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Edited Transcript of DQ earnings conference call or presentation 14-Aug-19 12:00pm GMT

Q2 2019 Daqo New Energy Corp Earnings Call

Wanzhou, Chongqing Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Daqo New Energy Corp earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin He

Daqo New Energy Corp. - Head of IR

* Longgen Zhang

Daqo New Energy Corp. - CEO & Director

* Ming Yang

Daqo New Energy Corp. - CFO

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Conference Call Participants

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* Philip Shen

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Daqo New Energy Second Quarter 2019 Results Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Kevin He of Investor Relations. Please go ahead.

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Kevin He, Daqo New Energy Corp. - Head of IR [2]

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Hello, everyone. I'm Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today.

Daqo New Energy just issued its financial results for the second quarter of 2019, which can be found on our Investor Relations website at ir.xjdqsolar.com. To facilitate today's conference call, we have also prepared a PPT presentation for your reference.

Today, attending the conference call, we have Mr. Longgen Zhang, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and the operations, and then Mr. Yang will discuss the company's financial performance for the second quarter of 2019. After that, we will open the floor to Q&A from the audience.

Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future, operational and financial performance and industry growth are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those containing any forward-looking statements.

Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and the preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable law.

Also during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience.

Without further ado, I now turn the call over to our CEO, Mr. Zhang, please.

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [3]

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Hello, everyone, and thank you for joining us today for our earnings call. We are pleased to report a solid quarter in which we made good progress in capacity increase and quality improvement. During the second quarter, we completed our capacity debottlenecking project on time, which allowed us to increase our annual capacity to 35,000 metric tons. At the same time, we also completed the scheduled annual maintenance of our Xinjiang facilities, which was originally scheduled in the third quarter.

While our production volume was temporarily impacted by the debottlenecking project and the annual maintenance of our facilities, we were still able to produce 7,151 metric tons of polysilicon in second quarter at the total production costs $8.12 per kg and the cash cost of $6.65 per kg. Even with these impacts, the company recorded adjusted net income of USD 2.3 million for the second quarter, with USD 66 million of operating cash flow from continuing operations for the first half of this year.

With the production ramp-up at our newly debottlenecked facilities, we anticipate our production volume in the third quarter to be approximately 9,200 to 9,500 metric tons of polysilicon, with the total production cost returning to normal level of approximately $7.50 per kg. So far, for the month of July, both our production volume level and cost reduction is tracking well and are receptive of this trend.

During the second quarter, we also significantly improved the quality of our product. Out of our entire sales volume during the quarter, approximately 80% of our polysilicon was sold to mono customers. With the completion of our debottlenecking project and annual maintenance, we expect to -- or expect the percentage of mono-grade polysilicon of our production to further increase to approximately 85% in the third quarter. In addition, we are now working closely with some leading mono wafer producers to test our ultra-high-purity polysilicon for application in the potential N-type mono wafer market.

The expansion of our Phase 4A project is progressing smoothly and remains on schedule. The equipment installation has already begun and will continue through to the end of third quarter of 2019. Based on [our current] assessment, we expect to complete the Phase 4A project by the end of 2019 and a ramp-up to the full capacity of 70,000 metric tons by the end of the third quarter of 2020. Upon the full ramp-up, we expect that 90% of our total production volumes will be sold to mono customers, including 40% for the N-type mono wafer market.

In early July this year, China's National Energy Administration released a list of 22.88 gigawatts of approved solar projects that secured the government subsidies for 2019. Combining these approved subsidized project, residential distributed-generation projects, top-runner projects and the poverty alleviation PV projects, China is expected to install approximately 40 gigawatts to 45 gigawatts of new solar PV projects in 2019. During the first half of this year, China has already installed 11.4 gigawatts, which means the installation volumes could triple in the second half of 2019.

Realistically, it will take some time to complete the preparation work for these recently approved subsidized solar projects, which includes detailed designs and rounds of procurement bidding and procurement contract negotiations. All of these stage have to be completed before the actual modules can be shipped. Based on our discussions with downstream customers, some project procurement biddings have already begun. All in all, we anticipate China's solar demand to pick up significantly starting from early September.

The second quarter of 2019 was a challenged time for the polysilicon industry as the prices dropped to their lowest levels in the history, particularly for multi-grade products. While prices for mono-grade products declined sequentially, they were relatively stable. We expect the polysilicon supply and demand dynamics to improve when Chinese project developers begin to place orders by the end of the third quarter. Incremental demand for China is expected to gradually exceed the supply in the current market.

