Good day, and welcome to the Daqo New Energy 2017 1st Quarter results Conference Call. 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 first quarter 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 Dr. Gongda Yao, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Dr. Yao on market and operations, then Mr. Yang will discuss the company's financial performance for the first quarter of 2017. 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 statement. Further information regarding these and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties.
All information provided in today's call is as of today, and we undertake no duty to update such information except as required under applicable law. Also, during the call, we will occasionally reference monetary amounts in 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 our CEO, Dr. Yao. Please.
Hello, everyone, and thank you for joining our call today. We are pleased with the strong financial and operation results we achieved for the first quarter of 2017. I would like to thank our entire Xinjiang Polysilicon team for their great efforts to make the first quarter of 2017 our best quarter ever in terms of cost structure, production volume and polysilicon quality. During the quarter, we fully ramped up our Xinjiang Polysilicon facility to 18,000 MT annual capacity and achieved full production. Our capacity ramp up progressed ahead of schedule. We produced 4,927 mt of polysilicon in the first quarter, an increasing of 100% as compared to the first quarter of 2016.
While achieving a substantial increase in sequential polysilicon production volume, we also saw strong demand for our high-quality products from our customers. As polysilicon external sales volume reached the 4,223 mt 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 at 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 GW - 80 GW for 2017, compared to approximately 75 GW -78 GW 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 the company to weather through the market volatility.
During the quarter, we also achieved the lowest ever cost structure with total production cost of $8.41 per kilo, and a cash cost of $6.68 per kilo. With our low production cost, gross margin was 42.8% for the first quarter of 2017. The company generated $22.9 million in net income, and $41.7 million 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 first quarter 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 backend package system in the clean room 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 cost. At the same time, we continue to pursue various programs and initiatives on the polysilicon quality improvement, which will help the company to meet the ongoing growing demand for ultra-high purity polysilicon, such as demand from the monocrystalline wafer manufacturers. We are currently undergoing qualification at the additional monocrystalline 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 improvement initiatives should increase our corporate flexibility, and it reinforce our competitive position as one of the leading polysilicon supplier in China, which will allow us to take advantage of additional opportunities in 2017 and beyond. Let me provide the outlook for the second quarter of 2017. With the fully ramped capacity, we expect to produce 4,800 MT - 5,000 MT polysilicon, and then sell approximately 4,200 MT - 4,500 MT to external customers during the second quarter of 2017. The above external sales guidance exclude a shipment of polysilicon to be used internally by our Chongqing solar wafer facility, which utilize polysilicon for its wafer manufacture operation.
Wafer sales volume is expected to be approximately 23.5 million to 24 million pieces in the second quarter of 2017. I will turn the call to our CFO, Mr. Ming Yang, for the financial updates.
Thank you, Dr. Yao. Good day, everyone. Thank you for attending our call today. Now I will provide the financial updates for the first quarter of 2016. Revenues from polysilicon sales to external customers were $ 70.4 million, an increase of 115% from $ 32.8 million in the fourth quarter of 2016, and 76% from $ 39.9 million in the first quarter of 2016. External polysilicon sales volume was 4,223 MT , an increase of 91% from 2,209 MT in the fourth quarter of 2016, and an increase of 45% from 2,905 MT in the first quarter of 2016.
The average selling price of polysilicon was $16.66 per kg in Q1 2017, an increase of 11.4% from $14.96 per kg in the fourth quarter of 2016. The increase in polysilicon revenue as compared to the fourth quarter of 2016 was primarily due to higher polysilicon sales volume and higher ASPs. Revenues from wafer sales were $13.4 million, compared to $13.4 million in the fourth quarter of 2016, and $17.8 million in the first quarter of 2016. Wafer sales volume was 22.4 million pieces, compared to 21.3 million pieces in the fourth quarter of 2016, and 22.1 million pieces in the first quarter of 2016.
Gross profit was approximately $ 35.9 million, an increase of 153% from $ 14.2 million in the fourth quarter of 2016, and an increase of 115% from $ 16.7 million in the first quarter of 2016. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon assets in Chongqing, was approximately $ 36.9 million, an increase of 133.5% from $1 5.8 million in the fourth quarter of 2016, and 95% from $ 18.8 million in the first quarter of 2016. Gross margin was 42.8%, increased from 30.7% in the fourth quarter of 2016 and 29% in the first quarter of 2016.
The increase in gross margin as compared to the fourth quarter of 2016 was primarily due to higher quarterly polysilicon ASPs and lower polysilicon production costs. In the first quarter of 2017, total costs related to the non-operational Chongqing polysilicon assets, including depreciation, were $1 million, decreased from $ 1.6 million in the fourth quarter of 2016 and $2 million in the first quarter 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, the non-GAAP gross margin was approximately 44%, increased from 34.1% in the fourth quarter of 2016 and 32.6% in the first quarter of 2016. Selling, general, and administrative expenses were $ 4.1 million, compared to $ 3.5 million in the fourth quarter of 2016 and $ 4.1 million in the first quarter of 2016. Research and development expenses were approximately $ 0.4 million, compared to $ 2.8 million in the fourth quarter of 2016 and $ 0.1 million in the first quarter of 2016. The research and development expenses fluctuate from period to period according to the R&D activities occurred in such periods.
