Hanwha Q Cells Q4 Earnings Conference Call: Full Transcript

Operator: Good day ladies and gentlemen and welcome to the Fourth Quarter and Full Year 2015 Hanwha Q Cells Earnings Conference Call. My name is Shishir and I will be your operator for today. At this time all participants are in a listen-only mode. The company will host the 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. Sean Park: Thank you operator and good morning and good evening everyone. There will be three speaker's 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 our Safe Harbor Policy which is included in the earnings release and posted in its entity 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 run down over this risk. Now I will turn the call over to our Chairman and CEO Mr. Seong-woo Nam, who will review key achievements in 2015 and broader the strategy focus for 2016 and 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 the Corporate Planning. Mr. Nam? Seong-Woo Nam: Chief Executive Officer: Thank you Sean and welcome to our fourth quarter 2015 and full year earnings call Hanwha Q Cells. We are pleased to report our successful, traditional, financial, and operational results for the full year 2015 highlights by a return to net profitability record high total volume shipments and solidifying our foundation for consistent and profitable growth in coming years. Let me recap four key management objectives we set out on the merger deal between Hanwha SolarOne and Hanwha Q Cells one year ago. First, achieve industry-leading manufacturing cost structure; second, optimize global operations to support reps facility expansion while controlling operating expenses; third, science and technology leadership and improve product quality and thus return to profitability. Four above key objectives I am very proud to deliver tangible results while executing on post-merger integration as followings. 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 net revenues to 10% in the fourth quarter of 2015, compared with the 10 percentage points pre-merger. We are the first major merger manufacturer of a high efficiency multi therapy with the gigawatts scale commercial production starting this year, and we are recently named as one of the top five most Dencore PV manufacturer by Bloomberg and for full year 2015, we have fully returned to net profitability even including restructuring cost in 2015 related to the merger transaction. With our successful year behind us we have now raised out a new set of management strategy objective for 2016. First and the foremost we will focus on the delivery of consistent steps for substantial profitable growth. Second will we further strengths our course leadership both in manufacturing and operations, so that we'll complete and fully ramp our current module capacity expansion in South Korea and Malaysia on time and in budget. And lastly, we will provide liquidity and reduce financial leverage with the prudent capital management to support our full growth potentials. Now let me turn the call over to our CFO, Jay Seo for more detailed review of our financial results. Jay Seo: Chief Financial Officer: Thank you Chairman. First for the fourth quarter of 2015, our net revenues grows 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 megawatt in line with our guidance of which 990 megawatts were revenue recognized in the quarter. ASPs on our external module shipments of 911 megawatt versus 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 cost. 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 through 10.1% in the fourth quarter as we are now fully benefiting from anticipated merger synergies and from continuing operational efficiencies improvement. Continued weakness in Chinese Yen resulted in foreign exchange net loss of $9.3 million in the fourth quarter mostly due to trended translation of outstanding USD denominated borrowings. Net income attributable to our shareholders was $26.4 million with earnings for fully diluted ADS $0.32 and for the full year 2015 net revenues were $1.8 billion with 2,956 megawatt of revenue recognized shipment volume for the year. Gross profit was $323.5 million with a 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 leveraging. 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 activities 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 at us improved our cash conversion cycle to a 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. Andy Park: Vice President, Corporate Planning: Thank you, Jay. First, I will outline our module business sales operations. We continue to have well diversified the geography mix over both developed and emerging markets, while the U.S., Japan continue to be our two largest end markets and within emerging market we see good growth in India and Turkey. In the fourth quarter our geography mixes by revenue were 36% from North America 22% from Japan 13% EMEA, 12% from China and 16% from the rest of the world. In 2016 we expect our U.S. Market continuous to be very important end market with improved long-term stable growth after ITC extension. Japan one of the largest end market in the world sees its demand shrinking with reduced government subsidies in recent years. However, there are still meaning from 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 supply in Japan. Within the emerging and mid-size market we see our shipments to Turkey and India growing among emerging markets and also Korea and few Northern European markets also growing. Now I will provide an update with our downstream activities. Our active pipeline declined to approximately 