Yingli Green Energy's (YGE) CEO Liansheng Miao on Q1 2016 Results - Earnings Call Transcript

| About: Yingli Green (YGE)

Yingli Green Energy Holding Company Limited (NYSE:YGE)

Q1 2016 Earnings Conference Call

June 14, 2016 8:00 AM ET

Executives

Jean Tian - General Counsel

Liansheng Miao - Chairman and Chief Executive Officer

Zhiheng Zhao - Vice President

Wang Yi Yu - Chief Financial Officer

Miao Qing - Vice President of Corporate Communications

Jeffrey Barnett - Managing Director, Yingli Green Energy Americas

Darren Thompson - VP, Sales and Managing Director, Yingli Europe

Analysts

Patrick Jobin - Credit Suisse

Justin Clare - Roth Capital Partners

Presentation

Operator

Hello, ladies and gentlemen. This is Raphael. I’ll be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited’s First Quarter 2016 Financial Results Conference Call. All lines have been placed on mute to prevent background noise. After today’s presentation, there will be a Question-and-Answer session. Please follow the instructions given at that time, if you would like to ask a question.

Now, I would like to transfer the call to the host for today’s call, Mr. Jean Tian, General Counsel of Yingli Green Energy. Mr. Tian, please proceed.

Jean Tian

Thank you operator and thank you everyone for joining us today for Yingli’s first quarter 2016 financial results conference call.

The first q

uarter of 2016 earnings release was issued earlier today and available on the Company’s website at www.yinglisolar.com.

On the call today from Yingli Green Energy are Mr. Liansheng Miao, Chairman and Chief Executive Officer; Mr. Zhiheng Zhao, Vice President, Mr. Wang Yi Yu, Chief Financial Officer; Ms. Miao Qing, Vice President of Corporate Communications; Mr. Jeffrey Barnett, Managing Director of Yingli Americas; Mr. Darren Thompson, Vice President of Sales and Managing Director of Yingli Europe; and Ms. Jean Tian, IR Director; Mr. Lawrence Wang, Financial Controller.

The call today will feature a presentation from Mr. Zhiheng, covering business and operational development. Mr. Jeffrey and Mr. Thompson will talk about the development of American, European and other emerging markets respectively. And then Mr. Yi Yu Wang will take you through a discussion of the Company’s financial performance. After that, we will open the floor to questions from audience.

Before beginning, Yingli Green Energy’s management team would like to remind the audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates and similar phrases. Such statements are based upon management’s current expectations, and current markets and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy’s control, which may cause Yingli Green Energy’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in Yingli Green Energy’s filings with the U.S. SEC. Yingli Green Energy does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law.

I would now like to turn the call over to Mr. Zhiheng. Please begin.

Zhiheng Zhao

[Foreign Language]

Good morning and thank you for joining us today. We are very excited to announce that we achieved profitable results for Q1 2016. This marks a impressive turning point and it was our first profitable quarter since the third quarter of 2011. Our income from operations and net income reached RMB186 million and RMB79.6 million, respectively, in the first quarter.

In the first quarter compared to a loss from operations and net loss in the previous quarter gross profit was as RMB469 million and a increase of about 90% quarter-over-quarter representing a gross margin of 20% up from 11.8% in the first quarter of 2015.

Meanwhile, we also took proactive steps to maintain the overall utilization rate of our production capacity to around 85% in particular the output of our PV, cell production lines goes to a record high of 320 megawatts per month during the first quarter 2006.

In addition, our operating expenses were significantly reduced, thanks to our internal organizational restructuring and international sales channel reorganization efforts.

Very successful quarter was a result of timely strategic decisions and execution by our management and the dedication demonstration by our employees as a result, as of Q1 2016, we have cumulatively shipped over 15 gigawatts of PV modules across the world making important milestone in our history.

During the first quarter, in the China market, we took advantage of the rush in installation in the first half of 2016. By the end of May, we secured orders of totaling 820 megawatts and over 60% of our full amount cash prepayment agreements.

We continue to prioritize sales to those markets with higher ASP such as Japan in this quarter of change and challenging from global markets our shipments to Japan continue to increase and our percentage of total shipments account for approximately 40% this quarter compared to around 30% in the previous quarter which slightly surpassed the China market and topped our shipments among all markets.

Because of the reduction of subsidies for PV announcements of a PV announced by METI of Japan that will become effective in April 2017. This may bring an intense reinstallation period giving the rate of the use; we expect our shipments to Japan to remain robust in 2016.

