Earnings Call: Q1 2019

May 21, 2019

Good day, and welcome to the Daqo New Energy First Quarter 2019 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 Ho, 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 Q1 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. Lin 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 Q1 of 2019. 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 the 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 achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in U. S. Dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U. S. Dollars solely for the convenience of the audience. Without further ado, I now turn the call over to Mr. Zhang, 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 Q1 of 2019, during which we hit record high production and sales volumes as well as our most competitive cost structure. During the call, 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 de bottlenecking 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 processing as planned and we expect to complete the project ahead of schedule in early June 2019. During the de bottlenecking project, we also will finish our annual equipment maintenance. Therefore, the ramp up co selling of this debottlenecking debottlenecking project and annual maintenance with temporary impact production volumes and costs. And as a result, we expect to produce approximately 7200 to 7,400 metric tons of polysilicon at total production cost of $8 to $8.5 per kilobytes during the Q2 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 main place capacity and our production costs will return to the current level of approximately $7.50 per kg. Our Phase 4A project is also processing smoothly and remains on schedule. The foundation work has been completed and the construction of various buildings and structures are processing as planned. The initial equipment installation has already begun and is planned to continue through to the Q3 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 Q1 of 2020. China installed approximately 5.2 gigawatts of new solar PV installations during the Q1 of 2019, While installation numbers for the Q2 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 1st batch to start installations and then followed by subsidized projects which were bid for the total RMB3 1,000,000,000 of subsidy. Market consensus indicates that China will install approximately 35 to 40 gigawatts in 2019, which means solar project installation volumes during the second half of this year could potentially double or even triple those in the first half of this year. As polysilicon is the key raw materials of solid PV modules, we believe demand for polysilicon will significantly increase in the second half of this year. We are optimistic about China's booming demand for solar PV in the second half of this year. Beginning since May, the market conditions for polysilicon have shown signs of improvement as prices appears to have buttoned out, while Daqo remained solidly profitable in the Q1 with our lower cost and high mix of mono grade polysilicon products. We believe that the current challenging pricing environment for polysilicon has resulted in serious financial losses for many of the existing polysilicon producers. According to news from China Silicon Industry Association, at least 3 major Chinese polysilicon producers have shut down VX facilities for maintenance in the month of April May, resulting in reduced supply. In addition, the ramp up processing of other Chinese producers' new capacity has not been assessed as smooth as they expected, contributing to production delays and unscheduled shutdowns. Furthermore, this new capacity is generally enabled to immediately produce high quality mono grade polysilicon due to quality issues. This has resulted in increased pricing spread between monigrade and multigrade 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 twenty nineteen, we anticipate the booming demand from China's domestic PV market will significantly improve the overall supply demand situation, particularly for the tightly supplied monoch 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 manufacturers. Outlook and guidance. Due to the significant pricing spread between mono grade and multi grade polysilicon, the company currently maximized the amount of monograde polysilicon. It produces a percentage of total production volume to approximately around 87% in April and 88% in May until today. In addition, the ramp up process of the company's debottlenecking project is expected to take place ahead of the original schedule in early June. As such, the company may see some impact on production volume and cost structure in the Q2. The company expects to produce approximately 7200 to 7400 metric tons of polysilicon with total production cost of $8 to $8.5 per kg during the Q2 of 2019, sell approximately 7,100 metric tons to 7,300 metric tons of polysilicon to external customers during the Q2 of 2019. The company expects the total production costs will come back to normal at the level of $7.5 per kg in 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 inclusive of the impact of the company's annual facility maintenance. This outlook reflects Daqo New Energy's current and preliminary view as of the date of this press release and may be subject to change. With that, I return the call to Ming, 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 Q1 2019 earnings conference call today. I will now discuss our company's financial performance for the quarter. Revenues for the quarter were $81,200,000 compared to $75,600,000 in the Q4 of 