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Edited Transcript of DQ earnings conference call or presentation 21-May-19 12:00pm GMT

Q1 2019 Daqo New Energy Corp Earnings Call

Wanzhou, Chongqing May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Daqo New Energy Corp earnings conference call or presentation Tuesday, May 21, 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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* John Segrich

* 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 First Quarter 2019 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Kevin He, 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 first quarter of 2019, which can be found on our website at www.dqsolar.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 operations, and then Mr. Yang will discuss the company's financial performance for the first quarter of 2019. After that, we'll 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 maybe 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 Mr. Zhang, our CEO.

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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 very pleased to report a solid operational and financial performance for the first quarter of 2019, during which we hit record-high production and sales volumes as well as our most competitive cost structure. During the quarter, our polysilicon facilities were running at full capacity and produced 8,764 metric tons and sold 8,450 metric tons of polysilicon. We were also able to successfully reduce our total production cost and cash cost to $7.42 per kg and $6.20 per kg, respectively, our lower cost ever.

We are currently undertaking a capacity debottlenecking project to gradually upgrade several old CVD furnaces with improved technology, allowing us to increase production capacity by an additional 5,000 metric tons. This project is progressing as planned, and we expect to complete the project ahead of schedule in early June 2019. During the debottlenecking project, we also will finish our annual equipment maintenance. Therefore, the ramp-up processing of this debottlenecking project and annual maintenance will temporarily impact production volumes and cost. And as a result, we expect to produce approximately 7,200 to 7,400 metric tons of polysilicon, a total production cost of $8 to $8.5 per kg during the second quarter of 2019. Once our facilities are fully ramped up in June, we anticipate our total annual production capacity will reach 35,000 metric tons in nameplate capacity, and our production cost will return to the current level of approximately $7.50 per kg.

Our Phase 4A project is also progressing smoothly and remains on schedule. The foundation work has been completed, and the construction of various buildings and structures are progressing as planned. The initial equipment installation has already begun and is planned to continue through the third quarter of 2019. Based on our current assessment, we expect to complete Phase 4A by the end of 2019 and ramp up to full capacity of 70,000 metric tons by the end of the first quarter of 2020.

China installed approximately 5.2 gigawatts of new solar PV installations during the first quarter of 2019. While installation numbers are -- numbers for the second quarter of 2019 haven't been released yet, we believe they will likely be even lower. Installations should significantly pickup as China's solar PV policy is gradually rolled out this year. Grid parity projects will be the first batch to start installations and then followed by subsidized projects, which will bid for the total CNY 3 billion of subsidies. Market consensus indicates that China will install approximately 35 to 40 gigawatts in 2019, which means solar project installation volumes during the second half of this year could potentially double or even triple those in the first half of this year. As polysilicon is the key raw materials of solar PV modules, we believe demand for polysilicon will significantly increase in the second half of this year.

We are optimistic about China's booming demand for solar PV in the second half of this year. Beginning -- since May, the market conditions for polysilicon have shown signs of improvement as prices appears to have bottomed out. While Daqo remained solidly profitable in the first quarter with our lower cost and high mix of mono-grade polysilicon products, we believe that the current challenging pricing environment for polysilicon has resulted in serious financial losses for many of the existing polysilicon producers.

According to news from China Silicon Industry Association, at least 3 major Chinese polysilicon producers have shut down their facilities for maintenance in the month of April and May, resulting in reduced supply. In addition, the ramp-up processing of other Chinese producers' new capacity has not been as fast and smooth as they expected, contributing to production delays and unscheduled shutdowns. Furthermore, this new capacity is generally unable to immediately produce high-quality mono-grade polysilicon due to quality issues. This has resulted in increased pricing spread between mono-grade and multi-grade polysilicon.

Looking into the future, we believe current oversupply in the market will be alleviated by a reduction in supply from high-cost players. For the second half of 2019, we anticipate the booming demand from China's domestic PV market will significantly improve the overall supply demand situation, particularly for the tightly-supplied mono-grade silicon. We are confident in our ability to overcome the temporary market challenges with our low-cost structure and world-class products. Moreover, our Phase 4A project is expected to double our capacity and reduce our cost even further, strengthening our leading position as one of the world's most competitive polysilicon manufacturer.

