Hanwha Solarone Co Ltd. (HSOL) Q4 2013 Earnings Call March 13, 2014 8:00 AM ET
Paul Combs – IR
Ki-Joon Hong – CEO
Jung Seo – CFO
Min-Su Kim – President
Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full Year 2013 Hanwha SolarOne 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 you that this conference is being recorded today Thursday, 13 March 2014.
I would now like to hand the conference over to your speaker today, Mr. Paul Combs. Thank you, sir. Please go ahead.
Okay. Thank you Edwin and good morning everyone. Welcome to our call. Joining me today is Chairman and CEO Ki-Joon Hong, our President Min-Su Kim, and Jung Seo our CFO.
I need to quickly remind you of our Safe Harbor policy, which is included in the earnings release and posted in its entirety on Slide 2 of our slide package. I also need to remind you that our comments today will contain forward-looking statements that are subject to risk and uncertainties. Please review our filings with the SEC for a complete rundown of these risks.
I will now turn the call over to Chairman Hong, for some introductory comments. His remarks will be outlined on Slide #3 and 4. Chairman?
Thank you, Paul, and good morning everyone. As you can see from our financial release, we made significant progress in a number of areas during the first quarter including higher revenue and shipments reducing our cost structure by over 7% quarter-over-quarter more than doubling our gross margin, maintaining a strong presence in Japan and growing our – growing our business in the dynamic China market, generating positive operating cash flow significantly reducing our debt loss to level approaching breakeven on our GAAP basis and excluding non-cash charge achieving bottom-line profitability.
We expect to continue this positive momentum through 2014. Specifically, we look for Q1 shipment to be similar to the preceding quarter, improve our internal manufacturing cost with notable contribution from a more efficient ingot and wafer production, beginning to prepare for increased global demand eye towards strong consideration to expand our cell and module capacity to 1.5 gigawatt and 2.0 gigawatt respectively, achieve a full year shipment increase up to 25%, target full year gross margin over 15% to 20%, achieve cell efficiencies around 18% by year end. Continue our operation with Hanwha Q CELLS especially in the area of technology exchange, integration of supply chains and improving tolling volumes, establishing a downstream business in China with the operation of several strategic partnership already established within our core market.
Now our CFO, Jung Seo, will give a rundown of financial highlights for the fourth quarter and full year.
Thank you, Chairman Hong. I want to like to take you through some financial highlights from the fourth quarter as summarized on Slide 5 through 8. Hanwha SolarOne has made a decisive step towards bottom-line profitability this quarter with shipments, revenues and margins all improving. In fact, without the $9 million in non-cash charges, we would have recorded a profit of $5.4 million.
Revenues increased by 14.1% this quarter to $213.9 million. Shipments which include module processing services were up by more than 10% at 352.2 megawatt. This quarter, ASPs were stable at $0.68 per watt as we continue to benefit from our successful penetration of the Japanese market. A price increase in China that are EU pricing resulting from the negotiated settlement and some activities of higher price market in Canada. Shipments to Japan represented 44% of total shipments while deliveries to China increased to 16% in Q4. Our growth in China comes as the government compound a 14 gigawatt target for 2014 and we begin to benefit from a number of partnerships to capitalize on this potential.
The two additional markets of Germany and Spain made up 7% and 2% respectively of total shipments. Shipments of Korea increased from 4% to 7% as we look to leverage our connections within the country. The Canadian market remained stable for us as we continue to work through a sizeable contract. The full geographic mix of shipments is illustrated on the Slide 7. Gross profitability during the fourth quarter significantly improved to $30.2 million, giving us a gross margin of 14.1% as compared to 5.1% for the previous quarter. Gross margin would have been 16.1% without the impact of the aforementioned non-cash charges. The gross margin increase is the result of a greater shipments and lower cost.
In particular, this quarter we have made larger strides to bring the cost of our ingot and wafer facilities down and expect further improvement throughout the year. We expect to see extending gross margins going forward with higher shipment volumes and reduced cost. Our operating loss during the fourth quarter was $3.9 million and 82% reduction from Q3 $21.7 million operating loss. As a percentage of revenues, operating expenses were slightly lower at 16%. G&A expenses rose primarily due to $4.7 million provision or doubtful debt for accounts receivable.
Without the non-cash charges, we would have been profitable on an operating basis. On a GAAP basis, our net loss came down substantially to $3.6 million or $0.04 per basic ADS as compared to a net loss of $75.2 million or $0.89 per share in the previous quarter. Excluding the total, $9 million in non-cash charges, we would have recorded a GAAP profit of $5.4 million and $0.06 per share. On a non-GAAP basis, we recorded a net loss of $0.05 per basic ADS versus a net loss of $0.78 per basic ADS the prior quarter. The non-GAAP numbers are somewhat influenced by the accounting treatment required for our convertible bonds which is out of our control.
Now, let’s turn our attention to the balance sheet. As of December 31, 2013, our cash balance including restricted cash increased about $50 million to $233 million. Net working capital remained very stable at $97.6 million. This quarter, we were a cash flow positive as net cash provided in operating activities stood at $42.8 million as compared to net cash used in operating activities of over $51 million in the prior quarter. The change in operating cash flow was primarily due to a substantial reduction in net as we approached the breakeven on a GAAP basis.
Total short-term bank debt including the current portion of long-term borrowings remained relatively stable at just over $221 million. Our outstanding long-term debt which includes the non-current portion of long-term bank borrowings and our convertible bonds decreased about $8 million to $582.5 million.
Access to credit for working capital opportunities in China remains challenging but is still accessible particularly outside the Tier 1 base. We do see banks willing to lend for viable solar project development within the country. We continue to have a – have good banking relationships overseas in a strong parent company standing behind us. Accounts receivables stood at $123 million and days sales outstanding markedly decreased to 103 days payment term in China improved. We expect this trend to continue throughout 2014 as the supply/demand balance levels and a credit terms swing more favorable to the manufacturer.
