Earnings Call: Q3 2020

Nov 23, 2020

Hello, and welcome to the Docu Energy Third Quarter 2020 Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations for Daqo Energy. Please go ahead. 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 Q3 of 2020, 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. Lungben Zhang, our Chief Executive Officer and Mr. Min 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 Q3 of 2020. After that, we will open the floor to Q and 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 contained in 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 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, Hungen. Thank you, Kevin. Hello, everyone. Thank you for joining our conference call today. During the Q3 of 2020, we successfully completed the annual maintenance and several technology improvement projects at our polysilicon manufacturing facilities. We resumed full production in August with excellent operational results. For the Q3, we produced 18,406 metric tons of polysilicon, among which approximately 97.7% was moderate grade. We continued our relentless drive to lower production cost and reached to a record lower cost in renminbi terms. During the Q3, we completed our digital transformation project with a fully digitized manufacturing system that allow us to continuously improve our process control and analyze our manufacturing and product quality in the future. As our facilities are now running with increased efficiency, we expect it to achieve a higher production volume of approximately 19,500 metric tons to 20,500 metric tons in the 4th quarter, with a potential cost reduction by approximately 3% as compared to the 3rd quarter. During the quarter, polysilicon ASPs increased rapidly due to the quick recovery in solar PV demand from both domestic and foreign markets. Our ASP was $9.13 per kg, a significant improvement from approximately $7.04 per kg in the 2nd quarter. With robust market demand for mono grade polysilicon, we expect our ASP to improve meaningfully in the Q4 as compared to the Q3. In recent weeks, because of strong solid module and installation demand, we began to see solid glass capacity shortage becoming a bottlenecker for the solid industry and limiting module production. We expect the shortage of solid glass to ease over the coming months as additional solid glass capacity comes online. The temporary constraint on the industry's utilization rate will be removed, which eventually will increase demand for polysilicon. Solar is now becoming one of the most competitive sources of energy, even compared to traditional power generation methods. Globally, we are seeing strong momentum around the world in adopting and implementing renewable energy policies that would strongly benefit the solar end market. Last month, Mr. Shi Jinping, the President of China, announced China's initiative to scale up the national contributions to peak carbon dioxide emissions by 2,030 and achieve carbon neutrality by 2,060, we believe favorable policies benefiting solar will be implemented during the upcoming 4th 5 year plan 14th 5 year plan, driving a substantial increase in solar installations in China. In addition, a growing number of countries and regions, including the most important economies in the world, have announced goals and plans to reduce carbon emissions and widely adopt renewable energies. In particular, we are starting to see the trend of utility scale solid generation combined with power storage, providing base load energy and replacing and displacing core power plants. We believe this is the beginning of a long term solid displacing traditional fossil fuel based generation, driven by both economics and renewable energy mandates. We are strongly committed to contributing our efforts as a new as a raw material provider for mainstream solar PV modules and are fully confident we will benefit from this fast growing market. Now I will discuss outlook and the guidance for our company. The company expects to produce approximately 19,500 metric tons to 20,500 metric tons of polysilicon and selling approximately 20,500 metric tons to 21,500 metric tons of polysilicon to external clients during the Q4 of 2020. For the full year of 2020, the company expects to produce approximately 75,800 metric tons to 76,800 metric tons of polysilicon inclusive of the impact of the company's annual facility maintenance. Now, I will turn the call over to our CFO, Mr. Yang, who will discuss the company's financial performance for the Q3 of 2020. Thank you, Luang Jin, and hello, everyone. Thank you for joining our call today. Now I will discuss our company's financial performance for the Q3 of 2020. Revenues were $125,500,000 compared to RMB133.5 million in the Q2 of 2020 and RMB83.9 million in the Q3 of 2019. The