We believe polysilicon ASP will begin to improve in the third quarter of 2019 to a level that the majority of marginal high-cost players are able to breakeven on a cash-cost basis, which we estimated to be approximately $10.50 to $11 per kg. Moreover, the pricing spread between mono-grade and the multi-grade polysilicon products will likely remain significant because output of mono-grade polysilicon still lags behind the market demand and new capacities of mono wafer are still growing significantly.

In early August, we signed a 3-year supply agreement with LONGi Green Energy to supply 112,800 metric tons of polysilicon products. LONGi is our longtime strategic partner with strong balance sheet and growth momentum in mono wafer sector. This is the second long-term supply agreement between us. It's also a testament to our supply stability and excellent quality of polysilicon product for mono applications.

We are confident that the combination of our premium product quality and the competitive cost of structure will set a benchmark for the polysilicon industry and solidify our position as the market leader. Our competitive advantage will be further strengthened once the Phase 4A project is completed and ramped up to full capacity in the first quarter of 2020 which will double our capacity and drive our production costs even lower.

The company expects to produce approximately 9,200 to 9,500 metric tons of polysilicon, with a total production cost of $7.50 per kg during the third quarter of 2019 and sell approximately 9,000 to 9,300 metric tons of polysilicon to external customers during the third quarter of 2019.

For the full year of 2019, the company expects to produce approximately 37,000 to 40,000 metric tons of polysilicon, inclusive of the impact of the company's annual facility maintenance. This outlook reflects Daqo New Energy's current and preliminary view as of the date of this press release and may be subject to change.

With that, I will turn the call over to Ming, our CFO, who will go over our financials for the quarter. Ming, please go ahead.

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Ming Yang, Daqo New Energy Corp. - CFO [4]

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Thank you, Longgen, and good day, everyone. Thank you for joining our earnings conference call today.

Revenues in the second quarter of 2019 were $66 million compared to $81.2 million in the first quarter of 2019. The decrease in revenue was primarily due to lower polysilicon sales volume and lower ASP. Gross profit was $8.6 million compared to $18.3 million in the first quarter of 2019.

Gross margin was 13% compared to 22.6% in the first quarter of 2019. The sequential decrease was primarily due to lower ASP and higher polysilicon production costs caused by the annual facility maintenance and ramp-up process of the company's debottlenecking project.

Selling, general and administrative expenses were $7.8 million compared to $7.9 million in the first quarter of 2019. This quarter's SG&A expense includes $3.9 million of noncash share-based compensation cost related to the company's share incentive plan.

R&D expenses were $1.5 million compared to $1.3 million in the first quarter of 2019. R&D expenses reflect R&D activity that took place during the quarter and could vary from period to period.

For this quarter, we primarily conducted R&D projects and experiments related to polysilicon quality improvement, including methods to reduce carbon and metal content within our manufacturing system. As a result of the foregoing, loss from operations was $0.4 million compared to income from operations of $9.2 million in the first quarter of 2019. The company recorded an operating loss for the second quarter compared to operating margin of 11.3% in the first quarter of 2019.

Interest expense was $1.9 million compared to $2 million in the first quarter of 2019. EBITDA from continuing operations was $10.2 million compared to $20 million in the first quarter of 2019. EBITDA margin was 15.5% compared to 24.6% in the first quarter of 2019.

During the third quarter of 2018, the company decided to continue (sic) [discontinue] with solar wafer manufacturing operation. Net income from discontinued operation was $0.5 million in the second quarter of 2019 compared to $0.8 million in the first quarter of 2019. Net income from discontinued operations during the first and second quarter of 2019 resulted from the disposal of fixed assets which were impaired in 2018 and previous years.

Net loss attributable to Daqo New Energy shareholders was $2.2 million in the second quarter of 2019 compared to net income attributable to Daqo New Energy shareholders of $6.6 million in the first quarter of 2019. Loss per basic ADS was $0.16 in the second quarter compared to earnings per basic ADS of $0.50 in the first quarter of 2019.

Non-GAAP adjusted net income attributable to the Daqo New Energy shareholders was $2.3 million in the second quarter of 2019 compared to $11.1 million in the first quarter of 2019. Adjusted earnings per basic ADS were $0.17 compared to adjusted earnings per basic ADS of $0.83 in the first quarter of 2019.