950 megawatts in the fourth quarter compared with 1.2 gigawatt in the previous quarter. Such a decline was mostly due to the reevaluation of our emerging market pipeline including Chile as we see some softening of early to a mid-stage pipeline in this market in a near to mid-term. On the other hand our pipeline in Turkey where we are the market leader has grown by 35% to 285 megawatt in the fourth quarter. The active downstream pipeline controlled by other Hanwha fleet was increased by 21% to 2.55 gigawatt of which 680 megawatt are in the late stage. Now I will turn the call over to our Chairman who will provide an company's guidance for the first quarter and full year 2016. Seong-Woo Nam: Okay Thank you Andy. Let me now outlined the first quarter and the full year 2016 guidance. For the first quarter we expect few months volume range between 850 megawatt to 900 megawatt. Gross margin in the range of 18% to 19%. For the full year 2016 our target total shipment volume is at 4.5 gigawatt to 4.7 gigawatt. We expect to spend approximately $108 million which $100 million for first expansion and remaining $8 million for manufacturing technology upgrade in the short-term R&D related expenditure and for our manufacturing name plate capacity for 2016 our indoor capacity will reach to 1.25 gigawatt our wave capacity will reach 950 megawatt, our volume capacity will reach 5.2 gigawatt respectively 2016. Now I will turn the call back over to Sean. Sean Park: Thank you, Mr. Nam. This will conclude our prepared remarks, and we will now turn the call over for questions. Operator, please go ahead. Question & Answer Operator: Thank you, Sir. Ladies and gentlemen, we will now begin the question and answer session, if you wish to ask a question please press star, one on your telephone and wait for your name to be announced. If you wish to cancel your request please press the pound or a hash key. Your first question comes from the line of Philip Shen from ROTH Capital Partners. Please ask your question. Philip Shen: ROTH Capital: Hi, everyone. Thank you for taking my questions. Wanted to explore guidance that with you, in terms of the guidance in shipments. Can you give us the mix of external versus internal shipments for the first quarter and also for the full year. Sean Park: Thanks, Phil. For the first quarter, we expect to our volume guided will be entirely expand our sales, and for the full quarter and full year guidance we expect about couple of hundred megawatt will before downstream the our own downstream in the project, and the balance will be external sales. Philip Shen: Great, thanks Sean. In terms of the full year as well, can you talk about how many megawatts in terms of projects you plan to sell externally? Sean Park: So we expect for 2016, we expect about 180 to little over 200 megawatt will be used towards our own the downstream projects. Philip Shen: Right/ I understand that's for module shipments, but then does that translate directly to the number of megawatts that you plan on showing as well to third party buyers of your projects? Sean Park: Thanks for the clarification. That also includes certain project that we'll sell on the as under development assets so together that's going to be we expect that to be about 200 to 250 megawatt for the 2016 including both some of the our owned project and also certain the downstream the development asset sale. Philip Shen: Okay great. Shifting gears, can you update everybody on the latest vision for Hanwha Group Solar business you know has it changed it all and if you can talk about HQCLs 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. Sean Park: So for the 2016 and as you know there are the several entities within Hanwha group engaged in the broader solar business and Hanwha Q Cell is our current business portfolio is predominantly our module sales -- module manufacturing and sales business and for the pipeline that we currently own Hanwha Q Cell, they are largely in emerging market the focus portfolio and India, in the light of the recent softening of this market so we are maintaining slightly cautious stance, trying not to be too aggressive. So while that said, our Hanwha Q Cell business for 2016 will be more focused on our module manufacturing and sales activities and our downstream activities will be more led by other Hanwha affiliated and we'll be providing the module and certain EPC services for our Hanwha related company. So there will be those slightly, the little less focus on the downstream for 2016 or at least on the first half of this year until we see more on the civilization in the emerging market, the downstream market for the project pipeline that we currently own under Hanwha Q Cell. Philip Shen: Okay fantastic. Can you guys touch on polysilicon as well? What's -- how is the Hanwha Group and you guys thinking about the polysilicon division these days? Sean Park: For our affiliate Hanwha chemical, we cannot speak on behalf of them but as far as on the Hanwha Q Cell, our business, we are seeing the fairly the flat, fully priced for 2016 so that's going to be definitely, keep our overall cost structure in line and potentially slightly declining from where we are but that also depending on over the market dynamics, but that's as far as I can comment on those silicon side. Philip Shen: 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 just about your business in the US, and what -- your outlook and your approach and impacts at the ITC extension? Thanks. Sean Park: Sure, as it related to the our existing the NextEra contract that we are delivering as agreed the