sequential decrease in revenue was primarily due to lower polysilicon sales volume despite higher average selling prices. Gross profit was $45,300,000 compared to $22,700,000 in the Q2 of 2020 18,100,000 in the Q3 of 2019. Gross margin was 36% compared to 17% in the Q2 of 2020 21.5 percent in the Q3 of 2019. The increase in gross margin was primarily due to improvements in production costs and higher ASP. Selling, general and administrative expenses were $9,200,000 compared to $10,100,000 in the Q2 of 2020 and 8 $200,000 in the Q3 of 2019. SG and A expenses during the quarter included $4,000,000 in non cash share based compensation costs related to the company's share incentive plans. Research and development expenses were $1,700,000 compared to $2,000,000 in the Q2 of 2020 $1,200,000 in the Q3 of 2019. R and D expenses can vary from period to period and reflect the R and D activities that took place during the quarter. As a result of the foregoing, income from operations was $33,300,000 compared to $10,800,000 in the Q2 of 2020 and $8,800,000 in the Q3 of 2019. Operating margin was 26.6% compared to 8.1% in the Q2 of 2020 and 10.5% in the Q3 of 2019. Interest expense was $5,400,000 compared to $6,700,000 in the Q2 of 2020 $2,600,000 in the Q3 of 2019. EBITDA for the quarter was $51,600,000 compared to $26,800,000 in the Q2 2020 $19,700,000 in the Q3 of 2019. EBITDA margin was 41.1% compared to 20 percent in the Q2 of 2020 and 23.5% in the Q3 of 2019. Net income attributable to attributable to Daqo New Energy shareholders was $20,800,000 in the Q3 of 2020 compared to $2,400,000 in the Q2 of 2020 and $5,000,000 in the Q3 of 2019. Earnings per basic ADS was $0.29 in the Q3 of 2020 compared to $0.03 in the Q2 of 2020 and $0.07 in the Q3 of 2019. Now for the company's financial condition. As of September 30, 2020, the company had $109,800,000 in cash and cash equivalents and restricted cash compared to $115,800,000 as of June 30, 2020. As of September 30, 2020, notes receivable balance was $1,900,000 compared to $8,200,000 as of June 30, 2020. And as of September 30, 2020, total borrowings were $271,000,000 of which $140,000,000 were long term borrowings compared to total borrowings of $264,800,000 including $116,900,000 of long term borrowings as of June 30, 2020. For the 9th month ended September 30, 2020, net cash provided by operating activities was $71,100,000 compared to $101,600,000 in the same period of 2019. And for the 9 months ended September 30, 2020, net cash used in investing activities was $80,300,000 compared to RMB202,300,000 in the same period of 2019. Net cash used in investing activities in 2020 2019 was primarily related to capital expenditures on our Phase 3b and Phase 4a polysilicon projects. And for the 9 months ended September 30, 2020, net cash provided by financing activities was $1,100,000 compared to $76,600,000 in the same period of 2019. And that concludes our prepared remarks. We will now open the call to questions from the audience. Operator, please begin. We will now begin the question and answer session. The first question comes from Gary Zhou of Credit Suisse. Please go ahead. Hi, management. Congratulations on the strong results. So this is Gary from CL. So basically, I have three questions. So firstly, your cost reduction guidance for the Q4 down around 3% Q on Q. May I ask, is it production cost or cash cost? And is it based on RMB terms or U. S. Dollar terms? And secondly, I noticed that in the Q3 this year, so basically there was a base of my calculation around 4,700 inventory tie up, if I simply calculated difference between your production cost and the sales volume. And if we look at the Q4 guidance, your sales volume is around only 1,000 ton higher than your production volume. So may I ask if it is company strategy, you think it is reasonable to pile up some inventory given the potentially very strong polysilicon demand in next year? And then lastly, a quick question on the do you expect to sign more long term polysilicon contracts in the future? Because in recently, we saw some news from your peers, so basically people starting to secure their quality service supply for next year? Hello, Gary. Thank you for your question. So this is Ming, I'm the CFO. So regarding your question about the 3% cost reduction quarter over quarter, so that would be our U. S. Dollar cost reduction. And I think if you look at for this particular quarter for Q4 relative to Q3, so there are actually 2 headwinds. So one is the U. S. Dollar exchange rate. So that moved significantly during the quarter. And also there's some increase in silicon nanodegrad silicon costs. But even with these two increases, I think because of our increased manufacturing efficiency and especially reduction in our energy usage. So we still expect about 3% reduction