modules accounted for 248 megawatt, cells accounted for 189.5 megawatt. And a module cell tolling accounted for 5.2 megawatt.

In Q1, the geographic breakdown of the shipments including modules, cells and tolling was approximately 39% in China, 33.6% to APAC, 26.8% to Europe and the rest of the world accounted for only 0.6%. Net revenue for Q1 was $270 million representing an increase of 0.4% sequentially on a year-over-year increase of 4.7%.

Q1 gross profit was $16.1 million or 6% on net revenue compared to a gross loss of $12.4 million last quarter and a gross profit of $5.4 million Q1 of last year. The R&D expenses in Q1 were $3.4 million, an increase from $1.5 million in Q4 and a decrease from $3.6 million in Q1 2012. The sequential increase was primarily related to the various R&D initiatives to further improve the efficiency and the quality of our products. Quarterly loss from operations was $13.7 million, or negative 5.1% on net revenue in Q1, this compares with a loss from operations of $79.5 million or a magnitude of 29.6% on net revenue in Q4.

Interest expense in Q1 totaled $15.8 million, a decrease from $16.7 million in Q4. Other loss in Q1 was $2.8 million compared to other income of $3.3 million in Q4. Our net loss for Q1 was $33.3 million of which net loss attributable to ordinary shareholders was $32.9 million, loss per diluted ADS was $0.85 compared to loss per diluted ADS of $2.42 in the first quarter of 2012. On the balance sheet side, our cash and cash equivalence were $454.9 million, compared with $488.1 million for Q4 and $685.6 million for Q1 2012.

Accounts receivable at the end of Q1 was $308.1 million, compared to $277.4 million at the end of Q4, days of sales outstanding at the end of Q1, were 103 days compared to 93 days in Q4 2012 and 82 days in Q1 2012. Total inventories at the end of Q1 were $171.9 million, an increase from $149.8 million in Q4 and a decrease from $192 million in Q1, 2012. Inventory turnover days in Q1 were 61 days compared to 48 days in Q4 2012, and 67 days in Q1 2012, total prepayments to suppliers were $208.6 million in Q1, compared with $233.8 million in Q4.

Total working capital at the end of Q1 was $44.8 million compared with $203.2 million at the end of Q4. Total short term bank borrowings and convertible notes due May 2013, were $268.8 million, as you know we successfully repaid $119 million of our outstanding convertible bonds last week. Total long term bank borrowings were $623.2 million among which $451.4 million were due in one year.

CapEx for Q1 was $16 million, compared with $9.8 million in Q4. That concludes our prepared remarks, operator, we are now ready to take questions, thank you.

Question-and-Answer Session

Operator

The question and answer session of this conference call will start in a moment. (Operator Instructions).

Your first question comes from the line of Satya Kumar, from Credit Suisse, please ask the question.

Brandon Heiken - Credit Suisse

Hi, this Brandon Heiken, speaking on behalf of Satya Kumar. I was wondering for one if you could talk about the shipments to Japan. Is this do you think a more sustainable level or was the result of say, one large order of shipments and then I have a follow up question if I may please.

Bill Chen

Thank you for the question. I think our shipment to Japan is sustainable and we have built the market over the past two years and this year we had a very good result in the Japanese market and the result for the future will continue to be very strong.

Brandon Heiken - Credit Suisse

Okay and I know you guys have been working on some project development activity, can you give an update maybe on the project megawatts that you expect for the year and if you can give maybe a longer term outlook for that as well please?

Jian Xie

So most of our project of this year are at early stages, so in total I think around 50 to 100 megawatts we’ll be installing this year, so the profit I think will be as more part of our total like margin.

Brandon Heiken - Credit Suisse

And if I may ask one more, can you talk about your progress on cost reductions for the year? What do you foresee for reducing your cost and if you could talk about what your cost were for the first quarter please?

Bill Chen

I think our cost reduction effort has been materialized in Q1 compared to the Q4 our cost reduced $0.04 on average and it will continue to do a cost reduction from full years.

Brandon Heiken - Credit Suisse

How much do you expect the cost to comedown this year for say…?

Jian Xie

Our target by end of the year, the processing cost is $0.46.

Brandon Heiken - Credit Suisse

Okay that's for non…

Jian Xie

End of year - processing cost, non-silicon processing cost.

Brandon Heiken - Credit Suisse

Okay for the module, okay. And what is it in the first quarter?

Bill Chen

I think Q1 is $0.52.

Operator

Thank you. Your next question comes from the line of Edwin Mok from Needham & Company. Please ask the question.

Edwin Mok - Needham & Company

Hi, thanks for taking my question, first question is on your average selling price, how much of that increased sequentially from the fourth quarter to the first quarter, and how do you expect you average selling price to trend as again in second quarter and the rest of the year?

Bill Chen

I think our ASP has been increased for at least to $0.03 sequential basis and on annual basis, I think it will continue the trend.

