Hanwha SolarOne Reports Second Quarter 2012 Results

 Hanwha SolarOne Co., Ltd. (“SolarOne” or the “Company”) (Nasdaq: HSOL), a vertically integrated manufacturer of silicon ingots, wafers and photovoltaic (“PV”) cells and modules inChina, today reported its unaudited financial results for the quarter endedJune 30, 2012.  The Company will host a conference call to discuss the results at8:00 am Eastern Time (8:00 pm Shanghai Time) onSeptember 11, 2012.  A slide presentation with details of the results will also be available on the Company’s website prior to the call.

SECOND QUARTER 2012 HIGHLIGHTS(1)

• Total net revenues wereRMB1,071.7 million(US$168.7 million), an increase of 33.3% from 1Q12, and a decrease of 40.4% from 2Q11.
• PV module shipments, including module processing services, were 230.7 MW, an increase of 43.6% from 160.7 MW in 1Q12, and an increase of 12.0% from 205.9 MW in 2Q11.
• Average selling price (“ASP”), excluding module processing services, decreased toRMB4.85per watt(US$0.77)fromRMB5.30per watt in 1Q12, and decreased fromRMB10.09per watt in 2Q11.
• Gross profit wasRMB67.5 million(US$10.6 million), compared with a gross loss ofRMB75.2 millionin 1Q12 and gross profit ofRMB162.9 millionin 2Q11.
• Gross margin was 6.3%, compared with negative 9.4% in 1Q12, due to the decline in production costs outpacing the decline in ASP, and higher factory utilization which was driven by higher shipment volumes. Gross margin in 2Q11 was positive 9.1%.
• Operating loss decreased toRMB82.8 million(US$13.0 million) from an operating loss ofRMB220.9 millionin 1Q12.  The Company recorded an operating loss ofRMB25.7 millionin 2Q11.  The decrease in operating loss in 2Q12 from 1Q11 was primarily due to the return to gross profitability and tight control of operating expenses.
• Operating margin was negative 7.7%, compared with negative 27.5% in 1Q12 and negative 1.4% in 2Q11.
• Net loss attributable to shareholders on a non-GAAP basis wasRMB245.9 million(US$39.0 million), compared with a net loss ofRMB269.9 millionin 1Q12 and a net loss ofRMB64.9 millionin 2Q11.
• Net loss per basic ADS on a non-GAAP basis wasRMB2.91(US$0.46), compared with a net loss per basic ADS on a non-GAAP basis ofRMB3.20in 1Q12 and a net loss per ADS on a non-GAAP basis ofRMB0.77in 2Q11. 
• Net loss attributable to shareholders on a GAAP basis wasRMB266.7 million(US$42.0 million), compared with a net loss attributable to shareholders on a GAAP basis ofRMB303.7 millionin 1Q12.  The Company recorded a non-cash gain ofRMB1.1 million(US$0.2 million) from the change in fair value of the convertible feature of the Company’s convertible bonds as compared with a non-cash loss ofRMB9.5 millionin 1Q12.  Net loss attributable to shareholders on a GAAP basis in 2Q11 wasRMB69.0 million, including a non-cash gain ofRMB51.9 millionfrom the change in fair value of the convertible feature of the Company’s convertible bonds.  As explained in prior quarters, the fluctuations in the fair value of the convertible feature of the Company’s convertible bonds are primarily due to changes in the Company’s ADS price, over which the Company has no direct control, and does not reflect the operating performance of the Company.
• Net loss per basic ADS on a GAAP basis wasRMB3.16(US$0.50), compared with a net loss per basic ADS on a GAAP basis ofRMB3.60in 1Q12 and a net loss per basic ADS on a GAAP basis ofRMB0.82in 2Q11.
• Annualized Return on Equity (“ROE”) on a non-GAAP basis was negative 28.8% in 2Q12, compared with negative 29.4% in 1Q12 and negative 5.2% in 2Q11. 
• Annualized ROE on a GAAP basis was negative 27.6% in 2Q12, compared with negative 29.2% in 1Q12 and negative 5.2% in 2Q11.

