Earnings Call: Q4 2018

Mar 13, 2019

Good day, and welcome to the Daqo New Energy 4th Quarter and Fiscal Year 2018 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. 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 Q4 fiscal year of 2018, 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, and then Mr. Yang will discuss the company's financial performance for the Q4 and the fiscal year of 2018. 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 of 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 to 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 Mr. Zhang, our CEO. Hello, everyone, and thank you for joining us today for our earnings call. I would like to thank our entire team for their hard work and dedication for delivering another outstanding course in which we successfully completed the Phase IIIB project and ramped production up to full capacity by the end of November 2018, 3 months ahead of schedule. During the quarter, we achieved a new record both in production volume and sales volume, which were 7,301 metric tons and 7,030 metric tons, respectively. With the successful ramp up of our new Phase 3b facility and efforts of our operating team, both production volume and cost reduction targets were achieved with excellent results. During the Q4 of 2018, we successfully reduced our total production cost to $7.94 per kg and our cash cost was lower to $6.64 per kg, representing our lowest cost structure in history. With our Xinjiang production facilities now running at full capacity, we expect to produce approximately 8,500 to 8,700 metric tons of polysilicon during the Q1 of 2019. Furthermore, with the reduction in unit utility usage, operating leverage and other cost savings, we expect to further reduce our total production cost approximately $7.50 per kg. In addition, we plan to conduct capacity debottlenecking projects to gradually upgrade several old CVD furnaces with improved technology, allowing us to increase production capacity by additional 5,000 metric tons. We plan to start this project in the middle March and completed by the end of June. The debottlenecking project will have limited impact on production volume. Therefore, we expect to produce 7,600 to 7,800 metric tons of polysilicon during the Q2 of this year. Subsequent to completion of the debottlenecking project, we anticipate the company will reach total annual production capacity of 35,000 metric tons. The Phase 3A capacity expansion project is progressing smoothly and will increase our production capacity to 70,000 metric tons by the end of the Q1 of 2020 with an even lower cost structure once fully ramp up. In February 2019, we received approval from Bank of China for a renminbi 400,000,000 5 year fixed asset capital project loan and renminbi50,000,000 working capital loan. The company has obtained a total of RMB830 1,000,000 additional banking loans, including the loans from the Bank of China and the credit facility from other domestic Chinese banks to support our capacity expansion and the working capital needs. These loans will support capital expenditure for our Phase 3 Phase 4a project and enable us to complete it on schedule. 2018 was a challenge but also promising year for Solar PV Industry. The policy was issued by the Chinese government on March on May 31, 2018 immediately impacted the market and resulted in a significant price decline across the entire value chain. However, this fall implies significantly stimulated demand from markets outside of China, especially when grid parity has already been reached. The global solar PV market recovered rapidly in the following months and has since achieved equal levering again, even with very limited condition from China, the world's largest individual solar PV market. A draft of China's solar policy for 2019 has already been released with the final vision yet to be confirmed. The draft indicates a new incentive program based on a fixed subsidy amount rather than a fixed quarter system as was previously done. The fixed subsidy amount is expected to be in the range of approximately RMB 3,000,000,000 and could cover approximately 30 to 35 gigawatts of installations. Property alleviation projects will be subsidized and funded separately. In addition, the market anticipates some grid parity projects, which will not require central government subsidies. Based on industrial research, China's installation target for 2019 is anticipated to be approximately 40 to 45 gigawatts, but there could be some variations in the final version of China's policy in 2019. Grid parity and cost reduction will continue to play a key role in driving global demand from developed markets such as Europe and the U. S. To developing markets like India, South Asia, Africa, South