Jian Xie

In Q1, our ASP is about $0.64 for module, and last quarter it was $0.61, so that’s less than improvement and we expect stabilization of our ASP this year.

Edwin Mok - Needham & Company

I think the sale increased by similar amount as well.

Jian Xie

The same percentage.

Edwin Mok - Needham & Company

Okay that’s fair. In the first quarter, how much of the revenue came from module, can you give us that breakout?

Bill Chen

I think 60% revenue come from module sale.

Edwin Mok - Needham & Company

Okay great very well and then can I ask you, when I look at your guidance right, if I just take your guidance range from second quarter and then I take the midpoint of the full year range that would imply that you have slower shipment in the second quarter (inaudible) first quarter but you expect shipment to pick up in the second half. What are the factors that contribute to that range of shipment for the next three quarters?

Jian Xie

I think in four quarter we have relatively flatter shipment. In Q2, due to the uncertainty in Europe, we based a lot of our shipment through Europe, so that's why our guidance in Q2 has relatively lower number compared with our Q1.

Edwin Mok - Needham & Company

EBITDA for the full year, you expect, you have to come back and back off or is that more from the emerging market?

Jian Xie

Yes, in fact we have more shipment to other emerging market in Q3 and Q4, so we have relatively flatter shipment in the coming quarters.

Edwin Mok - Needham & Company

And then last question; I noticed that your APAC shipments was very high in the first quarter, how much of that was Japan versus other market and can you describe, I think in your prepared remarks you talked about the other market which was very-very helpful but not a lot of commentary on the APAC. I was just curious, what other market in Asia that you are seeing that increase in demand right now?

Bill Chen

I think in APAC Japan is the leading market for us, which account for the majority of the APAC delivery and in future I think we are developing some other APAC market as well. But Japan will still keep the leading position in this region.

Edwin Mok - Needham & Company

I see great so just maybe one more; so beyond Japan how about Australia, that has been in market that you talked about. Have you guys seen much demand on that market?

Bill Chen

We see the potential in Australian market and we had the sales force already for this market.

Operator

(Operator Instructions). We have follow-up question from the line of Satya Kumar from Credit Suisse. Please ask your question.

Satya Kumar - Credit Suisse

I was wondering if you could clarify if European tariffs are implemented, what strategy you may implement, are you planning on possibly outsourcing. I know you are talking about the slowing shipments starting in the second quarter, but if you could talk more about your plans in the case of tariff, that would be helpful, please.

Jian Xie

Yes we have evaluated some partners on to find an opportunity to do OEM and everything is ready but we are waiting for the preliminary decision from European commission. So we have a plan but it's just to wait for one or two more months.

Operator

Your next question comes from the line of Amy Song of Goldman Sachs. Please ask your question.

Amy Song - Goldman Sachs

Hi this is Amy from Goldman; I have two questions, first of all for your shipment in on 2013 1.7-1.9 gigawatts, can you give me a geographic breakdown between different countries? Second question is the ASP, seems like you are targeting certain profitability so what exactly is your targeting offering ASP from your customer which means below what price you are not going to take the order, can you talk about that? Thank you.

Bill Chen

Okay for the whole year guidance, I think by geographic region, APAC should be 30-40%; China 20%, Europe about 20%, North America 10%; South America and Middle East 10-20%. For the ASP I think our general rule is if you have one versus other will make us lose money or in other words there is not any reasonable gross margin for a specific order. We will typically will drop for this year.

Amy Song - Goldman Sachs

Okay so you guided new silicon cost structure about 46% by the end of this year so can I assume module price or in total module cost is roughly 57 and 58 or beyond that, below that in a particular order is that right?

Bill Chen

I think we should make a decision case by case for different regions, for different customers, each case maybe different so it is hard to give you a very specific number at this moment.

Amy Song - Goldman Sachs

Okay also maybe on the Japan market I know you guys are doing very well on that market first of all congratulations on that. Second of all, can you explain to us the competitive environment in Japan right now seems like it start with a high fit market so expecting the price to go up probably impossible but when you guys are doing quite well how is the competitive environment that you are seeing right now versus maybe in a month or two ago where Japan market is starting to show strong momentum. Maybe just give us more color on that?

Bill Chen

The emerging market, it definitely is going to be very competitive market. As we are the leader, our competitor may follow us. However, we truly believe we add a lot of value to our customers that is why we take the leadership in the market and the most important thing is definitely the market is the Japanese customer will focus on the quality, the sustainability and the post sell services all this value chain not only for the price. So I hope this market will be still pretty well, we will be very sustainable and we truly believe we will continue to negotiate in that market.

Operator

(Operator Instructions) All right we are now approaching the end of the conference call. I will now turn the call over to Mr. Jian Xie for his closing remarks.

Jian Xie

Thank you everyone for joining us today. We appreciate your interest 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 on today's press release. Thank you again for your continued support and the team will look forward to talking with you in the coming months. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference this concludes the presentation. And you may now disconnect, good day.

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