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China Sunergy Co., Ltd. (NASDAQ:CSUN)

Q4 2013 Earnings Conference Call

April 04, 2014 08:00 AM ET

Executives

Elaine Li - Senior IR Manager

Stephen Cai - CEO

Yongfei Chen - CFO

Jianhua Zhao - CTO

Analysts

James Medvedeff - Cowen & Company

Operator

Ladies and gentlemen, welcome to China Sunergy’s Fourth Quarter and Year 2013 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

Ms. Elaine Li, Senior Investor Relations Manager; you may begin your conference.

Elaine Li

Thank you, operator and welcome to China Sunergy fourth quarter and full year 2013 earnings conference call. This is Elaine Li speaking, CSUN’s Senior Investor Relations Manager. We have posted a presentation on our website and during today’s discussion we will be closely following and referring to the presentation. With us today are China Sunergy’s CEO, Mr. Stephen Cai; CFO, Mr. Yongfei Chen; and CTO, Dr. Jianhua Zhao.

Today, before the market opened, the company issued a press release announcing our fourth quarter and full year 2013 financial results and our guidance for the first quarter and full year of 2014. This press release is also available on the Investor Section of our website at www.csun-solar.com.

To start, Stephen will present an overview of our fourth quarter results and a quick review of important developments at CSUN and the solar industry. Then, CFO, Mr. Chen will explain our financial results in more detail. Following that, CTO, Dr. Jianhua Zhao will provide a technology update, and then Stephen will close with guidance. Afterwards, they will all be available to take your questions.

Before I turn the call over to Stephen, I would like to remind our listeners that management’s remarks include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties and as such, our results may be materially different from the views expressed here today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Sunergy does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded.

Now, I’d like to turn the call over to CEO, Mr. Stephen Cai. Stephen?

Stephen Cai

Thank you all for joining today’s conference call. We are pleased that our shift to more OEM arrangements has benefited CSUN, driving better than expected total shipments. As you may recall from our discussion with you during the last earning calls, in light of China’s tightened credit environment has seriously limited our working capital, we productively decided to take on more OEM arrangements in order to sustain the production scale while employing our limited working capital to produce a higher margin cells and modules.

As summarized on slide four, in the fourth quarter, we shipped a total of 235.8 megawatts, beating the high end of our previous forecast of 168 megawatts. Embedded in the total shipments was 14 megawatts to OEM including 21 megawatts in module and 19 megawatts in cells.

Blended ASP for modules in the fourth quarter declined to $0.03 sequentially to $0.59 per watt, primarily due to the more sales to lower pricing regions, especially in China during the quarter. Even though the ASP declined our strong shipment volume more than made up for it as we more than doubled our total revenue from the previous quarter to $125.5 million.

We also expanded gross margin by 220 basis points from the previous quarter to 5.2% in the fourth quarter, aided by the higher gross profit, we were able to hold net loss for the quarter at $13.2 million, unchanged from the third quarter, despite high finance expense and the low ForEx gains in the fourth quarter.

In reviewing 2013, we are satisfied with our ability to nimbly adapt our strategy in keeping with the tough solar industry dynamics. Our operational flexibility and the scale combined with effective expense controls contributed to hand an overall improvement in efficiency. Our Turkey manufacturing plants favourably buffered us against the impact of anti dumping rules in the European market, and we achieved a rich geographical balance in our customer base.

At the same time, we continued to make progress in expanding our global sales network, increasing production efficiency and also for gaining ahead with the downstream projects. As such, despite the challenging macro-environment and the tough industry dynamics we believe China Sunergy is now more efficient and nimble than ever. Let’s together make a more detailed review of our progress in 2013.

First, please turn to slide 6 for updates on our initiatives to optimize the global supply chain. As you recall, we completed the construction of our Turkey manufacturing plants in the first quarter of 2013 with an initial capacity of 300 megawatt for module and 100 megawatt for cell. Subsequently, our top priority in Turkey was to ramp up production and the capacity utilization in order to enhance efficiency and profitability.

