Operator: Hello, and thank you for standing by for JA Solar's Fourth Quarter and Full Year 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 would now like to turn the call over to your host for today's conference, Nick Beswick of Brunswick Group.
Nick Beswick - IR, Brunswick Group: Thank you. Welcome to JA Solar's fourth quarter and full year 2012 earnings conference call. Joining us today from the Company are Mr. Jian Xie, COO; Mr. Min Cao, CFO; and Mr. (Bill Chen), VP of Strategic Development.
As stated in the press release, the oversimplified transition of CNY into U.S. dollars, which is set at 6.2301 RMB to the $1, 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, Jian Xie will begin with an overview of the Company's Q4 and full year 2012 results, covering business and market developments and outlook. Following that, Bill will provide details of our technological progress and financial performance.
After 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 would 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 U.S. Private Securities Litigation Reform Act of 1995.
Factors that could cause actual results to differ include 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 user-end products by consumers and inventory levels of such products in the supply chain; changes in the 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 financing; exchange rate fluctuation; litigation and other risks as described in the Company's SEC filings, including in 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.
Before I turn the call over to Mr. Xie, I would like to briefly introduce him and Mr. Chen. Both of whom are joining the Company's earnings call for the first time. Mr. Xie, has been a member of JA Solar's Board since August 2009 and Chief Operating Officer since January 2010. Since joining in the Company in April 2006 Mr. Xie has served in roles including Director of Corporate Finance, Director of Investor Relations, Assistant to the Chief Executive Officer and Secretary of the Board of Directors.
Mr. Chen joined the Company in January 2011 with more than 20 years of management experience in various Fortune 500 companies, including IBM and Ashland Inc. He has also held senior positions at professional firms including Capgemini and BDO.
Without further ado, I'll now hand the call over to Mr. Jian Xie.
Jian Xie - COO: Thanks Nick, and thank you everyone for joining today's call. It's a pleasure to be here. 2012 was another terrific year for the solar sector as the industry-wide overcapacity continued to put downward pressure on ASP and the margins. For JA Solar, it was a year in which we have readjusted and optimized our business to couple with various challenges in this adverse environment. As a result, we successfully maintained our leading position in the market and we are more confident than ever that JA Solar will emerge as a long-term winner in the industry.
There are a few key points here that I wanted to highlight. First of all, this year we completed our transition from a cell-based business model to a module (indiscernible). During the second quarter, modules for the first time came to account for over 6% of our revenues and 55% of our shipments.
By the fourth quarter module shipments, including module tolling, accounted for 70% of our revenues and 64% of our shipments. We are very pleased with the speed and efficiency of this transformation. Making this shift has enabled us to stay closer to end customers; meaning we can be more responsive to market dynamics. In such a difficult margin environment, this kind of flexibility is crucial.
Secondly, (indiscernible) brought a variety of ways to lower costs through optimization of manufacturing processes, increased operating efficiency, improvements in product conversion efficiencies, and a negotiation of raw material plus equipment prices, we were able to continuously reduce our non-silicon manufacturing costs throughout 2012.
Thirdly, we focus on stringent management of our financial position. We closed 2012 with debt to asset ratio of 63%. While the healthiest in the industry, in such a competitive marketing environment it is not enough to simply have reliable and efficient fall backs. Customers place equal value on suppliers that have a solid financial footing to remain as the long term partner and to serve product warranties. This continues to be a major focus of our overall strategy.
Before we go on to discuss each of our markets, I just want to quickly tell you some highlights for the first quarter. Shipments in Q4 were 500 megawatts, which exceeded our prior guidance of 380 megawatts to 420 megawatts. This was largely due to a stronger than expected performance across key emerging markets, including Japan and China. As highlighted just now, in Q4, modules constituted about 64% of our total shipments and about 70% of revenue, another step in our successful transition into a major module company. Gross margin was negative 4.6%, an improvement from negative 5.9% in Q3.
Now, I want to take you through our view of the global market. While there are signs that some consolidation is taking place, we expect industry-wide overcapacity to continue in the near-term. Clearly, the current market situation is having an impact on ASPs and the margins and it's being tough for players across the industry. Having said that, we have seen signs that ASPs are stabilizing in decent amounts and we are positioned, our sales were – by carefully managing our debt and the cash position and also by pushing into newer markets with long-term growth potential.
Over the last couple of quarters, while Europe transitioned away from an FIT-based model, we have seen promising growth in newer markets such as Japan and China. Growth prospects in the U.S. look encouraging as well, and other markets such as the Middle East, Australia and the Latin America, all have promising long-term potential. We have already established our strong position in many of these markets, particularly in Japan and China, and this will form an important part of our strategy going forward.