Mr.Ki-Joon HONG, Chairman and CEO ofHanwha SolarOnecommented, “In spite of a difficult operating environment, we achieved some good progress during the second quarter. Our shipment volumes grew nicely quarter-to-quarter, our production costs continued to improve and now are in reach of our year-end target, and we are increasingly seeing synergies with our parent company, particularly in downstream activities. We remain optimistic that our presence in large new growth markets such asChina,Japanand the US, will provide incremental volume potential in the second half of 2012. Challenging industry conditions remain: overcapacity, a spike in manufacturer’s inventories, declining prices, and regulatory issues pertaining to duties in the US and possiblyEurope. In spite of these, we continue to move forward with our long-term goals, in concert with support from our largest shareholder, and believe we have established the brand, competitive cost structure, balance sheet and management team to enter the next growth stage of the industry.” 

SECOND QUARTER 2012 RESULTS

• Total net revenues wereRMB1,071.7 million(US$168.7 million), a increase of 33.3% fromRMB803.9 millionin 1Q12, and a decrease of 40.4% fromRMB1,797.8 millionin 2Q11.  The increase in total net revenues in 2Q12 compared with 1Q12 is due to higher shipment volumes, partially offset by lower selling prices.
• Revenue contribution from PV module processing services as a percentage of total net revenues was 4.8%, compared with 7.7% in 1Q12 as the Company continued to shift its focus to branded sales.  
• PV module shipments, including module processing services, were 230.7 MW, an increase from 160.7 MW in 1Q12, and also an increase from 205.9 MW in 2Q11.  The increase in module shipments in 2Q12 was primarily due to increased demand fromGermanyahead of the reduction of incentives that commenced onJuly 1, 2012.
• The Company shipped to over 25 countries during 2Q12, led by activities inGermanyprior to the reduction of incentives that commenced onJuly 1, 2012.Germanyaccounted for 57% of total shipments.EuropeandAfrica(“EA”) accounted for 76% of total shipments. Other significant markets inEuropeincludedEngland,ItalyandSpain, representing 5%, 4% and 4% of total shipments, respectively. TheAsia Pacificregion (“AP”) accounted for 17% of total shipments, includingKorea(3%),Australia(3%),Japan(2%) andChina(2%). Shipments toNorth America, includingthe United States, represented 7% of total shipments.

• ASP, excluding module processing services, decreased toRMB4.85per watt(US$0.77)fromRMB5.30per watt in 1Q12 and fromRMB10.09per watt in 2Q11. 
• Gross profit wasRMB67.5 million(US$10.6 million), compared with a gross loss ofRMB75.2 millionin 1Q12 and gross profit ofRMB162.9 millionin 2Q11. 
• Gross margin was 6.3%, compared with negative 9.4% in 1Q12. Internal production costs decreased significantly and outpaced the decline in ASP from 1Q12 to 2Q12.  Gross margin in 2Q11 was positive 9.1%.  