In the fourth quarter, our shipment from Turkey totalled 25 megawatts, up from 15 megawatts in the previous quarter. Thus far, modules made at our Turkey plant have been well accepted and are benefiting from the higher ASP in the region, the average gross margin for shipment from our Turkey plant reached 8% for fourth quarter of 2013, much higher than the average gross margin from our China plant. In addition, the Turkey plant also helped to broaden our financing channel at a cheaper cost.

In the second half of 2013, we were able to localize our financing facilities in Turkey and the financial expense ratio was much lower than that in China. So, although this current labour cost in Turkey is relatively high, the lower financial expenses helped to generate a high net profit. And in fact we generated a positive net profit in January and the February of 2014. As we continue to raise production efficiency and leverage more of the cheaper local financing, we have confidence to gain even the higher profitability from our Turkey plant in 2014. We are very pleased with the success of our expansion in Turkey as the plant not only fulfilled its initial objective of serving as a buffer against the impact of these anti-dumping rules in the Europe but also help to further our penetration in Europe and the surrounding market.

This February, our Turkey plant received a certificate under the UK Microgeneration Certification Scheme for its normal and poly modules which provide us additional ammunition to our improving business in Europe. We are on plan to full ramp utilization towards its designed module capacity of 300 megawatts by the end of this year. And we are quite optimistic with our strategic position in Europe and surrounding market.

Now please turn to the slide 7 for our revenue breakdown by geography. As you know we have been actively working on further diversifying our geographic mix and during the fourth quarter high sales in Asia fortify our objective. Notably, China driven by the many government initiatives and the benefits contributed over 56% of total revenue in the module sales in the fourth quarter and became the first single country to contribute all half of our total quarterly module revenue.

Within Asia, Japan and India were also healthy accounting for 7% and 3% of fourth quarter total revenue. Europe was also solid in the fourth quarter with total module shipment of 45.4 megawatts and a revenue contribution of 32%. It is worthwhile to note that improved demand in the Europe actually came from the broadened swift of the continent with solid demand in Germany, France, UK, Eastern Europe and the Northern Europe. Meanwhile the pricing environment in Europe was more robust with a blended region ASP of more than $0.70, much higher than our overall ASP of $0.59 in the fourth quarter. For full year 2013, Europe and Asia were the major revenue contributor for us accounting for 47% and 50% of the total revenue respectively. This was much more balanced than in the previous year when Europe alone was over 70% of the total revenue.

Looking ahead, we aim to further capture more opportunity in faster growing markets and we view China, Japan and Australia as important markets for CSUN for the coming future quarters. As you know China offer very attractive product, attractive product economics supported by not only central government incentives but also including tariff and local tax incentives. Naturally we will continue to grow our business in China.

Meanwhile, Japan was the fastest shipment growth for us in 2013 and also offered one of the highest ASP for modules. Accordingly, we are in the process of opening a sales office in Japan this April, and that we believe the localized sales team will help us to quickly upgrade our local market knowledge and the expertise. Elsewhere in the Asia-Pacific we also recently established a new sales office in Australia this March. With our extended sales network and the local team we are confident of our ability to drive more business in the region.

Now let’s turn to the Slide 8 for a review of the conversion cost. This quarter conversion cost of cells and modules manufactured were at $0.15 and $0.19 per watt respectively, compared with the $0.15 and $0.22 per watt in the previous quarter. Our Turkey plant contributed the most to the saving in the conversion cost of modules improving to $0.23 per watt in the fourth quarter, compared with the $0.26 per watt in the previous quarter. As our Turkey plant further expand manufacturing scale and catches us up to our normal efficiency we anticipate the conversion cost on module in Turkey to improve by another $0.02 or $0.03 in 2014. As such, we are confident we can further improve our overall conversion cost in 2014.

Next, a quick update on downstream projects. During the fourth quarter we closed the first cell transition for our cells developed 500 megawatt solar power project in UK. A signified network filed in the UK has qualified for filling tasks and connected to grid in the fourth quarter and we anticipate selling these signified network projects in the first half of 2014. This [indiscernible] our downstream projects, strengthened our confidence in investing and developing in other markets, and we’ll continue our efforts to explore additional downstream projects in 2014.