Inventories decreased by about $60 million to $124.3 million as the result of the shipment increase in the first quarter. Sales inventory outstanding as 63 days was about the same as the prior quarter. Capital expenditures in the fourth quarter was $16 million and $70.4 million for the full year. Our capacity remained unchanged at 800 megawatts for ingot and wafer, 1.3 gigawatt for cell and 1.5 gigawatt for module. We anticipate spending around $80 million in capital in 2014 and should be able to fund almost or all of this from internally generated cash. If we choose to expand the capacity additional spending would be required.
I won’t spend much time on the full year comparison in order to conserve time. But, clearly we operated in a difficult environment much of the year which is reflected in our results. However, in spite of top industry conditions, we did meaningful shipment gross of 54% year-over-year to 1.28 gigawattt and achieved the gross profit of $55 million. Our full year loss of $144 million was significantly impacted by $85 million in non-cash charges.
Now, Min-Su Kim, our President, will make some comments on market outlook, manufacturing and cost reduction and our China and downstream strategy.
Thank you, Jung and good morning everyone. As you heard from both Chairman Hong and Jung, we are really pleased with the substantial operating result in the final quarter last year and remained enthusiastic of our further progress in 2014. First, let me go through our outlook and strategies for some of the main demand regions over the world. As you can see from our geographic shipment data, Asia Pacific region is quite important to us particularly as Europe and United States markets have undergone changes to credit issues.
We enjoy our first move advantage in Japan, the Hanwha Corporate brand is a well known and respected. And our reputation for supplying high-quality product is growing. In addition, we have additional expose through our tolling agreement with the Q CELLS. So it’s a big market, we’ll clearly undergo some transition in 2014, we have instant we have changes likely much more a intense competition resulting in lower prices and the governments push to complete previously approved project has been [low] (ph).
That being said, we are well positioned to protect our cell and (indiscernible) as one of our core markets. I will first comment on China and Europe and I spend on our downstream strategies there. Rigorous to say, it is larger and dynamic market and becoming increasingly more important contributor to our results and our future. The market in U.S. remains uncertain near-term due to the pending anti-dumping and CVD process, they’re obviously most large scale project on hold for optimizing downstream using our cells the shares and additional trends to make profitability on lower price within the secured business less attractive.
Therefore, we will position the company as the stable and high-quality Korean brand in our residential and small commercial markets. We will selectively target partners for co-marketing and expand our presence with a key third party testers to establish our quality. We will decrease the utility-scale market following the final credit outcome. Outside of U.S. and Canada, we see emerging opportunities throughout the Americas including Mexico and the Caribbean for example we participated in a project in Guatemala [Listerine] (ph) through one of our European EPC relationships.
Markets in Europe have changed and is passed to the – on a patent situation and we will continue to evolve our strategy in this pass. Except in U.K. the European market has almost disappeared and largely efficient distributors started to survive under the U.K. conditions. We have added good surface in the U.K. where government incentives and make utility-scale business more attractive and by partnering with a strong efficient customers have signed about 60 megawatt of our business in the first quarter around. The U.K. government give us a some signs of a continuous support for several additional shares.
In Germany and Italy our residential and commercial market will be pressed South Korean large-scale utility-scale opportunities. We are working to broaden relationship with small distributors and installers in these market and develop non-price factors such as product features and financing to compete with the local brands.
Now, let me shift [calls] (ph) and spend a few more minutes on the manufacturing side of our business. As you heard earlier, we made a good strides in reducing our cost structure during the fourth quarter with a COGS per watt representing over 7% a quarter-to-quarter to $0.59. As a part of our products comes from better utilization and lower production cost as our internal ingot and wafer facility. Fourth quarter production were more than double levels earlier in the all tier and manufacturing U.S. proposed ingot and wafers both improved. We also begin full commercialized – commercial production of our E-STAR II cell which further reduced cost from higher efficiencies and reduced material consumption.
Throughout 2014, we planned to convert the most of our PV module manufacturing lines to full automation. The clear benefits are labor reduction, improved quality and reduced the material loss. Payback on investment is around 2.5 a share through lower unit cost. We will use manufacturing equipment made by Hanwha affiliate Hanwha Tech M in our module lines.
Let me conclude my formal comments with a brief discussion of our trends for the China market including our downstream efforts. We are beginning to see some tangible results from our efforts in China with the three months as a percentage of a total growing from 3% in the first quarter of 2013 to 60% in the first quarter. We have experienced a good progress in estimation of our efficient capabilities and have completed one of the largest distributed generation project in China to-date in conjunction with the largest state-owned [MS] (ph) provide.
As you probably know the government is aggressively pushing development of a distributed generation so our early success position us well here. There are still some obstacles to overcome in the China market so in order to strength our networking within the country, we have established a several key strategic partnership already had several others remain in active discussion. These partners provide help in obtaining permits customers for more module and EPC expertise and potential co-investment in IPT project. To-date, this network provides us with a potential pipeline over 950 megawatt. We intended to own and operate projects going forward as the returns and opportunity are effective within a initial target of $15 megawatt to 200 megawatt annually in the future.
Now, we will be pleased to withstand to any further questions you may have.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). There are no questions at this time. I would now like to hand the conference back to Mr. Paul Combs for your closing comments. Thanks.
Thank you, for attending the call. As you can see from our results and as you heard from management, this business is much improved and we’re quite excited about the rest of 2014. I have a good rest of the day. If you need further input from anyone, please contact us directly. Thank you and good night.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you, for participating. You may all disconnect.
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