• The blended cost of goods sold (“COGS”) per watt, excluding module processing services, wasUS$0.72, representing a 21.7% decrease fromUS$0.92in 1Q12.  The blended COGS takes into account the production cost (silicon and non-silicon) using internally sourced wafers, purchase costs and additional processing costs of externally sourced wafers and cells.
• Internal production costs (including both silicon and non-silicon costs) using internally sourced wafers wereUS$0.71per watt, representing a 9.0% decrease fromUS$0.78per watt in 1Q12.  The decrease was primarily due to reduced polysilicon costs as well as operational improvements.
• Operating loss wasRMB82.8 million(US$13.0 million), compared with an operating loss ofRMB220.9 millionin 1Q12 and an operating loss ofRMB25.7 millionin 2Q11.  Operating margin improved to negative 7.7% from negative 27.5% in 1Q12, compared with negative 1.4% in 2Q11.
• Operating expenses as a percentage of total net revenues were 14.0% in 2Q12, compared with 18.1% in 1Q12 and 10.5% in 2Q11. The lower percentage in 2Q12 compared with 1Q12 was primarily due to an increase in total net revenues in 2Q12.
• Interest expense wasRMB76.6 million(US$12.1 million), compared withRMB69.1 millionin 1Q12 andRMB40.3 millionin 2Q11, as a result of the Company’s higher debt levels.
• The Company recorded a net loss ofRMB34.3 million(US$5.4 million), which combined the effect of a foreign exchange loss with a gain from the change in fair value of derivatives.  The Company recorded a net gain ofRMB11.4 millionin 1Q12 and a net loss ofRMB38.2 millionin 2Q11, which were the net effect of the foreign exchange gain/loss and the gain/loss from changes in fair value of derivatives.
• Gain from the change in fair value of the conversion feature of the Company’s convertible bonds wasRMB1.2 million(US$0.2 million), compared with a loss ofRMB9.5 millionin 1Q12 and a gain ofRMB51.8 millionin 2Q11.  The fluctuations resulting from the application of ASC 815-40 onJanuary 1, 2009, were primarily due to changes in the Company’s ADS price during the quarter.  This line item has fluctuated, and is expected to continue to fluctuate quarter-to-quarter.  The Company has no direct control over the fluctuations.
• Income tax expense in 2Q12 increased  toRMB77.8 million(US$12.2 million), compared with income tax benefit ofRMB37.7 millionin 1Q12 and income tax expense ofRMB16.1 millionin 2Q11.
• Net loss attributable to shareholders on a non-GAAP basis(1) wasRMB245.9 million(US$39.0 million), compared with a net loss attributable to shareholders ofRMB269.9 millionin 1Q12 and net income attributable to shareholders ofRMB64.9 millionin 2Q11.
• Net loss per basic ADS on a non-GAAP basis wasRMB2.91(US$ 0.46), compared with a net loss per basic ADS on a non-GAAP basis ofRMB3.20in 1Q12 and a net loss per basic ADS on a non-GAAP basis ofRMB0.77in 2Q11. 
• Net loss attributable to shareholders on a GAAP basis wasRMB266.7 million(US$42.0 million), compared with a net loss attributable to shareholders ofRMB303.7 millionin 1Q12 and net income attributable to shareholders ofRMB69.0 millionin 2Q11.
• Net loss per basic ADS on a GAAP basis wasRMB3.16(US$0.50), compared with a net loss per basic ADS on a GAAP basis ofRMB3.60in 1Q12 and net income per basic ADS ofRMB0.82in 2Q11.
• Annualized ROE on a non-GAAP basis was negative 28.8 % in 2Q12, compared with negative 29.4% in 1Q12 and negative 5.2% in 2Q11.
• Annualized ROE on a GAAP basis was negative 27.6 % in 2Q12, compared with negative 29.2% in 1Q12 and negative 5.2% in 2Q11.

FINANCIAL POSITION

As ofJune 30, 2012, the Company had cash and cash equivalents ofRMB1,789.3 million(US$281.6 million) and net working capital ofRMB1,280.4 million(US$201.5 million), compared with cash and cash equivalents ofRMB1,908.9 millionand net working capital ofRMB45.9 millionas ofMarch 31, 2012.  Total short-term bank borrowings (including the current portion of long-term bank borrowings) wereRMB1,941.6 million(US$305.6 million), compared withRMB2,727.0 millionas ofMarch 31, 2012.  The decrease in short-term bank borrowings was primarily due to the Company’s ongoing strategy to shift debt to longer—term bank borrowings.

In the second quarter of 2012, the Group provided a full valuation allowance ofRMB92 millionon deferred tax assets related to tax losses of a subsidiary of the Group, as the subsidiary is not expected to have sufficient future taxable income from its operations, and such tax losses may not be utilized in the future.

As ofJune 30, 2012, the Company had total long-term debt ofRMB2,878.4 million(US$453.1 million), which comprised both long-term bank borrowings and convertible notes payable.  The Company’s long-term bank borrowings are to be repaid in installments until their maturities, which range from 2 to 4 years.  Holders of the convertible notes have the option to require the Company to redeem the notes beginning onJanuary 15, 2015.

Net cash used in operating activities in 2Q12 wasRMB335.5 million(US$52.8 million), compared with net cash generated from operating activities ofRMB46.0 millionin 1Q12 and net cash generated from operating activities ofRMB443.8 millionin 2Q11.

As ofJune 30, 2012, accounts receivable wereRMB802.9 million(US$126.4 million), compared withRMB603.9 millionas ofMarch 31, 2012andRMB537.5 millionas ofDecember 31, 2011. Days sales outstanding were 77 days in 2Q12, compared with 83 days in 1Q12 and 76 days in 2Q11.  