All in all, I believe China Sunergy is more efficient, nimble and we’re positioned for the foreseeable future. We’ll continue to see the positive momentum in the solar market, with a stabilized healthy pricing environment.

In addition in March 2014, CSUN was awarded Tier 1 status on the Bloomberg New Energy Finance PV Module Maker Tiering System. This Tier 1 status allows our developer and the EPC customer easier access to financing instruments which is important pre-requisites for utility scale solar installations.

In summary, I am pleased that we made a significant progress in 2013 and I am optimistic that we will further build on that in 2014.

Now I would like to turn the call over to Yongfei Chen our CFO to go through the numbers in detail.

Yongfei Chen

Thank you Stephen. Considering the credit crunch during the third quarter, our top priority for the management team was to maximize available working capital. And accordingly we continually communicated to its local banks to expand our loans. During the fourth quarter we successfully took local bank support and were able to renew nearly all due short-term commercial bank loans. We also converted a short-term loan to $120 million from China Development Bank into long-term bids during the fourth quarter. Importantly we continue to win local banks confidence and support and thus far we estimate that we have successfully renewed approximately 90% of the short-term loans due by the end of the first quarter of 2014. We also continued our emphasis in controlling operating expenses and the completion of effective expense controls and the increased scale through high production volume during the quarter. Positively, contributed to our operational efficiency.

A few highlights for the fourth quarter. Gross margin expanded by 220 basis points to 5.2%. Operating expenses shift by nearly $1 million to $13.9 million. Net loss margin narrowed to 10.5% compared with the net loss margin of 23.1% in the previous quarter.

Now let’s turn to Slide 9 of the PowerPoint presentation for more details on the fourth quarter financials. In the fourth quarter of 2013 we shift a total of 235.8 megawatts, an increase of 109.2% of the third quarter of 2013. Included in total shipment, OEM arrangement was about 20.9 megawatts for module and 19.4 megawatts for cells and also 5 megawatts from our cells of the UK downstream project.

Our revenue this quarter was $125.5 million, up 119.8% sequentially driven by higher shipments of module. Our module ASP decreased $0.03 sequentially to $0.59, primarily due to increased shipments to lower-priced regions.

Gross profit increased to $6.6 million from $1.7 million in the previous quarter. The increase in gross profit was mainly attributable to higher shipments and lower manufacturing cost in the fourth quarter. During the quarter we had an inventory provision of $0.4 million compared with inventory provision of $0.9 million in the previous quarter. Overall gross margin of the quarter was 5.2% compared with 3% a quarter ago.

Non-GAAP gross profit totaled 7 million on non-GAAP gross margin of 5.6% of the quarter. During the quarter total OpEx decreased by 0.5 million, $9 million to 13.9 million. G&A expenses were $8.9 million compared with $8.4 million in the previous quarter.

The G&A expenses incurred to the affected provision of $1.1 million compared with $1.3 million in the previous quarter. Sales and marketing expenses was $3.9 million, a slight decrease from $4.8 million in the previous quarter. Going forward we will continue to tightly control OpEx and diligently collect receivables.

Net interest expense increased to $9.2 million compared with $7.1 million a quarter ago, mainly due to more interest expense on discounted notes receivables as we pre-cashed some notes to quickly boost the working capital. Tax expense was $0.6 million compared with tax benefit of $1.2 million in the previous quarter.

All in all, net loss attributable to ordinary shareholders was $13.2 million and net loss per ADS was $0.89 in the fourth quarter. Non-GAAP net loss attributable to ordinary shareholders was $11.6 million and net loss per ADS was $0.78.

Going into our balance sheet and case items on slide 10; reflecting the strong shipment volume during the quarter, inventories decreased by $21 million sequentially to $44.7 million while account receivables increased by $14.6 million to $82.1 at the year-end.

