China Sunergy's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Executives

Michael Tieu - Asia Bridge Capital, IR

Stephen Cai - Chief Executive Officer

Yongfei Chen - Chief Financial Officer

Dr. Jianhua Zhao - Chief Technology Officer

Analysts

James Medvedeff - Cowen and Company

Colin Rusch - Northland Capital Markets

China Sunergy Co. Ltd. (CSUN) Q3 2013 Results Earnings Call December 5, 2013 8:00 AM ET

Operator

Welcome to China Sunergy’s Third Quarter 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.

Mr. Michael Tieu from Asia Bridge Capital, you may begin your conference.

Michael Tieu

Thank you, Operator. And welcome to China Sunergy third quarter 2013 earnings conference call. For this call, we have posted a presentation on our website and during today’s discussion we will be closely following and referring to this 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 third quarter 2013 financial results and our guidance for the fourth quarter and full year of 2013. This press release is also available on the Investors Section of our website at www.csun-solar.com.

To start, Stephen will present an overview of our third 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 prepared 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 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, Michael. Thank you all for joining today’s conference call. I am glad to speak with you again today and as we have noted with you in our last call several weeks ago, we observe that China’s domestic banks drastically reduced the credit facilities to solar companies from July to October of this year, which we believe is due to their concerns stemming from the uncertainties regarding the EU anti-dumping case.

Consequently, our working capital during the third quarter was severely constraint and as we were able -- unable to purchase adequate raw materials to meet our production requirement. Our shipment volume decreased sequentially.

Recognizing this near-term tough credit environment, we proactively took more OEM arrangements during the third quarter in order to keep our production lines running and avoid potentially costly production shutdown.

Although, some of the OEM business arrangements may sometimes yield an active profit margins, we believe our [core decisive] actions, deceivable actions during the quarter helped us to sustain critical mass and remained in a healthy position to recapture shipment growth when the situation eventually improve.

The good news is, the situation has improved, this November, we are thrilled to witness local banks return confidence and a support, boosted by recent positive policies and incentives for the solar industry enacted by China's central and provincial governments.

The virtually frozen credit environment in China has slowed in the fourth quarter and we are once again about to secure additional working capital for operations and other initiatives. Now, let’s provide you with a more detailed review of our operations during the third quarter of 2013.

As summarized on slide four, in third quarter, we shipped total of 113 megawatts, roughly in line with our previous expectation of 110 megawatts. Embedded in the total shipments was approximately 22 megawatts of OEM arrangements.

Blended average ASP for modules in the third quarter was $0.62 per watt, which was $0.01 lower than in the previous quarter. The lower module ASP was primarily due to more sales to lower priced regions during the quarter. Accordingly, gross margin for the quarter decreased to 3% and a non-GAAP gross margin was about 4.6% in line with our guidance.

Please turn to Slide 4 -- sorry Slide 5 for our revenue breakdown by geography. As you know, we have been working actively on further diversifying our geographic mix. And during the third quarter, we effectively lowered our reliance on European sales.

Asia filled by favorable government policy and plans was a highlight during the quarter and we were successful in further penetrating this market with higher shipments to China, India and Japan. This quarter, Asia for the first time surpassed Europe and became our largest market with revenue contribution of more than 63% of our total revenue, compared with less than 20% in the previous quarter.

Within Asia, India and China became the largest market, accounting for 24% and 23% of the quarter total revenue, followed by Japan at 16%, which more than doubled compared with last quarter. As anticipated, the demand in the year-over decrease with the revenue contribution decreasing to 33% as European customer that have the stockpiled before August of settlement reduced purchases.

Looking ahead, we aim to further capture the market opportunities in fast-growing market and we view China, Japan and India as important markets for CSUN for the quarters ahead. China solar market has outperformed thus far into 2013. As China has very attractive project economics that are supported by not only central government incentive but also feed-in-tariffs and local tax incentives to promote solar growth.

Next, please turn to Slide 6 for update on our Turkey manufacturing plant. Our top priority for the Turkey plant is to continue ramping up the production at a capacity utilization in order to enhance efficiency and profitability. During the third quarter, our shipments are from Turkey more than tripled to 15 megawatts from 4 megawatts in the previous quarter.

Our monthly module production volume increased more than five folds to 11 megawatts from only 2 megawatts in the second quarter. In addition, our cell production line in Turkey also started to test around this October and then we plan to use the cells for module production going forward.

In addition, during the third quarter, our Turkey plant completed full inspection and received certifications from TUV. As we continue to secure sales and the backlog from the European customers, we expected to further expand sales and eventually to fulfill all orders from Europe and the surrounding markets from our Turkey plant.

