Hello, and thank you for standing by for JA Solar second quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
I’d now like to turn the call over to your host for today's conference, Mr. Nick Beswick of Brunswick Group.
Thank you. Welcome to JA Solar’s second quarter 2012 earnings conference call. Joining us from the company today are Dr. Peng Fang, CEO; Mr. Min Cao, CFO; and Dr. Christoph Flinck, Head of Strategic Planning and Corporate Development.
As stated in the press release, the oversimplified translation of CNY into US dollars, which is set at 6.343 RMBs to the dollar, is made solely for the convenience of the audience. References to dollars are the lawful currency of the USA.
The press release published today provides detailed financial tables for the conversion from CNY to USD. On this call, Dr. Fang will begin with an overview of the company's Q2 2012 results covering the business and market developments and outlook. Following that, Christoph will provide details of the company’s financial performance.
After the prepared remarks, we will open up for questions for the remainder of the call. We expect the entire call to last approximately one hour.
Before we begin the formal remarks, I’d like to remind you that certain statements on today’s call, including statements regarding expected future financial and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ into general, business and economic conditions in the solar industry; governmental support for the development of solar power; future shortage or availability of the supply of high purity silicon; demand for end-user products by consumers and inventory levels of such products in the supply chain; changes in demand from significant customers; changes in demand for our major markets; changes in product mix, capacity utilization, level of competition, pricing pressures, and declines in average selling prices; delays in the introduction of new product lines; continued success in technological innovations; shortage in supply of raw materials; availability of finance; exchange rate fluctuation, litigation and other risks as described in the company’s SEC filings including its annual report on Form 20-F filed with the SEC.
Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. You should not place undue reliance on these forward-looking statements. All information provided on today’s conference call speaks as of today’s date unless otherwise stated and the company undertakes no duty to update such information except as required under applicable law. I will now turn the call over to Dr. Peng Fang, CEO of JA Solar.
Thank you, Nick and thank you everyone for joining today’s call. In the second quarter, market conditions in the solar industry remained challenging, but I am encouraged that JA Solar recorded a healthy shipment volume and that way sustained our strong financial position. Throughout the current market downturn, we demonstrated a clear strategy to work through these past conditions by focusing on maintaining healthy cash flow and strong balance sheet while remaining a solid market share.
We have always believed it would be irresponsible to prioritize short-term shipment gains over long-term financial stability. As a consequence we entered the second half of the year in a relatively strong financial position in the industry. This combined with the consistent excellence of our product ensures that we receive the task of our customers across key market. We see us as a long term player.
Let's take a look of some of the key metrics for the quarter starting with our shipments. In this quarter shipments were 418 megawatts, in line with the low end of our guidance. As that said, given the current market uncertainty ensuring long-term financial stability is more important than chasing short-term shipments volumes. Having said that, I do want to highlight that we are making excellent progress in module shipments.
Customers, in question they recognized the quality and the value of our offerings. This quarter for the first time modules account for more than 60% of revenues and more than 55% of shipments. In the long term, the greater share of modules in overall shipments to the [gross] margins.
Gross margins, in this quarter continued to improve increasing to 4.8% in second quarter than 2.1% in first quarter. This shows the success of our cost cutting effort, increased operating efficiency and technological improvements. Our operating margin was negatively impacted by increase in operating expense and this was primary due to the prepayment impairment of 3.4 million related to the share transfer agreement with M.SETEK for the acquisition of a 65% interest in Hebei Ningjin Songgong. We will discuss this in more detail later.
Operating margin was also affected by an increase in freight cost and other export-related expense of $3.6 million due to increase in module shipments and [yearly] shipment to price.
We also incurred tax expenses of $18.9 million, which was primarily due to the accrual of a $12.8 million income tax expense by our Hebei province subsidiary JA Hebei and $3.3 million of withholding tax for a dividend distributed by our Jiangsu province subsidiary [JA] Jiangsu to its parent holding company.
We will give more details on tax expenses later. These factors results in a net loss for a quarter of $72.1 million or loss per diluted ADS was $0.37 compared to loss per diluted ADS of $0.20 in the first quarter.
Excluding the impact of foreign exchange loss $11 million and the tax expenses of $18.9 million [net] loss in Q2 was $42 million and a loss per diluted ADS in Q2 was $0.22.
