Call Start: 08:00
Call End: 08:26
Hanwha SolarOne Co Ltd (HSOL)
Q1 2014 Earnings Conference Call
May 14, 2014 08:00 AM ET
Paul Combs - VP IR
Jay Seo - Head of China Business
Seong-woo Nam - Chairman and CEO
Ladies and gentlemen, thank you for standing by and welcome to the Hanwha SolarOne Q1 2014 earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Wednesday 14, May 2014.
I would now like to hand the call over to your first speaker for today, Mr. Paul Combs. Thank you sir, please go ahead.
Thank you, operator, and good morning everyone. Welcome to our call. I first would like to remind you of our Safe Harbor policy which is included in the earnings release and posted in its entirety no slide two of the slide package.
Note that our comments today will contain some forward-looking statements that are subject to risk and uncertainties. Please review our filings with the SEC for a complete rundown of these risks.
Before we begin formal comments about the quarter and outlook, I would like to point out the previously announcement management and Board of Director change that we announced following the conclusion of our first quarter.
Our former Chairman and CEO Ki-Joon Hong took a well-deserved retirement from his various roles with the Hanwha Organization, including his position as Chairman and CEO with Hanwha SolarOne. In addition, Min-Su Kim resigned his position as President and as a member of our Board.
We wish both Mr. Hong and Mr. Kim good luck in their new endeavors.
We are excited to have on board a new Chairman and CEO, Mr. Seong-woo Nam whom you'll hear from in just a few minutes as he outlines his visions, goals and priorities for Hanwha SolarOne.
Mr. Nam previously spent 30 years with Samsung Electronics and brings to Hanwha a broad background in a number of management disciplines and a strong track record of operational success.
He most recently led Samsung's large IT solution business which included PC and printers. Under his four year leadership, the IT solutions business experienced a threefold revenue gain, captured significant market share, expanded their geographic footprint globally and built large manufacturing scale.
Now, Jay Seo, our CFO and Head of China Business will outline some highlights of the first quarter as well as some other comments on our business and plans.
Jay was recently appointed to the Board of Directors, filling the seat vacated by Mr. Kim's departure.
Thank you, Paul.
Two main factors had a strong influence on our first quarter results. They were a pause in demand in the China market which led to an unexpected small quarter-to-quarter shipment volume decline. And the devaluation of the RMB which impacted results below the operating income line.
Now, let's take a quick look at some financial highlights from the first quarter as summarized no slide 3 through 7.
Revenues fell by 12% this quarter to $183.1 million. Shipments, which include module processing services, were down about 8% to 323.6 megawatts. We saw ASPs this quarter improve slightly to $0.69 per watt.
Lower volume in the China market helped our average selling price as it has historically experienced lower prices than most other large markets.
Our presence in Japan remained strong, with shipments increasing to 51% of total shipments.
The UK (moves) [ph] to 22% of total shipments and became our second largest market. Demand there was primarily for large scale ground-mounted projects, supported by an attractive subsidy.
The US and Korea were relatively stable as a percentage -- per cent of total shipments at 8% and 7% respectively.
The shipments by geography for this quarter versus the prior quarter on slide six. As I noted earlier, the China market was quite slow due to seasonality and to customers' anticipation of expected subsidy changes by the Government.
China was 16% of our business in Q4 last year and this quarter fell into the others category. Some estimate, overall China market demand for the Q1 may have been one gigawatt or less, well below the pace needed to hit the government 14 gigawatt annual target.
We have seen a pickup in China demand recently, but expect the second quarter will still be relatively small compared to demand in the second half of the year when new government subsidies and other incentives are likely to be implemented.
Our progress and outlook for China is presented on slide 8. The slip in China shipments accounted for more than the overall 8% decline. So outside of China, our business remained solid.
In broad geography terms, we shipped to 22 countries including new emerging markets. The Asia-Pacific region remained the largest by far at 63% of total shipments, followed by Europe and Africa at 24% and North America at 13%.
Gross profits were impacted by lower revenues and fell 13.6% quarter-over-quarter to $25.4 million. Gross margins dropped just to 200 basis points to 13.9%. Our blended cost of goods sold remained constant at $0.59 per watt.
We expect further improvements in this number going forward as revenues climb. [indiscernible] utilization improves, cost-cutting initiatives take hold and our internal ingot and wafering operations become more efficient.
We have a reasonable opportunity to improve gross margins to a range between 15% and 20% by year end.