As for the policy in China in June, NEA announced its 2016 target for PV energy installation at 18.1 gigawatts including 12.6 gigawatts utility scale PV projects and 5.5 gigawatts high efficiency projects under the top ranking progress which will further support implementation of 13 five year point growth for solar PV installation and bring more demand to the set opportunities.

Furthermore, the People’s Bank of China announcing to launch Qing bond in interbank bond markets at the end of 2015, which may facilitate and accelerated the financing of new energy components and a sustainable development of this industry.

On the technology innovation starts to continue to technical innovation and improvements, we are proud to say that energy yield of our dual glass 60 cell module is enhanced from 275 kilowatts to 290 kilowatts. In May, we successfully commercialized high efficiency dual glass module comprises of PANDA and CAP and monocrystalline PV cells.

This energy yield per watt is up to 30% more than prevailing monocrystalline margins, this module are widely applicable to harsher environments such as snow conditions and have passed successfully the durability and the safety tests conducted by TUV Rheinland.

Our high efficiency monocrystalline dual glass modules were selected for a 50 megawatts top runner project in Datong, Shanxi and were shipped by earlier June. These were the first dual glass module in China to be used in a top runner project and it will further approach for the advancement of PV industry domestically. This module are popular with coastal area clients who are option for the solar in China markets and we expect aggressively push these modules in the global markets.

We are still in discussion with note holders about the revision of – to the repayment schedule of the MTLs for the bank loans we have been actively negotiating with creditors of our borrowings and until now some of the major creditors have agreed to extend the great majority of their borrowings to us and enter into amendment with our reduced interest returns. This will further release our current financial challenges.

Overall, the backdrop of energy consumption transitioning into cleaner and complex challenging surrounding China in itself and internally. We have returned to profitability. We believe we will achieve healthy operating results and keep this on track this year and beyond by continuing leveraging our strength and efforts.

Now, I will hand over to Mr. Jeff Barnett, Managing Director of Yingli Green Energy Americas and Darren Thompson, Managing Director of Yingli Europe to give you a briefing on their markets. Thank you.

Jeffrey Barnett

Thank you, Jean. Yingli Americas had a solid first quarter with the successful closing of three utility scale projects in the United States and Mexico. We finished 100% on-time deliveries to a large utility scale project in Texas and continued with orders from a stable base of run rate customers with increased number of requests for products.

We added three new residential and commercial distributors to our current customer base in the US and expanded our presence in Latin America and the Caribbean with the addition of four new distributors and three different countries across the region. We closed our first 1.1 megawatt roof-top project in Chile and continued with steady demand for large commercial projects in countries like Honduras and Panama.

We positively anticipate a gainful Q2 as updated government incentives in loss in Costa Rico, Colombia and the Caribbean drive higher demand for the distributed generation segment while the utility sector in the US very likely is to remain strong throughout the year.

I’ll pass the call over to Mr. Darren Thomson. Thank you.

Darren Thompson

Thank you, Jeff. Since our Q4 2015 earnings call a few weeks ago, there were no material changes to our qualified gross capacity pipeline and milestones reached to-date. In summary, our qualified gross capacity pipeline outside of China is 401 megawatts. Defined it’s reaching at least the status of term sheet and excludes the 18.8 megawatt UK projects sold in 2015.

Within the project portfolio, we have invested in 73 megawatts of projects with a waiting to the Polish market which we anticipate to exit through 2016 and into 2017. We continue to see regulatory progress in Poland although the exact timing of the first auction for renewable projects under one megawatt is not clear, we expect it during the second half of 2016.

In the UK, we recently exchanged the sale of contract for a 5 megawatt project following grid connection in March. In Africa, we continued to focus and gain traction in the West Africa markets with along the term utility scale projects and see accelerating demand for commercial roof top projects ranging from several hundred kilowatt peak to several megawatt peak in scale with a relatively short development period.

We continue to focus on the cell within the holding strategy or downstream projects to efficiently recycle cash. Our Japanese operations delivered another successful quarter with our shipments to Japan representing nearly 40% of our total Q1 global shipments, compared to 30% in Q4 2015.

In Japan, we have now reached 2 gigawatts of cumulative shipments. We continue to have solid demand visibility in Japan and anticipate supply side demand of nearly 600, 700 megawatts.

Now I’ll hand over the call to our CFO, Mr. Wang Yi Yu. Thank you.

