Earnings Call: Q1 2017

May 9, 2017

Good day, and welcome to the Daqo New Energy 2017 First Quarter Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations for the company. 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 2017, 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 Doctor. Gunnar Yao, our Chief Executive Officer and Mr. Ming Gang, our Chief Financial Officer. The call today will feature an update from Doctor. Yao on market and operations, and then Mr. Yang will discuss the company's financial performance for the Q1 of 2017. 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 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 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. 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 our CEO, Doctor. Yang. Please? Hello, everyone, and thank you for joining our call today. We are pleased with the strong financial and operational results we achieved for the Q1 of 2017. I would like to thank our entire Xinjiang Polytech team for their great efforts to make the Q1 of 2017 our best quarter ever in terms of cost structure, production volume and the polysilicon quality. During the quarter, we fully ramped up our Xinjiang polysilicon facility to 18,000 metric ton annual capacity and achieved full production. Our capacity ramped up progressed ahead of schedule. We produced the 4,927 metric ton of polysilicon in the 1st quarter, an increasing of 100% as compared to the Q4 of 2016, While achieving a substantial increase in sequential polysilicon production volume, we also saw strong demand for our high quality products for our customers as polysilicon external sales volume reached the 4,223 metric ton in Q1 2017, an increase of 91.2% from Q4 2016. Achieving highest sales volume in the company's history. This is in light of recent reports from some of our competitors who have seen their Q1 2017 revenue decline from Q4 2016 despite a sequential increase in polysilicon ASP. We are clearly gaining meaningful market share during the quarter. Polysilicon market demand started strong in the beginning of the year, but weakened towards the end of March, primarily due to the inventory management at downstream PV Manufacturers. This resulted in a temporary polysilicon inventory buildup across the industry with price adjustments reflecting the weakness. Market conditions stabilized towards the end of April with strong demand recovery and the industry poly inventory situated adjusted to the healthy level polysilicon pricing also improved meaningfully in the late April with robust customer demand and orders for our high quality polysilicon product. Based on industry forecast, the global PV installations is expected to be approximately 75 to 80 gigawatts for 2017 compared to approximately 75 to 78 gigawatts for the 2016. Overall, the annual PV volume demand for this year is anticipated to be rather evenly spread between the first and the second half of the year. While PV and the market demand environment is very dynamic and may lead to polysilicon ASP volatility, we believe overall volume demand for the year is solid and healthy. Our cost leadership should help company to weather through the market volatility. During the quarter, we also achieved the lowest ever cost structure with a total production cost of $8.41 per kilo and a cash cost of $6.68 per kilo. With our lower production cost, gross margin was 42.8 percent for the Q4 of 2017. The company generated $22,900,000 in net income and $41,700,000 in EBITDA with EBITDA margin of 49.8%. In addition, thanks to the various quality improvement projects we initiated starting from the second half of last year, the Q1 of 2017 was the best quarter in our history in terms of product quality. As part of our ongoing quality improvement program, we recently implemented a new automated back end package system in the cleanroom environment. Programs like this has helped increase in production volume of polysilicon for mono wafer manufacturers. Going forward, we will continue to focus our efforts on cost reduction. We have identified several cost reduction opportunities with potential reduction in unit energy usage and the raw material usage, which should allow us to continue to reduce our costs. At the same time, we continue to pursue various programs and initiatives on polysilicon quality improvement, which will help the company to meet the ongoing demand growing demand for ultra high purity polysilicon such as demand from the mono crystalline wafer manufacturers. We are currently undergoing qualification at the additional mono crystalline wafer customers for high purity polysilicon. With additional high efficiency mono wafer capacity coming online in the second