in cost on U. S. Dollar terms. Okay. And then for the Q3, in terms of inventory, I think your numbers are fairly close to our actual numbers. Now every quarter, we use about 500 to 600 metric tons of our own polysilicon for manufacturing of silicon seed rods, which then we reuse in our production of polysilicon. So that's how we also keep our costs low. So I think that needs to be factored in. So I think if we include that impact, I think for Q4, overall, we expect to draw down approximately 15 100 to maybe north of 2,000 tons of inventory. I think that's what we're seeing. Now I think the overall demand for monograde poly is strong from our customers. I think there is some impact from the glass shortage, which is impacting the overall industry utilization and then the module volume shipments. So I think if there is no glass shortage then I think there's going to be even better demand for polysilicon. But I think the overall transaction volume is very healthy for the industry currently. And I think for a long term contract, Lan Wang will take this question. Gary, I think for your second question about inventory, I think basically we think right now I think even downstream we've capacity expansion so quickly and we see the sign continue to demand in Q4. We've given guidance a little conservative because we believe we can by the end of Q3, our inventory actually yes, close your figure, maybe about more than 5,565 tons, natural tons. So basically what I want to say is we will sell I think more than our production And it's possible move some capacity to next year and for high ASP and also for stock market valuation. 2nd is for long term contracts. So far, we have long term contracts with 3 clients and one is Longqi, one is Sanji, and one is Jinko. And all 3, we collect the deposits from 3.5% to 6%. So I think we will continue to sign 1 or 2 long term contracts and cover 3 years, I think, supply. We know that a lot of clients right now want to sign long term contract with us, especially because from now on to end of next year, no more additional adding capacity is on, but the demand is continuing to increase. So basically we have 2 conditions. One is, if you are signing long term contract at least 3 years and the quantity may be starting lower in next year, then higher, maybe 2023 or 2022. Secondly, we have to collect at least right now, I think 4% deposits from long term contracts. Otherwise, we will not sign those contracts because we want to lock the quantity. So we have to collect the deposits. So yes, I'm answering your question, Gary? Yes. Thank you very much, management. So maybe if I may, just a very quickly follow-up on the first question. So if I articulate the extreme delay, I think in Q4, the R and D may appreciate versus U. S. Dollar by roughly around 3% to 4%. So is it fair to say that in R and D terms, we are expecting around almost 7% Q on Q cost reduction in Q4. And so and what is our kind of expectation for our further cost reduction into next year? Year? Thank you. I think, Gary, if you look at our Q3, basically right now, because renminbi continued to appreciation, so our I think cash cost is $4.88 compared to Q2, I think it's $4.87 $0.01 adding. So, for dollar, yes, it's go up. But for the renminbi, actually our cash cost is RMB33.75 per kg compared to Q2's 34.53 per kg. The production cost, cost of goods sold, I think, rmb40.3 per kg compared Q2 is 4,104 per kg. So basically, yes, what I want to say is 3% continue to go down. Maybe combined with our renminbi, I think costs continue to go down, then with maybe possible foreign exchange, I think renminbi appreciation. Ming, do you have any? Yes, Gary, you're right. So I think for Q4, if you look at our expectation is that in terms of RMB terms, we expect roughly a 7% reduction in costs. That's correct. The next question comes from Allen Han of JPMorgan. Please go ahead. Hi. This is Allen from JPMorgan. I have like 2 minor questions on the ASP side of things. Because like on the Q3 of this year, your average like ASP selling price was around like US9.13 dollars per kilogram, but that's slightly lower than what we have been seeing on the spot market. So I'd like to understand why. And small follow-up questions on this one is, what is the price outlook for price to be realized for Daikou in the Q4? And I guess like also along the prices, like what is the pricing outlook for 2021? And that's my questions. Okay. I think basically, if maybe Ming can continue adding on. If you look at our Q3 ASP, actually it's $9.13 per kg, of which I think because the mono grade, I think we're selling is 13,278 tons. So the count 97 percent is $9.23 Then rest of them is I think 3% is the around 3.60 metric tons I think is the selling price is around like 5 point $0.60 So basically, if you compare