Operator: Hello, and thank you for standing by for JA Solar's First Quarter 2013 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 our today's conference, Nick Beswick of Brunswick Group.
Nick Beswick - IR, Brunswick Group: Thank you. Welcome to JA Solar's first quarter 2013 earnings conference call. Joining us from the Company today 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 6.2108 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, Mr. Xie will begin with an overview of the Company's Q1 2013 results, covering business and market developments and outlook. Following that, Mr. Chen will provide details of our technological progress and financial performance.
After the prepared remarks, we will open up for questions for the remainder of the call. We expect the entire call to last approximately one hour.
Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including statements that involve a number of risks and uncertainties – excuse me – including statements regarding expected future financial and industry growth of 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 end-user products by consumers and inventory levels of such products in the supply chain; changes in demand from significant customers; changes in demand for our major markets; changes in product mix, capacity, utilization, level of competition, pricing pressures, and declines in average selling prices; delays in the introduction of new product lines; continued success in technological innovations; shortage in supply of raw materials; availability of financing; exchange rate fluctuation; litigation and other risks as described in the Company's SEC filings, including its Annual Reports on Form 20-F filed with the SEC.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. You should not place undue reliance on these forward-looking statements. All information provided on today's conference call speaks as of today's date, unless otherwise stated, and the Company undertakes no duty to update such information, except as required under applicable law.
I’d now like to hand the call over to Mr. Jian Xie.
Jian Xie - COO: Thank you, Nick and thanks everyone for joining today’s call. While it's real tough time for a solar industry, we are encouraged by our performance in the first quarter as shipments exceeded the high end of our previous guidance and that we achieved a positive gross margin.
In the quarter, we (deducted) a significant proportion of shipment to regions with higher ASPs and as a result, we were able to slightly increase revenue and posted much improved bottom line despite a seasonal decrease in shipment volumes. We also remained focused on managing costs and the cash to ensure we maintain our position as one of the most financially secure companies in the industry.
Having successfully repaid our convertible notes due last week, maintaining a healthy balance sheet would remain essential focus of our strategy going forward. As we continue to make in-roads into new and growing markets, we are confident JA Solar has the components in place to achieve solid, sustainable business growth while maintaining a sound financial position.
Let me now please go through our operating highlights for Q1. Shipments for the quarter were 442.7 megawatt, above the high-end of our previous guidance of 413 megawatt. This was driven by strong performance across key markets, most notably in Japan, which I'll discuss in more detail shortly.
Gross margin was a positive 6% for the quarter, which was encouraging. This was due to the large proportion of shipment to higher margin markets as we expand our global footprint. We continue to prioritize margins over shipment volumes.
As you well know, we successfully repaid at maturity $119 million of our convertible notes last week. This is a testament to our solid business execution and the financial strengths. Going forward, we will remain committed to medium or lower debt obligations and managing our balance sheet prudently to protect our net interest of our stakeholders.
In terms our global market, we are cautiously optimistic. While there is a huge amount of regulatory uncertainty in Europe, we continue to see strong demand across other key markets and we have also seen encouraging developments in various emerging markets in Southeast Asia, South America, and the Middle East.
Alongside of this, there has been a clear improvement in supply/demand balance as a result of a steady process of industry consolidation and the list has brought a broader stabilization of ASPs in most regions.
Looking now in our performance in each of our key markets; Europe accounted for (27) of our total shipments this quarter. As we mentioned before, we are working to gradually decrease our exposure to the European market by opening up new and emerging markets with greater regulatory uncertainty. We have been actively cooperating with the EU Commission investigation team and we are continuing to close – monitor regulatory developments closely.
We had a strong quarter in Japan in Q1. In the past several quarters, we have been working diligently to deepen our presence in the market and have built a solid position there. This allowed us to benefit immensely from an increased (indiscernible) activity in the quarter. In fact, our Japan shipments in Q1 alone were greater than our shipments there for the whole of 2012. Going forward, we will continue to work closely with our partners in Japan to capitalize on that growing demand for solar energy there.
Moving to China, a much smaller proportion of our modules (indiscernible) this quarter, 14% compared to nearly 50% in the previous quarter.
As we'd said last time, China is an important market for the industry and we recognized the importance of maintaining a strong position here. However, right now our focus is more on margins and (collectability) is on our market share, and as a result of which led to lower proportion of our shipment to China this quarter. Having said that, we expect to see the introduction on more effective policies to support the distributed generation and the ground-mounted projects in China, which should benefit the industry as a whole.
