Solarfun Power Holdings Co. CEO Discusses Q3 2010 Results - Earnings Call Transcript

Solarfun Power Holdings Co., Ltd. (SOLF)

Q3 2010 Earnings Call

November 09, 2010 07:00 am ET


Paul Combs - VP, Strategic Planning

Gareth Kung - CFO

Ping Peter Xie - President and CEO


Jesse Pichel - Jefferies Sam Dubinsky from Wells Fargo

Vishal Shah - Barclays Capital

Edwin Mok from Needham & Co.

Dan Ries - Collins Stewart

Mark Bachman - Auriga

Kelly Dougherty - Macquarie

Josh Baribeau - Canaccord



Good day, ladies and gentlemen and welcome to the Solarfun third quarter earnings conference call. My name is Madge and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a Q&A session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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

Paul Combs

Thank you and good morning everyone. Welcome to our call and we appreciate your continued interest in Solarfun. Joining me today are my colleagues, Peter Xie, our President and CEO, Gareth Kung, Chief Financial Officer. And (inaudible) Managing Director of Hanwha Chemical Corporation.

Before we continue, I’d like to remind you that you can download a PowerPoint file that will accompany this presentation on our IR website. If you are on a mailing list, you should have received this file in conjunction with our earnings release. I need to take a moment and remind you of our Safe Harbor policy, which is also included in the earnings release and posted in its entirety on slide two of the slide package.

Gareth will open with the financial summary of the third quarter just announced, followed by Peter’s review of some of the key elements of our progress including an outlook for the remainder of the year. Mr. Lee will conclude with some formal comments introducing Hanwha and address several questions we commonly received including why Solarfun, what does Hanwha bring to the table, and how do we plan to work together.

Now Gareth will walk us through the details of another outstanding quarter for Solarfun.

Gareth Kung, Chief Financial Officer

Thanks Paul, good morning. As you can see from our reported results, our business momentum and financial performance came in ahead of our expectations and continues to show steady improvement. If you’re following along the presentation file, slide three to seven cover the third quarter review.

We recorded good gains in year-over-year and quarter-over-quarter shipments. And ASPs improved largely due to a recovery of the euro as well as strong market demand. Gross margins rose in spite of increased raw material costs. The company continues to generate strong net earnings and EPS growth as well as achieve our return equity, well above most of our peers.

Revenues for the third quarter achieved another quarterly record, reaching 226.7 million. This represents a 24.7% increase from the second quarter of 2010, while ASP increased from $1.65 to $1.75 during the same period.

Total shipments, including module processing services, rose 9.4% to 223.9 megawatts in the third quarter 2010 as compared to the second quarter of 2010, when we shipped 204.6 megawatts. Module processing services accounted for approximately 6.9% of total revenue for the quarter.

As shown in the pie chart on slide five of our presentation, we are quite pleased with the traction we have achieved in important new growth markets, especially in Italy, in US and China. Based on the shipment data and excluding module processing, for the third quarter of 2010 Germany declined from 63% to 53% of shipments compared with the second quarter. Italy rose from 9% to 15% and US from 3% to 7%. China remained constant at 5% of total shipments. Other important markets were Australia and Belgium at 6% and 5% respectively.

Gross profit increased 34.6% quarter-over-quarter to 74.2 million. And gross margin improved to 22.7%. This margin improvement was largely driven by the increase in ASP. Raw material supplies from poly to module components remained tight and we needed some price increases during the third quarter. This resulted in a slight increase in blended COGS per watt, excluding module processing services, from $1.31 in the second quarter to $1.35 for the quarter just reported.

The blended COGS takes into account the production cost, both silicon and non-silicon, using internal wafers, purchase costs and additional processing costs of externally sourced wafer and cells as well as freight costs. For modules made with internal wafers, we experienced an increase in cost per watt to $1.16 from a dollar trough in the second quarter, primarily due to the high cost of polysilicon. Peter will provide some further comment on our expectation for the manufacturing costs and gross margins in the future.

Operating profit increased 45.5% quarter-over-quarter to 58.6 million, which represented a 17.9% operating margin as compared to 15.4% in the second quarter. We continue to take a disciplined approach to watch managing the operating expenses while investing in our brand, sales and marketing and technology. Low operating expenses as potential revenue relative to our peers is one of our continued benefits of our OEM business model.

Operating expenses as a percentage of total revenue declined quarter-on-quarter to 4.8%, which was way below our guidance of 6%, largely due to higher shipments and revenue. Interest expenses stayed flat at around US $6 million. Our current hedging strategy remains consistent with above 50% of our euro exposure hedged six months ahead. With euro rising relatively to a dollar during the third quarter, we experienced a net foreign exchange loss of 4.8 million. On a non US GAAP basis, net income attributable to shareholders for the quarter was 40.9 million, an 18.1% increased from the preceding quarter.

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