Other operating income was $ 0.8 million, compared to $ 1.9 million in the fourth quarter of 2016 and $ 0.7 million in the first quarter 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 $ 32.2 million, an increase of 235% from $ 9.6 million in the fourth quarter of 2016, and 142% from $ 13.3 million in the first quarter of 2016. Operating margin was 38.4%, increased from 20.7% in the fourth quarter of 2016 and 23.1% in the first quarter of 2016.
Interest expense was $ 4.3 million, compared to $ 4.1 million in the fourth quarter of 2016 and $ 3.9 million in the first quarter of 2016. EBITDA was $ 41.7 million, an increase of 137% from $ 17.6 million in the fourth quarter of 2016, and increase of 90% from $ 21.9 million in the first quarter of 2016. EBITDA margin was 49.8%, increased from 38.3% in the fourth quarter of 2016 and 38% in the first quarter of 2016. Net income attributable to Daqo New Energy shareholders was $ 22.9 million in the first quarter of 2017, increased from $ 4.1 million in the fourth quarter of 2016 and $ 8.3 million in the first quarter of 2016.
Earnings per basic ADS were $2.18, increased from $0.39 in the fourth quarter of 2016 and $0.80 in the first quarter of 2016. As of March 31, 2017, the company had $ 61.2 million in cash and cash equivalents and restricted cash, compared to $ 31.9 million as of December 31, 2016, and $ 35.7 million as of March 31, 2016. As of March 31, 2017, the accounts receivable balance was $ 13.1 million, compared to $ 4.8 million as of December 31, 2016. As of March 31, 2017, the notes receivable balance was $ 11.7 million, compared to $13 million as of December 31, 2016.
As of March 31, 2017, total borrowings were $ 236 million, of which $ 129.2 million were long-term borrowings, compared to total borrowings of $ 217.9 million, including $ 111.9 million of long-term borrowings as of December 31, 2016. For the three months ended March 31, 2017, net cash provided by operating activity was $ 28.6 million, increased from $ 22.5 million in the same period of 2016. For the three months ended March 31, 2017, net cash used in investing activities was $ 16.6 million, compared to $ 17.5 million in the same period of 2016. Capital expenditures related to purchase of PP&E were $16 million 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 million-$50 million in capital expenditures. For the three months ended March 31st, 2017, net cash provided by financing activities was $16.5 million compared to net cash used in financing activities of $3.3 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. That concludes the official part of our presentation. Now let's have the Q&A session.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Philip Shen of Roth Capital Partners. Please go ahead.
Good. 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? How do you expect the step down in the feed-in tariff in China on June 30th to impact demand?
Hi, Phil. That's really based on conversations with our downstream customers. Most of them are engaged in international business for modules. Also from some of the recent industry reports on supply and demand for PV and downstream. It looks like overall the first half I think most forecasts are looking at maybe 30 GW - 35 GW of installation. Well, maybe more than that, I'm sorry, 35 GW in that range. The second half, probably higher than that. I think that's what most of the analysts reports we looked at indicated. Also, you know, our downstream customers are also looking at that as well.
I think the rush for Chinese demand is less than it was, for example, for 2016, but they're also seeing, you know, increase in projects, like the projects for distributed generation, you know, and other like bigger project within China that's geared for the second half installation.
Great. In terms of China demand, can you share I think we saw 7 GW in 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. I think Q2 should be higher than Q1. That's what it looks like.
Yeah. Phil, the semi, you know, middle year, there's some issues with tariff cut is already built in the market. We thought is Q2 will be relatively weak. Actually, we saw the weakness is show up in the second half of March. Clearly show indication of recovery from that weakness already. 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. It seems like so far, we see the demand is much stronger than first quarter right now at this moment, compared with the average of quarter and especially compared with the end of last quarter, which is March, as very strong.
We believe most likely we're even in distributor. For Q1, like you mentioned, is 7 GW. It's, you know, roughly say is it will be like a 30 GW - 35 GW annually. It's, it's roughly right. Normally Q1 is slow and hopefully will catch up in the few quarters after that. You know, as you say, all the forecasts from our point of view, just we took feeling from our customer feeling. It's not direct feeling. We don't have any installations for our business. That's just through the business, through our customer, we see that. There's no guarantee that our view is right. We look like there's more evenly distributed for four quarters.
Great. How do you see that more even distribution of demand impacting ASPs for polysilicon?
Yeah. ASP, recovery from weak, from the low point on the second half of March to right now is already around $2 higher, you know, roughly. Averages speaking. Is still below right now, ASP is still below the high peak in the Q1. We still see the recovery first of all. Secondly, we will sign more contract with the mono wafer manufacturers for whole year, even few multiple years. Seems like people don't worry about the short term of up and down, and they aim in the long-term stability of business.