America. We expect global solar installations in 2019 to be approximately 120 to 140 gigawatts. We believe demand for polysilicon, which is the key ultra pure raw material for crystalline silicon solar PV module. We'll keep growing as solar PV becomes more and more competitive compared to other energy sources. We believe the current market challenges are temporary and should be resolved during the second half of 2019, especially when demand and installation from China recovers. Looking forward, we believe the solar PV industry has become much stronger and increasingly independent of policies and is expected to grow substantially sustainably over the long term with a better stability. The pace of new capacity expansion within the polysilicon industry will smooth out going forward. As a leading polysilicon manufacturer, we believe Daqo New Energy is ideally positioned to be to benefit from this fast growing market and will continue to outperform its peers with lower cost and better quality. Outlook and guidance for this year. The company expects to produce approximately 8,500 metric tons to 8,007 100 metric tons of polysilicon and sell approximately 8,400 metric tons to 8,600 metric tons of polysilicon to external customers during the Q1 of 2019. For the full year of 2019, the company expects to produce approximately 37,000 tons to 40,000 metric tons of polysilicon, inclusive of the impact of the company's annual facility maintenance. This outlook reflects Bakker New Energy's current and preliminary view as of the day of this press release and may be subject to change. The company's ability to achieve these projections is subject to risks and uncertainties. With that, I will turn the call over 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 call today. Before I begin, I would like to remind everyone that since the company discontinued its Chongqing business subsidiary in the Q3 of 2018, the operational results of the Chongqing business have been excluded from the company's financial results from continuing operations and have been separately presented under discontinued operations. Retrospective adjustments to the historical statements have also been made to provide a consistent basis of comparison for the financial results. Going forward, the company will focus all of its resources and expertise on its core power steering and manufacturing business. For the Q4 of 2018, revenues from continuing operations were $75,600,000 compared to $67,400,000 in the Q3 of 2018. The sequential increase in revenue was primarily due to higher polysilicon sales volume partially offset by lower ASPs. Gross profit was $16,900,000 compared to $12,800,000 in the Q3 of 2018. Gross margin was 22.4% compared to 19.1% in the Q3 of 2018. The sequential increase was primarily due to lower average polysilicon production costs, partially offset by lower ASP. Selling, general and administrative expenses were $8,200,000 for the quarter compared to $7,600,000 in the Q3 of 2018. R and D expenses were approximately $1,000,000 for the quarter compared to $1,400,000 in the Q3 of 2018. R and D expenses could vary from period to period and reflect R and D activities that took place during the quarter. Other operating income was $12,500,000 for the quarter compared to $100,000 in the Q3 of 2018. Other operating income was mainly composed of unrestricted cash incentives that the company received from local sovereign authorities, the amount of which vary from period to period. During the Q4 of 2018, the company received national innovation and technology development grants related to PV Silicon Materials as well as other government subsidies and incentives. Income from operations was $20,300,000 compared to $4,000,000 in the Q3 of 2018. Operating margin was 26.8% compared to 5.9% in the Q3 of 2018. Interest expense was $1,900,000 compared to $2,100,000 in the Q3 of 20 18. EBITDA from continuing operations for the quarter was $29,500,000 compared to $14,800,000 in the Q3 of 2018. EBITDA margin was 39.1% compared to 22% in the Q3 of 2018. During the Q3 of 2018, the company decided to discontinue its oil wafer manufacturing operation. Results of the discontinued operation of the previous quarter and comparative quarter were presented accordingly. Loss on discontinued operation was 5 point $7,000,000 in the Q4 of 2018 compared to $22,400,000 in the Q3 of 2018. Net income attributable to Daqo New Energy shareholders was $11,400,000 in the 4th quarter of 2018 compared to net loss attributable to Daqo New Energy shareholders of $18,300,000 in the Q3 of 2018. Earnings per basic ADS was $0.86 in the Q4 of 2018 compared to loss per basic ADS of $1.39 in the Q3 of 2018. Now I will discuss the balance sheet. For the at the as of December 31, 2018, the