Outlook and guidance. Due to the significant pricing spread between mono-grade and multi-grade polysilicon, the company currently maximized the amount of mono-grade polysilicon it produces as percentage of total production volume to approximate around 87% in April and 88% in May until today. In addition, the ramp-up process of the company's debottlenecking project is expected to take place ahead of the original schedule in early June. As such, the company may see some impact on production volume and the cost structure in the second quarter.

The company expects to produce approximately 7,200 to 7,400 metric tons of polysilicon with total production cost of $8 to $8.5 per kg during second quarter of 2019, sell approximately 7,100 metric tons to 7,300 metric tons of polysilicon to external customers during the second quarter of 2019. The company expects the total production cost will come back to normal at the level of $7.5 per kg in 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 return the call to Ming, who -- 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 first quarter 2019 earnings conference call today. I will now discuss our company's financial performance for the quarter. Revenues for the quarter were $81.2 million compared to $75.6 million in the fourth quarter of 2018. The sequential increase in revenue was primarily due to higher polysilicon sales volume, partially offset by lower ASPs.

Gross profit was $18.3 million compared to $16.9 million in the fourth quarter of 2018. Gross margin was 22.6% compared to 22.4% in the fourth quarter of 2018. The sequential increase in gross margin was primarily due to lower average polysilicon production cost, partially offset by lower ASPs. During the quarter, we successfully reduced cost by approximately 7% compared to the previous quarter to $7.42 per kilogram, primarily as a result of reduced electricity utilization and silicon usage per unit of poly production, lower electric utility rates as well as greater economies of scale.

Selling, general and administrative expenses were $7.9 million compared to $8.2 million in the fourth quarter of 2018. Q1 SG&A expenses include approximately $4 million of noncash share-based compensation costs related to the company's share incentive plan. Excluding such noncash costs, SG&A would have been approximately $4 million.

R&D expenses were $1.3 million compared to $1 million in the fourth quarter of 2018 and $0.1 million in the fourth quarter of 2018. Research and development expenses vary period-to-period and reflect R&D activities that took place during the quarter.

Income from operations was $9.2 million compared to $20.3 million in the fourth quarter of 2018. Operating margin was 11.3% compared to 26.8% in the fourth quarter of 2018. Interest expense was $2 million compared to $1.9 million in the fourth quarter of 2018.

EBITDA from continuing operations was $20 million compared to $29.5 million in the fourth quarter of 2018. EBITDA margin was 24.6% compared to 39.1% in the fourth quarter of 2018.

During the third quarter of 2018, the company decided to discontinue its solar wafer manufacturing operations. Net income from discontinued operation was $0.8 million in the first quarter of 2019 compared to net loss from discontinued operation of $5.7 million in the fourth quarter of 2018. The net income from discontinued operations during the quarter was primarily due to disposal of fixed assets, which were impaired in 2018 and previous years.

As a result of the aforementioned, net income attributable to Daqo New Energy Corp. shareholders was $6.6 million compared to $11.4 million in the fourth quarter of 2018. Earnings per basic ADS were $0.50 compared to $0.86 in the fourth quarter of 2018. Adjusted net income attributable to Daqo New Energy shareholders was $11.1 million in Q1 2019 compared to $15.7 million in Q4 2018. Adjusted earnings per basic ADS were $0.83 in Q1 2019 compared to $1.18 in Q4 2018.

As of March 31, 2019, the company had $113.7 million in cash and cash equivalents and restricted cash compared to $94 million as of December 31, 2018. As of March 31, 2019, the accounts receivable balance was $2.2 million compared to $1.2 million as of December 31, 2018. And as of March 31, 2019, the notes receivable balance was $0.7 million compared to $8.1 million as of December 31, 2018. As of March 31, 2019, total bank borrowings were $193 million, of which $149.7 million were long-term borrowings compared to total borrowing of $171.5 million, including $133.3 million of long-term borrowings as of December 31, 2018. We continued to manage our debt level prudently. In addition, the company currently has RMB 600 million of approved of Chinese bank loans and bank credit facility, including from Bank of China, which the company can use to support its Phase 4A capacity expansion.

For the 3 months ended March 31, 2018 -- 2019, net cash provided by operating activities was $48.5 million compared to $22 million in the same period of 2018. And for the 3 months ended March 31, 2019, net cash used in investing activities was $38.6 million compared to $11.8 million in the same period of 2018. The net cash used in investing activities was primarily related to the capital expenditure of Xinjiang Phase 3B and 4A polysilicon projects.