the real is because this is ASP. If you look at the renminbi cost, the selling price is 71.42. The reason why because in Q3, if you look at July August, your selling price is not immediately come back match the industry guidance. The reason is because most July August, you already signed the contracts before. You deliver on those months. So actually Q3, you enjoy the high price maybe only in September and the partial is August. So that's why in Q4, OSP will dramatically increase higher than Q3. Meantime, the cost was down continued down 3%. So the gross margin in Q4, you can imagine, I think at least around a 10% improve. Yes. So, Alan, thanks for your question. So, because of our order contracting, so the time from when we signed the orders and 2, when the products are then shipped and then delivered to the customer recognized as revenue. So there could be 2 to 3 weeks lag. So for example, most of our revenue that was recognized for the month of July, actually these contracts or pricing were determined around the end of June when pricing was still fairly low. Yes. So really the price normalization really happened for the month of August and for the month of September. But when you average out the prices, then it is a little bit lower than what the industry market spot market pricing is. So there is that lag. But I think by Q4 this will have normalized. Got you. And the last follow-up is on the pricing outlook in 2021. Okay. Basically, right now, just like you mentioned, we only in mono grade silicon right now. We just I think the highest price is a small partial of what do you call it, reimport the price, the highest, okay. Basically, right now, I think it's around the industry guidance right now is around $85,000,000 to $86,000,000 And we believe because of the shortage of glass, the module right now production is limited. So we believe, okay, by the end of this month, this quarter, maybe the selling price model grade is around like 84 to 86 the range, even 82 to 86. RMB per day. Always RMB. So for the next year, we believe, okay, in Q1, maybe even China is maybe Chinese New Year, but we think the out of China, the market has come back. So we still believe, I think, Q1, the selling price around 82 to 85 and even higher. But in the Q2, because the I think glass will increase, I think, maybe 40% the capacity. So, it's no way to limit the market for the demand for the module. And we believe the price because silicon supply is limited, is there stable. I think demand is continuing to increase as the wafer capacity continue to increase. And we believe in the second quarter, third quarter, the silicon price were about $90 even above $100 So basically for 2021, we believe the ASP were between 90 to 100 per kg, renminbi. Got it. I guess like on the technology front, I guess just get one more last follow-up question on the technology front. Like some of your competitors threat of FBR technology? I think FBR, I think only one of the company in China right now I think still stick on that, is they use the NVMC technology. Basically, I think FVI, due to the quality, still contains the high percentage of hydrogen and carbon. So determining the product still is lower quality is classified as the multi silicon. So the selling price also is lower. And we don't believe, I think maybe it's a supplementary to high quality polysilicon made with the modified Siemens process. I don't think they were maybe only maybe supplementary 5% in the future. But right now, because the cash cost is still higher, around the $47.50 and but the selling price lower. Secondly is, we believe, I think, one of the company right now is used, I think, take advantage of the local subsidized, continue to expansion their capacity. But there's no way from cost effective FBI will replace, I think, Siemens Master, the polysilicon. Got it. And I guess I'll pass from here. And thank you very much for your answer. Thank you, Alan. The next question comes from Philip Shen of Roth Capital Partners. Please go ahead. Hey, guys. Thank you for taking my questions. The first one is on the outlook for 2021 volume. I know you're not providing official guidance, but the run rate you're looking at or we're looking at for Q4 is about 20,000 metric tons per quarter. Factoring out maybe 2 weeks of maintenance, do you think you can get to 80,000 as a baseline for next year? Or do you think there's possibly some upside to that? Basically, it's not the timing for us to given guidance for, I think, 2021. We were given guidance in next, I think, earnings call. And but you, I think, projection is correct because basically we were not adding more capacity to underline, but we continue to improve and I think digitized the manufacturing system will reach that figure you mentioned. So, yes. Okay. Thank you, Logan. As it