As of June 30, 2019, the company had $79.6 million in cash, cash equivalents and restricted cash compared to $113.7 million as of March 31, 2019. At the end of Q2, we have low levels of accounts receivable balance of $0.1 million, where our customers generally paid us cash upon sales contract signing and prior to order delivery, further demonstrating the superior quality and strong customer preference for our high-quality polysilicon products.

As of June 30, 2019, the notes receivable balance was $9.4 million compared to $0.7 million as of March 31, 2019. As of June 30, 2019, total bank borrowings were $243.2 million, of which $151.5 million were long-term borrowings, compared to total borrowing of $193 million including $149.7 million of long-term borrowings as of March 31, 2019. The increase in bank borrowings was primarily related to capital expenditures for our Phase 4A expansion project.

For the 6 months ended June 30, 2019, net cash provided by operating activities was $67.8 million compared to $67.1 million in the same period of 2018. For the 6 months ended June 30, 2019, net cash used in investing activities was $144.9 million compared to $52.5 million in the same period of 2018. The net cash used in investing activities in 2019 and 2018 was primarily related to the capital expenditures of Xinjiang's Phase 3B and Phase 4A polysilicon projects.

For the 6 months ended June 30, 2019, net cash provided by financing activities was $61.3 million compared to net cash used in financing activities of $93.2 million in the same period of 2018.

This concludes our prepared remarks. We would now like to turn the call over to the operator to begin the Q&A session. Operator, please begin.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Phil Shen with Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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The first one is on China demand. I know you've talked about volumes ramping up in September and how that could impact poly pricing positively, especially mono poly pricing. How do you expect the momentum of demand to trend into Q1? Do you expect some strength in Q1 as well? Or -- and also Q2? And then additionally, when do you expect the government to provide the next subsidy package for the 2020 time frame?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [3]

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Okay. Thank you. I thank Philip from Roth Capital. For the first question, the China total of this year -- total subsidized -- total amount fixed is CNY 3 billion, as you see that the 22 gigawatts project is already down. So only thing is the housing implementation and the installation that we think will happen, occurred after September, maybe majority were installed in Q4. So that's why I think China is a key major -- one of the major driver for the market right now, of course including the out-of-China international market demand.

So we will see that the silicon demand is not only from the any market but also from the middle stream, the capacity continued expansion. [At this,] LONGi announced another 15 gigawatts and will finish by the end of 2020. Then [Chongqing], the second one, will double the capacity, wafer capacity, from 25 gigawatts to 50 gigawatts. Jinko also announced that in (inaudible) is another 25 gigawatts. So then also 2 [Asia] company, one is (inaudible), has also announced within next 2 years, 25 gigawatts. [Nanjing] also is the furnace manufacturing company in Mongolia also announced maybe 25 gigawatts.

So we can see a lot of capacity will come out to prepare for the strong demand for next year, even year 2021. So we believe and think as the downstream capacity continue expansion for the working capital in the [processing] because we are the upstream. So we see the demand for monosilicon will be higher in fourth quarter, even in Q1 to Q2. So that's why we think for this quarter, we see monosilicon price is stable almost. So we believe, okay, Q4, the price will come back, will go up a little. And Q1, Q2, maybe will stay there higher.

So basically, I'm not worried about that monosilicon price. The reason because we compete with the imported silicon. If you look imported silicon, their cost structure is around like $10 to $12 cash basis. So as the market -- you see that monosilicon continue to -- the percentage of monosilicon -- mono module continued demand percentages going to increase, so the monosilicon demand is hot. For meantime, we see that the multi price is weak, the real demand is weak then also supply is a lot. So that's why Daqo's forecast on monosilicon, in the third quarter, we believe we were above 85%. In the fourth quarter, we were above 90%, the next year even higher. So that's all then. Ming, do you have any comment?

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Ming Yang, Daqo New Energy Corp. - CFO [4]

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(inaudible)

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [5]

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Philip. Yes.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [6]

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Yes. Perhaps -- so do you think -- what does demand look like in Q1? Could we see a reduction in demand? And when do you expect China to issue the next policy? Is there -- I haven't heard any details around or hints about when that could come out. I was wondering if you might have some information about that.

