Hanwha SolarOne Co Ltd. (HSOL) Q1 2013 Earnings Conference Call May 30, 2013 8:00 AM ET
Paul Combs – Vice President of Investor Relations
Ki-Joon Hong – Chairman and Chief Executive Officer
Min-Su Kim – President
Dong Kwan Kim – Chief Strategy Officer
Jay Seo – Chief Financial Officer
Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2013 Hanwha SolarOne Company Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise that this conference is being recorded today Thursday May 30, 2013.
I’d now like to hand the conference over to your host for today, Mr. Paul Combs. Sir, please go ahead.
Thank you, Carolyn and good morning everyone. Welcome to our call. Joining me today on the call are our Chairman and CEO, Ki-Joon Hong; our President, Min-Su Kim; and our CFO, Jay Seo.
Chairman Hong will open with some general introductory comments followed by Jay with a review of the improving solar industry operating environment and a brief review of some first quarter key financial metrics. Min-Su will then follow and focus on some commercial, technology and manufacturing related achievements. Jay will then conclude with formal comments on some forecast data. We’ll then be happy to answer any questions you may have.
I would like 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 risks and uncertainties. Please review our filings with the SEC for a complete rundown of these risks.
Now, it’s my pleasure to turn the call over to our Chairman, Hong.
Thank you, Paul, and good morning, everyone. We are quite pleased with the progress achieved in a number of areas during the first quarter and look forward to farther improvement as the remainder of the year unfolds. Firstly, to some of the major achievements for the period, cost variables was the reflection of higher shipment volumes and improved prices driving the return back to gross profitability. We substantially narrowed the gap to reaching operating break-even and positive operating cash flow.
Our feasibility in new gross market, good in Japan and South Africa was good. Our investment in technology innovation was evident in our new introduction of the HSL Series of modules, and our growing synergies with Hanwha portfolio of solar investment are positively impacting our business. There are number of signs that the solar industry has not noted, but Hanwha recovery through bad operating environment.
We continue to see gradual improvement in the solar industry for the remainder of 2013 and for those who remain large company like us with a scale, trend, technology and low cost structure, are much better and profitable 2014 and 2015. Now Jay SEO, our Chief Financial Officer will highlight some of the improving market trends in the solar industry along with some financial highlights.
Thank you, Chairman, Hong. There are a number of encouraging trends that indicate the protracted downturn in the solar industry is stabilizing, is now reversed, and we are increasingly confident that a brighter future is evolving. Slide four and five summarize some of these trends.
The primary reasons for the industry’s recent challenges including overcapacity feed in tariff reductions in some of the world’s largest markets formatting product prices and a lenient credit environment are in most cases showing signs of active change. We believe the following sector result is encouraging leading to a more regional operating environment. A large number of inefficient players have substantially reduced or shutdown operations or have become financially insolvent, resulting in reduced industry capacity throughout the solar value chain. Large better capitalized players have maintained discipline by not deviationally adding capacity.
Average selling prices for solar modules have improved 5% to 10% in most markets, during the first quarter. The credit environment, particularly in Mainland China has become more disciplined, leading to financially leveraged companies including some notable large players. Challenge is to survive and presenting share gain opportunities for those of us strong enough to remain. New emerging markets for solar including China, Japan and South Africa are generating significant demand to replace if not over time as to or in those historically large European markets such as Germany and Italy. Other macro trends, it adds to our confidence for an improving solar industry climate include full year shipment growth forecasted by many Tier 1 players input prices including polysilicon remain low and cost structure for the leaders have improved.
Utilization rates of Tier 1 industry participants are much improved, leading to better operating economics and less pressure on prices. Manufacturer and generous inventories are lower. A large number of new financing sources including leasing programs for residential applications have been introduced, improving funds available to support solar development. Module prices are low enough to support decent project economy in some markets without the need of government incentives. And better provisions many of which are non-cash but in fact repurchased financial returns including inventory valuation that the asset impairments and prepayment on supply concepts should be substantially reduced going forward for industry players.