As ofJune 30, 2012, inventories increased slightly toRMB684.9 million(US$107.8 million) fromRMB659.1 millionas ofMarch 31, 2012, and fromRMB684.0 millionas ofDecember 31, 2011.  Days inventory were 60 days in 2Q12, compared with 69 days in 1Q12 and 51 days in 2Q11.

Capital expenditures wereRMB39.6 million(US$6.2 million) in 2Q12.  Following the close of the 2Q.12, the Company repurchased an additional$22 millionof its convertible bonds. The Company previously repurchased approximately$50 millionof its convertible bonds during 1Q12.

CAPACITY  

As ofJune 30, 2012, the Company had production capacity of 800 MW for ingots and wafers, 1.3 GW for cells and 1.5 GW for modules.  The Company currently has no near-term plan to add additional capacity.  Management will review expansion needs in the future in line with changes in overall market demand.

BUSINESS OUTLOOK

The Company provides the following guidance based on current operating trends and market conditions.

For 3Q12, the Company expects

• Total module shipments to be similar to those achieved in the 2Q 2012.
• Gross margin to be positive.

For the full year 2012, the Company expects:

• Module shipments reduced from the previous forecast of 1 GW to a range of 900 MW to 1 GW.
• Capital expenditures ofUS$150 million, depending on demand and other market conditions.
• Processing costs (excluding silicon costs) to be approximatelyUS$0.50per watt by the end of 2012.

OTHER DEVELOPMENTS

OnSeptember 6, 2012, theEuropean Commissionlaunched an anti-dumping investigation regarding whether Chinese producers are selling solar panels at unfairly low prices in Europe.  The Company believes its pricing practices have been fair and lawful inEuropeand other jurisdictions. In any event, the Company intends to vigorously defend itself and rebut all allegations. 

 CONFERENCE CALL

The Company will host a conference call to discuss the second quarter of 2012 results at8:00 am Eastern Time (8:00 pm Shanghai Time) onSeptember 11, 2012. Mr.Ki-Joon HONG, Chairman and CEO, Mr.Hee Cheul KIM, President, Mr.Dong Kwan KIM, Chief Strategy Officer, and Mr.Jung Pyo SEO, Chief Financial Officer, will discuss the results and take questions following the prepared remarks. 

The dial-in details for the live conference call are as follows:

A live webcast of the conference call will be available on the investor relations section of the Company’s website at: http://www.hanwha-solarone.com.  A replay of the webcast will be available for one month.

A telephone replay of the call will be available for seven days after the conclusion of the conference call.  The dial-in details for the replay are as follows:

FOREIGN CURRENCY CONVERSION

The conversion in this release of Renminbi into U.S. dollars is made solely for the convenience of the reader, and is based on the exchange rate as set forth in the H.10 statistical release of theFederal Reserve Boardas ofJune 29, 2012, which wasRMB6.3530toUS$1.00.  No representation is intended to imply that the Renminbi amounts could have been, or could be, converted, realized or settled into U.S. dollars at that rate onJune 30, 2012or at any other date.  The percentages stated in this press release are calculated based on Renminbi amounts.

USE OF NON-GAAP FINANCIAL MEASURES

The Company has included in this press release certain non-GAAP financial measures, including certain line items presented on the basis that the accounting impact of ASC 815-40 had not been recorded.  The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the performance of the Company and when planning and forecasting future periods.  Readers are cautioned not to view non-GAAP financial measures on a stand-alone basis or as a substitute for GAAP measures, or as being comparable to results reported or forecasted by other companies, and should refer to the reconciliation of GAAP measures with non-GAAP measures also included herein.

SAFE HARBOR STATEMENT

This press release contains forward-looking statements.  These statements constitute “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995.  These forward-looking statements include 3Q and/or full-year 2012 estimates for PV product shipments, ASPs, gross margin, production capacities, production costs, capital expenditures  and other results of operations.  Forward-looking statements involve inherent risks and uncertainties and actual results may differ materially from such estimates depending on future events and other changes in business climate and market conditions. Hanwha SolarOnedisclaims any obligation to update or correct any forward-looking statements.