2018. The sequential increase in revenue was primarily due to higher polysilicon sales volume, partially offset by lower ASPs. Gross profit was $18,300,000 compared to $16,900,000 in the Q4 of 2018. Gross margin was 22.6% compared to 22.4 percent in the Q4 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 $7,900,000 compared to $8,200,000 in the Q4 of 2018. Q1 SG and A expenses include approximately $4,000,000 of non cash share based compensation costs related to the company's share incentive plan. Excluding such non cash costs, SG and A would have been approximately $4,000,000 R and D expenses were $1,300,000 compared to $1,000,000 in the Q4 of 2018 $100,000 in the Q4 of 2018. Research and development expenses vary period to period and reflect R and D activities that took place during the quarter. Income from operations was $9,200,000 compared to $20,300,000 in the Q4 of 2018. Operating margin was 11.3% compared to 26.8 percent in the Q4 of 2018. Interest expense was $2,000,000 compared to $1,900,000 in the Q4 of 2018. EBITDA from continuing operations was $20,000,000 compared to $29,500,000 in the Q4 of 2018. EBITDA margin was 24.6% compared to 39.1% in the Q4 of 2018. During the Q3 of 2018, the company decided to discontinue its solar wafer manufacturing operations. Net income from discontinued operation was $800,000 in the Q1 of 2019 compared to net loss from discontinued operation of $5,700,000 in the Q4 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 $6,600,000 compared to $11,400,000 in the Q4 of 2018. Earnings per basic ADS were $0.50 compared to $0.86 in the Q4 of 2018. Adjusted net income attributable to Daqo New Energy shareholders was $11,100,000 in Q1 2019 compared to $15,700,000 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 $113,700,000 in cash and cash equivalents and restricted cash compared to $94,000,000 as of December 31, 2018. As of March 31, 2019, the accounts receivable balance was $2,200,000 compared to $1,200,000 as of December 31, 2018. And as of March 31, 2019, the notes receivable balance was $700,000 dollars compared to $8,100,000 as of December 31, 2018. As of March 31, 2019, total bank borrowings were $193,000,000 of which $149,700,000 were long term borrowings compared to total borrowing of $171,500,000 including $133,300,000 of long term borrowings as of December 30 1, 2018. We continue to manage our debt level prudently. In addition, the company currently has RMB600 1,000,000 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 3 months ended March 31, 2019, net cash provided by operating activities was RMB48.5 million compared to RMB22 1,000,000 in the same period of 2018. And for the 3 months ended March 31, 2019, net cash used in investing activities was $38,600,000 compared to $11,800,000 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 longer 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 Q1 2020 with anticipated cost target of $6.80 per kilogram and cash costs below $6 per kilogram. For the 3 months ended March 31, 2019, net cash provided by financing activities was $7,200,000 compared to net cash used in financing activities of $2,400,000 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. 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, but it seems like consensus thinking is for a Q3 ramp up of activity and then Q4 strength. But a lot of that is actually dependent on when the NEA announces the subsidized projects and when they're awarded. Do you have confidence that the NEA will be able to turn that around quickly so that we actually get the Q3 strength? Or is it a reasonable scenario that we actually get instead of Q3 ramp up, a Q4 ramp up and then more strength in and higher volumes in Q1 of next year? Thanks. Philip, I think that's a good question. I think about China, I think basically to direct answer your question is we believe the NDA will announce the detailed policy by the end of May. And no later, we believe, in the middle of June. The reason is because the government, I think, definitely were now needed time to installation that to finish I think to carry out the target RMB3 1,000,000,000 subsidized. So to answer your question, does that answer your question? I think so. Yes. Thanks, Longgen. So you think they will announce the project details earlier. So shifting gears to polysilicon ASPs and pricing ahead, can you talk about let's say we get this NDA announcement, do you think what do you expect the polysilicon pricing to do? How much how do you expect it to trend in Q3 specifically and Q4? Okay. If you look right now, you see the Q1, our polysilicon price, I think is around $9.65 Definitely also in terms of the foreign exchange, I think let me be continued to depreciation and actually Lemin B, our selling price is $74.75 per kg. So basically, we believe in the Q2 right now, our monosilicon price is continuing to go up. So if you look at our Q4, our mono account for percentage is around 74%, as I remember that. The figure maybe I think Ming can continue to comment that. So in the Q2, right now in May, our monosilicon grades accounted for 87%. By today May 21 20 to yesterday, our mono grade is around 80%, 80%. So basically, in the Q2, if you consider the multi silicon price, yes, I think it will go down. Right now it's around, I think, around RMB6 to RMB63 per kg. But all percentage is lower. For this month, I think we're below 15% is multi silicon. So to me, I think for ASP, definitely in the Q2, we think we can keep the same or even slightly equal to the Q1. Okay? Then 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 hot, we didn't have too much available