Earnings Call: Q1 2019

May 21, 2019

Good day. Welcome to the Daqo New Energy first quarter 2019 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, then 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Kevin He, 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 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, then Mr. Yang will discuss the company's financial performance for the first quarter of 2019. After that, we will open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth, are forward-looking statements that are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those 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 the preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information except as required under applicable law. 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 Mr. Zhang, our CEO. 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 proceeding as planned. 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. As a result, we expect to produce approximately 7,200 to 7,400 metric tons of polysilicon at 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 costs will return to the current level of approximately $7.50 per kg. Our Phase 4A project is also proceeding smoothly and remains on schedule. The foundation work has been completed, the construction of various buildings and structures are proceeding as planned. The initial equipment installation has already begun and is planned to continue through to the third quarter of 2019. Based on our current assessments, we expect to complete Phase 4A by the end of 2019 and ramp up to the full capacity of 70,000 metric tons by the end of the first quarter of 2020. China installed approximately 5.2 GW of new solar PV installations during the first quarter of 2019. While installation numbers for the second quarter of 2019 haven't been released yet. We believe they will likely be even lower. Installations should significantly pick up 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 3 billion CNY of subsidies. Market consensus indicates that China will install approximately 35-40 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 appear to have bottomed out. 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 three major Chinese polysilicon producers have shut down their facilities for maintenance in the months of April and May, resulting in reduced supply. The ramp-up processing of other Chinese producers' new capacity has not been as fast, as smooth as they expected, contributing to production delays and unscheduled shutdowns. 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 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 the multi-grade polysilicon, the company currently maximize the amount of mono-grade polysilicon. It produces a percentage of total production volume to approximately 87% in April and 88% in May. May until, you know, today. In addition, the ramp-up processing 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 CNY 8-CNY 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 CNY 7.5 per kg in the 3rd quarter of 2019. For the full year of 2019, the company expects to produce approximately 37,000 metric tons-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 Min, our CFO, who will go over our financials for the quarter. Min, please go ahead. 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 CNY 81.2 million, compared to CNY 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 CNY 18.3 million, compared to CNY 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 costs, partially offset by lower ASPs. During the quarter, we successfully reduced costs 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 non-cash share-based compensation costs related to the company's share incentive plan. Excluding such non-cash 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 operation 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. 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 31st, 2019, total bank borrowings were CNY 193 million, of which CNY 149.7 million were long-term borrowings, compared to total borrowing of CNY 171.5 million, including CNY 133.3 million of long-term borrowings as of December 31st, 2018. We continue to manage our debt level prudently. In addition, the company currently has 600 million RMB of approved 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 three months ended March 31st, 2019, net cash provided by operating activities was CNY 48.5 million compared to CNY 22 million in the same period of 2018. For the 3 months ended March 31st, 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's 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 1st quarter of 2020, with anticipated cost target of $6.80 per kilogram and cash cost below $6 per kilogram. For the three months ended March 31st, 2019, net cash provided by financing activities was CNY 7.2 million, compared to net cash using finance activities of CNY 2.4 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. To ask a question, may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Philip Shen with ROTH Capital. Mr. Shen, please go ahead. Hi, everyone. Thanks for the questions. The first one is on the outlook for China. I know you gave some details in your remarks there. It seems like consensus thinking is for a Q3 ramp-up of activity and then Q4 strength. A lot of that is actually dependent on when the NEA announces the subsidized projects and when they're, you know, awarded. Do you have confidence that the NEA will be able to turn that around quickly so that we actually get the Q3 strength? Is it 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? Thanks. Philip, I think, you know, that's a good question, I think, about China. I think basically to direct answer your question is we believe, I think, the NEA will announce the detail, I think, policy, by the end of the May, and no later, we believe, you know, in the middle of the June. The reason is because the government, I think, definitely will, you see, now need a time to installation that, you know, to finish the I think to carry out the targets, RMB 3 billion subsidized. To answer your question Did that answer your question? I think so, yeah. Thanks, Longgen. You think they will announce the project details earlier? 