Wang Yi Yu

Thank you, Darren and hello everyone. First I would like to walk you through our financial results for the first quarter of 2016 followed by the guidance for the second quarter of 2016. As Mr. Zhao mentioned, I am delighted to announce that our net income in Q1 2016 was US$12.3 million turning into a positive for the first time since Q3 2011.

Total net revenues in Q1 2016 were US$364.6 million representing an 11.4% sequential increase from Q4 2015, which was primarily due to the high ASP of the company’s PV module compared to Q4 2015. This is mainly due to the high proportion of shipments to Japan where in such market the selling price for PV modules is generally high than that in other markets.

The increase of other revenue, especially is mainly due to the sales of PV cells also contributed to the increase of total revenue. During the quarter, despite of the continued challenge in working cash flow, we should have 108.1 megawatt of PV modules at the high end of our previous guidance of 480 megawatts to 510 megawatts.

Gross profits and the gross margins were US$72.8 million and a 20% in Q1 2016, significantly increased from US$38.3 million and US$11.8 million in Q4 2015. Gross margin on sales of PV modules were 19.7% in Q1 2016, increased from 13.5% in Q4 2015.

The increase in the gross profit and gross margin on sales of PV modules was mainly due to the high ASP of the company’s PV module sales compared to Q4 2015. This is mainly because of the high proportion of sales to Japan markets in Q1 2016. The appreciation of Japanese Yen against RMB in Q1 2016 and more shipments to the U.S. dollar was relatively higher selling price of PV modules also contributed to higher ASP of the Company's PV modules sales in Q1 2016.

In addition, our gross margin on sales of PV modules was positively impacted by the decrease of our in-house cost of module per watt from US$0.42 to US$0.41 in Q1 2016.

Moving down to the operating lines, operating expenses were US$43.9 million in Q1 2016 compared to US$211.3 million in Q4 2015. The significant decrease was mainly due to – we recorded a certain provisions like prepayments in relation to inventory purchase commitments, doubtful accounts receivable, reserve of inventory, purchase commitment and the settlement cost to Solyndra case in Q4 2015 while in 2016, we don’t have such kind of big provisions.

Excluding the impact of the mentioned provisions, the decrease of operating expenses was also due to we put more strict and effective control on the general and administration expenses control and that we also adjusted our marketing and sales strategies, meanwhile we also decreased the research and development activities in Q1 2016 to saving more cost.

However, selling and research and development expenses may increase in future periods as the company's PV module shipments and increase and we are going to have more active research and development activities in the following quarters.

Operating income in Q1 2016 were US$28.9 million, compared to the operating loss of US$172.9 million in Q4 2015. Foreign currency exchange again were US$8.6 million in Q1 2016, compared to the loss of US$4.6 million in Q4 2015. The foreign currency exchange gain in Q1 2016 was mainly resulted from the appreciation of Japanese Yen against RMB and the fact that the company had a balance of net current assets denominated in Japanese Yen.

Income tax expenses was US$2.2 million in Q1 2016, decreased from US$20.5 million in Q4 2015 which was mainly because of there is no allowance of deferred income tax assets accrued in Q1 2016 while this allowed us was recorded in the last quarter of 2015.

Net income was US$12.3 million and earnings per ADS was US$0.7 in Q1 2016 in Q1 2016, compared to the net loss of US$200 and US$22.1 million a loss per ADS of US$12.2 million in Q4 2015.

On an adjusted non-GAAP basis, adjusted net income was US$11.4 million and adjusted earnings per ADS was US$0.6 in Q1 2016.

Let’s have a quick look at our balance sheet. At the end of March 31, 2016, our cash and cash equivalents were US$85 million decreased fromUS$191 million as of December 31, 2015. The decrease is mainly due to the repayments of certain mature short-term loans which is in the process of renewal in Q1.

The restricted cash balance were US$50.3 million at the end of Q1 compared to US$53.6 million by the end of 2015.

Meanwhile, the company has maintained a good credit across its relations with our lending banks and other financial institutions in China. The company’s subsidiary has been actively communicating with the lending bank for renewal and a rollover of their borrowings.

Recently, some of the banks has been agreed with the company's subsidiaries to extend some of the borrowings and slightly reduce the interest rates for some of the borrowings. In addition, the company and its subsidiaries are exploring different kinds of financial options to continue to manage the company and its subsidiaries' liquidity and to enhance their financial flexibility.

Now let’s move into the guidance for Q2 2016. Since the second quarter, we continued to improve our operating results through a series of actions such as increased utilization ratio, continued efforts and control all the operating expenses and all level efforts on reducing the manufacture cost of PV modules. Based on current market conditions, the company’s current operating conditions, we and the estimated production capacity and the forecast of customer demand, we expect our PV module shipments will be in the estimated range of 580 megawatts to 620 megawatts for the second quarter of 2016.