As Longgen indicated, the Phase 4A project is progressing smoothly, and we expect the project to be complete by the end of 2019 and ramp up to full capacity of 70,000 metric tons by the end of first quarter of 2020, with anticipated cost target of $6.80 per kg and cash cost below $6 per kilogram. For the 3 months ended March 31, 2019, net cash provided by financing activities was $7.2 million compared to net cash used in financing activities of $2.4 million in the same period of 2018.

This concludes our prepared remarks. We'll 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) The first question today comes from Philip Shen with Roth Capital.

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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 the outlook for China. I know you gave some details in your remarks there. But it seems like consensus thinking is for a Q3 ramp-up of activity and then Q4 strength. But a lot of that is actually dependent on when the NEA announces the subsidized projects and when they're awarded. Do you have confidence that the NEA will be able to turn that around quickly so that we actually get to Q3 strength? Or is that a reasonable scenario that we actually get instead of Q3 ramp-up, a Q4 ramp-up and then more strength in higher volumes in Q1 of next year?

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

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Philip, I think -- that's a good question, I think, about China. I think basically, direct answer to your question is we believe, I think, the NEA will announce the detailed policy by the end of the May and no later, we believe, in the middle of the June. The reason is because the government definitely see now need a time of installation that -- to finish to carry out the targets CNY 3 billion subsidized. So to answer your question -- does that answer your question?

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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I think so. Yes. So you're saying they will announce the project details earlier. So shifting gears to polysilicon ASPs and pricing ahead, can you talk about -- let's say, we get this NEA announcement. Do you think -- what do you expect the polysilicon pricing to do? How much -- how do you expect it to trend in Q3 specifically and Q4?

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

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Okay. If you look right now, the Q1, our polysilicon price, I think, is around $9.55. Definitely, also in terms of foreign exchange, I think, renminbi continue to depreciation. And actually renminbi, our selling price, is CNY 74.75 per kg, right, per kg. So basically, we believe in the second quarter right now our monosilicon price is continue go up. So if you look at our Q4, our mono account for percentage is around 74%, I still remember that. Okay, the figure maybe, I think, Ming can continue to comment there. So in the second quarter, right now, in May, our monosilicon grades accounted for 87%. By the today, May 21 -- 20, to yesterday, our mono-grades is around 88%. So basically, in August -- in the second quarter, if you consider the multi-silicon price, yes, I think, is go down.

Right now it's around, I think around CNY 63 per kg. But our percentage is lower. For this month, I think, we're below 15% is multi-silicon. So to me, I think -- for ASP, definitely in the second quarter, we think we can keep the same or even slightly equal to the first quarter, okay? Then looking forward, I think, definitely, we see Q3 and Q4, the price will bounce back. The reason why because right now, the mono-grade, the demand is so hot. We didn't have too much available for sale. If you look our Q4 -- Q1 customer, LONGi and Jinko, accounted for almost, I think, more than 70%, this LONGi and Jinko.

So we see a lot of clients right now, potential clients, asking for more, such as, I'm not mention JA Solar, Canadian Solar and Chongqing , and even LONGi is asking for more volume because based on the contracts -- long-term contracts. For example, in April, we gave LONGi more -- 500 tons more monosilicon grades. So that will, I think, we see the tendency mono-grade price go up. The reason why because we see out of China right now today if you look the market, the demand is so hot but besides that the grid parity project percentage also go up. And so we see this year, the global demand, let's say, 125 gigawatts maybe the monosilicon grade panel were accounted for, I think, more than 70%.

So you know what, we believe, I think, in the second half of this year, the monosilicon price definitely will go back to normal, around CNY 80 to CNY 90, I'm just giving range, okay. Why give so bigger range? Because really we cannot projectable. The reason if you look, as renminbi continue depreciation will stimulate the panel export were unfavor to import polysilicon from abroad. So if you see the 2 major abroad, one is with Korea, one is Germany, I think, those 2 companies right now their supply is -- will go down at today's price. So they got more pressure than us. If you look at the financial earnings release, you can see there. They have lost money, and they're struggling, same as some producer in China. So I think, that's my comments, Philip.

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Ming Yang, Daqo New Energy Corp. - CFO [6]

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So let me follow-up...

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

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Go ahead, Ming.

