Solarfun Power Holdings Co., Ltd. Q1 2010 Earnings Call Transcript

Solarfun Power Holdings Co., Ltd. Q1 2010 Earnings Call Transcript
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Solarfun Power Holdings Co., Ltd. (SOLF)

Q1 2010 Earnings Conference Call

May 26, 2010 8:00 AM ET


Paul Combs – VP of Strategic Planning

Gareth Kung – CFO

Peter Xie – President


Gary Hsueh – Oppenheimer

Burt Chao – Simmons and Company

Josh Baribeau – Canaccord

Jay Greenflower [ph] – Barclays Capital

Dan Ries – Collins Stewart

Christine Hersey – Wedbush

Edwin Mok – Needham

Dylen Liu – Pacific Epoch

Michael Sumetsky [ph] – American Capital

Pranab Sarmah – Daiwa Capital

Vishal Shah – Barclays Capital

Mark Bachmann – Auriga USA



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Good day, ladies and gentlemen, and welcome to the first quarter 2010 Solarfun Power Holdings Co., Ltd. earnings conference call. My name is Erika and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Paul Combs of Solarfun. Please proceed sir.

Paul Combs

Good morning, everyone. Welcome to our call and thanks for your continued interest in Solarfun. Joining me today on the call are my colleagues Peter Xie, our President and Gareth Kung, our Chief Financial Officer.

Before we continue with our formal commentary, I need to take a moment and remind you of the company’s Safe Harbor policy. This call will contain forward-looking statements, which are subject to risk and uncertainties. Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risk and uncertainties in the company’s filings with the SEC. In addition, any projections about the company’s future performance represent management’s estimates as of today, May 26, 2010. Solarfun assumes no obligation to update these projections in the future as business and market conditions change.

Gareth will open with the financial review of the first quarter just announced followed by Peter’s review of our progress on several key strategic objectives and our outlook for the second quarter and the remainder of the year.

Before we begin the formal commentary, I would like to announce that Solarfun will hold an analyst meeting in New York City on Monday June 14 from 4 PM to 6 PM followed by informal reception from 6 PM to 7 PM. Six of our senior executives will be presenting in addition to Peter and Gareth, our Vice Presidents of manufacturing, technology and both European and U.S. sales. We believe this will be a good opportunity for us to outline our strategy going forward and for you to be exposed to a broader number of people from our senior management team. Keep an eye out for more formal details to follow.

I will now turn the call over to Gareth for a summary review of our quarterly results.

Gareth Kung

Thanks, Paul. Good morning. As you see from our release, we recorded strong continued year-over-year shipment growth. ASP declines were in line with our guidance. More importantly, our net income grew well above market expectations and returns on equity continued to improve. Revenues for the first quarter reached $216.2 million, the highest level in company’s history. This represents a 17.8% quarter-over-quarter increase from the fourth quarter of 2009 while ASP declined from $1.95 to $1.76 during the same period. Total shipments grew 35.9% to 150.6 megawatts in the first quarter of 2010 as compared to the fourth quarter of 2009 when we shipped 110.8 megawatts.

It is important to highlight that our module processing services contributed only 7.8% of the overall total revenue in the first quarter of 2010, which was relatively constant as compared with the fourth quarter of 2009. So our OEM and brand businesses are growing nicely as a percentage of total shipments.

Our shipments by geographic region reflect the cooling Germany ahead of the anticipated reduction in feed-in tariffs. Excluding our module processing business, German based customers accounted for 81% of our total PV module revenue up from 57% in the fourth quarter of 2009. We anticipate that the contribution from non-German customers will increase in the second half of 2010 as most of our shipments to customers outside of Germany have been pushed out to the third and fourth quarters of 2010.

Other markets of note in the first quarter included Australia, Italy, Portugal and Spain, which collectively accounted for about 15% of total module revenues. On a U.S. GAAP basis, gross profit was $39.9 million and gross margin was 18.5%. Despite the decline in ASP, we have managed to maintain gross margin around the same level as the previous quarter due to improvements in our cost structure. The blended COGS per watt excluding module processing services was $1.42 in the first quarter representing a 9.6% reduction from $1.57 in the previous quarter. The blended COGS takes into account the processing cost, both silicon and non-silicon, using internal wafers, purchase cost and additional processing cost of the externally-sourced wafers and cells, as well as freight costs. Later Peter will further elaborate on our cost roadmap.

Operating profit increased to $27.7 million, which represented a 12.8% operating margin as compared to 10% in the fourth quarter. The improvement in operating margin was primarily due to tight control over operating expenses. Operating expenses as a percentage of total net revenues decreased to 5.7% in the first quarter as compared to 8.8% in the previous quarter. Specifically, selling expenses as a percentage of total net revenues declined from 3.7% in the fourth quarter to 2% in the first quarter of 2010 in spite of an expanded sales force, largely as a result of eliminating several non-recurring items from the fourth quarter. G&A expenses as a percentage of total net revenues declined from 4.1% in the fourth quarter of 2009 to 2.6% in the first quarter as we continue to tightly manage our overhead costs. At the same time, we have increased R&D expenditures 24% quarter-over-quarter in the first quarter as we continue to invest in the development of new product technology and new products.

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