Looking now at our performance in each of our key markets; firstly, Europe. As I just touched upon, a shift away from government incentives has impacted demand here, and as a consequence, our shipments to the region have declined over the last couple of quarters. We expect that ongoing investigation into Chinese solar products will have an impact on shipments to the European market for the foreseeable future.
Overall, while we're looking to minimize our inventory exposure, we continue to work closely with our European customers to serve their needs. We have seen significant shipment growth in Japan over the last several quarters. The demand and the regulatory environment here have been positive and we have quickly established solid relationships with local distributors, EPCs and project developers, including several of our strategic clients who not only place sizable orders, but also use the JA brand. We are proud that we have established ourselves as one of the top international suppliers there. Having said that, we are seeing increasing competition in Japan as more players enter the market. As a result, ASPs may trend lower this year, but Japan will still be a very important market for us in the long-term.
China; China remains an important growth market and we performed very strong here in Q4. China accounted for nearly 50% of our module shipments. China is going to be an important long-term growth engine for us and to the industry as a whole going forward. We have good visibility here including (indiscernible) pipeline of utility-scale projects. That said, the payment terms are a big priority for us in the China market and last as I said margins will always take precedence over market share.
Looking to the North American market, our shipment to the U.S. declined sequentially in Q4. However, we remain optimistic as finance innovation, with better grow trends and the renewable portfolio standards are driving demand there. We expect to increase our shipments to the U.S. by over 50% in 2013. We are looking closely with our partners to make sure we fill our customer's needs. We are also making exciting progress effectively into new markets such as the Middle East. Recently for ground mount we have shipped 35 megawatts of modules to Siemens in Israel. Despite an ongoing anti-dumping investigation in Europe we will remain focused on development of our major growth markets including China, Japan, Australia and the Americas and the Middle East.
Now outlook for 2013. We expect the quarterly shipments in Q1 to be in the range of 410 megawatts to 430 megawatts. For the full year we currently expect the shipment to be approximately 1.7 gigawatt to 1.9 gigawatt. Moving to 2013, however we are cautiously optimistic about growing demand in a global solar market. In the near term we expect our capacity to remain a challenge but we are encouraged by size of the ASPs and the margins are gaining some level of credibility. For our part we are confident that our focus on margin improvement and the development of our key growth market positions us there for the year ahead. Our prudent management of cash should ensure that this remains the case. Alongside this, we are continuing to investing in R&D to increase the quality, efficiency, and the reliability of our product offering to enhance our technology leadership in the industry.
With that, I will turn the call over to Biao for a more detailed look at our operations and financials.
Bill Chen - VP of Strategic Development: Thank you, Mr. Xie, and welcome everyone to today's call. I'm glad to be here. I would like to give quickly an update on our technological progress and financial results for the fourth quarter and full year 2012. First, our progress on technology.
As Mr. Xie pointed out, efficiency and reliability are important as ever to customers in the current. That's why we maintained our focus on R&D alongside prudent cash management to ensure we retain our leading position in 2012 and we made a number of significant breakthroughs as a result.
Thanks to our continuous efforts to optimize manufacturing processes, the average efficiency of our CYPRESS model and the (product) cells, the mass production reached 19.15% and 17.5% respectively. By the end of 2012 this allowed us to begin volume production of 6-inch full-square mono modules in a 40-cell format with the mainstream power output of 275 watt and 5-inch mono modules in a 72-cell format with the mainstream power output of 210 watt. The mainstream power output of 6-inch multi-modules in a 60-cell format reached 255 watt. We also began volume production or MWT or metal wrap-through cells with an average efficiency of 19.6% and 18% from model and multi-cells respectively.
As a part of our efforts to further enhance the reliability of our products, our entire range of solar cells and modules now feature potentially induced degradation or PID-resistant capabilities. As you know, PID-resistant cells and modules experience significantly lower power loss caused by (indiscernible). This means we not only have a longer lifespan, but are able to operate reliably even in adverse weather conditions. All our PID-resistant modules have been certified by TUV SUD and the pass to pass conducted by PI-Berlin.
On the R&D side, we made a significant progress in technologies to enable an increase in conversion, efficiency of at least 0.4%, making another important milestone in our roadmap to 20% efficiency. We expect to announce our next generation of service cells in the second half of this year.