Elsewhere, the North American market was (largely required) for us in Q1. However, we expect increasing our shipments to the region starting from Q2. Demand was strong in both the U.S. and the Canada and we will maintain the solid relationships with customers there to ensure we have a good pipeline through the rest of the year.
We also made a significant progress in other emerging markets including the Middle East and Africa. For example, we delivered more than 17 megawatts of solar modules to the UAE in Q1. In March, we announced significant contract wins in both Israel and Morocco. Our success in these regions is a testament to our ability to (capitalize) in emerging markets.
Going forward, we are continuing to shift all our focus to emerging markets with growing demand, improve the regulatory support and the better margin, while maintaining a healthy relationships with the existing customers in established market.
As for shipment guidance, we expect the quarterly shipments in Q2 to be in a range of 410 megawatts to 430 megawatts. For the full year, we reiterate our previous shipment guidance of between 1.7 gigawatt and 1.9 gigawatt.
Overall, while the solar industry remains tough, our penetration on key growth market gives us the flexibility necessary to surviving a dynamic situation. Alongside this, financial prudence remains a core focus of our strategy.
Having successfully repaid our convertible notes, we are continuously assessing our finance options and closely managing our cash and cost to minimize risk. Demand for JA Solar’s high-efficiency, high quality products remains strong and we are continuing to invest as necessary to maintain our leadership in technology.
Customers (trust) both on our products and our ability to manage our balance sheet to ensure us – to ensure we can be a reliable long-term partner. The combination of risk factors make us confident, we will retain our industry-leading position in a long-term.
With that, I will turn the call over to Mr. Bill Chen for a more detailed rundown of our financial metrics and the progress in technology and R&D.
Bill Chen - VP of Strategic Development: Thank you, Mr. Xie. Welcome everyone to todays' call. I would like to quickly update you on our technological progress and the financial result for the first quarter 2013. First, our progress on technology.
In Q1, we continued to improve cell efficiency, which there is efficiency in our mono and multi-crystalline cells in mass production increasing to 19.2% and 17.6%, respectively compared to 19.15% and 17.5% in the last quarter.
We commenced mass production of 5-inch high-efficiency monocrystalline modules with a maximum power output of 215 watt and a mainstream power output of 210 watt. On an annual basis, the modules produce an accumulated power output 3% higher than comparable models or our competitors, allowing for cost savings in transportation, space and materials of over 2%.
JA Solar is in fact the first of PV manufacturer to achieve mainstream output of 210 watt in the 5-inch monocrystalline format. Also, this quarter, our solar module successfully has salt mist corrosion and sulfur dioxide corrosion test conducted by TUV NORD AG, confirming that JA Solar's products offer exceptional reliability even in severe environments. These positive results prove that we can better address the specific needs of certain markets and reaffirm our position as a technology leader in the industry.
On the R&D side, we expect to announce the next generation our Cypress series or (Cypress 2) in the third quarter, capitalizing on the success we've already had with the Cypress technology. (Cypress 2) will feature and optimize manufacturing process that will further increase cell efficiency and improve cell reliability. Mass production should follow soon after the launch of the series.
Now, I would like to walk you through our financial result for the first quarter 2013. In Q1, we shipped 442.7 megawatt of solar power products, above the high-end of our previous guidance of 430 megawatt, representing a decrease of 11.5% sequentially and an increase of 20.9% year-over-year. Of these shipments, modules accounted for 248 megawatt. Cells accounted for 189.5 megawatt, and the module and cell tolling accounted for 5.2 megawatt. In Q1, the geographic breakdown of the shipments including modules, cells and tolling was approximately 39% in China, 33.6% to APAC, 26.8% to Europe, and the rest of the world accounted for only 0.6%.
Net revenue for Q1 was $270 million, representing an increase of 0.4% sequentially and a year-over-year increase of 4.7%.
Q1 gross profit was $16.1 million or 6% of net revenue compared to gross loss of $12.4 million last quarter and a gross profit of $5.4 million Q1 of last year.
The R&D expenses in Q1 were $3.4 million, an increase from $1.5 million in Q4 and a decrease from $3.6 million in Q1 2012. The sequential increase was primarily related to the various R&D initiatives to further improve the efficiency and the quality of products.
Operating loss from operations was $13.7 million, negative 5.1% on net revenue in Q1. This compares with the loss from operations of $79.5 million or a negative 29.6% on net revenue in Q4.