Now, let me shift to some financial highlights from the first quarter as summarized on the slide six and seven. As Chairman, Hong mentioned earlier, we enjoyed a much improved quarter with accelerating growth in the revenues and shipments and higher ASPs or combined to return us to grow gross profitability. Although we still have negative operating income and cash flow, the amounts were quite small and was improved from periods during 2012. In addition, the quarter was not negatively impacted by any provisions or write downs. Revenues grew 33% quarter-to-quarter, reaching $172.2 million, shipments, which include module processing services, gained more regularly raising 45% to 289.1 megawatts.
The pricing environment generally improved and we saw our ASP gain 10% to $0.66 from $0.60, the preceding quarter. Now, currently, we see ASP is stabilizing during the second quarter of course ASPs for each company defer depending upon the geographic perpetuation of shipments with the markets like Japan and South Africa over $0.70 per watt, Europe and the U.S. averaging $0.62 to $0.65 per watt, China and India typically lower priced markets.
We continue to see a migration in our business from historically large markets in Europe to new gross markets, particularly Japan and South Africa, near-term. Japan continues to gain momentum and it was our largest market in this quarter with 33% of shipments. South Africa represented 21% of total shipments; both these markets enjoy good pricing. Germany was over 60% of our overall business that fall into only 13% of shipments and Europe overall was below 30%. The U.S. was 9% of our volume and should see further progress throughout the remainder of 2013. The UK, Portugal and China accounted for 5%, 4% and 3% of shipments respectively. We expect China to become a larger portion of our business during the second half as we have recently mentioned our strategy and invested resources to (inaudible). The full geographic mix of shipments is illustrated on slide eight
Return to gross profitability during the first quarter with gross profit reaching $4.7 million versus negative $42 million in the Q4 2012 and gross margin improved to 2.6% that’s compared to negative 31.3% for the previous quarter. The comparable numbers used for the Q4 2012 has improved some provisions and excluding, then gross margin was negative 2.6%.
Our operating loss during Q1 was $20.6 million, substantially down from the $100 million operating loss recorded for Q4 2012. Operating expenses for the Q1 portray a more normal level and also indicated that we’ve had been bringing this number under tight control, which benefited from a higher revenue base. As a percentage of revenues, operating expenses at 14.1% were significantly lower than 44% we recorded during the fourth quarter. Interest expense rose modestly to $12.2 million as we increased our average debt level. On a GAAP basis, we substantially narrowed our net loss to $36.4 million or $0.43 per basic ADS, as compared to a net loss of $107.6 million or $1.27 per share the previous quarter.
On a non-GAAP basis, we recorded a net loss of $0.39 per basic ADS versus a net loss of $1.24 per basic ADS the prior quarter. This figure was not significantly impacted by the change in fair value of our convertible bonds this quarter as it had 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 take a look at the balance sheet. As of March 31, 2013, our cash and cash equivalent balance stood at nearly $162 million, over $50 million more than we had on hand at 2012 year-end. Net working capital increased almost $49 million from the prior quarter to $55.7 million. Net cash used in operating activities fell substantially to just $8.8 million, well below the $71 million figure reported the prior quarter. Through disciplined working capital management, we have a decent change – chance of returning to a position of a positive operating cash flow this quarter.
Total short-term bank debt, including the current portion of long-term borrowings, increased about $25 million to just over $286 million. Our outstanding long-term debt, which includes non-current portion of long-term bank borrowings and our convertible bonds, rose about $17 million to $504.l million. Access to credit for working capital purposes is scarce in China for any solar companies now, but we continued to have access to funding selectively from China and Korea. The former backing of our largest shareholder, Hanwha Chemical, continues to be a strong positive in our ability to access immediate capital.