Now, I would like to walk you through our financial results for the first quarter and full year 2012. In Q4, we shape the 500 megawatt solar power products above the high-end of our previous guidance of 420 megawatt, representing an increase of 19.7% sequentially, an increase of 25.6% year-over-year within these shipments, modules, and modules tolling accounted for 64.4%, while sales in cell tolling accounted for 35.6%.
Full year shipments slightly increased to 1.7 gigawatt compared to 1.69 gigawatt in fiscal year 2011. During 2012, we continued to execute our strategic shift towards an increased proportion of module sales and achieved a substantial growth in module shipment volumes. In total, modules accounted for 55.2% of total shipments in 2012 and compared to 25.5% in 2011.
In Q4, the geographic breakdown of shipments was approximately 56% to China and 44% to overseas markets. To breakdown our international shipments further, our European shipments were 16.1%, APAC shipments were 23.9%, and the rest of the world including the U.S., accounted for 4%.
Total revenue for Q4 was $268.1 million, an increase of 1.8% sequentially. 2012 revenue was $1.08 billion compared to $1.72 billion in 2011, representing a year-over-year decrease or 37.4%.
Q4 gross loss was $12.4 million or a negative 4.6% on net revenue. Full year gross loss was $8.7 million or a negative 0.8% on net revenue. For comparison, our 2011 gross profit was $74 million or 4.3% on net revenue. The year-over-year decrease gross margin was primarily due to a decline on average selling price for solar cell and solar modules. Quarterly loss from operations was $88.2 million or a negative 32.9% on net revenue in QQ. This compares with a loss from operations of $101.3 million or negative 38.5% of revenues in Q3. For the full year loss from operations was $240.1 million compared to a loss from operations of $67.5 million in 2011. Interest expense in Q4 totaled $16.6 million a slight decrease from $20.8 million in Q3.
For the full year we incurred interest expense of $78.5 million compared to $60 million in 2011. The year-over-year increase in interest expense, were primarily due to an increase in total bank borrowings. Other income in Q4 was $3.3 million compared to other income of $58.4 million in Q3. Other income in Q3 includes a one-time gain of $59.3 million from sales proceeds of a share lending claim related to Lehman Brothers International. For the full year other income was $59.1 million compared to other income of $44.9 million in 2011.
Now I would like to give you a bit more color on the tax expenses accrued by JA Hebei. In Q1 2012, JA Hebei received a notice from local tax bureau of Xingtai city, Hebei province ruling that JA Hebei should not have enjoyed a previously grandfathered tax holiday related to the portion of the taxable income of JA Hebei attributable to a capital injection made in 2008.
Consequently, the Company recorded tax payable of $13 million at the end of second quarter of 2012 and made a subsequent payment in July 2012. However, the Company believes its tax position related to this matter has been and is still in compliance with PRC Corporate Income Tax Law. Therefore, the Company appealed in September 2012. In December 2012, the Company received a full refund from Local Tax Bureau of Xingtai City and recognized a tax benefit of $13 million, offsetting the initial charge. Then in February 2013, JA Hebei received a notice from the Local Tax Bureau stating that, JA Hebei should not have enjoyed a previously approved tax holiday related to the portion of taxable income of JA Hebei attributable to a separate capital injection made in 2007. Consequently, the Company recorded an additional income tax expense of $13.3 million at the end of 2012.
Tax expense in the fourth quarter of 2012 was $0.9 million compared with tax benefit of $4.1 million in the third quarter of 2012 and a tax expense of $5.4 million in the fourth quarter of 2011. Our net loss for the first quarter was $102.4 million and loss per diluted ADS was $2.65 compared to a loss per diluted ADS of $1.53 in the third quarter of 2012.
On the balance sheet side, our cash and cash equivalents at the end of 2012 were $486.6 million compared with $548.5 million at end of Q3 and $624.2 million at the end of 2011. Accounts receivable at the end of Q4 were $276.6 million compared with $214.2 million and at the end our Q3 $199.8 million at end of 2011. Days of sales outstanding at the end of Q4 were 93 days compared with 85 days in Q3.
Total inventories at the end of Q4 were $149.3 million a decrease from $215.8 million at the end of Q3 and an increase from $117.3 million at the end of 2011. Inventory turnover days in Q4 were 48 days compared with 70 days in Q3. Total prepayments to suppliers were $228.6 million a decrease from $203.1 million at the end of 2011. Total working capital at end of Q4 was $193.6 million compared to $315.3 million at the end of Q3. Total short-term bank borrowings and convertible notes due May 2013 were $269.9 million. The total long-term bank borrowings were $632.2 million, among which $297 million were due in one year. The total face value of our outstanding convertible notes due 2013 was $116.6 million at end of Q4.
