Earnings Call: Q2 2019

Aug 14, 2019

Good day, and welcome to the Daqo New Energy second quarter 2019 results conference call. I would now like to turn the conference over to Kevin He of Investor Relations. 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 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 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 the 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 statement. 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 US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into US dollars solely for the convenience of the audience. Without further ado, I now turn the call over to our CEO, Mr. Zhang, please. Hello, everyone, 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 ton. 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 cost CNY 8.12 per kg and a cash cost of CNY 6.55 a kg. Even with these impacts, the company recorded adjusted net income of $2.3 million for the second quarter, with $66 million of operating cash flow from continuing operations for the first half of this year. With the project ramped 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. For the month of July, both our production volume level and the cost reduction is tracking well and reflective of this trend. During the second quarter, we also significantly improved the quality of our products. 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 expected 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 so to the end of the third quarter of 2019. We expect to complete the Phase 4A project by the end of 2019 and ramp up to the full capacity of 70,000 metric tons by the end of the 1st 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. Combined with these approved subsidized projects, residential distributed generation projects, top runner projects, and poverty alleviation PV projects, China is expected to install approximately 40 gigawatts-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 challenging 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 dynamic to improve when Chinese project developers begin to place orders by the end of the 3rd quarter. Incremental demand for China is expected to greatly exceed the supply in the current market. We believe polysilicon ASP will begin to improve in the 3rd quarter of 2019 to a level that the majority of marginal high-cost players are able to break even on a cash cost basis, which we estimate to be approximately $10.50-$11 per kg. Moreover, the pricing spread between mono-grade and 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 three-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 competitive cost 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 9,200-9,500 metric tons of polysilicon with a total production cost of $7.50 per kg during the 3rd quarter of 2019, and sell approximately 9,000-9,300 metric ton of polysilicon to external customers during the 3rd quarter of 2019. For the full year of 2019, the company expects to produce approximately 37,000-40,000 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. 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 expense were $7.8 million compared to $7.9 million in the first quarter of 2019. This quarter's SG&A expense includes CNY 3.9 million of non-cash share-based compensation costs related to the company's share incentive plan. R&D expense were CNY 1.5 million compared to CNY 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 CNY 0.4 million compared to income from operations of CNY 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 its 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 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 equivalents and restricted cash compared to $113.7 million as of March 31, 2019. At the end of Q2, we had 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 30th, 2019, total bank borrowings were CNY 243.2 million, of which CNY 151.5 million were long-term borrowings compared to total borrowing of CNY 193 million, including CNY 149.7 million of long-term borrowings as of March 31st, 2019. The increase in bank borrowing was primarily related to capital expenditures for our Phase 4A expansion project. For the six months ended June 30th, 2019, net cash provided by operating activities was CNY 67.8 million compared to CNY 67.1 million in the same period of 2018. For the six months ended June 30th, 2019, net cash used in investing activities was CNY 144.9 million compared to CNY 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 six months ended June 30, 2019, net cash provided by financing activities was CNY 61.3 million compared to net cash used in financing activities of CNY 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. Thank you. We will now begin the question and answer session. Our first question today comes from Philip Shen with ROTH Capital Partners. Please go ahead. Hi, everyone. Thanks for the questions. The first one is on China demand. I know you 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 then also Q2? Additionally, when do you expect the government to provide the next subsidy package for the 2020 timeframe? Thanks. Okay. Thank you. I think Philip Shen is from ROTH Capital Partners. For the first question, you know, the China total of this year, total subsidized, total amount is fixed is CNY 3 billion. As you see that, the 22 gigawatts project is already down. Only things is how to implementation and installation. That we think will happen, occur after September. Maybe majority were installed in Q4. That's why I think China is one of the major driver for the market right now. Of course, including the out of China international market demand. We will see that the silicon demand is not only from the end market, but also from the middle stream, the capacity continued expansion. You see that LONGi is announced another 15 gigawatts, and will finish by the end of 2020. TCL Zhonghuan, the second one, will double the capacity, with the capacity from 25 gigawatts to 50 gigawatts. JinkoSolar also announced that in Sichuan, Leshan is another 25 gigawatts. They Asia company, one is Shangji, also announced within next 2 years, 25 gigawatts. Jingsheng also is a furnace manufacturing company in Inner Mongolia, also announced, you know, maybe 25 gigawatts. We can see a lot of capacity will come out to prepare for the strong demand for next year, even year 2020, 2021. We believe, I think as the downstream capacity continue