Interest expense in Q1 totaled $15.8 million, a decrease from $16.7 million in Q4.
Other loss in Q1 was $2.8 million compared to other income of $3.3 million in the Q4. Our net loss for Q1 was $33.3 million. Of which, net loss attributable to ordinary shareholders was $32.9 million. Loss per diluted ADS was $0.85, compared to loss per diluted ADS of $2.42 in the first quarter of 2012.
On the balance sheet side, our cash and cash equivalents were $454.9 million compared with $488.1 million for Q4 and $685.6 million for Q1, 2012.
Accounts receivable at the end of Q1 was $308.1 million compared to $277.4 million at end of Q4. Days of sales outstanding at the end of Q1 were 103 days compared to 93 days in Q4, 2012 and 82 days in Q1, 2012.
Total inventories at the end of Q1 were $171.9 million, an increase from $149.8 million in Q4 and a decrease from $192 million at Q1, 2012. Inventory turnover days in Q1 were 61 days compared to 48 days in Q4, 2012 and 67 days in Q1, 2012.
Total prepayments to suppliers were $208.6 million in Q1 compared with $233.8 million in Q4.
Total working capital at the end of Q1 was $44.8 million compared with $203 million at the end of Q4. Total short-term bank borrowings and convertible notes due May 2013 were $268.8 million. As you know, we successfully repaid $119 million of our outstanding convertible bonds last week. Total long-term bank borrowings were $623.2 million among which $451.4 million were due in one year. CapEx for Q1 was $16 million compared with $9.8 million in Q4.
That concludes our prepared remarks. Operator, we are now ready to take questions. Thank you.
Operator: Satya Kumar, Credit Suisse.
Brandon Heiken - Credit Suisse: This is Brandon Heiken speaking on behalf of Satra Kumar. I was wondering for, one, if you could talk about the shipments to Japan. Do you think a more sustainable level or was this the result of say one large order of shipment? Then I have a follow-up if, I may please?
Jian Xie - COO: I think our shipment to Japan is sustainable and we have ability – the market over the past two years and this year we had a very good result in Japanese market and the result for the future will continue to be very strong.
Brandon Heiken - Credit Suisse: I know you guys have been working on some project development activity. Can you give an update maybe on the projects megawatts that you expect for the year? If you could give maybe a longer-term outlook up for that as well, please?
Jian Xie - COO: So most our projects that developed this year are at early stages. So in total, I think we're at around the 50 to 100 megawatts will be installed this year. So the profit I think will be a small part of our total like margin.
Brandon Heiken - Credit Suisse: If I may ask one more; can you talk about your progress on cost reductions for the year, what you foresee for reducing your cost and if you could talk about what your costs were for the first quarter, please?
Jian Xie - COO: I think our cost reduction effort has been materialized in Q1. Compared to the Q4, our costs (indiscernible) still reduce $0.04 on average and we will continue to do a cost reduction (for full years).
Brandon Heiken - Credit Suisse: How much do you expect the cost to come down this year for …?
Jian Xie - COO: Our target by end of the year that processing cost is $0.46.
Brandon Heiken - Credit Suisse: So that's for non…
Jian Xie - COO: End of the year. Processing cost, our non-silicon processing cost.
Brandon Heiken - Credit Suisse: Okay. For the margin, okay?
Jian Xie - COO: Yes.
Brandon Heiken - Credit Suisse: What is it in the first quarter?
Bill Chen - VP of Strategic Development: In Q1, it's $0.52.
Operator: Edwin Mok, Needham & Company.
Edwin Mok - Needham & Company LLC: First question is on your average selling price. How much of that increased sequentially from the fourth quarter to first quarter? How do you expect your average selling price to trend as again in the second quarter and the rest of the year?
Bill Chen - VP of Strategic Development: I think our ASP has been increased for at least ($0.03) on a sequential basis. On an annual basis, I think that we'll continue this trend.
Jian Xie - COO: In Q1, our ASP is about ($0.54) for module and the last quarter it's $0.61; so less (indiscernible) improvement and we speculate further stabilization of our ASP this year.
Edwin Mok - Needham & Company LLC: (I'd say) the (cell) increased by similar amount or so?
Jian Xie - COO: The same percentage.
Edwin Mok - Needham & Company LLC: In the first quarter, how much of your revenue came from module? Can you give us that break out?
Jian Xie - COO: I have 60% revenue come from module sales.
Edwin Mok - Needham & Company LLC: Did you say 50?