We recorded a small operating profit of $3.5 million, reversing the small loss position from the preceding quarter. On a GAAP basis, our net loss increased to $21.5 million or 20% per basic ADS, as compared to a net loss of $3.6 million or (percent) [ph] loss per share the previous quarter.
As highlighted earlier, the bottom line was influenced by an $11.7 million net loss in foreign exchange and a fair value of derivatives in hedging activities. Note that these are unrealized losses who can be turned around to a more favorable standing throughout the year.
For the period ending March 31, 2014, our cash balance was $173.5 million. Net working capital declined to $22.5 million as we were required to reclassify our outstanding convertible bonds of $81.9 million, to a current liability reflecting the call feature in January 2015. Since the conclusion of the first quarter, we have repurchased an additional $9.5 million of convertible bonds.
We recorded a negative operating cash flow during the first quarter totaling $46.7 million versus the positive operating cash flow of $42.8 million in the Q4 last year.
The changes were largely due to the increase in net loss as well as a negative change in the restricted cash and accounts and notes receivables.
Note, the working capital changes in the first quarter are short term in nature due to some extended payments from Europe, higher inventory days and supply constraint where we took advantage of cash discount pricing.
Total short term bank debt, including the current portion of long term borrowings, rose a little over $20 million to $244 million. Our outstanding long term debt, which includes the non-current portion of the long term bank borrowings decreased $102 million to $480.2 million.
Most of the decrease was due to the reclassification of our convertible bonds described earlier.
There has been a noticeable and positive change in the credit environment in China. Large state owned banks are open to renewing revolving credit facilities and providing capital for both working capital and capacity expansion, in addition to downstream project financing.
A large number of second tier banks within China are also supporting select solar companies, including Hanwha SolarOne. We continue to have good banking relationships overseas and the backing of a strong parent Company.
Accounts receivable rose less than $10 million to $133 million and days sales outstanding increased slightly to 116 days.
Inventories remained relatively flat at $125.4 million. Days inventory outstanding rose from 63 days to 70 days this quarter.
Capital expenditures in the first quarter were only $5.1 million and most of the Company's capital programs begin in the second half of this year, which I will describe in more detail shortly.
We understand there is a considerable interest in the progress of our previously signed MOUs in China, so let me spend a few minutes providing an update.
First, understand that MOUs are a common practice in early stages of business relationships in China. Although both parties enter into these agreements with serious intent, they do not always result in [indiscernible] and take some time to materialize.
Our relationship with Shanghai HuiTianRan is growing stronger and expanding in a number of directions. This 700 megawatt potential agreement now includes the establishment of a new joint venture company linking our two companies with two other large, well-recognized state owned enterprises with the intent to use our modules and EPC capabilities and to develop a 300 megawatt project.
Additionally, this consortium will potentially seek capital through a market vehicle and provide us with some equity participation.
We have also established a new MOU with the Wuxi New District Administrative Committee to own and operate up to 100 megawatts of distributed generation solar projects. And the relationship is active and progressing.
We have several other strategic partner discussions underway with one significant project at the proposal stage. In addition, just yesterday, 32 megawatts commercial rooftop project in Guangdong province was connected to the grid.
The project used Hanwha SolarOne EPC services in cooperation with large state owned energy company. This project is one the largest distributive generation projects completed in Asia to date.
Before turning the call over to Chairman Nam, I want to comment on our manufacturing progress and expansion plans as summarized in slide nine.
As we noted last quarter, we are converting all of our existing module lines to full automation.
New temporary equipment made by Hanwha Tech M will begin arriving in August and we are scheduled to begin conversion soon thereafter and complete during the spring of 2015. This is an important step to both improve quality and lower cost.
We have now decided to expand both our cell and module capacities to 1.5 gigawatt and 2.0 gigawatt respectively. This capital project should be completed by year end, enabling us to serve a potential 30% increase in demand in 2015.
The capital cost is reduced since we already have buildings and infrastructure in place at our Qidong production facility. Capital spending for the full year should be approximately $80 million.
Our cell and module processing costs are quite competitive but we continue to need to drive down our ingot and wafer production cost in order to achieve the next [indiscernible] reduction in cost.
The primary issues at our ingot and wafering plant are underutilized assets, yield and quality. With a number of initiatives underway, we believe we can reduce non-poly processing costs on ingot and wafers enough to have a significant positive impact on our cost structure.