While we have recorded a loss for the quarter, we have maintained a strong balance sheet with one of the healthiest debt-to-asset ratio in the industry, cash and the cash equivalent and the [restrictive] cash in the second quarter were $622.6 million versus short-term borrowing, [long-term] borrowing due within one year and the convertible notes totaling $621.4 million, this strong financial position indicates that JA Solar will be large-term winner in the global solar industry.
Now, I want to take you through our view of global market. The macro environment in traditional market remains challenging however, growth in the new market particularly in Japan and in China continues to be strong. The clear lesson over the last several quarters is that producers who have top quality and have demonstrated a strong bankability were continue to do well even in the volatile market.
Starting first in Europe, we continue to do well there in the second quarter. Demand from Germany continued hold up and account for 24% of our overall shipments this quarter. This was partially a consequence of the installers rushing orders in (inaudible) of logistic change in the [FIT] program.
Our focus in Germany is on working with along the distributors who recognize our high quality, high efficiency products. We continue to build a strong brand, we are continuing in Germany as well. (inaudible) is our official sponsorship of German Cycling Federation or BDR which won one gold medal and three silvers medals during the London Olympics.
Elsewhere in Europe, we have seen growth in new markets like the UK installation activity is picking up quickly in the UK and JA Solar is benefiting from this change, early this month we launched a 47 megawatt supply agreement with A Shade Greener the leading free solar panel installer in the UK partnership like this positioned us well to benefit us from the growth of rooftop market in the UK.
And we expect to make good progress in the coming quarters. Looking to the North American market, we continue to work with our overseas manufacturing partners to supply the US and we gained significant new shipments in Canada. While we are making good progress in developing new customers, we still see great growth potential in the US market, but at this stage we are proceeding with a caution given the regulatory uncertainty there.
Japan has rapidly become an important market for the solar industry in general and we are one of the biggest foreign solar companies there in terms of shipments. We are quickly building momentum in this promising market where we have achieved a strong position in both rooftop and megawatt-scale solar farm segment and our shipments to Japan continue to be strong in this quarter.
As I have said before, JA Solar is a high power module, our attention to detail and our strategically emphasis on working with the local partners are one of the main differentiators for this attractive market. We have a strong pipeline in the commercial and the utility market in Japan and the way I expected to realize in these coming quarters. In preparation of robust growth in this market, we opened our new office in Tokyo early this month.
Looking at China, we continue to make steady progress with significant shipment growth from the previous quarters and we won bid from various major utility companies in Q2 and in Q3. In July for example, we own won bids on utility project with China power [investment] and CGN solar energy development totaling 160 megawatts as is the case elsewhere Chinese customers’ value our high quality, high efficiency products and our competitive price makes us an even more obvious choice.
Most importantly though, they need a partner who can guarantee a long-term commitment in all the work a partner with clear financial stability where margin China can be (inaudible) than those in other markets, we are looking further to benefiting from long-term growth here.
We have also made a significant progress in other emerging markets such as Chile, Brazil and Australia. The Australian market has traditionally been dominated by the rooftop segment, but we expected significant growth in the commercial and utility segments there as related policies are finalizing at the end of this year.
Now, I'd like to give you our forecast for the third quarter. We expect the shipment in the third quarter to be in the range of 350 megawatt to 370 megawatt. For this reason, we are revising our four-year guidance down to the range of 1.5 gigawatts to 1.8 gigawatt compared to our previous estimate of 1.8 gigawatt to 2.0 gigawatt.
This new guidance reflects our emphasized [goal] maintaining long-term financial stability over chasing short-term shipments. It also takes in to account the continued lack of clarity in the US market. As yet, we haven't seen any impact on the demand in Europe as a result of regulatory uncertainty there, but at this pace we remain cautious until the situation becomes clear.
Looking to the quarters ahead, the transition from subsidized to non-subsidized industry model will be a big challenge for solar companies, positioning ourselves as a provider of high efficiency offerings with superior technology ensure we are at a strong position to be a long-term winner.
We have a strong presence across the key markets and segment with a proven track record in both the rooftop and the utility share market and we continue to take advantage of growth in emerging markets with our product, cash management and a strong balance sheet we expect to be able walk through this tough marketing environment for last few quarters. And I also want to highlight here that we have [worked] hard to get to the financial position in the industry.