The Company had a negative operating cash flow of $4.4 million in Q4. For the entire year the Company generated $1.4 million of cash flow from operations. Our total CapEx for 2012 was $84.5 million, including $9.8 million incurred in Q4. Our annual 2012 CapEx was lower than $353.7 million in 2011, primarily due to less ramping-up activities taken in 2012.
Operator, we are ready for questions now.
Operator: Satya Kumar, Credit Suisse.
Satya Kumar - Credit Suisse: I was wondering if you can give some detail on the shipments by geography in Q4. How much was Japan, China, EU, U.S. and RoW? And can you give some detail by region on why Q1 shipments are down about 20%?
Bill Chen - VP of Strategic Development: You asked for Q4, right, Q4 (indiscernible)?
Satya Kumar - Credit Suisse: Yeah, right.
Bill Chen - VP of Strategic Development: The China domestic is 317 megawatt.
Jian Xie - COO: I will give you the percentage impact on the jobs that we breakdown. So, for China market, firstly, we will breakdown on the module shipment. For the China market, I think I think it is about 20% – 48% and for year-over-year market is below 30% and Asia-Pacific excluding China is about 25%.
Satya Kumar - Credit Suisse: How much is Japan in there?
Jian Xie - COO: Japan and other Asia-Pacific country is about 25%.
Operator: Y. Edwin Mok, Needham.
Y. Edwin Mok - Needham & Company: I guess for to start this question, for your first quarter guidance as well as for the full year guidance, how much do you think that the business will come from China and Japan and other markets? I guess what we are trying to ask is, does it relate to end demand rather than just some of your customer that was buying more cell from you in China and use it for other market?
Bill Chen - VP of Strategic Development: For the guidance with China and Asia-Pacific, Asia-Pacific is 30% to 40%, and China 20%, and Europe were 20% and U.S. about 10%, the rest of world 10% to 20%.
Operator: Y. Edwin Mok, Needham.
Y. Edwin Mok - Needham & Company: Just if you can help me with how do you guys think about your growth margin beyond the fourth quarter, and in the fourth quarter, did you guys take any inventory charge or any kind of one-time charge in the fourth quarter?
Bill Chen - VP of Strategic Development: I think the gross margin in Q4 is very low. It is low compared to Q3 because the decline in ASP. In Q4, definitely we had one-time accounting charges, including inventory and PPE impairment and accounts receivable written off, and one accounting treatment in inventory loss with one other joint venture we have with MEMC.
Y. Edwin Mok - Needham & Company: How much does those charge totaled, at least roughly?
Bill Chen - VP of Strategic Development: I think it's probably close to $15 million plus, I think, for the one-time accounting charge.
Y. Edwin Mok - Needham & Company: And then, how do you think about your margins as you go into your first quarter? You mentioned I think on the call that price has stabilized? Do you think that you can get back to positive gross margin shortly or how do you think about that?
Bill Chen - VP of Strategic Development: I think in Q1 we will try to improve the gross margin and we believe the market price will be stabilized in Q1 better off than Q4. The Company also – our strategy to try to focus on purchase order with high gross margin, so we think by end of Q1 our gross margin will probably will have much higher than Q4.
Operator: Satya Kumar, Credit Suisse.
Satya Kumar - Credit Suisse: Just wanted to clarify on the gross margins, are we looking to having a positive gross margin in Q1 based on what you are expecting?
Jian Xie - COO: Yes. I think that we expected a positive gross margin. That's for sure. As you know, we have a focused the market in emerging markets, especially in Japanese and also some other Asia Pacific market. Some are emerging market from South America and Middle East as well. Those are areas where gross margin much higher than traditional market in Europe and some markets in China as well.
Satya Kumar - Credit Suisse: So sounds like mix is helping gross margin become more positive in Q1. What is your current non-silicon and silicon cost in Q4 and how you expect that to track in 2013?
Bill Chen - VP of Strategic Development: Alright, our current non-silicon cost in Q4 is $0.53 and to enter the year 2013, we believe we have a 10% improvement for the non-silicon cost, to our target of $0.46 by end of the year.
Satya Kumar - Credit Suisse: And silicon cost?
Bill Chen - VP of Strategic Development: Silicon cost is up to the market. Overall, our procurement had achieved a great result last year. I think it depends on some other factors because China may have the anti-dumping - once the Europeans has done the anti-dumping to China market. So there are some factors we will make – the silicon cost very hard to predict.