for sale. If you look at our Q1 customer, LONGi and Jinko accounted for almost I think more than 70% is LONGi and Jinko. So we see a lot of clients right now, potential clients asking for more, such as, I mentioned, JEA Solar, Canadian Solar and Zhongkuan and even LONGi is asking for more volume because based on the contract, long term contracts. For example, in April, we gave LONGi more, 500 tons more monosilicon grade. So that's I think we see the tendency, monograph, the price go up. The reason is why because we see out of China right now today, if you look at the market, the demand is so hot. Besides that, the grid parity project percentage also go up. And so we see this year, the total global demand, let's say, 125 gigawatts, maybe the monosilicon grade panel were accounted for, I think, more than 70%. So, in a word, we believe I think in the second half of this year, the monosilicon price definitely will go back to normal around 80 to 90. I'm just giving range, okay. Why give us so big a range? Because really we cannot projectable. The reason if you look, as renminbi continued depreciation, we stimulate the panel export. We're on favor to import polysilicon from abroad. So if you see the 2 major abroad, one is Korea, one is Germany, I think those 2 companies right now, their supply will go down as today's price. So they got more pressure than us. If you look at their financial earning release, you can see that they have lost money and they're struggling, same as some producer in China. So I think that's my comments, Philip. So let me just follow-up quickly. Yes, so I think from a market perspective, based on supply and demand dynamic, the second half of this year is clearly going to be a much stronger than the first half. If you look at just our Q1 more or less is the baseline of pricing for this year, secondly, second half should be higher than our Q1 ASP, particularly for mono. We think mono pricing potentially could hit $10 or higher in the second half of this year because of the strong incremental demand and that's where our core focus is. And there's very limited new supply of monogray 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 going to be higher for the reasons you stated. What do you expect the cost structure to look like for Q3 and Q4? Could you get back to Q1 levels or even lower since you will be on the back end of your debottlenecking? I think maybe I'll say first then Ming or add a comment. Right now we've given guidance in the second quarter is $8 to $8.50 I think we are very conservative, okay. Just under right now current foreign exchange rates without change, I think to the Q3 and the Q4 definitely our costs will continue to go down even below 7.50 dollars especially in the Q4. The reason is because you see our electricity cost maybe continue to go down. And the ramping up is you see the production output also continue to increase. So we definitely I think given the figure right now is very conservative. Ming, maybe you add any comments. Yes. So I think Phil, again you're seeing our Q1 as baseline where we did 87 8,764 metric tons at $7.42 per kg of cost. By Q3, with the debottlenecking project, it should hopefully should be fully ramped up by then, we should get additional, let's say, 1,000 to 1200 metric ton of incremental new capacity on a quarterly basis for that quarter. And so I think just on economies of scale, we already hit fairly significant, reasonably good cost reduction from the current level. 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 Q2 we've given right now the cost, the reason is because one is debottlenecking project is going on. Secondly, we also combine with any maintenance. Usually, we do any maintenance in August or September, but this time, because of debottlenecking projects, we combine with any maintenance together. So that's why in the second quarter, the output, I think you can see, is go down for the projection. So the cost is we are very conservative because of your scalability, because of any maintenance, you always some cost has come up. So that's why we're 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 want to check our numbers suggest that you could be negative EPS. Just want to kind of check-in and see if that's directionally correct for the Q2? Thanks. I think, Ming, go ahead. Yes. So just to be consistent with what we've guided in the past, we've always consistently guided to our production volume and our external sales volume. So that's only that's what we're only guiding to right now. Thanks. Okay. Fair enough. Thanks very much, Longgen and Ming, and I'll pass it on. Great. Thank you, Philip. 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? And maybe can you talk about what accounted for the $5,000,000 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. So 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 wave capacity only is building and the land is available in my book. You can see. I think so far only have asset is around sitting there. I think for the assets in Q1 ending, I think only have 57,000,000 there. The major is the building and the land, okay? For the equipment, I think up to now we sell all the equipment. So that's why you see the Q1, Q2, we still have some cash flow in because we're selling all the equipment. So we were down basically on the second quarter. So only left is the land and the building, okay. So basically on the second half of the year should be no more impact. This concludes our question and answer session. I would now like to turn the conference back over to Kevin Ho 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.