delivery schedule and which is on the kind of picking during the second and third quarter of this year, and of course on the just as on the other the tier 1 end customer we are maintaining our good relationship with NextEra and but we are currently focusing on our existing contract and then while maintaining good the relationship with NextEra and the more broadly speaking on the US market after the extension of the ITC as () seeing the market place there is some softening in the second half towards the second half of this year, because and we -- I mean the market doesn't have to kind of rush ahead of the pre ITC extension, but I think over after that of slight the softening towards the second half of this year the US market we are enjoy the price stable the longer term the mid to longer term the growth over the next and couple of years. With based on that existing IT schedule, the 2019, that will be another pick out there. But I think that's kind of where which we share the sort of the similar view of market players. Philip Shen: Okay. I will ask one more and then I will jump back in the question queue. Can you comment on what kind of margin you see for full year 2016 and then how you expect the margin profile trends beyond Q1? Sean Park: I think on the -- our cost structure is well under control and then as we, our business is on the more of the second half heavy compared to first half and then our overall cost structure is to support the full year as we guided over 5.5 gigawatt -- 4.5 gigawatt shipments and the business. So the first half -- over the course of the year I think our margin structure will be -- that will expand towards on the second half as we are monetizing more with our over growing business volume. Philip Shen: Okay. Great thank you Sean. Thank you everyone else as well and I will jump back in queue. Sean Park: Thank you Phil. Operator: Thank you. The next question comes from the line of Theodore Kim from Goldman Sachs. Please ask your question. Theodore Kim: Goldman Sachs: Hi, thank you for taking my question. I have three questions. First compared to 3Q '15, 4Q '15 ASP is flat despite U.S. Exposure increase. Is there any specific reason why so? And the second question is that given the ASP is flat and processing cost decrease still the gross profit margin and operating margin decrease; is there any reason why is it? My third question is what is the depreciation number for the FY '15? Thank you very much. Sean Park: So thanks for the question and the first question about the flat ASP quarter-over-quarter despite higher revenue mix from the U.S. Market, that's also largely driven by the currency effects because those uncertain or the emerging market the business, there was on the -- currency translation, professional yield was impacted more. So that is why despite the increase volume towards the U.S. Market over 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 is a one-time gain from the settlement, arbitration of the settlement, which we benefit from the -- about the $53 million between 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. Seong-Woo Nam: And regarding the depreciation for 2015 full year the total month of depreciation -- depreciation is around $100 million in this year. Theodore Kim: Okay, Thank you very much. Operator: Excuse me, sir. Shall we move to the next question? Theodore Kim: Yes, thanks. Sean Park: Thank you. Operator: Thank you, once again ladies and gentlemen if you wish to ask a question please press star one on your telephone and wait for your name to be announced. 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. Mike Tempero: Cavalry: I am sorry, I was on mute. I just had two questions, one is about the opportunity for further cost reduction, processing cost reduction in module processing several way for 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. Sean Park: Thank you, Mike. I think on the first question, from the further potential the further additional the processing cost decline, we expect over the across of 2016 we expect additional five or higher percent more decline in the processing cost. But as we are continuing to ramping up massively in our Malaysia and South Korea at over 2 gigawatt the solar motor capacity. So it's a bit premature to specific exactly the specific potential in the reduction cost. But that we expect it will be 5% or higher the further reduction in this year and the over the course of coming quarters we'll share more detailed number on that. And the key background of the decline of the inventory is on we had to build up the inventory ahead of the increase in sales volume because we wanted to make sure that while we are ramping up our the new capacity, there is no gap between. So during the third quarter we had increased our inventory level and then now we have more stable operation with existing and the new line coming up so now we are able to reduce that inventory level to optimize our overall working capital. Mike Tempero: Very good. Thank you. Sean Park: Thank you Mike. Operator: Thank you. [Operator Instructions] There are no questions at this time. I'd like to hand the call back to your speakers. Please go ahead sir. Sean Park: Thank you Operator. Thanks for joining our the fourth quarter and full year 2015 conference call. If you have any additional question please feel free to contact me or the company as per your convenience and thanks again and we look forward sharing our upcoming first quarter which are in coming months. Thank you very much. . Ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all disconnect the lines now.