half of this year, we believe we are well positioned to supply the growing demand from this market. The combination of our cost reduction and quality improved initiatives should increase our cognitive flexibility and reinforce our competitive position as one of the leading polysilicon suppliers in China, which will allow us to take advantage of additional opportunities in 2017 and beyond. Now let me provide the outlook for the Q2 of 2017. With a fully ramped up capacity, we expect to produce 4,800 metric ton to 5,000 metric ton polysilicon and the sale approximately 4,200 metric ton to 4,500 metric ton to external customers during the Q2 of 2017. The above external sales guidance excludes the shipment of polysilicon to be used internally by our Chongqing solar wafer facility, which utilized polysilicon for its wafer manufacturing operation. Wafer sales volume is expected to be approximately 23,500,000 to 24,000,000 pieces in the Q2 of 2017. Now I will turn the call to our CFO, Mr. Ming Yang, for the financial updates. Thank you, Doctor. Yao, and good day, everyone. Thank you for attending our call today. Now I will provide the financial updates for the Q1 of 2016. Revenues from polysilicon sales to external customers were $70,400,000 an increase of 115 percent from $32,800,000 in the Q4 of 2016 and 76% from $39,900,000 in the Q1 of 2016. External polysilicon sales volume was 4,223 metric tonnes, an increase of 91% from 2,209 metric tonne in the Q4 of 2016 and an increase of 45% from 2,905 metric ton in the Q1 of 2016. The average selling price of polysilicon was $16.66 per kilogram in Q1 2017, an increase of 11.4 percent from $14.96 per kilogram in the Q4 of 2016. The increase in polysilicon revenue as compared to the Q4 of 2016 was primarily due to higher polysilicon sales volume and higher ASPs. Revenues from wafer sales were $13,400,000 compared to $13,400,000 in the Q4 of 2016 and $17,800,000 in the Q1 of 2016. Wafer sales volume was 22,400,000 pieces compared to 21,300,000 pieces in the Q4 of 2016 and 22,100,000 pieces in the Q1 of 2016. Gross profit was approximately RMB35.9 million, an increase of 153 percent from RMB14.2 million in the Q4 of 2016 and an increase of 115 percent from RMB16.7 million in the Q1 of 2016. Non GAAP gross profit, which excludes costs related to the non operational policies and assets in Chongqing, was approximately $36,900,000 an increase of 133.5 percent from RMB15.8 million in the Q4 of 2016 and 95% from $18,800,000 in the Q1 of 2016. Gross margin was 42.8%, increased from 30.7% in the Q4 of 2016 and 29% in the Q1 of 2016. The increase in gross margin as compared to the Q4 of 2016 was primarily due to higher quarterly polysilicon ASPs and lower polysilicon production costs. In the Q1 of 2017, total costs related to the non operational Chongqing polysilicon assets, including depreciation, were $1,000,000 decreased from $1,600,000 in the Q4 of 2016 and $2,000,000 in the Q1 of 2016. As we have already relocated the majority of the idle equipment from our Chongqing site to Xinjiang site and successfully reutilized them in our capacity expansion projects, the total costs related to the non operational Chongqing polysilicon assets have been significantly reduced. In the near future, we expect such costs will remain at a level that is similar to that in Q1 2017. Excluding costs related to the non operational Chongqing polysilicon assets, non GAAP gross margin was approximately 44%, increased from 34.1% in the Q4 of 2016 and 32.6% in the Q1 of 2016. Selling, general and administrative expenses were RMB4.1 million compared to RMB3.5 million in the Q4 of 2016 and CNY4.1 million in the Q1 of 2016. Research and development expenses were approximately CAD 400,000 compared to CAD 2,800,000 in the Q4 of 2016 and CAD 0.1 million in the Q1 of 2016. The research and development expenses fluctuate from period to period according to the R and D activities occurred during such period. Other operating income was CAD800,000 compared to CAD1.9 million in the Q4 of 2016 and $700,000 in the Q1 of 2016. Other operating income was mainly composed of unrestricted cash incentives that the company received from local government authorities, the amount of which varies from period to period. Operating income was CNY32.2 million, an increase of 2 35 percent from CNY9.6 million in the Q4 of 2016 and 142% from $13,300,000 in the Q1 of 2016. Operating margin was 38.4%, increased from 20.7% in the Q4 of 2016 and 23.1% in the Q1 of 2016. Interest expense was $4,300,000 compared to $4,100,000 in the Q4 of 2016 and $3,900,000 in the Q1 of 2016. EBITDA was CNY41.7 million, an increase of 137% from CNY17.6 million in the Q4 of 2016, an increase of 90% from