Now let me quickly introduce the new voice to this call. Dr. Christoph Flinck who joined us earlier this year as Head of Strategic Planning and Corporate Development. Christoph has a PhD in Physics from Germany and performed silicon research at the University of California at Berkeley for a number of years. Following that he worked in the semiconductor industry for more than 10 years in various management positions. Chris also holds an Executive MBA from a well know China Europe International Business School in Shanghai.
With that I'll turn the call over to Christoph for a more detailed look at our operating and financials.
Thank you, Dr. Fang and welcome everyone to this call. I would like to give you some details about our technology process and financial results for the second quarter 2012. First I would like to update you on the progress in R&D. As part of our efforts to continuously increase conversion rates and reliability of our products, we recently announced a new (inaudible) series and at the Intersolar Exhibition in Munich.
The new series went into mass production in June and is expected to run up to full production by end of the year. The average efficiency of SECIUM mono cells in mass production is 19% with the peak value of 19.5%, while (inaudible) cells have average efficiencies of 13.3% with a peak value at 17.6%.
In other words the average efficiency of the (inaudible) series is now the same as peak efficiency levels for previous product lines. Thanks to this higher efficiency and the lower power loss in the transition from cell to module, as of this quarter modules with [cypo] cells have an average power output of 305 watts from mono cells modules and 295 watts for poly cell modules in mass production, high endpoints of 5 to 10 watts more.
We are already able to offer some of the most cost efficient modules on the market and this improvement extends our clear competitive percentage. In addition to this we continue to make an important progress with our existing technologies. As such we have made a number of other important improvements to our cells and module manufacturing processes.
These improvements have enabled us to reduce costs on average by more than 10% from last quarter. As Dr. Fang mentioned, these efforts have played a key role in our improved margins performance over the past quarter.
Looking now at our key financial indicators for the quarter. In Q2, we shipped 418 megawatt of solar power products in line with the bottom of our previous guidance representing an increase of 14.2% sequentially and an increase of 4.2% year-over-year.
Solar cells and cell technology accounted for 45% of shipment and modules accounted for 55%. As Dr. Fang mentioned this was the first quarter in which modules accounted for the majority of both revenue and shipments and we are pleased to tell you that we are well on track to meet our annual target in terms of module shipments.
In the coming quarters we expect modules to account for an increased proportion of overall shipments and revenues. In Q2 the geographic breakdown of shipments was approximately 39% to China and 42% to Europe, the rest of the world including the U.S. and Japan account for 19%. Total revenue for Q2 was $284.4 million, an increase of 12.8% sequentially. Q2 gross profit was 30.6 million or 4.8% of net revenue.
Total operating expenses in the second quarter was $38.1 million, a sequential increase of $7.8 million from Q1. As mentioned by Dr. Fang earlier, the increase in total operating expenses quarter to quarter was primarily due to a prepayment impairment of $3.4 million related to the share transfer agreement with M.SETEK for the acquisition of a 65% equity interest with Hebei Ningjin Songgong which I will explain in more detail in a moment.
High operating expenses were also partly due to increase in freight costs and other export related expenses of $3.6 million as a result of an increase in module shipments and higher per unit shipment prices.
Loss from operations was $24.5 million or negative 8.6% of net revenue in Q2. This compares with a loss from operations of $25.0 million or negative 9.9% of revenues in Q1. Interest expenses in Q2 $21.0 million, slightly up from $19.4 million in Q1.
Other loss from Q2 was $7.6 million compared to other income of $5.1 million from Q1. Other loss is primarily due to a foreign exchange loss of $11 million resulting from the depreciation of the euro against the RMB in the second quarter of 2012. Tax expenses in Q2 2012 was $18.9 million compared to $0.1 million in Q1 2012.
The increase in tax expenses was primarily due to a $12.8 million income tax expense for JA Hebei and $2.3 million for the total tax for dividend distribution by JA Jiangsu.
Now, I would like to give you a bit more color on the tax expenses secured by JA Hebei. Assuming for the PRC Foreign Enterprise Income Tax Law, JA Hebei received approval to a joint two-year corporate income tax exemption from 2006 to 2007 as well as [50%] corporate income tax reduction of 2008 to 2010, after the new corporate income tax law became effective from [January 1, 2008], JA Hebei was ground solid to continue and join (inaudible) days until there original expiration date.
The company believes that the income generated essentially acquire by JA Hebei to a capital injection made in 2008 was on subject to the above mentioned tax holdings and it made the tax filings accordingly consistent with the tax filing of previous years.