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, you know, how do you expect it to trend in Q3 specifically and Q4? Okay. If you look right now, you see the Q1, our polysilicon price, I think, is around $9.65. Definitely also, you know, in terms of, you know, the foreign exchange, I think RMB continue to depreciation. RMB, our selling price is RMB 74.75 per kg. Right? Per kg. We believe in the second quarter right now, our mono-silicon price is continue go up. At our Q4, our mono account for is around 74%, as I remember that. Okay. The figure maybe, I think, Ming can continue to comment that. In the second quarter, right now in May, our mono-silicon grades account for 87%. By the today, May 21st to yesterday, our mono grade is around 80%. Basically, in our, you know, in the second quarter, if you consider the multi-silicon price, yes, I think is go down. Right now is around, I think around, CNY 6-CNY 63 per kg. Our percentage is lower, you know. For this month, I think we're below 15% is multi-silicon. To me, I think, for ASP, definitely in the second quarter, we think we can keep the same or even slightly, you see, equal to the first quarter. Okay. Looking forward, I think definitely we see Q3 and Q4, the price will bounce back. The reason is why, because right now the mono-grade, the demand is so high, we didn't have too much available for sale. If you look our Q4, Q1 customer, LONGi and JinkoSolar account for almost, I think, more than 70% is LONGi and JinkoSolar. We see a lot of clients right now, potential clients asking for more, such as I mentioned, JA Solar, Canadian Solar and Zhonghuan, and even LONGi is asking for more volume because based on the contract, long-term contract. For example, in April, we give LONGi more, 500 tons more, mono-silicon grade. That's, I think with the tendency, mono-grade. The price go up. The reason why, because we see out of China right now today, if you look the market, the demand is so high. Besides that, the, you know, grade current projects potentially also go up. We see this year the total global demand, let's say 125 gigawatts, maybe the mono-silicon grade panel will account for more than 70%. In a word, we believe in the second half of this year, the mono-silicon price definitely will go back to normal around CNY 80-CNY 90. I'm just giving range, okay? Why give so big a range? Really we cannot, you know, projectable. The reason, if you look as the renminbi continued depreciation, will stimulate the panel export. We're unfavor to import polysilicon from abroad. If you see the two major abroad, one is Korea, one is Germany. Those two company right now, their supply, you know, will go down, you know, as today's price. They get more pressure than us. If you look at their financial earnings release, you can see that. They lost money and they're struggling. You know, same as some producer in China. I think that's my comments, Philip. Yeah. Great. Let me follow up. Go ahead, Ming. Thanks. Quickly. Yeah. I think from a market perspective, based on supply and demand dynamic, you know, 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, you know, certainly second half should be higher than our Q1 ASP, and particularly for mono. You know, we think, you know, mono pricing potentially could hit $10 or higher, you know, in the second half of this year because of the strong incremental demand, and that's where our core focus is. There's very limited. Yeah. newest new supply of mono-grade, that's coming this year into the market. Great. Thank you, Ming. Thank you, Longgen. Shifting gears to your cost structure. I know in Q2 it's gonna 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 will be on the back end of your debottlenecking? I think maybe I'll say first, then Ming will add a comment. Right now, we've given guidance the second quarter is $8.00-$8.50. I think we are very conservative, okay? Just on the right now current foreign exchange rate without change, I think to the third quarter and the fourth quarter, definitely our costs will continue to go down, even below $7.50, especially in the fourth quarter. The reason is because our electricity cost may continue go down. The size, the ramping up of production output also continue to increase. We definitely, I think, given the figure right now is very conservative. Ming, maybe you add in comment. I think, Phil, again, using our Q1 as baseline, where we did 8,764 metric tons at CNY 7.42 per kg of cost. You know, by Q3, you know, with all the bottlenecking project, 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 for that quarter. I think just on economies of scale, you know, we're already hit fairly significant, reasonably good cost reduction from the current level. You know, it's hard for us to guide to that specific cost right now, but we think there's very good opportunity for us to hit costs of Q1 costs or lower. Philip, I think second quarter we've given right now the cost. The reason is because one is the debottlenecking projects is going on. Secondly is we also combine with annual maintenance. Usually we do annual maintenance in August or September. This time, because of, you know, debottlenecking projects, we combine with annual maintenance together. That's why in the second quarter, the output, I think, you can see it go down for the projection. The cost is we are very conservative because of scalability, because of annual maintenance, you always, you know, some costs will come up. That's why we've given that figure. Okay, great. One more, if I may, and then I'll pass it on. As it relates to your Q2 guidance, just wanna, you know, check that, you know, our numbers suggest that you could be negative EPS. Just wanna kinda check in and see if that's directionally correct for the second quarter. Thanks. I think Ming, go ahead. Yeah. I just to be consistent with, you know, what we've guided in the past, you know, we've always consistently guided to, you know, our production volume and our external sales volume. That's what we're only guiding to right now. Thanks. Okay. No, fair enough. Thanks very much, Longgen and Ming, and I'll pass it on. Great. Thanks, Phil. Thank you, Philip. Again, if you have a question, please press star then one. The next question comes from John Segrich with Luminus. Please go ahead. Hey, guys. 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? Maybe can you talk about what accounted for the CNY 5 million of cash outflow across all the discontinued through the cash flow in this quarter? Okay. I think pretty much in the second half, there should be very limited impact on the discontinued operation. I think right now we're in the process of winding down that facility in terms of disposing the remaining assets. There's some lingering impact in the first half, but I think going to second half, I think the impact should be very low. I think, John, I think basically in Wanzhou right now, the wafer capacity only is building on the 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 CNY 57 million there. The major is the building and the land. Okay. For the equipment, I think up to now we sell all the equipment. That's why you see the Q1, Q2, we still have some cash flow in because we're selling all the equipment. We were down basically on the second quarter, so only left is the land and the building. Okay. Basically on the second half of the year should be no more impact. Okay, great. This concludes our question and answer session. I would now like to turn the conference back over to Kevin He for any closing remarks. Yes, 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. Bye-bye. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.