Earnings Call: Q2 2019

Aug 14, 2019

Good day, and welcome to the Dacu New Energy Second Quarter 2019 Results Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Kevin of Investor Relations. Please go ahead. Hello, everyone. I'm Kevin He, Investor Relations of Daqiu New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the Q2 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. Min Yao, our Chief Financial Officer. The call today will feature an update from Zhang on market and operations and then Mr. Yang will discuss the company's financial performance for the Q2 of 2019. After that, we will open the floor for Q and 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 contained in 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 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'll now turn the call over to our CEO, Mr. Zhang Ruiz. 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 Q2, 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 Q3. 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 the 2nd quarter to the total production cost $8.12 per kg and a cash cost of $6.65 per kg. Even with these impacts, the company recorded adjusted net income of US2.3 million dollars for the 2nd quarter with US66 million dollars of operating cash flow from continuing operations for the first half of this year. With the project ramp up at our newly debottlenecked facilities, we anticipate our production volume in the Q3 to be approximately 9,200 metric tons 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 reflective of these trends. During the Q2, 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 to we expected the percentage of mono grade polysilicon of our production to further increase to approximately 85% in the Q3. 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 to the end of Q3 of 2019. Based on our assessment, 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 Q1 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 laser 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 positive 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 twenty nineteen. Realistically, it will take some time to complete the preparation work for these regulatory approved subsidized solar projects, which include detailed designs and the runs of procurement billing and procurement contract negotiations. All of these stage have to be completed before the actual modules can be shipped. Based on our discussions with the upstream customers, some projects procurement billings have already begun. All in all, we anticipate China's solar demand to pick up significantly starting from early September. The Q2 of 2019 was a challenging time for the polysilicon industry as the prices dropped to their lower 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 Q3. 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 Q3 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 multi grade polysilicon products will likely remain significant because output of mono grade polysilicon still lacks behind the market demand and new capacities of monowaver 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 long time strategic partner with strong balance sheet and growth momentum in Warner Waiver sector. This is the 2nd long term supply agreement between us. It's also a testament to our supply stability and excellent quality of polysilicon product for modern applications. We are confident that the combination of our premium product quality and the 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 Q1 of 2020, which will double our capacity and drive our production costs even lower. The company expects to produce approximately 9,200 metric tons to 9,500 metric tons of polysilicon with a total production cost of $7.50 per kg during the Q3 of 2019 and the sale approximately 9,000 to 9,300 metric tons of polysilicon to external customers during the Q3 of 2019. For the full year of 2019, the company expects to produce approximately 37,000 to 40,000 metric tons of polysilicon in terms 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, Lan Jin, and good day, everyone. Thank you for joining our earnings conference call today. Revenues in the Q2 of 2019 were $66,000,000 compared to $81,200,000 in the Q1 of 2019. The decrease in revenue was primarily due to lower polysilicon sales volume and lower ASP. Gross profit was $8,600,000 compared to $18,300,000 in the Q1 of 2019. Gross margin was 13% compared to 22.6% in the Q1 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 $7,800,000 compared to $7,900,000 in the Q1 of 2019. This quarter's SG and A expense includes $3,900,000 of noncash share based compensation costs related to the company's share incentive plan. R and D expense were $1,500,000 compared to $1,300,000 in the Q1 of 2019. R and D expenses reflect R and D activity that took place during the quarter and could vary from period to period. For this quarter, we primarily conducted R and 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 $400,000 compared to income from operations of $9,200,000 in the Q1 of 2019. The company recorded an operating loss for the 2nd quarter compared to operating margin of 11.3 percent in the Q1 of 2019. Interest expense was $1,900,000 compared to $2,000,000 in the Q1 of 2019. EBITDA from continuing operations was $10,200,000 compared to CAD 20 1,000,000 in the Q1 of 2019. EBITDA margin was 15.5% compared to 24.6% in the first quarter of 2019. During the Q3 of 2018, the company decided to continue its solar wafer manufacturing operation. Net income from discontinued operation was $500,000 in the Q2 of 2019 compared to $800,000 in the Q1 of 2019. Net income from discontinued operations during the 1st and second quarter of 2019 resulted from disposal of fixed assets, which were impaired in 2018 previous years. Net loss attributable to Daqo New Energy shareholders was $2,200,000 in the Q2 of 2019 compared to net income attributable to Daqo New Energy Shareholders of $6,600,000 in the Q1 of 2019. Loss per basic ADS was $0.16 in the Q2 compared to earnings per basic ADS of $0.50 in the Q1 of 2019. Non GAAP adjusted net income attributable to Daqo Newan to shareholders was $2,300,000 in the Q2 of 2019 compared to $11,100,000 in the Q1 of 2019. Adjusted earnings per basic ADS were $0.17 compared to adjusted earnings per basic ADS of $0.83 in the Q1 of 2019. As of June 30, 2019, the company had $79,600,000 in cash, cash equivalents and restricted cash compared to $113,700,000 as of March 31, 2019. At the end of Q2, we had low levels of accounts receivable balance of $100,000 where our customers generally paid us cash upon sales contract signing and prior to order delivery, further demonstrating the superior quality and showing customer preference for a high quality polysilicon product. As of June 30, 2019, the notes receivable balance was $9,400,000 compared to $700,000 as of March 31, 2019. As of June 30, 2019, total bank borrowings were $243,200,000 of which $151,500,000 were long term borrowings compared to total borrowing of $193,000,000 including $149,700,000 of long term borrowings as of March 31, 2019. The increase in bank borrowing 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 CNY67,800,000 compared to CNY67.1 million in the same period of 2018. For the 6 months ended June 30, 2019, net cash used in investing activities was $144,900,000 compared to $52,500,000 