We receive no request to amend our tax filings before 2012. However, in June 2012, the company received a notice from the local tax bureau in Xingtai City, Hebei Province, which proved that JA Hebei was not eligible to benefit from previously grant public tax [holidays] related to the portion of the taxable income of JA Hebei executed to a capital [injection] made in 2008.
Consequently, the company reported tax payable of $12.8 million at the end of Q2 2012 and paid the amount in July 2012. Q2 net loss was $72.1 million and loss per diluted ADS was $0.37 compared to loss per diluted ADS of $0.20 in the first quarter.
On the balance sheet side, our cash and cash equivalents at the end of Q2 was $589.1 million compared with $678.3 million at the end of Q1 and $627.6 million at the end of Q2 2011. The decrease in cash and cash equivalents was primarily through the increase in accounts receivable in inventory related to an increase in module sales.
Accounts receivable at the end of Q2 were $241.1 million compared with $228.9 million at the end of Q1 and $162.2 million at the end of Q2 2011. Days of sale outstanding at the end of Q2 were 76 days compared to 82 days in Q1.
Inventory at the end of Q2 were $262.5 million compared to $187.7 million at the end of Q1 and $255.3 million at the end of the second quarter 2011.
Inventory turns of days in Q2 were 87 days compared to the 67 days in Q1. This is largely a result of module shipments accounting for bigger proportion of over shipments as well as greater geographical diversification in the global solar market. Total prepayments to suppliers were $257.5 million compared with $294.6 million in Q1 2012 and $392.0 million at the end of Q2 2011.
We expect to utilize $44.2 million of prepayments for 17.2% over the next 12 months. Total working capital at June 30, 2012 was $316.6 million. The decreased in working capital sequentially was primarily due to the reclassification of the convertible notes from long-term to short-term.
Total short-term bank borrowings and convertible notes due May 2013 were $374.1 million total long-term bank borrowings were $682.3 million amount which $247.3 million were due in one year. The total sales value of outstanding convertible notes due 2013 was $219.7 million on June 30, 2012.
Now I would like to briefly go through a couple of business developments. This year we entered into framework agreement with M.SETEK to settle a prepayment we had with them. This was the result of the negative impact of the last earthquake in Japan last year on a delivery of fully silicon MC Tech to us.
Consequently, as we announced last month JA Solar Honk Kong our wholly owned subsidiary signed an agreement with M.SETEK to buy 65% interest in Hebei Ningjin Songgong Semiconductor Limited. Ningjin Songgong is a producer of solar grades mono-crystalline silicon ingots. The purpose of the share transfer is to settle a portion of the outstanding prepayments with M.SETEK.
Historically, JA Solar has had a very close relationship with Ningjin Songgong which is partially owned by our Executive Chairman Mr. Baofang Jin. Operator you may now open the call to questions. Thank you very much.
(Operator Instructions) Your first question comes from Satya Kumar.
Brandon Heiken - Credit Suisse
Hi, this is Brandon Heiken speaking on behalf of Satya Kumar. Thanks for taking my question. I was wondering if you could talk about the ASP changes for [solar cells] and modules in the quarter?
So the ASP for sales during the quarter decreased you know in the high single digit in [our case] and module is about the low [teen] decrease in the price.
Brandon Heiken - Credit Suisse
Okay and how do you see that in the third quarter and fourth quarter?
We see the decrease is stabilizing for the high end market and also the different region has different impact due to local regulatory.
Brandon Heiken - Credit Suisse
Do you think it will stabilize now in the third quarter or do you think that is later in the fourth quarter or the next year?
Our thinking is it will stabilize in the third quarter for the high end market and for the mainstream market.
Your next question comes from Edwin Mok.
Edwin Mok - Needham
So, if I take your full year update for your guidance and your third quarter guidance that will imply that your (inaudible) increase in the fourth quarter. Can I ask you why do you expect the shipment increase and relate to that in the third quarter do you expect the module shipment to increase or decrease?
Firstly, for the third quarter our shipment is slightly balanced due to our strategy or policy to maintain the relatively healthy financial situation. So we do have orders but we only pick the order so financially it is not reaching our cash so in the fourth quarter there are a few factors right now is undecided.