The company further improved working capital management. Accounts receivable increased to $182.2 million in line with higher shipments and revenues, but day sales outstanding decreased to 127 days from 164 days in the Q4, 2012. Inventories declined about $10 million to $125 million and days inventory outstanding increased to 67 days from 65 days the prior quarter. Capital expenditures in the first quarter were $32.4 million, much of which was payment for projects completed last year.
Our capacity remained unchanged at 800 megawatts for ingot and wafer, 1.3 gigawatt for cell and 1.5 gigawatt for module. We have no specific plan to add capacity near-term. And we’ll 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 advances we’ve made in product innovation, technology and manufacturing efficiencies as well as touch on where we see our best commercial opportunities for the remainder of the year.
Thank you, Jay, and good morning everyone. My comments will touch on some achievements on the technology and manufacturing fronts of significant new product introduction, the ton of commercial opportunities we see going forward in certain regions and some source on the EU (inaudible).
Slide ten summarizes some of our technology achievable. The company has recently received a certification from VDE in Germany for our test, data or acceptance program, so called TDAP. This is a list of test and forwarded to only a few selective companies in China that allows us to do product certification testing in our own list, if you’ve seen the time from development in the lateral commercialization. Totally, we have represented our view for the products outside of company for the product testing normally taking a total of six months for approval.
We are outside with our network higher cell efficiencies [multi-cell] now offsetting over 70% composite addition. Our efforts to address (inaudible) continue in certain harsh operating environments, mono and PID have registered in progress at both the (inaudible). The next generation cell, we are working on also strategically present over the (inaudible) to further bring down costs and improve composite efficiencies. Interest in new (inaudible) technologies like anti-mono are familiar to us, but the challenge remains being able to produce at costs that are commercially feasible. To-date, the market is generally not willing to pay for the improved efficiency.
Capital spending on new equipment and improved technologies have been successfully reduced for the solar industry overall during this recent industry downturn. We think this trend will change with a improved operating environment in 2014 and beyond. There are only a few remaining strong companies, across in which we include Hanwha SolarOne. We have the resources to invest in new technologies, widening gap in product performance and production cost. Considering the source of the broader Hanwha Group including (inaudible) one of the best portfolios of solar (inaudible) from Q Cells, we believe that we are in a very good position.
Our manufacturing costs remained relatively stable during the first quarter with a feel just at (inaudible) per watt. However through recent engineering achievements used over new material and improved great achievement, we have taken on average sales tick down in production costs. This seems (inaudible) we got all of our second quarter performance.
Our new HSL Series of merger had relatively cost of – less hasn’t used less material including ingots cost direct through and assembly processing is simple. First during the first quarter, we gradually increased our utilization to fell we are now allows through purchase agreement and we expect to stay there for the demand of the first half of this year. Of course this was our cost structure. During the first quarter, we lower our new generation module the HSS Series of our known internally as of this time. As referenced on slide 11, the new module has smaller demand which is lower in rate and is stronger which allows increased durability in harsh environments with wind and solar.
Module efficiency has been improved by 2% to 3%, which had a TUV certification for PID and in order to with premium capability which reduces both cleaning and maintenance cost and reach to higher units. We are relatively working on the next module cost tool scheduled to introduction in 2014. It didn’t have multi-parallel in April (inaudible) stand even higher loads. It also could (inaudible) capabilities. Our first quarter begins and from our expectation for even higher than the second quarter and for the first year that our brand is becoming more wide exceptive.
We are particularly pleased with our filtration of our (inaudible) and expect volumes to increase in markets like China and North America through the remainder of this year. We are defocused and (inaudible) our efforts in China with new organizational structure and more associated services for the country. We did also business as well growth opportunities for other process. There are number of synergies developing on the commercial front and (inaudible) strong brand in countries like Japan, Australia. So we did not only benefit from growth in terms of our own products but as of module from (inaudible).