Satya Kumar - Credit Suisse: Then you took an AR provision in Q4. Can you give some color on what were the regions or the detail behind that? And have you scrubbed all your receivables now and do you expect any more AR charges, or are all the doubtful accounts fully expensed?
Bill Chen - VP of Strategic Development: Especially 2013, I don't think we will have more charge for accounts receivable. The Company will take a very prudent measure to control their accounts receivable. In this market, we think we have advantages because we have a lot of major purchase order coming to JA Solar, because of consolidation. So our policy is we will balance our cash position, balance our cost of production, and we will focus on the emerging market and take a strategic purchase order more important to customer. So, those measures will help to reduce our accounts receivable charge.
Operator: Pranab Sarmah, Daiwa Capital.
Pranab Sarmah - Daiwa Capital Markets: First of all, should antidumping tariff come to China polysilicon import, what would be your options in that case? Would you consider making some of the product outsourced from outside so that you can avoid some of the antidumping tariff? Just trying to figure out like what would be your strategy if it happens that way.
Bill Chen - VP of Strategic Development: I think this question is a good question. As I said, China antidumping to the polysilicon makers will be hinged to European antidumping ruling to Chinese solar manufacturing. At this time, I think there are a lot of factors and norm, so we couldn't make a final comment on the China antidumping. Definitely, we have some provision policies or strategies to prepare for the coming antidumping.
Pranab Sarmah - Daiwa Capital Markets: My second question is on your (testing) high-efficiency modules. Can you give us a little bit of a roadmap like what is the high-efficiency module conversion efficiency going to by end of 2013 and what will be the production costs are what basis on those modules?
Bill Chen - VP of Strategic Development: I think our R&D effort will go into two directions, high efficiency, leading to the market demand and low degradation. As I said in my address for the financial, in the second half of the year, we will announce new generation technologies. But these new technologies depend on the market situation. It may take a little time for mass production. So, it's hard to give you a mass production cost for the high efficiency cell and module at this moment.
Pranab Sarmah - Daiwa Capital Markets: My last question is on your financial health, like what are the measures you will be taking in 2013 so that your gearing ratio comes down?
Bill Chen - VP of Strategic Development: I think a few measures we will take. The first thing we will focus our sales efforts in emerging markets, firstly in the Japanese markets and the rest in specific markets. Second thing we focus on strategic customer acquisitions. In this market situation we have advantages to take the value-added customer. We try to have strategic partnerships with major customer we sign in at this time. Also, the Company is reviewing all purchase orders one by one to try to make sure the purchase order satisfy our cash management requirements and gross margin measurement requirements and so on. And also, we have cash management policy to reduce our G&A and SG&A costs, and also for product portfolio, we have new product portfolio policy – will satisfy the market demand. For instance, in Japan, we tried to have more product in high-efficiency. That will satisfy the market demand. Also, the Company have a policy to manage our costs in good way. And the condition, we have provided the high-quality products, but we also have a very stringent cost control policy. I think all those measures will help the Company to retain our healthy financial situation.
Operator: (Shawn Shoe, Clearwater Capital).
Shawn Shoe - Clearwater Capital: So, my question is more related to Company's liquidity position. So, going forward, because the market is still not fully recovered for sure, so just wondering what's your guidance about operating – hello, can you hear me?
Bill Chen - VP of Strategic Development: Yeah, I hear you, yeah.
Shawn Shoe - Clearwater Capital: Sure. So, what's your guidance about operating cash flow in year 2013? And what's the Company's plan about coming due convertible bonds this year, and would the Company take of like additional – thinking about taking up additional leverage after paying down the CP?
Bill Chen - VP of Strategic Development: Let me answer your last two questions. For the second question for the coming due convertible notes, the Company is prepared. All the money has been prepared. So, we'll pay the – kind of (indiscernible) at a time it matures. That's not a problem. Your last question; we try to have new borrowings from some other banks currently. We don't have any balances. And also, our current bank – most of the current bank will have a renewal policy to our current borrowings. So, we'll maintain – given the banks (on) relationship at the current stage and we believe we are the top manufacturers in China to have (indiscernible) current balances for our debt. For your first question, our regular policy, we don't have any guidance for operating cash flow. I couldn't have any concrete number for you this time.
Operator: We are now approaching the end of the conference call. I will now turn the call over to Mr. Jian Xie for his closing remarks.
Jian Xie - COO: Thank you everyone for joining us today. We appreciate your interest 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 working with you in the coming months.
Operator: Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.