By the end of this third quarter, we have received orders totaling approximately 30 megawatt. Our Turkey-made module has been well accepted and the first project deploying this module has been installed, being a Turkish customer on top of the Asfa school in Istanbul and it will be connected into the grid zone.

Originally, we have initiated the local financing and secured initial cash loan and credit lines from local banks in Turkey. Although these initial loans and credit lines are for small amounts. They help to establish corporation and relationship with the local banks for future financing activities.

Now let’s turn to Slide 7 for a review of the converging cost. This quarter converging cost of sales and modules manufactured were at $0.15 and $0.22 per watt respectively, compared with $0.15 and $0.20 in the previous quarter. As discussed in our last call with you, our Turkey plant just managed production in May and average conversion cost of the module. They are still higher than that at our China plants.

During the third quarter, as we ramp up production, the average monthly module production volume as the Turkey plant increased more than fivefolds. And accordingly, due to the higher production volume from the Turkey plant, the weightage average conversion cost of the module increased by $0.02 compared with previous quarter.

Last, a quick update on downstream project. I’m glad that earlier this month, we closed our first PV project sale, the 5 megawatt U.K. project. This marks the first sale transaction for the CSUN self developed downstream project and highlights our pioneering spirits as we are the first Chinese developer to fully complete downstream project last cycle, having invested, developed, construct, operated and now solar ground-based solar PV project in the Europe, U.K.

The second of 5 megawatt project in the U.K. has qualified for feed-in tariffs and is scheduled to be connected to grid by the end of this year. In China, the construction of the 22 megawatt commercial rooftop project for the Golden Sun project is also on schedule and on budget.

In summary, despite facing a tough credit environment, we were able to quickly adjust our business through proactive sales mix of the modules and the OEM, while continue to make further progress in our objectives.

Looking forward, I believe China Sunergy is progressively getting back to on track. We have secured additional working capital and further enhanced operations through high production efficiency and more disciplined cost and expense control.

We are seeing the solar market continued positive momentum with the stable pricing environment. As such, I'm optimistic that China Sunergy will capture additional market opportunity and again build operational scale.

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

Yongfei Chen

Thank you, Stephen. In light of the credit trends given in the third quarter, our top priority for the management team was to maximize available working capital, while also finding ways to keep our production lines running and low expenses.

Accordingly, we continually communicated to local banks to extend our loans. We took our long OEM business and we comprehensively controlled operating expenses. A good news as Stephen had mentioned is that the tough credit environment in China has eased, and we have been able to renew more than 60% of due loans by the end of the third quarter.

And based on our current communication with local banks, we are confident to rollover nearly all due loans by the end of December. I’m glad that we now have sufficient working capital and we are confident in our ability to return to normal operational scale and continue to go past to improve profitability.

Now, let’s turn to Slide 8 of the PowerPoint presentation for more details on financials. In the third quarter of 2013, we shipped a total of 112.7 megawatts, a decrease of 10.8% of the second quarter of 2013.

Included in total shipment, OEM arrangements was about 22 megawatts, compared with 25 megawatts in the previous quarter. Our revenue this quarter was $57.1 million from 20.6% sequentially, due to a combination of lower shipment volume and ASP. Our module ASP decreased $0.01 sequentially to $0.52, primarily due to increased shipments to lower-priced regions, including India and China.

Most importantly, gross profit decreased to $1.7 million from $6.7 million in the previous quarter, the decrease in gross profit was mainly due to higher OEM shipments, increased inventory provision, higher conversion cost and as well as low ASP.

During the quarter, we had an inventory write-down of $0.9 million compared with only $12,000 in the previous quarter. Overall, gross margin for the quarter was 3%, compared with 9.3% a quarter ago. Excluding inventory provision, non-GAAP gross profit was 4.6%.

During the quarter, general expenses was $8.4 million compared with $5.1 million in the previous quarter. The general expenses during the quarter included a bad debt provision of $1.3 million, compared with our reversal of bad debt provision of $2 million in the previous quarter.

On a non-GAAP basis, general expenses remained unchanged at $7.1 million. And we will continue to tightly control OpEx, diligently collect bad debts and optimize headcount.

Sales and marketing expense was $4.8 million, a slight increase from $4.6 million in the previous quarter. Net interest expense increased to $7.1 million compared with $5.1 million a quarter ago, mainly due to more interest expense on discounted note receivables as we pre-cashed some notes.

Other income totaled $3.7 million, mainly from exchange gains during the quarter. Tax benefit was $1.2 million compared with tax expense of $1.4 million in the previous quarter.

All in all, net loss attributable to ordinary shareholders was $13.2 million and net loss per ADS was $0.99 in the third quarter. Non-GAAP net loss attributable to ordinary shareholders was $11 million and net loss per ADS was $0.83.

Going into our balance sheet items on slide nine, as working capital improved later in the quarter. We purchased some more raw materials in preparation for the first quarter production requirements.