company had $94,000,000 in cash and cash equivalents and restricted cash compared to 113 200,000 as of September 30, 2018. As of December 31, 2018, the accounts receivable balance was $1,200,000 compared to $1,000 as of September 30, 2018. Most of our polysilicon sales were made with customer payments, prior to product delivery and without payment terms. We continue to manage our accounts receivables prudently. As of December 31, 2018, the notes below balance was $8,100,000 compared to $22,500,000 as of September 30, 2018. As of December 31, 2018, total bank borrowings were $171,500,000 of which $133,300,000 were long term borrowings compared to total borrowings of $165,300,000 including CNY 119,400,000 of long term borrowings as of September 30, 2018. Our bank loan to asset ratio stood at a low of 0.20. For the 12 months ended December 31, 2018, net cash provided by operating activities was CNY95,600,000 compared to CNY143,700,000 in the same period of 2017. For the 12 months ended December 31, 2018, net cash used in investing activities was $164,700,000 compared to CNY 67.9 million in the same period of 2017. The net cash used in investing activities in 2018 2017 was primarily related to the capital expenditure on our Xinjiang Phase 3b and Phase 4a polysilicon expansion projects. For the 12 months ended December 31, 2018, net cash provided by finance activities was $86,700,000 compared to net cash used by finance activities of $37,400,000 at the same period of 2017. The company completed a follow on offering of 100 and $10,000,000 in April 2018. Now I will discuss full year 2018 results. For the year of 2018, revenue from continuing operations was $301,600,000 compared to $323,200,000 in 2017. The decrease in revenue was primarily due to lower average selling prices, partially offset by higher processing sales volumes. Gross profit for the full year of 2018 was $98,100,000 compared to $144,000,000 in 2017. Gross margin was 32.5% in 20 18 compared to 44.6% in 2017. The decrease in gross profit and gross margin was primarily due to oil polysilicon ASPs. SG and A expenses were $27,100,000 in 20.18 compared to $16,000,000 in 27. The increase in SG and A expenses was primarily due to an increase of non cash share based compensation costs related to the company's 2018 share incentive plan. R and D expenses were $2,700,000 in 2018 compared to $700,000 in 2017. R and D expenses vary from period to period to reflect the R and D activities that took place during such period. Operating income was $13,200,000 in 20.18 compared to $3,800,000 in 2017, which mainly consisted of unrestricted cash incentives that the company receives from local government authorities, which vary from period to period at the discretion of the government. Income from operations was $81,500,000 in 20.18 compared to $131,100,000 in 20.17. Operating margin was 27% in 2018 compared to 40.6% in 2017. Interest expense was $10,800,000 in 20.18 compared to $16,300,000 in 20.17. Net income attributable to Daqo New Energy shareholders were $31,100,000 in 20.18 compared to $92,800,000 in 20.17. Earnings for basic ADS were $3.06 in 20.18 compared to $8.76 in 20.70. Adjusted net income non GAAP attributable to that from shareholders was $71,600,000 in 20.18 compared to $99,500,000 in 20.17. Adjusted earnings per basic ADS non GAAP were $5.74 in 2018 compared to $9.38 in 20.7. 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. We will now begin the question and answer session. The first question comes from Philip Shen of Wealth Capital. Please go ahead. Hi, everyone. Thanks for taking my questions. The first one I'd like to explore is for Q4, you reported $75,600,000 of revenue. But if you take the volume of shipments times the average ASP for quarter, I think we get to $68,000,000 So can you help us understand the difference in that revenue? Because I think wafer, you guys recognized with no it's discontinued operation now. So the wafer revenue, I'm guessing, is not a part of that revenue number. Hi, Phil. Good to hear from you, and thanks for joining our call. So as we said before, so in the Q3, we discontinued our Chongqing business subsidiary and then the operational results of Chongqing is now excluded. And so some of the revenue that we recognized in Q4 has to do with revenue and financial adjustments related to the continuing and discontinuing operations and including some of the profit revenue commission and profit allocation. So for example, when we shut down our Chongqing subsidiary still had, for example, polysilicon ingots and polysilicon block. These were so in terms of transfer but with our revenue recognized, but most of the profit and revenue should have gone to Xinjiang now. After the wine guidance, we sold some of these ingots