Hanwha Q CELLS Co. Ltd. (NASDAQ:HQCL)
Q4 2015 Earnings Conference Call
March 28, 2016 08:00 AM ET
Sean Park - IR
Seong-woo Nam - CEO
Jay Seo - CFO
Andy Park - SVP, Corporate Planning
Philip Shen - ROTH Capital Partners
Theodore Kim - Goldman Sachs
Mike Tempero - Cavalry
Good day ladies and gentlemen and welcome to the Fourth Quarter and Full Year 2015 Hanwha Q CELLS Earnings Conference Call. My name is Fisher and I will be your operator for today. At this time, all participants are in a listen-only mode. The company will host a question-and-answer session at the end of the conference.
I would now like to turn the presentation over to your host for today’s call Mr. Sean Park. Please proceed.
Thank you, operator, and good morning and good evening everyone. There will be three speakers on today’s call: our Chairman and CEO, Mr. Seong-woo Nam; CFO, Jay Seo; and Andy Park, our Senior Vice President of Corporate Planning. The supplementary slides supporting comments on today’s presentation have been posted on our Investor page of our Website.
Before we begin with our formal commentary, I would like to remind you of our Safe Harbor policy which is included in the earnings release and posted in its entirety on Slide 2 of the supplementary slide package. Please also note that our comments today will contain forward-looking statements that are subject to risks and uncertainties. Please review our filings with the SEC for a complete rundown of these risks.
Now, I’ll turn the call over to our Chairman and CEO Mr. Seong-woo Nam, who will review key achievements in 2015 and broader the strategic focus for 2016; then followed by the fourth quarter and full year 2015 financial results by our CFO, Jay Seo and highlights of our commercial operations by Andy Park, Senior Vice President of Corporate Planning.
Thank you, Sean, and welcome to our fourth quarter 2015 and first full year earnings call at the newly formed Hanwha Q CELLS. We are pleased to report a successful transitional, financial and operational results for the full year 2015 highlighted by a return to net profitability record high total module shipments and solidifying our foundation for consistent profitable growth in coming years.
Let me recap four key managements objectives, we set out upon the merger deal between former Hanwha SolarOne and Hanwha Q CELLS one year ago. First, achieve industry leading manufacturing cost structure. Second, optimize global operations to support rapid sales expansion, while controlling operational expenses. Third, strengthen technology leadership and improve product quality; and last, but not least, return to profitability.
For these key objectives I am very proud to deliver tangible results while executing on post-merger integration as following. We have achieved significant manufacturing cost reduction placing us in a leading position among Asian Tier-1 peer group. We shipped 3.3 gigawatt in 2015 compared with just over 2 gigawatt in 2014 prior to the merger while reducing our quarterly OpEx as a percentage of revenues to 10% in the fourth quarter 2015, compared to mid-teen percentage point pre-merger. We’re the first major module manufacturer of a high efficiency multi PERC cell with gigawatt scale commercial production starting this year and we were recently named as one of the top five most bankable PV manufacturers by Bloomberg. And for full year 2015 we have solidly returned to net profitability even including substantial restructuring costs in 2015 related to the merger transaction.
With our successful turnaround year behind us, we have now laid out a new set of management strategic objectives for 2016. First and foremost, we will focus on the delivery of consistent and sustainable profitable growth. Second, we will further strengthen our cost leadership both in manufacturing and operations. Third, we will complete and fully ramp up current cell and module capacity expansion in South Korea and Malaysia on time and in budget. And lastly, we will improve liquidity and reduce financial leverage with prudent capital management to support our full growth potential.
Now let me turn the call over to our CFO, Jay Seo, for a more detailed review of our financial results.
Thank you, Chairman. First for the fourth quarter of 2015, our net revenues rose to $700.8 million an increase of 64% quarter-over-quarter. Shipment volume sharply increased by 52% quarter-over-quarter to record of 1,238 megawatts, in line with our guidance of which 990 megawatts were revenue recognized in the quarter.
ASPs on our external module shipments of 911 megawatt was flat at $0.57 per watt from the previous quarter. The fourth quarter, gross margin was 17.7%, lower than our guidance, such a shortfall was largely due to lower than anticipated UK product sales, value and certain one-time ramp up related costs. Our all-in internal processing cost declined below $0.39 per watt in the fourth quarter for in-house production with China value chain.
Operating profit was $52.6 million, compared with $40.3 million from the previous quarter. Our total operating expenses of net revenue fell to 10.1% in the fourth quarter as we are now fully benefitting from anticipated merger synergies and from continuing operational efficiencies improvement. Continued weakness in Chinese yuan resulted in foreign exchange net loss of $9.3 million in the fourth quarter mostly due to a translation of outstanding USD denominated borrowings. Net income attributable to our shareholders was $26.4 million with earnings per fully diluted ADS of $0.32.
And for the full year 2015, net revenues were $1.8 billion with 2,956 megawatts of revenue recognized shipment volume for the year. Gross profit was $323.5 million with gross margin rate of 18% for the full year. Operating profit was $76.6 million with an operating margin rate of 4.3%. Net income attributable to company’s ordinary shareholders was $44 million with earnings per fully diluted ADS of $0.53 for the full year.