CapEx was $9.6 million this quarter, an increase of $6.2 million from the previous quarter. As we continue to invest to upgrade our production lines and the construction of [indiscernible] some project in our China Factory’s roof top.

This quarter operating cash outflow was $11.8 million compared with net cash inflow of $16.4 million in the previous quarter, primarily due to higher account receivables and lower account payables. We ended the year with total cash position of $248.5 million.

Lastly, let me now provide you with a quick summary of our full year 2013 financial performance on slide 11. For full year 2013, our total revenue increased 8% to $316.2 million on total shipment volume of 577.4 megawatts, which increased 47.7% from 2012. The total volume module shipments were 548.2 megawatts including 20.4 megawatts under OEM arrangements.

Gross profit [indiscernible] policy at $15.2 million, a gross margin of 4.8% in 2013, compared to gross loss of $1.2 million in 2012. Non-GAAP gross profit totaled $16.9 million with non-GAAP gross margin of 5.3% in 2013, reporting improved gross margin and effective OpEx control during the year. Loss from operations significantly narrowed to $39.9 million, and net loss attributable to ordinary shareholders narrowed to $50.6 million or $3.68 per ADS in 2013 compared to $9.99 per ADS in 2012.

Let me now turn the call over to Dr. Zhao to provide you with our technology updates.

Jianhua Zhao

Thank you Mr. Chen and Stephen and welcome everyone to our call. I am glad to speak with you again for an update on our recent technology achievements. As displayed on slide 12, we continued our efforts to improve conversion efficiency in both cells and the modules. As you all know, with everything else being equal, a higher efficiency panel converts more sunlight into electricity and has a smaller surface area [indiscernible] of related power output and also helps to reduce the cost of the balance of system. During the fourth quarter, average efficiency of our multi-cells and mono-cells further improved to 17.43% and 18.66% from 17.4% and 18.65% in the previous quarter. The year-end efficiency of our high performance multi-cells called Waratah successfully reached our 2013 year ended target of 17.8%.

During the fourth quarter, average QSAR II cell efficiency reached 19.23% and the highest module power output topped 275 watts, which is among the highest in the field. We also upgraded our QSAR production lines during the fourth quarter to expand capacity and we successfully achieved our target conversion efficiency of 19.5% of QSAR II cell by 2013 year-end.

We are also making progress in enhancing our technology at our Turkey plant. Following the completion of factory inspection and a grant of TUV certificate in the third quarter, the PV modules produced at our Turkey plant also passed salt mist and ammonia test conducted by TUV Rhineland in February 2014. We are confident that we can transfer our leading technology and expertise from China to Turkey and to monetize from large commercial application going forward.

I am honoured to say with the persistent efforts of our entire R&D team, our product are well recognized as the industry’s most advanced and we continually look to expand our lead by also deepening our co-operation with the elite research labs around the world.

This January, we signed a five-year collaborative research agreement with the PV Group at the University of New South Wales and the New South Innovations, Australia to substantially improve solar cell efficiency by improving wafer material quality. Combining UNSW's advanced hydrogenation technology with China Sunergy's deep experience in cell process, we are confident to enhance electrical properties of silicon wafers and thereby to obtain significantly higher cell efficiencies.

Additionally, UNSW may provide us with regular updates on its latest research achievements training and education for us which we believe will keep us at the forefront of leading-edge technology in the industry and help us sustain our competitive advantages.

Let me return the call to Stephen to provide our guidance. Stephen.

Stephen Cai

Thank you Dr. Zhao. Before providing you with our guidance, let me share with you some of the key developments that will support our optimism for 2014. Internally at the CSUN, we are seeing a clear path towards our return to earning positive net profit and the cash flows.

For 2014, we have put in place four initiatives that will get there. Firstly, we aim to upgrade the quality of OEM customers in terms of the pricing and volume commitment. In 2013, the large majority of our OEM business came from the China customers which typically require a lower price and at a smaller volume. For 2014, we have been actively in negotiation with prospectively overseas customers, including those in South Korea and Japan that are willing to commit to a higher price and at a high volume. We plan to expand our overseas OEM volume to 40% and we anticipate earning higher gross margins and generate better cash flows from OEM arrangements.