relates to capacity expansion, I can imagine the China listing is important for that. And just wanted to check-in on how you're thinking about capacity expansion with pricing, as you mentioned, possibly in that RMB 90 to RMB 100 per kilogram. What do you think the timing could be on a decision and for capacity expansion and remind us what that next amount of capacity could be? Thank you, Philip. I think it's a good question. I think, first of all, I think we actually make efforts, try to speed up, accelerate our processing of listing in stock market. I think so far, I think we can we cannot give given the timing table, but we believe we can listing in Star Market before the end of the Q1 2020. That I think IPO proceeds will give us the opportunity to continue to expansion 4B in Hezhen. So the 4B I think is 40,000 tons, measured tons. We believe because we're already starting our design and the main key equipment, I think, contracts and the bidding system. So we are planning, I think, maybe starting trial production before the end of next year. And definitely, we were, I think, starting, I think, full capacity running the 4B in Q1 2022. So I think in 2022, that we're adding more, I think, the capacity given us the output to meet the market. Considering right now, I think, downstream, especially the waiver capacity expansion, as you see that, By the end of this year, China maybe around 160 gigawatts I think weaver capacity. By the end of next year is around more than 300 I think gigawatts capacity. That's mean and need I think silicon around 100 metric tons. But so far, didn't have too much right now player, our competitor to declare, I think, capacity expansion on the silicon side. The only Tongwei, so 2 plants, I think 80,000 tons, then we are I think in the stock market for selling we also declare we will use the proceeds to invest in our 4B expansion, that's 40,000 tons. Then plus Asian silicon also declared is around maybe 30,000 tons. So basically, next year is no more silicon capacity is adding. So for the year 2022, only around 150,000 tons capacity adding up. But the demand side is very hot. So that's why we're thinking if the market continue to drive compound maybe 30 to 40 growth. By the end of the product module installation, we believe even year 2022, silicon price can continue still is it can keep a little higher price level. Great. Thank you for that detailed answer. Wanted to just ask about a comment you made on metallurgical grade silicon. I think Ming may have made that comment that it's a little bit higher now. Can you talk about why it's higher? How much higher it is versus maybe a quarter ago? And then what is the trajectory ahead? And do you expect some relief? Or do you think that there should be there might be tightness in that raw material as well for some time ahead? Thanks. Yes. Okay. Phil, so a couple of factors are impacting metallurgical grade silicon pricing. So one is supply and demand. I think because now we're pretty much in overall economic recovery, particularly for China, and so demand, for example, for silicones is improving. And for other products that use metallurgical grade, silicon is also improving as well. So overall demand is rising. And then in terms of supply because winter is usually the season where the production is a little bit seasonal. So we're seeing some increasing in the price. Right now, it's roughly 5% to 7% higher than the previous quarter Q over Q increase, but I we can absorb that into our cost and we're still forecasting a cost reduction for next quarter because of improved manufacturing efficiencies. Right. Thanks, Bing. So do you expect this to be relieved starting in Q2, the pressure there from metallurgical grade silicon? Or do you think it's like Q1 is still winter for most of it. So if it's seasonal, I'm guessing it's due to lower water levels as a result of needing hydro for the production? Exactly. Yes. Go ahead. Sorry. Yes. That's absolutely right. Yes. So we think probably Q1 will maintain the current level of costs in Q4 and then price would come down in Q2. Okay. Okay, good. Okay. I think that's it for me. I'll pass it on. Thanks. Great. Thank you, Phil. The next question comes from Tony Fay of DIOC Research. Please go ahead. Hi, management. This is Tony Fei from BOCI. I have three questions. First one regarding your long term contract. So we know that your long term contract typically only lock in the volume, not the price. And in the last September, we do notice that you can't agree on the pricing with 1 of your wafer customer. So are there any financial consequence of this kind of delayed procurement? And do you think it will happen again in the future? This is the first question. And second is on the product mix. So this year, we noticed that some of the cell manufacturers, they