and blocks, then the revenue and the profitability would go to the Xinjiang. And that happened in the Q4. So that's where you're seeing the difference between the sales volume and the ASP primarily. It's not the H and F Yes, the difference around the $7,000,000 Yes, right. Okay. Thanks for that. That's helpful. So on a go forward basis, we probably will not see that. Is that a fair thing to say? I'm guessing you guys can make out that inventory. Yes. We would not expect that starting in 2019. Okay. And what kind of margin did you get on that? I mean, you can get some blocks. I don't have the if we should call that $7,000,000 you can use to calculate the gross margin is around like 17%, right, our actual gross margin 18%. Yes. We can calculate using your numbers. Thanks. And then also on Q4, you guys had other income of about $12,500,000 which is bigger than I think you guys have had in the past. So can you talk to us about how did you guys get that for the quarter? And then I know you said in your prepared remarks that that can vary, but do you expect to get that kind of benefit in Q anytime in 2019? Is that something we should actually factor into our models? Or was this more of a one time $12,500,000 benefit for Q4? Philip, let me answer that question. Basically, if you look at the history, every, I think, Q4, we got some I think payback, the government paid back some tax refund, okay? Basically, in October, we received around US11 $1,000,000 from local governments, which is we paid the tax, income tax, value add tax in 2017. That tax is allowed to local governments and supposed to back to us. That's what we have contract signed with the local government in 2015. So basically, that will occur every year until 2020. Okay. That's great. Yes. I think this is the biggest I'm looking through the Q4s from past since 2016. Yes, 2017 we paid I think, the amount of tax value, VAT, all those. So we fund in 2018. Then this year, we will get a refund from 2018 figure. The figure is not decided. And one thought on one long answer. Because of the local government budget and fiscal year and planning, So most likely, most of the government incentives that we receive from government will generally occur in Q4. And then we also apply for, for example, technology grants and technology incentives. For example, this time, we happen to receive a pretty significant amount related to R and D for PV, Silicon Materials from a National Technology Innovation Grant. So we continue to apply for these projects from time to time. And when these awards are given to us, then we will recognize those as well. Okay, great. Both of those responses are very helpful. Thanks. Shifting gears to kind of some more big picture perspective, Can you talk about how you guys see the polysilicon capacity ramping up on a from for the industry and competitors in Q1, Q2. We believe that it could be capacity in Q1 or production in Q1 could be up 40% year over year relative to last year given all the expansions that we're seeing. Can you comment on kind of that expansion that you see ahead? And then also how much at this current pricing level capacity could possibly exit the landscape? And then we'll after that maybe we'll shift to demand? Thanks. Okay, Philip. I think it's a good question. Basically, I think it's a lot of information and data you see flies. And if you look at the new capacity, I think we are the first one, I think the 3B ramp up the production for production. Then other people, most I think are starting production like Tongwei, I'm not going to specific, okay? They're going to ramping up maybe on the Q2 of this year. Then other maybe ramping up in Q3. So basically, first of all, it's not all capacity were fully expected running this year. But definitely, I think for next year, yes, a lot of new capacity will come in. But total altogether, if you can see that, I think even this year, I think the good quality, better quality and lower cost maybe is around like 270,000 tonnes for this year. So basically, I'm not saying demand side, just say production side, I think the domestic high good quality products is not too much there. For example, I can't say an example, in Q4, our monosilicon supply is around 61%. So if you look our gross margin, our monosilicon price ASP is around like $10 and the multi is around $6.30 or whatever. Our ASP is around like renminbi is around like maybe U. S. Dollar maybe around like $9.50 So we see Q1, we will improve our gross margin. The reason is because, first of all, the monosilicon percentage will increase to around 70%, 78%. Then we can see the monosilicon price go down because we think it's already lower right now, dollars 10 because a lot of people actually the cost is probably above that, even the foreign producer. So then on that side, yes, I think on the multi silicon side, oversupply situation is coming, okay? We got a pressure, but we still can because of the quality, today we're still selling about $9 per kg. So basically, from our side, we're still very optimistic. The reason is because we see the Chinese senior new policy is going to installation in more detail. And in the second half of this year, we see the good picture there. 