CNY21.9 million in the Q1 of 20 16. EBITDA margin was 49.8 percent, increased from 38.3% in the Q4 of 2016 and 30 RMB22.9 million in the first quarter of 2017, increased from RMB4.1 million in the Q4 of 2016 and RMB8.3 million in the first quarter of 2016. Earnings per basic ADS were $2.18 increased from $0.39 in the Q4 of 2016 and $0.80 in the Q1 of 2016. As of March 31, 2017, the company had $61,200,000 in cash and cash equivalents and restricted cash compared to CNY31,900,000 as of December 31, 2016, and CNY35,700,000 as of March 31, 2016. As of March 31, 2017, the accounts receivable balance was $13,100,000 compared to $4,800,000 as of December 31, 2016. And as of March 31, 2017, the notes receivable balance was $11,700,000 compared to $13,000,000 as of December 31, 2016. As of March 31, 2017, total borrowings were $236,000,000 of which $129,200,000 were long term borrowings compared to total borrowings of $217,900,000 dollars including $111,900,000 of long term borrowings as of December 31, 2016. And for the 3 months ended March 31, 2017, net cash provided by operating activity was $28,600,000 increased from $22,500,000 in the same period of 2016. For the 3 months ended March 31, 2017, net cash used in vesting activities was $16,600,000 compared to CNY17,500,000 in the same period of 2016. Capital expenditures related to purchase of PP and E were $16,000,000 for the quarter, which was primarily related to the capital expenditure of Xinjiang polysilicon project. For the full year of 2017, the company expects to spend approximately $45,000,000 to $50,000,000 in capital expenditures. For the 3 months ended March 31, 2017, net cash provided by financing activities was $16,500,000 compared to net cash used in financing activities of CAD3.3 million in the same period of 2016. The increase was primarily due to the drawdown of long term project bank loans related to the company's recent polysilicon capacity expansion. And that concludes the official part of our presentation. Now let's have the Q and A session. We will now begin the question and answer The first question comes from Philip Shen of ROTH Capital Partners. Please go ahead. Hi, everyone. Thanks for the questions. In your release, you indicated you expect demand to be evenly spread between the first and second half. Can you share a bit more detail as to why you see that to be the case? And how do you expect the step down in the feed in tariff in China on June 30 to impact demand? Hi, Phil. So that's really based on conversations with our downstream customers. Most of them are engaged in international business for modules. And also from some of the recent industry reports on supply and demand for PV downstream. And it looks like overall, the first half, I think most forecasts are looking at maybe 30 to 35 gigawatts of installation. Well, it may be more than that, I'm sorry, 35 gigawatts in that range. And the second half, probably higher than that. And I think that's what most of the analysts before as we looked at indicated. And also, our downstream customers are also looking at that as well. I think the rush for Chinese demand is is less than it was, for example, for 2016, but they're also seeing, you know, increase in in projects, like the projects for distribution generation and other like bidded project within China that's geared for the second half installation. Great. So in terms of China demand, can you share I think we saw 7 gigawatts Q1. How much do you see in Q2, Q3 and Q4? I think at this point, it's hard for us to tell what the actual number looks like. But I think q2 should be higher than q1. Is what it looks like. Yes. So Phil, so the semi middle year, there's some issues with tariff cut is already building in the market. And we saw this Q2 will be relatively weak. Actually, we saw the weakness show up in the second half of March. So clearly show indication of recovery from that weakness already. So obviously, we don't know yet because probably we'll be clear to see that by end of May this month. We'll see what's happening in June. But it seems like so far, we see the demand is much stronger than Q1 right now at this moment compared with the average of quarter and especially compared with the end of last quarter, which is March very strong. So we believe most likely we're evenly distributed. So for Q1, like you mentioned, it's 7 gigawatts. So it's roughly, say, it will be like 30 to 35 gigawatts annually. So it's roughly right. So normally, Q1 is slow, and hopefully, we'll catch up in the few quarters after that. But as you say, all the forecast from our point of view just reach feeding from our customer feeding. So it's not directed feeding. We don't have any installations for our