Now for our financial positions as of December 31, 2015. The Company’s cash balance was $200 million, declined from $294 million in the previous quarter. This decline was largely from paying down some of the outstanding debt to reduce the Company’s financial leverage. Net cash used in operating activities was $43.8 million for the fourth quarter, and for the full year 2015 net cash provided by operating activates was $225.5 million.
Working capital metrics showed DSOs, DPOs and inventory days declining to 47, 58 and 71 days for the fourth quarter from 70, 105 and 130 days respectively in the previous quarter. Such a disciplined cash management helped us improve our cash conversion cycle to 60 days in the fourth quarter from 95 days in the previous quarter. Our total short-term bank borrowings including the current portion of long-term bank borrowings were $461 million decreased by $55 million from the third quarter. Long-term debt net of the current portion was modestly increased to $609 million for the fourth quarter.
Now let me turn the call over to Andy Park, who will give a rundown of our commercial activities.
Thank you, Jay. First I will outline our module business sales operations. We continue to have well diversified geographic mix over both developed and emerging markets while the U.S., Japan continued to be our two largest end market and within emerging markets, we see good growth in India and Turkey. In the fourth quarter our geographic mixes by revenue were 36% from North America, 22% from Japan, 14% from EMEA, 12% from China and 16% from the rest of the world. In 2016 we expect U.S. market to continue to be very important end market with improved long term stable growth after the ITC extension. Japan once the largest end market in the world sees its demand shrinking with reduced government subsidies in recent years. However there are still meaningful module demand for the next couple of years and we will continue to deploy resources to secure our market shares as the top foreign module supplier in Japan. Within the emerging and midsized markets we see our shipments to Turkey and India growing among emerging markets and also Korea and a few Northern European markets are also growing.
Now I will provide an update with our downstream activities. Our active pipelines declined to approximately 950 megawatts in the fourth quarter compared with 1.2 gigawatts in the previous quarter. Such decline was mostly due to the reevaluation of our emerging market pipeline including Chile as we see some softening of early to mid-stage pipeline in this market in the near to mid-term. On the other hand our pipeline in Turkey where we are the market leader has grown by 35% to 285 megawatts in the fourth quarter. The active downstream pipeline controlled by other Hanwha affiliates was increased by 21% to 2.55 gigawatts of which 680 megawatts are in the late stage.
Now I will turn the call over to our Chairman who will provide our Company's guidance for the first quarter and full year 2016.
Okay, thank you Andy. Let me now outline the first quarter and the full year 2016 guidance. For the first quarter we expect shipment volumes to range between 850 megawatts to 900 megawatts; gross margin in the range of 18% to 19%. For the full year 2016 our target total shipment volume is 4.5 gigawatts to 4.7 gigawatts. We expect to spend approximately $180 million in capital of which $100 million for capacity expansion and the remaining $80 million for manufacturing technology upgrades and certain R&D related expenditures.
And for our manufacturing nameplate capacity for 2016 our ingot capacity will reach to 1.5 gigawatts, our wafer capacity will reach 950 megawatts, our cell and module capacity will reach 5.2 gigawatts respectively by mid-2016.
Now I’ll turn the call back over to Sean.
Thank you, Mr. Nam. This will conclude our prepared remarks and we're ready now to turn the call over for questions. Operator please go ahead.
Thank you Sir. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Philip Shen from ROTH Capital Partners. Please ask your question.
Wanted to explore guidance a bit with you, in terms of the guidance and shipments can you give us the mix of external versus internal shipments for the first quarter and also for the full year?
For the first quarter, we expect our volume guided will be entirely external sales, and for the full year the guidance we expect about couple of 100 megawatts will be for our downstream project, and the balance will be external sales.
In terms of the full year as well, can you talk about how many megawatts in terms of projects you plan to sell externally?
So, for 2016, we expect about 180 to little over 200 megawatt will used towards our own downstream projects.
Right, I understand. That’s for module shipments. But then does that translate directly to the number of megawatts that you plan on selling as well to third-party buyers of your projects?
Thanks for the clarifications. That also include certain projects that we sell as the development assets. So together that’s going to be - we expect that to be about 220 megawatts to 250 megawatt for 2016 including, both for our own project and also certain development asset sales.
Okay, great. Shifting gears, can you update everybody on the latest vision for Hanwha Group’s solar business? Has it changed at all and if you can talk about HQCL’s role in that vision and if it’s changed? And if you can address also Hanwha Life and the ability of that Group to potentially drive demand for projects downstream?
So for the 2016, as you know there are several entities within Hanwha Group engaged in the broader solar business. And for Hanwha Q CELLS our current business portfolio is predominantly module manufacturing and sales business. And for the pipeline that we currently own under Hanwha Q CELLS, they are largely on the emerging market focused portfolio. And in light of the recent softening of market, we are maintaining a slightly cautious stance and trying not to be too aggressive.