Accordingly, total inventory level in the third quarter increased to $65.6 million from $46.5 million in the previous quarter. Account receivables decreased to $67.6 million at the end of third quarter, reflecting the decreased sales during the quarter.

CapEx was $3.4 million this quarter as we started to upgrade several of our current cell and module production lines. And we anticipate spending another $1 million to $3 million in the first quarter to complete these upgrades.

This quarter operating cash inflow was $16.4 million, compared with $6.3 million in the previous quarter, primarily driven by low account receivables, higher advances from customers and higher accounts payables.

However, during the quarter, we repaid due bank loans and purchased some more raw materials and as such October cash balance decreased slightly to $260 million from $220 million.

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

Dr. Jianhua Zhao

Thank you, Mr. Chen and Stephen, and welcome everyone to our call. I am glad to speak with you again for our update on our recent technology achievements. As displayed on slide 10, during the third quarter both the average efficiency of our multi-cells and mono-cells continue to achieve meaningful improvement over the previous quarter.

The average efficiency of our high performance multi-cells called Waratah reached a new record average efficiency of 17.7%, compared with 17.6% a quarter ago. We remained confident to achieve our 2013 year-end target of 17.8%.

During the third quarter, average QSAR II cell efficiency reached 19.2% and the average module power output was up to 265 watts, among the highest in the field. In addition, our upgraded QSAR II cell lines started mass production in September.

Since then our QSAR II cell efficiency has made outstanding improvement with daily production efficiency reaching 19.26% in September and 19.34% in October. We are confident to achieve the efficiency rate of 19.5% by the end of 2013. This November, we are also further upgrading our QSAR II production lines, which we believe will expand our production capacity.

Modules assembled with our QSAR II cells easily passed the TUV standard test of exposure to minus 1000 volt for 48 hours at 85 degree Celsius and 85% humidity. Even better, our module has already passed TUV’s minus 1,500 volt test and (inaudible) water fume test, which are the highest PID test condition. These achievements clearly demonstrate our QSAR II cells excellent PID 3 feature.

I am honored to say with the persistent efforts of our entire R&D team the advanced leading technology of our product has been proven and well recognized. In addition to our QSAR II modules had impact the highest PID Test, our new generation of high efficiency monocrystalline silicon cells has reached 20.26% conversion efficiency in our R&D line which has recently received the certification from Fraunhofer ISE.

The new record of 20.26% was confluent at the leading level among all PV enterprises in China and surpassed the benchmark of 20% set by the eight development guidelines issued by the state council for China 's PV industry in July 2013.

Lastly, as we communicated in our last call in November, we launched Super Black Module following initial customized order for 60 kilowatt rooftop project in Hawaii. With its anti-glare feature, the Super Black Module reduces reflection and has performed excellently in low sunlight conditions.

The Super Black module also recently received the TUV Certification and we will continue our efforts to fulfill unique customer requirements. As always, we are confident and are committed to bring additional innovations as well as reliable and affordable solar products to the world.

Let me return the call to Stephen to provide our highlights. Stephen?

Stephen Cai

Thank you, Dr. Zhao. To summarize, the third quarter was obviously unique this year as our production and our sales plan were impacted by the constrained working capital. However, we are pleased that, we were able to quickly adjust our business mix.

We are also pleased to see that easing of the credit by China Banks and we have secured additional working capital and further enhanced operations. Furthermore, we are encouraged to buy continue positive momentum in the solar market. And as such, we are optimistic about China Sunergy’s prospects in the near future.

For the fourth quarter of 2013, reflecting our improved working capital and stronger than expected OEM shipments, we estimate that total shipment will be in the range of 158 megawatt to 168 megawatt including approximately 40 megawatts of the solar module processed under OEM arrangement.

Gross margin for the first quarter of 2013 is expected to be mid single digit. Accordingly for the full year 2013, we raised total shipments estimates to range between 500 megawatts to 510 megawatts from the previous range of 440 megawatts to 480 megawatts.

At this time, I’d like to take your questions. If you have additional questions after this call, please do contact us afterwards. Operator, you may begin with the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of James Medvedeff of Cowen and Company. Please ask your question.

James Medvedeff - Cowen and Company

Good evening.

Stephen Cai

Hi. Good -- good morning, James.

James Medvedeff - Cowen and Company

Yes. Yes. Good evening to you. I have a question about the couple of the items in the P&L, for example, was there any revenue from the project sale in the quarter?

Stephen Cai

Yes. So far, the -- we divested the sales, but now we are -- we still have to confirm with our customers, but the -- may be we will say this revenue in the Q4. So far we are confirmed with our partner there. We could not now disclose this number. Sorry, James.