in the same period of 2018. The net cash used in investing activities in 2019 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 CNY61.3 million compared to net cash used in financing activities of CNY93.2 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 and A session. Operator, please begin. Thank you. We will now begin the question and answer session. Our first question today comes from Phil 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? And then additionally, when do you expect the government to provide the next subsidy package for the 2020 timeframe? Thanks. Okay. Thank you. I think, first from Roth Capital. So the first question, the China total of this year, total subsidized, total amount in the fixed is RMB 3,000,000,000. As you see that the 22 gigawatt project is already done. So only thing is how to implementation and 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 end market, but also from the middle stream, the capacity continue expansion. As you see that, LONGi has announced another 50 gigawatts and will finish by the end of 2020. Then Zhongguan, the second one, will double the capacity with the capacity from 25 gigawatts to 50 gigawatts. Jinko also announced that in Shichuan, it's another 25 gigawatts. So then also 2 Asia companies, one is Sanji, is also announced within next 2 years, 25 gigawatts. Then Jingintong also is a 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, I think as the downstream capacity continue expansion for the working capital in the process because we are the upstream. So we see the demand for monosilicon will be higher in Q4 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 to 0. And Q1, Q2, maybe we stay there higher. So basically, I'm not worried about that monosilicon price. The reason is because we competed with the import silicon. If you look at import silicon, their cost structure is around like $10 to $12 cash basis. So as the market, you see that monosilicon continue to as a percentage of monosilicon mono module continued demand percentage is going to increase. So the mono silicon demand is hot. For the meantime, we see that the multi silicon price is weak. The reason the demand is weak, then also supply is a lot. So that's why that is focused on monosilicon. In the Q3, we believe we were about 85%. In the 4th quarter, we were about 90% and next year even higher. So that's our plan. Thank you, Lomi. 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. I think China is in the history, in the let's say that way, this year actually in the billing system because of the new policy, the implementation process is a little slow. The reason is because for whole this year, the new policy is new. But for next year, definitely, I think we have experienced. So we'll speed up. As you can see that even though the $30,000,000 sorry, dollars 3,000,000,000 subsidized right now still have a lot of money available. And we think the second tranche will be soon, I think, a month. And even next year, the reason is because we think it's not only right now that this industry is not only way post because the governments right now want to blue sky, see they are cutting the coal power plant capacity. So they're 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 image. So right now, there's a lot of push then to adding the green image. For example, like we located in Shih Tzu, they are actually not the state grid, they are local grid, but they also right now the government is planning to add in the next 3 years 5 gigawatt solar projects. Those is not to have any government subsidized. Just the free subsidized and the generated just connected with the local grids. So right now I have 7 companies, including some big one, Chinese big one right now is billing through the billing system. So what I say that is we see strong demand in China, maybe in Q1, Q2 will happen. Okay, great. So moving on to your comment about 40 percent of your shipments could be N type. That's interesting. Who would be the primary N type customer? Would it be Longjing or somebody else? And what percentage of N type well, how many gigawatts of N type shipments do you think the industry could have in 2020? Okay. To answer your question here is because N type in history, we're only shipping to one of the company, actually the overseas company, he is in China, OEM. I'm not going to go ahead and announce the name, but you maybe know that. And they use our anti silicon. And the reason is because they worry about the overseas supply and the cost structure. Then 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 is not commercially order right now because they just based on right now testing to the cell and the module, everything is okay. But so far, we still didn't selling, you see, large quantity of N type to our clients. The only one client, only like in the history every month maybe is 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 sale segment. Okay. So that's maybe the feature on the mono, I think, panel, PV panel segment, the next technology. But right now, we are around 40% is impact, but we're selling this as a mono silicon. Got it. Okay. Thanks. In terms of the Long gs announcement that you recently had, it's maybe a bit more than half of your capacity or about half of your 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 $28,000,000 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 Longxi, do you expect any other kind of new agreements that you could put together or announce in the near term as well? Okay. The long game contract because you know that the first contract, we still have 1 year supply for year 2020, right? So this contract actually is almost 112,000 tons is covered from next year to 2022. So basically, tower deposits is around cannot be announced by between us and Longqi, but you will see from the financial statements later. So the price is based on the market price and every month determined I think as before as history. So the longer contract will account for our capacity from if we not continue to expand in 4 B, it's running more than 40%. And beside that, we already have the long term contract with JinkoSolar. So basically, we're in the future, maybe we will sign or extend another contract. But we have potential, still have potential, another 2 company. 1 is Asia company and it's mostly likely will be signed soon. So we are working on that. So all the long term contracts, we have from 2% to 4% deposits. Great. That's good color. One more for me. You mentioned Phase 4b. What are your thoughts, the latest thoughts on the 4b potential expansion? When do you expect to when will you expect to know about or make a decision? And if you do decide, what's the timing of that potential decision? I think, first of all, we have to focus our 4A and to speed up or even put our 4A even try production as soon as possible. And also we need around the 4A ramping up to full capacity. And we also need to consider our financial statements and all cash flow and the whole industry, the situation. So right now, to make a decision about 4B, too early. But we are focused on 4A and also on the quality. Great. Okay. Thank you. I'll pass it on. 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 for any closing remarks. Thank you everyone again for participating in today's The conference has now concluded. Thank you for attending today's presentation. You may now