Now, our new Chairman and CEO, Seong-woo Nam will make some brief comments about his vision and priorities for the Company, which is summarized on slide 10.
Good morning, everyone. First of all, let me express my excitement for the opportunity to lead Hanwha SolarOne and to create increased value for our shareholders.
As you know, both the opportunities and the challenges in solar are large. But I firmly believe this company with the blessing of the much larger Hanwha Organization and its vertical integrated solar strategy provides us with a unique platform to grow the business profitably and achieve a stronger market presence in the brand over time.
My goal for this company is straightforward. I intend to lead an aggressive transformation and turnaround of Hanwha SolarOne, achieving a tier 1 position in the industry within two years.
I led the very large and competitive IT solutions business while at Samsung, a similar accomplishment and I see no reason why success cannot be achieved here.
As most of you understand, product differentiation in solar are not great. So we must differentiate ourselves through focus and dedication. In other words, Hanwha SolarOne will define its own strength.
With this initiative, a systematic management discipline and conduct our operations with a sense of urgency. We will achieve operational excellence and therefore better profitability through a number of areas. Cost reduction can be achieved in areas other than materials.
Some areas targeted for improvement include manufacturing and engineering, driven by automation. Supply chain management and logistics. For example, global material sourcing will improve the processing leverage in corporation with Q CELL. Inventory management, leading to [indiscernible] and the reduced quantities from made to order manufacturing.
I have identified three initial areas for focus. First, marketing. We are not the largest company in the industry in terms of scale, so we need to choose our market focus wisely. The three main markets we target are Japan, EU and China.
We are an early leader in Japan -- sorry, and achieved a solid market share and reputation on which we can build. The customer in Japan, value both the quality focus of a Korean owned company along with a low cost advantage of production in China. We are in the unique position to leverage this combination.
The EU market opportunity is smaller than before due to the market tax restriction on Chinese manufacturers. But the profit potential is good with better pricing. We have maintained our market location positioning even with the overall quantity available to Chinese companies was recently reduced.
Our expectation of growing UK market is good and we can leverage our established relationship with our European ECC customer to penetrate new emerging markets if they extend their focus globally.
The shift from utility scales to rooftop installation favors the growing quality and the brand recognition we have established. Of course, China is a large and fast-growing market and is our home base. As Jay mentioned, the market -- as Jay mentioned, the market suffered a bit of a pause in the first quarter but we believe the longer term potential for growth is enormous and we want to capture our fair share.
In our opinion, there is a space for mainstream manufacturer to position itself with manufacturing excellence and the product quality. And we are actively pursuing long-term opportunities in China with a growing number of key partners.
The second area of operation will be manufacturing. We are a big sales player of a strong [indiscernible] and we need to fine tune our operations throughout the value chain. Manufacturing innovation will lead to competitive advantages as well as enhance the product cost opportunities including seasonal downstream business.
Third, quality and the low cost is a final area of concentration. Because product differentiation is small, we need to enhance our image as a quality manufacturer of high performance, reliable products. And in order to remain we must (resolve) [ph] at the lowest possible cost.
In many companies, they trade one for the other, but we believe excellence in both is achievable. Our relationship with Crystal also provides us with a number of unique opportunities for cooperation. Collaboration has been going smoothly and result in some progress recently, particularly in the area of cell efficiency improvements and the product development for our next generation (standard product) [ph].
These new products will be more cost competitive and reach the highest power crest.
Thank you for your participation in our call today and I look forward to sharing with you our progress in the future.
Now, Jay Seo will provide some formal outlook for the second quarter and the full year of 2014.
Thank you, Chairman. Our 2014 outlook and forecast are shown on slides 11 and 12. For the second quarter, we expect shipment volumes to range between 350 megawatts and 370 megawatts, 8 to 14 increase from the Q1.
For the full year, we forecast shipment volumes forecast remains unchanged at 1.5 to 1.6 gigawatts.
Gross margin is targeted at 15% to 20%. And capital expenditures of $80 million.
Now, we will be pleased to respond to any further questions you may have.
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). There are no questions on the line at the moment. I would now like to hand the call back to Mr. Paul Combs. Please continue.
Okay, thank you operator and thank you everyone for tuning into our call. Once you've all had a chance to digest our report and our comments, we'd be happy to respond to any further questions that you may have.
Have a great day, thank you very much.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, you may all disconnect.
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