That said, our Hanwha Q CELLS business for 2016 will be more focused on the module manufacturing and sales activities and our downstream activities will be more led by other Hanwha affiliate, and then we’ll be providing module and certainly EPC services for our Hanwha affiliated company. So there will be slightly a little less focus on the downstream for 2016, at least on the first half of this year until we see more stabilization in the emerging market for the downstream project pipeline that we currently own under Hanwha Q CELLS.
Okay, fantastic. Can you guys touch on polysilicon as well? How is the Hanwha Group and you guys thinking about the polysilicon division in these days?
For our affiliate Hanwha Chemical, we cannot speak on behalf of them, but as far as on the Hanwha Q CELLS, our business we are seeing fairly flat poly price for 2016. So that’s why we definitely have to keep our overall cost structure in line and potentially down slightly, declining from where we are, but that’s also depending on overall market dynamics, but that’s as far as I can comment on the silicon side.
Okay. As it relates to the NextEra relationship. Can you update us on how that may have changed or has evolved since the ITC extension? And then just in general as a result of the ITC extension. Can you talk to us about your business in the U.S. and what your outlook and your approach is and impact of the ITC extension? Thanks.
Sure. As related to our existing NextEra contract, we are delivering as agreed, on the delivery schedule which is on the kind of peaking during the second and third quarter of this year. Of course just as with other Tier-1 end customers, we are maintaining our good relationship with NextEra but we are currently focusing on our existing contract, while maintaining good relationship with NextEra.
And more broadly speaking on the U.S. market, after the extension of the ITC, as all of us are seeing in the marketplace there is some softening towards the second half of this year, because the market doesn’t have to kind of rush post-ITC extension. But I think over -- after that slight softening toward the second half of this year the U.S. market will enjoy the quite stable, the mid to longer term growth over the next couple of years. Based on that existing ITC schedule, the 2019, it’s a couple of years out, but that will be another peak out there. But I think that’s kind of -- we share a similar view of the market players.
Okay. I’ll ask one more and then I’ll jump back in the question in queue. Can you comment on what kind of margins you see for full year 2016 and then how you expect the margin profile to trend beyond Q1?
I think we're -- the cost structure is well under control, and then as our business is more of the second half heavy compared to the first half, and then our overall cost structure is to support the full year as we guided, over 4.5 gigawatts on the shipments and the business, so the first half over the cost of the year, I think our margin structure will expand towards the second half as we are monetizing more with our growing business volume as we progress.
Thank you. Your next question comes from the line of Theodore Kim from Goldman Sachs. Please ask your question.
I have three questions. First compared to 3Q '15, 4Q '15 ASP is flat, that's by U.S. exposure increase. Is there any specific reason why it is so? And the second question is that given the ASP is flat and processing cost decreased still the gross profit margin and operating margin decreased, is there any reason why? Is there any one off loss? And my third question is, what is the depreciation number for the FY'15? Thank you.
The first question about the flat ASP quarter-over-quarter but despite higher revenue mix from the U.S. market, that's also largely driven by the currency effects because those are on certain, more the emerging market business and there was the weak currency translation. Proportionately it was impacted more, so that is why despite the increased volume towards the U.S. market, overall ASP was flat quarter-over-quarter.
And the background of the margin decline on the net margin from the third quarter to fourth quarter is that, during third quarter there was a onetime gain from the arbitration settlement, which we benefited from about $53 million between, at the operating level and also net margin level. So, I think the fourth quarter is more representation of our more normalized pattern. So, the operating margin will be high single digit and net margin will be more of the mid-single digit.
And regarding the depreciation for 2015 full year, the total amount of depreciation is around $100 million– in this year.
Thank you very much.
Thank you. [Operator Instructions] We have the next question from the line of Mike Tempero from Cavalry. Please ask your question. Excuse me Mr. Mike Tempero your line is open, please go ahead.
I just had two questions. One is about the opportunity for further cost reduction, processing cost reduction in module processing, cell and wafer processing cost. And the second question is about inventories. Inventories were down sequentially from Q3 to Q4 and I just wanted to ask about that. Thank you.
I'll take the first question. From the further potential, further additional processing cost decline, over the course of 2016, we expect additional 5% or higher percent decline in the processing cost, but as we are currently ramping up massively in Malaysia and South Korea at over 2 gigawatts the cell and module capacity, so it's a bit premature to specify exactly the specific potential in the reduction cost, but we expect it will be 5% or higher on the further reduction in this year and then over the course of coming quarters we'll share more the detailed number on that.
And the key background of the decline in the inventory is that we had to build up inventory ahead of the increasing sales volume, because we wanted to make sure that while we are ramping up the new capacity, there is no gap between --. So during the third quarter, we had to increase our inventory level and now we have more stable operation with our existing and the new line coming up. So now we’re able reduce the inventory level to optimize our overall working capital.
Very good. Thank you.
Thank you, Mike.
Thank you. [Operator Instructions]. There are no questions at this time. I would like to hand the call back to your speakers. Please go ahead, sir.
Thank you, operator. Thanks for joining the fourth quarter and full year 2015 conference call. And please if you have any additional questions, please feel free to contact me or the Company at your convenience. And thanks again and we look forward to sharing our upcoming first quarter results in coming months. Thank you very much.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect the lines now.
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