2nd is the growth market is there. And right now, the downstream, if you look at the module 5 right now, renminbi, the following currency maybe around like $0.25 $0.26 on the mono is very lower. Actually, the grid parity is there. So basically, I'm not worried about that because basically right now, the ASP is already a lot of produce in China is consolidation. Even in foreign producer, as their price, today's price, we may be making gross margin 20%. Our competitors right now, I think, are bleeding. Yes. On that point, Logan, how many how much capacity do you think could go offline at current pricing in the industry? Already in China, maybe around 250,000 tons, 270,000 tons. Okay. I just want to clarify. So you think 250,000 tons could go away? Okay, great. And then in terms of ASPs looking ahead, our checks suggest that there could be some upside to pricing near term, let's say, by 5% to 10%. Do you think that could be true? And if so, why? And then how do you expect poly ASPs to trend by quarter through 2019? Okay. Basically, we right now have 2 forecasts. One is for the monosilicon to forecast the quality. To increase the monosilicon percentage go up, so Q1, we're around 77% to 78%. So we see right now the monosilicon price is around RMB81 to RMB83. In March, it already increased 1 per kg. Okay. Then for the multi silicon right now, we're selling around 70 to 72. But yes, we got a pressure because too much you supply, especially some new capacity right now, a majority of their new products, the tri products is multisilicon, okay? So in Q2, we don't think the price will go up dramatically. Maybe monosilicon has go up a little slightly, but not like you said 10% or 5%. I don't think so. And we hopefully Q2 can continue to keep the price stable and then all percentage continue monosilicon percentage continue to go up. So we can keep the ASP stable or slightly go up. But definitely, we think the second half of this year, the ASP will go up. I'm not sure because I cannot project with a 5% or 10%. It all depends on demand and supply. Okay. So and a lot of that I think is the demand part of the picture is something I think is not well understood. You mentioned in your prepared remarks that global demand is very strong and that a number of countries are seeing that grid parity and that China demand should support that. Can you talk to us about which specific countries perhaps your customers are highlighting as sources of strength, certain countries in Europe or Latin America, Southeast Asia, which countries in particular are you guys seeing as a place places of surprise, if you will, of that upside of demand? Okay. First of all, Philip, I'm not selling module, okay. I'm selling silicon. So only I can tell you is very strong demand from our clients downstream. Today is every I think as you see that, LONGi, Zhongkuan, Jinko, Canadian Solar, all these companies right now. But to answer your question, I think in the script, I already say, right now, globally, almost everywhere, you see from developed country to developing country, especially developing countries like India, South Africa, I think even Southern America, we see that. Then the developed countries, especially in Europe, and we see strong demand in there. I think you maybe can see Canadian Solar, I think in JinkoSolar, they are earning release. I think they may be around even later. I think the market is there. The only thing that I can tell is right now, Yoon Kee, Okay. Thank you, Logan. Thank you, Ming. I'll pass it on. Thank you. The next question comes from Gary Zhou of Credit Suisse. Please go ahead. Hello. Thank you, management, for taking my questions. This is Gary from Credit Suisse. So firstly, on the I have 3 questions. So firstly, on the policy side, so the management mentioned that you expect around 40 to 45 gigawatt China solar demand this year. So does management has a rough estimate? So how much of this demand may come out in this first half and how much in the second half? And secondly, so given the likely stronger demand into the second half of this year, so does management can give us some color on the what kind of polysilicon price can shoot up into the second half of this year? And lastly, so just after the company's electricity tariff cut at the end of last year, So what is your company's