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [7]

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I think China is in the history -- let's say, that way. This year actually this bidding system because of the new policy, the implementation processing is a little slow. The reason because for whole this year, the new policy is new. But for next year, definitely I think we have experience, so we're speed up. As you can see, that even though the 30 million -- sorry, CNY 3 billion subsidized were announced, still have a lot money available. And we think the second tranche will be soon, I think, announced.

And even next year, the reason because we think it's not only right now that this industry is not only wafer because the government right now want improved [sky]. You see they are cutting the coal power plant capacity. So they are asking to see the traditional CO2, whatever, the power generator company, especially those SOE. They have to own or have to have quarter of the clean image. So right now, there's a lot of push then to adding the green image.

For example, like we look at the issue that there are actually a lot of state grids, their local grids. But they also know the government is planning to add in the next 3 years 5 gigawatts solar projects. Those does not have any government subsidized, it's just the free subsidized and the generated (inaudible) just connected with the local grid. So right now, have 7 company including some big ones, Chinese big one, right now is bidding for the bidding system. So what I say is that is we see strong demand in China, maybe in Q1, Q2, will happen.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [8]

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Okay. Great. So moving on to your comment about 40% of your shipments could be N-type. That's interesting. Who would be the primary N-type customer? Would it be LONGi or somebody else? And what percentage of N-type -- well, how many gigawatts of N-type shipments do you think industry could have in 2020?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [9]

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Okay. The answer your question is because N-type, in history, we're only to shipping to one of the company, actually oversees company here in China, an OEM. I'm not going to go ahead and announce the name, but you maybe know that. And they use our N-type silicon. And the reason because they worry about, obviously, supply and the cost structure. And right now, one of the biggest Chinese I think producer right now test our N-type. And so far, it's going okay, but still not commercially ordered right now. Because they just, based on right now, testing to cell and the module, everything is okay. But so far, we still didn't selling large quantity of N-type to our clients. The only one client, only like in the history, every month maybe it's like 110. But we see the future, because N-type compared to P-type really the complete efficiency rate will increase 2% to 3% on the cell settlement. So that's maybe the future on the mono I think panel -- PV panel settlement, the next technology. But right now, we are around 40% is N-type, but we're selling this as a monosilicon.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

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Got it. Okay. In terms of the LONGi announcement that you recently had, it's maybe a bit more than half of your capacity or about half your capacity for 3 years. Can you talk about the prepayments that came with that? I noticed your advances in customers on your balance sheet increased to about 20 million, but obviously this contract happened after that. So I can imagine that balance is higher now. So talk us through the prepayments. And then also, looking beyond LONGi, do you expect any other kind of new agreements that you could kind of put together or announce in the near term as well?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [11]

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Okay. The LONGi contract, because you know that, the first contract we still have 1 year supply for year 2020, right? So these contracts actually is almost 100-plus all expense is covered from next year to 2022. So basically, total deposit is around -- is not -- cannot be announced by -- between us and LONGi, but you will see from the financial statements later. So the price is based on the market price. And every month determined has been before in history. So the LONGi contract will account for our capacity from -- if we're now going to continue expansion 4B, it's more than 40%. And besides that, we already have the long-term contract with JinkoSolar. So basically, we'll -- in the future, maybe we will sign or extend another contract. But we have potential -- still have potential another 2 company, one is Asian company and it's mostly likely will be signed soon. So we are working on that. So all the long-term contract, we have from 2% to 4% deposit.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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Great. That's good color. One more from me. You mentioned Phase 4B. What are your thoughts -- the latest thoughts on the 4B potential expansion? When do you expect -- when will you expect to know about -- or make a decision? And if you do decide, what's the timing of that potential decision?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [13]

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Philip, I think first of all, we have to forecast our 4A and to speed up or even put our 4A in trial production as soon as possible. And also need to ramp the 4A, ramping up to full capacity. And we also need to consider our financial statements and our cash flow and the whole industry the situation. So right now, to make a decision about 4B is too early. But we are focused on 4A and also on the quality.

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Operator [14]

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(Operator Instructions) As there are no further questions in the queue, this concludes our question-and-answer session. I would like to turn the conference over to Kevin He for any closing remarks.

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Kevin He, Daqo New Energy Corp. - Head of IR [15]

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Thank you, everyone, again for participating in today's conference call. Should you have further questions, please don't hesitate to contact us. Thank you and bye-bye.

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Operator [16]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.