First for example, we have some project shipment in China and the shipment base there are uncertainty. You know, we see some orders, we win some business over there, good shipping in the first quarter and also we’re entering into the new market such as Japan and other regions. There are pending orders in the fourth quarter or early next year.
So we’re thinking right now (inaudible) we were up in the October-November timeframe.
Your next question comes from the Caleb Dorfman.
Caleb Dorfman - Simmons & Company
I guess first, obviously it's understandable to have the lower shipment guidance, but with the lower shipment level, obviously you’re not going to be running operations at full capacity. How much of an impact do you think this will have on your cost structure? Thanks.
In the Q3, our shipment is relatively low. We do not run the capacity in the first [scheme] and basically the cost is slightly higher. However, our strategy for this year or this downturn continue to reserve the cash and we think that this strategy is put the company in the strongest financial position in the industry which is very, very critical in this dynamic, challenging marketing conditions.
Your next question comes from Pavel Molchanov.
Pavel Molchanov - Raymond James
You mentioned your desire to conserve cash and support the balance sheet, but at the same time you recently announced plans for up to a $100 million of share buyback, I am wondering how you reconcile those two things.
Okay. So we announced some cash, I mean the board approved some buyback in the -- you know a few months ago. We actually do not have to buy you know 400 million. We will see the opportunity to exercise the approval and also this I think it’s consistent with our operating cash positions.
Your next question comes from Nitin Kumar.
Nitin Kumar - Nomura Capital
Hi, just a couple of things. I mean first thing on inventories, what portion of your inventories is finished good and if you could give a color in terms of I mean how much module inventory versus sale inventory do you have on books?
Throughout Q2, we have a relatively higher inventory than before. The reason to do that is you know the module shipment lead additional 30,000 to 40,000 based to the markets like Europe and US. So the inventory has increased as compared to previous quarters. We have about 200 megawatt of module inventory and have about 60 megawatt fair inventory. And as the price is not quickly decreased this year, so the inventory provision is less exposed to the company right now.
Nitin Kumar - Nomura Capital
And in terms of your module shipments, I mean could you give a color on how much is OEM basis and how much is own brand.
We can see may be 30% to 70% [Stephen], 30% OEM and 70% is the brand.
Your next question comes from Edwin Mok with Needham.
Edwin Mok - Needham
Hi thanks for taking the follow-up. Just curious on your guidance how much essential of your shipment you expect to be large enough third quarter and also in the fourth quarter or second half?
By the end of this year, we expected the shipment module to reach the 70% and the 30% of this is sale. So the module portion is to continue to increase.
Edwin Mok - Needham
Is it (inaudible) from this 55% that you reported in the second quarter?
It’s a yeah 55 for the second quarter and right now we are 60% and in next few months we will reach the 70% of the module shipment.
And your next question comes from Jeff Osborne with Stifel Nicolaus.
Jeff Osborne - Stifel Nicolaus
On the module side can you just talk about what the payment terms are in terms how we should be thinking about day sales outstanding for the second half of the year?
So we are taking relatively conservative financial (inaudible) we are selecting our customer very much on the financial terms so as a result we are one of the companies with relatively short days of the outstanding. So our terms is to keep less than 90 days, in the Q2 our shipment I mean our terms was average is [70 days] compared to industry our thinking is still very healthy
And the next question comes from Caleb Dorfman with Simmons & Company
Caleb Dorfman - Simmons & Company
Thanks for taking the follow-up. Looking ahead what type of options are you looking at refinance your 2015 convertible notes and in general what are you seeing in the financing market in China?
Right now we have still have about [$240 million] of (inaudible) due $290 million due May next year and if look at our balance sheet our financial group is very well prepared to buyback this notes and we continuously buy some of the notes from the market right now higher but we depend on the condition. So we still have balance sheet of more than $600 million right now and for the next few quarters company is very well prepared to repay all the notes, we don’t see any problem we can buyback by when (inaudible) is due May by next year.
(Operator Instructions) We are now approaching the end of conference call. I will now turn the call over to call over to Christoph for closing remarks.
Thank you very much every one for joining us today. We appreciate your interest in and support of JA Solar. If you would like to arrange a meeting with us or if you have questions please contact or email our IR firm, Brunswick Group and they will be happy to help you. Their contact information is on today’s press release. Thank you again for your continued support and the team looks forward to talking with you in the coming months.
Thank you for your participation in today’s conference. This concludes the presentation. You may disconnect at this time. Good day.
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