First with prior of a high quality enabling us to approach the U.S. market and (inaudible) with a more stable price. Finally, there has more speculation about the outcome of the EU investigation into imports of the Chinese manufacturer of the solar products. There is an indication with a credit to average 47% and power implemented to the business of any Chinese manufacturers and we will serve to remediate the development of solar business in Europe. We are encouraged by the first step that two governments are actively engaged in negotiations to reach more favorable outcome.
In any case, it is worth noting that EU represents of our three quarters of our solar business now less than 30% and with exponential growth in new markets less than become less over time. Now Jay will conclude with a few outlook comments.
Thank you, Min. As shown on slide 12, for the second quarter 2013 shipments will be in the range of 330 megawatts to 350 megawatts. We will remain gross profit positive for the full year 2013, we confirm our prior shipments forecast of 1.3 kilowatts to 1.5 kilowatt, capital expenditures will approximate $50 million. We are now happy to answer any questions you may have. Operator, please open the floor for questions.
Thank you very much sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Paul (inaudible). Please ask your question.
Hey, guys. Congratulations on the strong improvement sequentially. Can you just run through your ASPs by region again? I missed that on the call. You broke down ASPs for the U.S., EU, Japan, China, India, could you just run through that one more time?
Average ASPs, we had a $0.66 and we are going to stand at South Africa over $0.70, and while we are pretty strong in the (inaudible) market as well.
Okay. And then, can you just talk about sort of, you talked about gross margins remaining positive in Q2, can you just talk about sort of maybe the trajectory of gross margins over the course of year and ASPs as well? Can gross margins grow to the double-digit for you guys or is 2% at the top?
With respect with to the gross margins, so as we reported for Q1, so we recorded a positive gross margin and so we are expecting another positive gross margin in Q2. So for the full year, so we are expecting also a positive gross margin. So I cannot clearly answer right now about the exact percentage, but so maybe it will be growing throughout the year
Okay. So okay, just to clarify, what you are saying is Q2 should be greater than Q1, Q3 should be greater than Q2 and so on. Is that fair to assume?
Yes, so regarding Q2, naturally the gross margin will be greater than that of Q1. However, for the Q3 and Q4, so it is too early to say about the gross margin growth but until, it will be a positive.
And finally just on ASPs into Q2 and maybe in the back half of the year, how are ASPs trending for you, we saw 10% sequential growth from Q4 to Q1, can we expect ASPs to remain flat in Q2, increase, decrease, how do you think about that?
Well, in the near term, the price – ASPs to be stable. There is any other factor such as…
Part of the instruction, this is the operator. The conference speaker has shut off the call. I will be connecting back. Please bear with us for a moment. This conference call will go on music hold for a while. Thank you. The speakers are back to the call. Please continue.
Thank you, sorry everybody we lost the connection here. I think we were talking about product name. Okay, let me continue my answer to your question about the ASP in the second quarter and later on. In the near-term in the second quarter the price is expected to be stable although there will be some geographic or differential and for the second half I think is it very hard to tell because there are many grey areas still there and so it will be very difficult to predict, but we believe it is still equally positive.
Okay. Great, and one last question on the EU tariff, as I understand it, with the preliminary tariff, you actually don’t pay a duty, you merely have to post the bond and the amount equal to the duty, is that a correct understanding? And that you basically have to promise to pay the tariff, should it be implemented in the final stage or do you have to actually pay the tariff once that modules are imported to Europe?
Well, regarding the specific procedure of anti-dumping investigation, we are not quite sure. So it is difficult to answer to your question.
Okay. Great and congratulations, guys, on the continued success. Thank you.
Operator, any further questions?
Thank you very much. (Operator Instructions) There is no further question from the lines at this time, sir.
Okay thank you everybody for turning in. I appreciate your continued interest in Hanwha. As always if you have any further questions feel free to ask us. Have a good day. Thank you very much. Good bye.
Thank you very much. Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may all disconnect.
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