James Medvedeff - Cowen and Company

Okay. But just to be clear, there was no revenue in Q3 for that.

Stephen Cai

Yes, you are right.

James Medvedeff - Cowen and Company

Okay. And on the Turkey plant, what do you think the long -- I guess, it’s about $0.02 of additional cost in Turkey. How much of that is -- or let me just ask this way, when Turkey is up at full production, do you expect its cost to be in line with the China cost?

Stephen Cai

We could not say that it will finalize, if it fulfills the whole capacity of Turkey manufacturing. We cannot say that conversion costs that were equal to China conversion cost. Maybe, well, that will be the only different there of $0.01 or $0.02.

James Medvedeff - Cowen and Company

Okay. Thank you. And my final question is on interest expense. It moved up in the quarter. I guess, there were some short-term things happening with the debt. How should I think about that in the fourth quarter and into next year? Should it go back to what it was before, or does it stay at this level?

Stephen Cai

Okay. Let me change the turn to our CFO, Mr. Chen.

Unidentified Participant

Hi, Chen. Let me translate this to our CFO. [Foreign Language]

Yongfei Chen

Hi, James. What Mr. Chen said is, it's only for the third quarter because in this quarter, because of the credit crunch we experienced, so in order to maintain our operational scale, we have to pre-cash some notes, but it won't happen in the next quarter and going forward.

James Medvedeff - Cowen and Company

Excellent, if I can just ask one more quick one on how ASPs are trending in Q4?

Stephen Cai

Yeah, I think ASP is close to 61.

James Medvedeff - Cowen and Company

Okay. Thank you very much.

Stephen Cai

Thank you, James.

Operator

(Operator Instructions) Our next question today comes from the line of Colin Rusch of Northland Capital Markets. Please ask your question.

Colin Rusch - Northland Capital Markets

Thanks so much. Can you talk a little bit about the demand environment around the factory that you're opening up in Turkey? It seems to be that it's a region right for a lot of activity. How involved are you and what do you expect to see in that market developing over the next couple of years?

Stephen Cai

So firstly, we are talking about this Turkey market. This Turkey market -- most people expect this -- the market happened in this year, but unfortunately now there will because the policy delayed to announce that, so approximately 600 megawatts that will be installed in the next year for this Turkey market.

Colin Rusch - Northland Capital Markets

And what about surrounding areas? There are number of other countries nearby that have similar sun resource with developed region.

Stephen Cai

Yes. Our surrounding market except this Europe market, because euro market, we could say this independently but the surrounding market that we see, that our Turkey manufacturing -- not only the supply in the domestic market and also it could supply to the U.S. market and this the Asia market as such, as the Japan market because we will use our high efficiency sales in the Turkey manufacturing to make the module to supply this higher profitable market, so that's why Turkey. We insist to ask the Turkey manufacturers to supply the high efficiency module and to provide a profitable market in the world.

Colin Rusch - Northland Capital Markets

Great. And can you talk a little bit about the geographic mix of your guidance for the fourth quarter and any comments that you have and how that might shift as you go into the first part of next year?

Stephen Cai

Okay. First quarter I think -- this is -- total China will be at least more than the 50% of our total shipment. And Europe, I think will go down to close to 20% of total shipments in first quarter. Next year, I think just roughly estimated that the total shipment of the geographic mix mainly come from China. But today, we cannot disclose all of this, precise numbers. But just to say, manly from China, about this 40% or 50% of total shipment for the next year.

Colin Rusch - Northland Capital Markets

All right. And do you have a view on the mandate for 2014 between utility scale and industry regeneration? And how difficult those distributed generation targets are going to be and what’s your expectation on the ability of the Chinese supply chain to meet 11.6 gigawatt target for next year?

Stephen Cai

Do you mean the CSUN targets or the total global ….

Colin Rusch - Northland Capital Markets

The global market target?

Stephen Cai

The global market, okay. Our geography, I think, as China most people say that -- that the 12 gigawatt target but my personal view is to look at the China market next year is about 8 gigawatt. Japan, we put this optimistic target is 6 gigawatt. U.S. is about 4, European -- Europe, I think is 5 gigawatt, India about 2 gigawatt, and the South America about 1 giga, Asia 1 giga, and that is the main markets and I think it will occupy -- just remember I say that this occupy more than -- more than to 60% or 70% of the world market size.

Colin Rusch - Northland Capital Markets

Okay. Great. Thank you so much.

Stephen Cai

So totally, our figures for next year, my view to look at next year’s total market size, say, about is 40 gigawatt.

Colin Rusch - Northland Capital Markets

Great. Thanks so much.

Stephen Cai

Thank you.

Operator

(Operator Instruction) As there are no further questions, I will now turn the call back to management for closing remarks.

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 the conference for today. Thank you for participating. You may all now disconnect.

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