business. So that's just through the business, through our customer, we see that. So there's no guarantee that our view is right. But we think we look like there's more evenly distributed for 4 quarters. Great. So how do you see that more even distribution of demand impacting ASPs for polysilicon? Yes. So, yes, recovery from the low point in the second half of March to right now is already around $2 higher, so roughly, so average speaking. So it's still below right now, ASP is still below the high peak in the Q1. So but we still see that recovering first of all. Secondly, we will sign more contract with the mono wafer manufacturers for whole year in Q multiple years. So it seems like people don't worry about the short term of up and down and their aim in the long term stability of business. So we as a polymer maker, we really need to look in the larger scale of the things. So the market we are positioning, as I said, in previous at the beginning, is we are aiming more and more in the mono wafer supply, because which is very, very tight supply and will be huge demand in China in the future. So we are positioning that. We are also enhancing our quality. So our market, loom is much larger compared with the traditional multi crystal wafer demand, the diather market. So of course, at this moment, we are still with burst markets, but seems on the way for business we're growing in the second half this year. So for our point of view, we do not see much difference from the first half and the second half. And actually, mono wafer may be better second half because there's a certain opportunity there we are trying to address. Great. Can you remind us, in Q1, what percentage of your polysilicon was suitable for mono? And then by Q4, how does that mix change? Well, so Q1 is still like around 20% to 30%, but we're trying to ship them all actually during the end of the quarter actually because price going down a lot, so causing a lot of people stop buying. They're using a lot of inventories to consuming inventory to trying to purchasing after stabilize the product price. And so we see a lot of ordering actually inventory wise by end when we exit the quarter actually some people order and they want to take the poly. So most likely, they will take the poly in the Q2 instead of the Q1. So look at the Q1 is a relative lower than we our expectation because we really shipped only 4th to 2 months. 3rd months, we didn't ship any much for the mono wafer manufacturers, but we were starting like April and May, we're starting to pick up. So those demand we see in Q2 is really high. So again, we like to ship more than 30%. I think we can manufacture that. Again, the model wafer product in actually different. Technically, you do some adjustment to the growing your poly. So we normally is only do that according to orders and shipment schedule. So if you don't have much shipment order in hand, so we will make a polysilicon more tuned to fit into the multi wafer crystal kind of polysilicon. So but for the basic parameters, spec is same. So for bottom phosphor impurity level is very low right now. We achieved more than 50% in the March for the, we call it, E3 kind of grade. And through the end of year, we will gradually increase in that percentage to 80%. So we will we were ready for the transition, for example, in future if the mono wafer supply where demand is getting growing. And while we were increasing improve our quality to meet that demand. Okay. So could we say that by the end of the year, you will be capable of shipping as much as 80% of your volume to the mono customers? Is that fair? Yes. That's a possibility, but it's tough because right now we are for we are doing a lot of testing with our customers. So there's 2 criteria to meet the mono wafer. First is, we call it impurity, is higher. And then second one is morphology of polysilicon. So currently, we only are shipping very dense material for those mono wafers. But we are trying to testing different morphology with our customer. If that can be done or proving is also suitable, then our volume for motor wafer, production percentage of volume wafer was increasing dramatically to more than 50%, like you said, to 60%, 70%. That depends on the testing result. Great. Okay. Thank you, Guangdong. Thank you, Ming. I'll pass it on. You're welcome. Great. Thanks, Phil. The next question comes from Paul Streigler of Esplanade. Please go ahead. Hey, guys. I was pleasantly surprised by your test cost, but I'm a little bit confused. You guys started production at your new 3A facility, what in early February or so. I would have expected a little bit of expense drag. And with all the mono upgrade projects going on at Acelity, I would have