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Ming Yang, Daqo New Energy Corp. - CFO [8]

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Quickly. Yes, so I think from a margin perspective, based on supply and demand dynamics, the second half of this year is clearly going to be much stronger than the first half. If you look at just our first quarter more or less as a baseline of pricing for this year, certainly second half should be higher than our Q1 ASP, and particularly for mono, we think mono pricing potentially could hit $10 or higher in the second half of this year because of the strong incremental demand, and that's where our core focus is. And there's very limited new supply of mono-grade to come in this year into the market.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Shifting gears to your cost structure, I know in Q2 it's going to be higher for the reasons you stated. What do you expect the cost structure to look like for Q3 and Q4? Could you get back to Q1 levels or even lower since you were beyond the back end of your debottlenecking?

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [10]

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I think -- maybe I'll say first and Ming will add a comment. Right now, we've given guidance for the second quarter is $8 and to $8.50. I think we are very conservative, okay? Just -- right now, current foreign exchange rate without a change, I think, the third quarter and fourth quarter definitely our cost will continue go down, even below $7.50, especially in the fourth quarter. The reason is because you see all electronics cost maybe continue go down and 5 -- the ramping up, you see the production outward also continue to increase. So we definitely, I think, given the figure right now is very conservative. Ming, maybe you add any comments?

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Ming Yang, Daqo New Energy Corp. - CFO [11]

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Yes. So I think so again using our Q1 as baseline where we did 8,764 metric tons at $7.42 per kg of cost. By Q3, with our debottlenecking project, hopefully, it should -- hopefully should be fully ramped up by then, we should get additional, let's say, 1,000 to 1,200 metric tons of incremental new capacity on a quarterly basis with that quarter. So I think, just on economies of scale, we already hit fairly significant, reasonably good cost reductions on the current level. It's hard for us to guide to the specific cost right now, but we think there's very good opportunity for us to hit cost of Q1 costs or lower.

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [12]

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Philip, I think, second quarter, we've given, right now, the cost. The reason is because one is the debottlenecking project is going up. Second is we also, combined with any maintenance, usually we do any maintenance in August or September. But this time, because of debottlenecking project, so we combined with any maintenance together. So that's why in the second quarter, the output, I think, you can see is go down for the projection, so the cost is we are very conservative because scalability because of any maintenance you always some cost is come up. So that's why we've given that figure.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Okay. Great. One more, if I may, and then I'll pass it on. As it relates to your Q2 guidance, just wanted to check. Our numbers suggest that you could be negative EPS. Just want to kind of check in and see if that's directionally correct for the second quarter.

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [14]

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I think Ming -- go ahead.

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Ming Yang, Daqo New Energy Corp. - CFO [15]

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Yes. So I -- just to be consistent with what we've guided in the past. We've always consistently guided to our production volume and our external sales volume. So that's only -- that's what we're only guiding to right now.

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Operator [16]

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(Operator Instructions) The next question comes from John Segrich with Luminus.

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John Segrich, [17]

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Just wanted to touch on the discontinued operations. When should we expect there to no longer be an impact, whether it's in the income statement or the cash flow? And maybe can you talk about what accounted for the $5 million of cash outflow across all the discontinueds through the cash flow in this quarter?

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Ming Yang, Daqo New Energy Corp. - CFO [18]

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Okay. I think pretty much in the second half, there should be very limited impact on the discontinued operations. I think right now, we're in the process of winding down that facility in terms of disposing the remaining assets. So there is some lingering impact in the first half. But I think, going to second half, I think the impact should be very little.

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Longgen Zhang, Daqo New Energy Corp. - CEO & Director [19]

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I think, John, basically, in rental right now, the labor capacity is -- only is building and land is available in my book. You can see. I think so far, only have assets is around sitting there. I think for the assets in Q1 ending, I think, only have 57 building there. The major is the building and the land, okay? For the equipment, I think, up to now we sell all the equipment. So that's why you see the Q1, Q2 we still have some cash flow in because we're selling all the equipments. So we were down basically on the second quarter. So only left is the lands and the building, okay? So basically in the second half of the year, should be no more impact.

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Operator [20]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Kevin He for any closing remarks.

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Kevin He, Daqo New Energy Corp. - Head of IR [21]

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Thank you, everyone, again for attending the conference call today. Should you have any query, please don't hesitate to contact us at any time. Thank you, again, and bye-bye.

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Operator [22]

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