Secondly, we plan to integrate our global supply chain for wafer. Wafer cost on average has historically accounted for about 40% of our total cost of the module. In 2014, we also hope to direct the purchase polysilicon and based on our current estimation can lower our average wafer cost by $0.02 to $0.03 in 2014, which translates to a potential improvement of about 300 to 400 basis points to our gross margin.

Thirdly, we hope to increase our manufacturing processes through equipment upgrade, recently in the first quarter, we invested in automated soldering machines that significantly upgrade our processing rate, while also effectively low level cost and the material waste, which will ultimately translate in to significant gross margin expansion. More importantly we were able to gain the favourable vendor financing for these machines, which limited the initial cash outlet and preserved working capital.

Fourthly, we’re actively exploring additional overseas financing channels, as I mentioned earlier, local financing channels in Turkey has actually been very helpful to our operations and we plan to deepen our corporation with additional banks in Turkey to gain high financing leverage going forward. We also consider broadening the use of cheaper financing channels elsewhere in the world, including such as Japan where annual interest rates can be as low as 2%.

Lastly, we’re also employing our own working capital to enlarge our cells production, which enjoys higher gross margins and a shortened collection terms thereby generating better cash cycle and profitability. We’re confident that we will deliver significant year-over-year growth in the shipment volume in 2014. So as you can see despite these tough challenges in the recent quarters, we are optimistic about 2014 and beyond.

Turning to our guidance on slide 13. We estimate that the total shipment for the first quarter of 2014 will range from 130 megawatts to 140 megawatts, including 35 megawatts to 14 megawatts of cell. We expect the gross margin for the first quarter of 2014 to remain in the middle single-digits. For the full year 2014, we estimate the total shipments will range between 750 megawatts to 800 megawatts, including 150 megawatts to 200 megawatt for cell.

At this note, at this time I’d like to take your questions. If you have additional questions of this call please do contact us afterwards.

Operator you may begin with the first question.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). The first question comes from the line of James Medvedeff from Cowen & Company. Please ask your question.

James Medvedeff - Cowen & Company

Can you say what depreciation was in the fourth quarter?

Stephen Cai

About $5.4 million depreciation.

James Medvedeff - Cowen & Company

And can you just review what your capacities are in China, Turkey and total for cell and module?

Stephen Cai

Yes, currently cell capacity is 470 megawatts and in China, 100 megawatt for cell in Turkey now. Module capacity now in Turkey now we expect it to be 300 megawatts. In China now we have 815 megawatts.

James Medvedeff - Cowen & Company

Okay, great, and the 5 megawatts that were shipped to the UK for the project, was any revenue recognized from those?

Stephen Cai

Yes, we already…

James Medvedeff - Cowen & Company

Okay, my next question -- and my final question is, can you say what your revenue per watt is for the tolling business on modules on cells?

Stephen Cai

You mean the total revenue or volume something?

James Medvedeff - Cowen & Company

We have the -- I believe we have volume. It’s the ASP that you receive for tolling.

Stephen Cai

OEM ASP, I think it’s for module I think is about $0.22 or $0.23.

James Medvedeff - Cowen & Company

Okay. In cells?

Stephen Cai

I am just talking about -- this is on OEM, the ASP means without any silicon components, so module is $0.05 per watt. Module is $0.05 per watt, cell is $0.03 per watt.

Unidentified Company Representative

Hi James, cell is $0.13, actually.

James Medvedeff - Cowen & Company

Cell is $0.13?

Stephen Cai

Yes, $0.13.

James Medvedeff - Cowen & Company

So $0.05 for module, $0.13 for cell.

Stephen Cai

Yes. Correct.

Operator

(Operator Instructions). There are no further questions at this time. I will now like to hand the conference back to management. Thank you, and please continue.

Stephen Cai

Thank you for participating in today’s quarterly earning call. We look forward to speaking with you again soon. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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