expected actually, I guess, smaller quarter over quarter cost improvement. Just can you sort of explain why we didn't see much drag? And I guess what was the drag? So what would have cash cost been had you not been ramping a facility during the period? Okay. So if you just look at the major driving down, I think it's because for average depreciation costs are going down because we added the project, the capital investment for depreciation is very limited. So that's why we're going down as a manufacturer cost. I think you have pointed out is why cash cost is not going down as much compared with total cost? No, no, the opposite actually, no, the opposite. I thought cash cost would have been maybe down sequentially, but not down so much. You were ramping a new facility. In fact, it didn't according to the press release, I think you didn't start ramping that facility until early February. I would have expected some sort of drag on expenses for the quarter. Actually, I would expect your cash cost to be a little bit higher. So I was wondering what was the expense drag from the new facility, 3A, in the quarter so that I should net out to what the cash cost would have been had that facility been operating at full capacity? Well, two points is, actually, overall, in the added the capital investment is less. So we do expecting this for the for depreciation, we're going down a little bit or at least maintain same, although it's a new facility. But new reactors is more efficient because we will see some saving for the output increasing and also saving the electricity consumption. So we see actually, you mentioned in the February ramp up, but actually we're starting ramp in the beginning of January, and we almost a little bit of slightly behind in the January, but February already catch up 100% ramp up. So we Q1, we see, is already ramp up to full capacity we designed for is 18,000 metric tons per year. So what was the on a per kilogram basis or just overall, how much do you think the Phase 3a facility cost you incrementally Q1? Just from the ramp from being underutilized? We've given the guidance already. We gave the guidance last time we say it will be like 8 point $5.0 average. So this means including maintenance will be scheduled for Q3 right now. So during the maintenance, we will shut down around a few weeks, 3 weeks. So the average costs will be going up a little bit. And then again, Q4 will be low. I think we're trying to achieve Q4 will be lower than Q1 definitely. So we're expecting to see the costs will be going lower 2nd quarter than Q1, then Q3 maybe is slightly higher and then Q4 would be lower again. So and as of this year and when we exited the 2017, we should see lower cost than Q1. We reported $8.41 We have some identified area we're trying to do that. And most likely, we'll realize in the Q4 or Q1 next year, so for sure. And then one just one last question for me. When do you think you'll be shipping your last polysilicon that will be converted into wafers and modules in the first half of the year? How long what's the lead time? So if you ship polysilicon today, when does that actually turn into a wafers then into a module? I guess, when is The time duration from they receive the part second to make modules? Is that what you're No, when will your shipments and pricing reflect sort of the second half of Q3? So that will be installed in the first half of the year. But when will you start shipping polysilicon that reflects demand in the second half of the year? That would be immediately in the second half will be like normally is 3 weeks before? 2 to 3 weeks before the end of the quarter. Yes. Yes. Like mid Q Perfect. Great job this quarter, guys. Congratulations. Great. Thank you. The next question comes from Gordon Johnson of Axiom Capital. Please go ahead. Thanks for taking the question. I guess just looking to Q3, it seems like the expectation, I think, broadly is that there's going to as well as, I guess, you may have unfold in Q3, as well as I guess, I guess you may have touched on this a bit, but what you expect your cost to do? Okay. Originally, we think again, the forecast of price is difficult job. I would just tell you what do we think. We think at the beginning, price will be Q1 is strong, Q2 is strong and Q3 were weak and Q4 was recovering. That's the original kind of V curve or whatever curve you saw. But right now, actually what happens in the end of Q1, price suddenly dropped a lot. So it's dropped like several dollars, dollars 3 to $4 And then right now, recovering back $2 So it's hard to say. So if we combine with original vision for next two quarters, so we will see already like a kind of little bit of W shape kind of thing. So