In addition, we expected our gross margin in the second quarter of 2016 will be in the estimated range from 18% to 20%.

Now I would like to open the call for questions. Operator, please proceed. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Patrick Jobin of Credit Suisse. Please ask your question.

Patrick Jobin

Hi, thanks for taking the question and congratulations on returning to profitability this quarter. First question, just thinking about the gross margin outlook beyond Q2, I guess some of the other companies in the space were talking about pricing pressure and having lower gross margins in the second half. I guess from what you are seeing with pricing into the second half, how do you think gross margins would trend from Q2 into the second half?

Wang Yi Yu

I think, generally, we also expect the pricing will be gradually decreased in the second half. I think, part of the reason is mainly due to in China the government just announced the 18 gigawatt annual installation target. However, they increment a kind of bidding system for the bidding tariff which may drive some competition for those project developers on bidding a lower bidding tariff for which may theoretically driving the system cost down. So the module price should have a slight pressure. However, based on the current overall situation, we are also believe that the company had a further room to increase its module manufacture by continued efforts on the increase – on the cost of control, increase of servicing et cetera. So, that’s why through the whole year, we don’t expect that the gross margin will jump significantly could be somehow slightly below the Q1 level, very slightly.

Patrick Jobin

Okay, thank you. And then just one quick question in regards to your debt position, you mentioned some of your lenders have agreed to modify terms and potentially lower interest rates. Can you quantify or correctly specify which lenders have agreed to amended terms or I am just trying to get a better sense of, if you have re-negotiated the medium-term note terms or if you are still trying to come to some agreement with those lenders? Thank you.

Wang Yi Yu

Okay, thanks for the question. I think the first is given the confidentiality agreement with the banks, we can’t disclose too much detail. What I can share with you is, the first is that, for those bank borrowings except for the medium notes, we have been very actively talking and discussing with our key lenders and some of the key lenders have agreed to help us to extend the original prepayment schedule to a more smooth payment schedule through the following few years while – which will significantly release – help us to release the financial pressure, but that will also help us to secure a very smooth overall cash flow situation. For the medium notes, for the interest rates, the increase is very slightly, so it’s not significant compared to the original interest rate. So the impact to the annual financial expense is not material. Regarding to the medium notes, at this moment, we are still in the stage of discussion with the medium note holders on how to find a mutual benefit for both parties to reach and settle on how to solve the current issue. So, once we reach the commitments, we will announce them officially through our website and the press release. Thanks.

Patrick Jobin

Thank you.

Operator

Your next question comes from the line of Philip Shen from Roth Capital Partners. Please ask your question.

Justin Clare

Hi everyone. This is Justin Clare. I am on for Phil today. Thanks for taking my question. So first off, I was wondering if you could talk about your capacity utilization in Q1 and share how much of your capacity was used for your own external module shipments versus how much of the capacity was used for OEM shipments to third-parties? And then could you talk about how you expect your capacity utilization to change through the year?

Wang Yi Yu

I think, first is our sales capacity has been significantly increased through the past quarters. Now our sales capacity has been reached around 320 megawatts in shipments. Our module capacity is roughly 350 megawatts for each shipment which equals roughly 4 gigawatts annually. At this moment, we are fully renewing our cell line and for the module capacity, roughly 55% to 60% is for the own module shipments. In Q1, we have very slight amount of OEM modules because we want to somehow focus more on our own customers. In the following quarters, I think our first priority is try to maximize the module manufacture, especially for our own shipment. At this moment, we don’t have a plan for a big amount of OEM manufacture for the third parties in Q2 and the second half of 2016.

Justin Clare

Okay, thanks and if I could fit just one more in, last quarter, you had provided 2016 guidance of 2.6 to 3 gigawatts, I didn’t see it in the press release this quarter. Could you talk about your current expectations for 2016 shipments and whether if anything has changed?

Wang Yi Yu

No, I think, we still maintain the same guidance for 2016 annually based on what we introduced this guidance in the last quarter press release presented out there.

Justin Clare

Okay, great. Thank you.

Wang Yi Yu

You are welcome.

Operator

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to Miao Qing for closing remarks.

Miao Qing

Thanks for joining with us today. If you have any follow-up questions, please contact us by email. Thank you.

Operator

That ends our call for today. Thank you for participating. You may all disconnect.