latest cash cost currently? Thank you. Okay, Gary. I think, first of all, to answer your question, I think China right now, we estimated around $40,000,000 to $45,000,000 Basically, the new policy is a fixed subsidiary amount, I think RMB3 1,000,000,000 as you know that, right? Instead of the old system is fixed quarter. So we believe that will support around the 30 gigawatts. I think Pioneer project or whatever, I think that though I think majority will do second half of this year. Then plus, I think a policy alleviation, we believe we should be around like 5 to 8 gigawatts. Then plus grid parity, I think around maybe I think another 5 to 8 gigawatts. So basically, I'll ask your question. We are based on that, I think basis we're projecting that. Then to answer your question, I think first half of the year maybe around 10 to 15 gigawatts. Majority, I think, were second half of this year. So I think second half maybe go to 30 to 35, even 40 because first half this year is not too much there. Only last year's project is going to finish. That's to your first question. To answer your second question is, how about the polysilicon price? As I just said, because as I think the monosilicon, especially I think the module puck, high efficiency module demand is hot. We believe this year the mono module will account for around 60% to 70% even. So the mono silicon demand is hot. So basically, in the history, there's not too much Chinese producer can provide the monosilicon. Majority is import. As you can see there, last year, the total consumption in polysilicon is around 41 metric tons, of which 140 tons is import, roughly 400,000 tons, okay? So this year, I think the import should be below 100,000 tons. So but the monosilicon total demand, I think it should be around like 250,000 tons to 200,000 tons. So basically, I think monosilicon price should go up. I think when the account is around 80 to 82, I think a reasonable second half of this year maybe go to about 85 to 90. But I don't think go beyond too much because it's not good for the whole industry. And for the multi silicon, because of the supply and demand situation and still a lot of small producers in China, especially state owned company, they're still running. Even they're bleeding, they're still running the money from governments. So I think they are suffering now from last year Q4, Q1, Q2. Hopefully, some company should stop, should shut down. So hopefully, we can synergy that. So I don't think the monosilicon price will improve in Q2. But maybe in second half of this year, the price maybe will come back, I think back to 75, around 75. So I think to answer your second question. The third question, I only can answer is Daqo. Last year, we successfully ramping up the 3B projects. So our electricity cost right now last year since the November 2020, our oil deficit cost is around $0.24 per KWH. And so right now, Q1, we think all costs will continue to go down because of the I think the electricity cost continue to come down. So the cash cost per KG, we will control maybe below RMB41 per kg. And by the October 15, if for the 4A, we're starting production, if we can ramp up, then we can enjoy yesterday cost around $0.20 per KWH. So I think by the end of this year, if we can successfully reach or even ramping up our Q1 of next year, 70,000 capacity. So our cost will dramatically go down. So you can see our cash cost is around like $6.50 even $6 I'm going to did I answer your question, Gary? Yes. Thank you very much. Yes, just a very quick follow on question. So can management share with us the latest progress of your Phase 4a expansion? And so and also is there any kind of guidance on when we can have an estimate on when the Phase 4B the possible Phase 4B expansion will start? Thank you. For Phase A, I think basically right now, because Xinjiang right now is in better weather, So our construction right now almost finished 18%. And for the older design, approvals license, we all finished. I think for the equipment, I think procurement, the contracts that we signed, total today, we signed around RMB 2,600,000,000. The total project cost total cost is around below RMB 2,900,000,000. So basically, our schedule starting to try production is October 15. Up to today, we're still thinking we are on a schedule. And ramping production in the Q1 2020. And for the 4B, we need to depend on the market to see what's going on and also to see our future cash flow. So basically, we're not determining when or whether we go to starting the 4B. Okay. That's helpful. Thank you. Great. Thank you, Gary. 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 query, please don't hesitate to contact us. Thank you very much. Bye bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.