it's if you believe me, so Q1 is strong and when we exit Q1, it's weak going down. And then Q2 is slightly going up. And then everybody said the second half is weak because the tariff cuts, so we'll be going down a little bit and Q4 will recover. So it's definitely we know it's not straight line. So it's not in a monotrem of going up or monotrem going down or flat. That's not the case. But fluctuation is always reflecting the demand and supply. So when oil price going down below $12.30 or $0.50 and the manufacturer polysilicon were restrained and they were reduced production because some manufacturer losing money, causing the supply tight and driving the price up and until some point and oversupply maybe too much high cost for the downstream producers and then we'll buy less and then pull the price back. So that's always the mechanism of the market that we'll play, and that give you some kind of instead of straight line into kind of W shape or M shape, whatever the shape is. So it's a fluctuation. But as we see, this time, the fluctuation is much less than in the history. So it's like $2 to $3 up and down. So it's manageable for the industry. So we do not see much problem for the whole year as we enter the year. So we still believe roughly is evenly distributed for polysilicon capacity coming online. And I think as we new polysilicon capacity coming online. And I think as we've seen recently, there's been some pressure on prices, clearly that's lifted recently. Are you concerned at all that all this incremental capacity coming online looking into No, nothing coming out in the first half. We're probably the only guy really bring to the real thing, real polysilicon. What you heard is we heard a lot on the paper or news media, whatever voice, but there's no solid silicon. So they said they were selling producer of solid silicon in the first half. We don't see those guys. Then most likely, they were maybe, if lucky, will be second half or maybe later. I know what you're saying, and they announced a lot of things. It's announced like 200,000 metric ton or even higher some guys for they will do, but we don't see those silicon come up yet. Okay. So you're not concerned at all that, that silicon may maybe it's not online now? Well, maybe they can produce some silicon, but not high purity silicon. So we are totally in different market. And they maybe can sell to some other people to using for some other purpose. But we know our Chinese market and manufacture very well. And it's not as straightforward. We wish them good luck. But if you just heard a lot of things, if you have any please confirm that if they already have silicon to sell. We as we know, there's no such sales in the market right now today. Okay. So if I'm hearing you right, you're saying that a lot of the new capacity coming online from the various players, some of which are established, you're saying you're not seeing that in the market right now? They're not funded. They haven't started construction. No, we're talking about the larger the significant amount like more than 20,000 metro town, those kind of things. If we added like a few 1000 metro town, we obviously cannot see from the market. I'm talking about the new suppliers, okay? And there's no and we know that several projects has been delayed for like a ULink project with IEC has been delayed for next year. This year will not happen, okay? And other things we heard is a delay for trial production, but it's not officially announced. So I cannot quarter those things. But you can find out. So if anybody from downstream customers, if they get any shipment from those new supplies, we will find out. Right. And then lastly, just looking at the broader Chinese market and looking at the project market, what are you guys seeing with respect to curtailments and actual payment of the feed in tariffs? Have you seen any improvement there and specifically in any provinces? Have you seen any improvement or are things still somewhat the same with respect 30% to 40% curtailments and a lack of fit payments? Thanks for the question. No, actually, we do not see significant change from the situation. Actually, last year, we saw some payment of our historical due to payment, but this situation is still lasting, I think. Are they trying to find a way for trading, new trending market for those things, but it's still in the early stage implementation for the new method most likely will be next year. Thank you. Great. Thank you. 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 attending the conference call today. Should you have any further questions, please don't hesitate to contact us. Thank you and bye bye. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.