announced new plans to ramp up the cell manufacturers, they announced new plans to ramp up the HJT capacity in 2021. So when that comes true, there will be new demand for the n type polysilicon. So I'm just wondering if you can give an update on your certification process for the n type polysilicon with the wafer manufacturers. And that is a housekeeping question. As you have paid down some of your debt in the Q3, so will you continue to do that given your strong operating cash flow? Thank you. Okay. First of all, for your first question about long term contracts, most of the long term contracts right now today in China is not the price is not locked, only the quantity. Even our competitors, even at correctly, I think deposits lower deposits. But to us, I think you can see we already signed 3 long term contracts. We collected deposits from 3% to 3.5% to 6%. The reason why we continue to stick on that because we think with certain little higher percentage of deposits can guarantee the quantity the contract can be stick on that, can deliver for. So that's, I think, our purpose. Even though I think one of our long term contracts you see in the history in this year and some months maybe delay and sign contracts. They still, I think, come back. For example, one of our clients didn't sign in September. So that's why our inventory jumped up. And but they still, I think, come back, book additional 1 month in Q4. So basically I think it's a long term relationship. And yes, from contract side, we have the right to if we then book take the contract, the quantity of silicon, we can forfeit their deposits. But all these clients is long term. We'll not do that. So basically, I think for us, I think if we collect enough deposits, we think we can still stick on the contracts. And the contracts I think basically the price is determined by I think the industry guidance and then the sign each month even right now 2 weeks we signed maybe signed contracts with clients. 2nd question about the HGT. HJT I think is the cell production for N type cell. Basically right now the import HJT equipment is almost 4x cost than the PERC technology. So it's not cost effective. So basically right now, China today, everyone right now tried to domestic manufacturing N type or you call HGT cell production. For example, I think one of our clients, I'm not mentioning this in U. S, they call HBT. So the HBT, they also still produce N type cell, but I think the efficiency maybe only increase 0.5% or 0.7% is not to compare with HVT increase almost 1.5% to 2%. So HVT right now, I think they cost like 1 point 5 times the cost of I think PERC. So that's why right now it's workable. But they're not specifically buying n type silicon from us. They just because the way supply is at all right now P type, they just select from all raw material to some N type to manufacturing right now, 800, I think, megawatts, I think the HBT n type cell. But for the future, yes, definitely. I think if HGT, the equipment can domestic manufacture, the cost continue to go down, the cost effective is short, then N type silicon will be demand will be more. Today, actually our silicon production, I think, of which almost 30% to 40% is n type. But we cannot sell n type in a separator. Only one client is SunPower. I think definitely one of the Chinese company right now. I think every month 2 ships 2 cotton, I think N type. So today N type, the SP compared to the P type only to renminbi per kg difference. So in the future, hopefully, I think as the HGT equipments continue to, I think, installed and adding, so n type silicon will continue to demand increase, then the price, the differentiation between n type and p type silicon were different, were kind of become large. For the third question about the debt, I think so far I think if you look our EBITDA, I think for the Q3, even for the Q4, we dramatically increased. So basically from now on, our target is to continue to improve our leverage reduce our leverage ratio, I think, to pay off some 4B, I think, expansion payments, then also to reduce the banking loans. And basically, I think as I mentioned, the stock market value, I think today in China, valuation is higher than the U. S. Market basically. Basically and we are making efforts to listing in stock market. We believe I think we can raise enough money to expansion for B, even more money to expansion for another new 40,000 tons, I think, facilities in somewhere we're looking outside of Xinjiang. So, Tony, did I ask you questions? Okay. Thank you for the color. Appreciate it. Okay. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Kevin He for any closing remarks. Thank you, everyone, again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you, and bye bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.