Jian Xie - COO: 60%.
Edwin Mok - Needham & Company LLC: Then can I ask you – when I look at your guidance, you got – if I just take your guidance range during the second quarter and then I take the midpoint of full year range, that will imply that you have slower shipment in the second quarter relative to the first quarter. Do you expect shipment to pick up in the second half? What are the factors that contribute to that range of shipment for the next three quarters (enough)?
Jian Xie - COO: In four quarters we have relatively flatter shipment. In Q2, due to the uncertainty in Europe, we slowed our shipment to Europe. So that’s why our guidance in Q2 has relatively lower number compared with our Q1.
Edwin Mok - Needham & Company LLC: That means for the full year you expect to come back in back half or was that more towards the emerging market?
Jian Xie - COO: We expect to have more shipment to other emerging market in closer end of Q4. So, we have a relatively flat shipment in coming quarters.
Edwin Mok - Needham & Company LLC: Then last question, I noticed that your APAC shipment design was very high in the first quarter. How much was that was Japan versus other market? Can you describe – I think in your prepared remarks you talked about the other market, which was very, very helpful, but (model all) commentary on APAC. I was just curious what other market in Asia that you are seeing that are increase in demand right now?
Bill Chen - VP of Strategic Development: I think in APAC, Japan is the leading market for us, which account for the majority of the APAC's delivery. In future, I think that we are developing some other APAC market as well, but Japan will still keep the leading position in this region.
Edwin Mok - Needham & Company LLC: So just maybe one more, sorry about that. So beyond Japan, how about Australia? That has been a market that people talked about? Have you guys seen much demand of that market?
Bill Chen - VP of Strategic Development: We see the potential in Australian market and we had sales force already for this market.
Operator: Satya Kumar, Credit Suisse.
Satya Kumar - Credit Suisse: Thanks for the follow-up question. I was wondering if you could clarify, if European tariffs are implemented, what strategy you may implement. Are you planning on possibly outsourcing? I know you are talking about the slowing shipments to Europe starting in the second quarter, but if you can talk more about your plans in the case of tariff, that would be helpful please?
Jian Xie - COO: Yes, we have evaluated some partners on there to find an opportunity to do OEM. Everything is ready, but we are waiting a preliminary like a decision from European Commission. So we'll have a plan, but just to wait for a while, two more months.
Operator: (Alex Seidel), Goldman Sachs.
Anne - Goldman Sachs: Hi, this is (Anne) from Goldman. I have two questions. First of all, for your shipment in 2013, 1.7 to 1.9 gigawatt. Can you give me a geographic breakdown between different countries? Second question is the ASP. It seem like you're targeting certain profitability. So what exactly is your targeting offering ASP from your customer, which means below what price you're not going to take the order? Can you talk about that?
Bill Chen - VP of Strategic Development: Okay. For the whole year guidance, I think the geographic – by geographic region, APAC should be 30% to 40%, China 20%, Europe about 20%, North America 10%, South America and the Middle East 10% to 20%. For the ASP, I think our general rule is if one purchase order will make us losing money or in other words there is no – any reasonable gross margin for (specific order), we'll typically will drop for this year.
Anne - Goldman Sachs: You guided non-silicon cost structure about 46% by the end of this year. So can I assume module price – on total module cost is roughly (57 or 58) or beyond that – beyond (indiscernible) particular order, is that right?
Jian Xie - COO: I think this should be – we should make a decision case-by-case for different regions, for different customers, each case will be different. So it's hard to give you a very specific number at this moment.
Anne - Goldman Sachs: Also, maybe on the Japan market. I know you guys are doing very well on that market. First of all, congratulation on that. Second of all, can you explain to us the competitive environment in Japan right now? It seems like it – and start with the high fit market. So expecting the price to go up probably impossible, but when you guys are doing quite well, how is the competitive environment that is seen right now versus maybe a month or two ago where Japan market starting to show strong momentum? Maybe just give us more color on that?
Jian Xie - COO: I think you have a very good question. Japanese market is definitely – it's going to be very competitive of market as we are the leader and our competitor may follow us, however, we truly believe we add a lot of value to our customers. That's why we take the leadership in the market. A most important thing in the Japanese market is, the Japanese customer will focus on the quality, the sustainability and there is a post-sale services, all this value chain, not only for the price. So, I hope this market will be still pretty well will be very sustainable and we surely believe we'll – to continue to be in good shape in that market.
Operator: All right. 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 talking with you in the coming months.
Operator: Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.