expansion for the working capital import setting, because we are the upstream. We see the demand for mono silicon will be higher in 4th quarter, even in Q1 to Q2. That's why we think, for this quarter we see mono silicon price is stable almost. We believe, okay, Q4 the price will come back, will go up a little. Q1, Q2 maybe we expect will stay there higher. Basically, I'm not worried about that mono silicon price. The reason is because we compete it with the import silicon. If you look at import silicon, their cost structure is around like CNY 10-CNY 12 cash basis. As the market, you see that mono silicon the percentage of mono silicon mono module continue demand percentage is going to increase. The mono silicon demand is hot. Meantime, we see that, you know, the multi price is weak. The reason the demand is weak, then also supply is low. That's why Daqo is focused on mono silicon. In the third quarter, we believe we were about 85%. In the fourth quarter, we were about 90%. Next year, even higher. That's our plan. Ming, do you have any comment? Thank you, Ming Yang. Yes. Perhaps, so do you think, you know, what does demand look like in Q1? Could we see a reduction in demand? When do you expect China to issue the next policy? 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. I think China, I think in the history, let's say it that way. This year actually is a 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. For next year, definitely I think have experience, so will speed up. As we can see that, even though the CNY 30 million, sorry, CNY 3 billion subsidized right now still have a lot of money available. We think, you know, the second tranche will be soon, I think, announced. Even next year, the reason is because we think it's not only renewable, this industry is not only we push because the governments right now want the blue sky. See, they are cutting the coal power plant capacity. They asking, you see, the traditional CO2, whatever, the power generator company, especially those SOE, they have to own or have to have the quarter of the clean energy. renewable is a lot of push to, you know, to adding the green energy. For example, like, we located in Shihezi. There's actually not a state grid, the local grid, but they also right now the government is planning to add in the next 3 years 5 GW solar projects. Those is not have any government subsidize. Just, you know, the free subsidize and the generated method, you know, just connected with the local grid. Right now, I have 7 company, including, you know, some big one, Chinese, you know, big one right now is bidding through the bidding system. What I say that is we see strong demand in China, maybe in Q1 or Q2 will happen. Okay, great. 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? What percentage of N-type, you know Well, how many gigawatts of N-type shipments do you think the industry could have in 2020? Okay. To answer your question is because N-type in history, we only ship into 1 of the company, actually it's overseas company here in China, you know, OEM. I'm not gonna go ahead announce the name, but you maybe know that. They use our N-type silicon, and the reason because they worry about, you see, the overseas supply and the cost structure. Right now, 1 of the biggest Chinese, I think, producer right now test our N-type, and so far it's going okay, but still is not commercially can, you know, order right now because they just based on right now, testing to the cell and the module, everything is okay. So far, we still didn't selling, you see, large quantity of N-type to our clients. The only one client, only like, you know, in the history every month maybe is like 100 tons. We see the future- Okay. because N-type compare the P-type, really the conversion efficiency rate will increase 2%-3% on the cell segments. Okay. That may be the future on the mono, you know, mono, I think, panel, PV panel segment, the next technology. Great. Right now we are around 40%, you know, is N-type, but we're selling just as a monocrystalline silicon. Got it. Okay, thanks. In terms of the LONGi announcement that you recently had, it's a maybe a bit more than half of your capacity or about half of capacity for 3 years. Can you talk about the prepayments that came with that? I noticed your advances from customers on your balance sheet increased to about CNY 28 million. Obviously this contract happened after that. I can imagine that balance is higher now. Talk us through the prepayments. Then also looking beyond LONGi, do you expect any other kind of new agreements that you could put together or announce in the near term as well? Okay. The LONGi contract, because you know that the first contract, we still have 1 year supply for 2, year 2020, right? This contract actually is almost 112,000 tons is covered from next year to 2022. Basically, total deposit is, you see, is around, I mean, you see, is not announced by, you know, between us and LONGi, but you will see from the financial statements, you know, later. The price is based on the market price, and every month determined, I think, before as history. The LONGi contract will account for our capacity from if we not continue to expand in Phase 4B, it's around more than 40%. Beside that, we already have the long-term contract with JinkoSolar Solar. Basically, in the future, maybe we will sign an or extend another contract. We have potential, still have potential another 2 company. One is Asian company, and it's most likely will be signed soon. We are working on that. All the long-term contracts we have from 2%-4% deposit. Great. That's a good color. One more for me. You mentioned Phase 4B. What are your thoughts, the latest thoughts on the Phase 4B potential expansion? When will you expect to know about or make a decision? If you do decide, what's the timing of that potential decision? I think, first of all, we have to focus on 4A and to, you know, to speed up or even put our 4A in high production as soon as possible. Also we need to run the 4A ramping up to full capacity. We also need to consider our financial statements and all cash flow and the whole industry, you know, the situation. Right now to make a decision about 4B, too early. We are focused on 4A and also on the quality. Great. Okay. Thank you. I'll pass it on. Again, if you have a question, please press star then one. As there are no further questions in the queue, 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.