As a poly maker, we really need to look in the larger scale of the thing. 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 future. We are positioning that. We are also enhance our quality. Our market, you know, room is much larger compared with the traditional multicrystalline wafer demand, the that market. Of course, at this moment, we are serve both markets. Seems the mono wafer business were growing in the second half this year.
From our point of view, we do not see much difference from first half and the second half. Actually, mono wafer may be better second half. There's a certain, you know, opportunity there we are trying to address.
Great. Can you remind us, in Q1, what % of your polysilicon was suitable for mono? Then by Q4, you know, how does that mix change?
Well, Q1 is still like 20% - 30%. We try to ship more actually during the end of the quarter, actually, because price going down a lot, causing a lot of people to stop the buying. They're using a lot of inventories to consuming inventory, to trying to purchasing after stabilize the polysilicon price. We see a lot of ordering actually, you know, inventory-wise, when we exited the quarter, actually, some people ordered, they want to take the polysilicon. Most likely they will take polysilicon in the Q2 instead of the Q1. Look at the Q1 is relative low than our expectation, because we really ship only for the two months.
For months we didn't ship any much for the mono wafer, the manufacturers. We were starting like April and May, we starting pick up. Those demand we see in Q2 is really high. Again, we like it to ship more than 30%. I think we can manufacture that. Again, the mono wafer product and slightly different, technically, you do some adjustment to the growing your polysilicon. We normally is only do that according to orders and shipment schedule. If you don't have much shipment order in hand, we will make a polysilicon more tuned to fit into the multicrystalline wafer kind of polysilicon.
But, you know, for the basic parameters, spec is same. It's for boron, phosphorus, impurity level is very low right now. We achieved more than 50% in the March for the we call it E3 kind of grade. Through the end of year, we will gradually increase in that percentage to 80%. We were ready for the transition, for example, in future, if the mono wafer supply were demand is getting growing, and while we were increasing, improve our quality to meet that demand.
Okay. 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?
Yeah. That's a possibility, but it's tough because right now we are for We are do lot of testing with our customers. There's two criteria to meet the mono wafer. First is, we call it impurity, is higher. Second one is the morphology of the polysilicon. Currently, we only are shipping very dense material for those mono wafers. We are trying to testing different morphology with our customer. If that can be done or proving is also suitable, our volume for mono wafer production percentage for mono wafer will increase dramatically to more than 50%, like you said, to 60%, 70%. That depends on the testing result.
Great. Okay. Thank you, Gongda . Thank you, Ming. I'll pass it on.
You're welcome.
Great. Thanks, Phil.
The next question comes from Paul Strigler of Esplanade. Please go ahead.
Hey, guys. I was pleasantly surprised by your cash costs, but I'm a little bit confused. You guys started to production at your new Phase 3A facility, what, in early February or so. I would have expected a little bit of expense drag. With all the mono upgrade projects, going on at the facility, I would have expected actually, I guess, smaller quarter-over-quarter cost improvement. Can you sort of explain why we didn't see much drag? I guess, what was the drag? What would have cash cost been had you not been ramping a facility during the period?
Okay. If you just look at the major driving down, I think it's because for average depreciation costs are going down because the capital investment for depreciation is very limited. That's why we're going down as a manufacture cost. I think you point out is why cash cost is not going down as much compared with because of cost, right? Yeah.
No, the opposite. No, the opposite. I thought cash costs 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. I would expect your cash costs to be a little bit higher. I was wondering, what was the expense drag from the new facility, Phase 3A, in the quarter as you net out to what the cash costs would have been had that facility been operating at full capacity.
There are two points overall in the added, the capital investment is less. We do expecting this for the for depreciation were going down a little bit, or at least maintain same, although it's a new facility. New facility, we added the new reactors is more efficiently because we will see some saving for the output increasing and also the saving the electricity consumption. We see Actually, you mentioned that in the February ramp up. Actually, we started ramp in the beginning of January, and we almost a little bit behind in the January, but February already catch up 100% ramp up.
We first quarter we see is already ramp up to full capacity we designed for. It's 18,000 MT per year.
What was the on a per kilogram basis or just overall, how much do you think the Phase 3A facility costs you incrementally, Q1? Just from the ramp, from being underutilized for the first.
We give the guidance already. We give the guidance last time we say will be like a $8.50 average. This means including, maintenance will be scheduled for Q3 by now. During the maintenance, we will shut down the, around a few weeks, three weeks. The average cost will be going up a little bit and then, you know, again, like fourth quarter will be low. I think, we trying to achieve, fourth quarter will be lower than first quarter, definitely. We expecting to see the cost will be going lower second quarter, than first quarter, then, Q3 maybe, is slightly high, and then Q4 will be lower again.
As this year end when we exit the 2017, we should see lower cost than Q1. We reported $8.41. We have some identified area we are trying to do that, and most likely will realize in the Q4 or Q1 next year. For sure.
Just one last question from 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? If you ship polysilicon today, when does that actually, you know, turn into a wafer, then into a module?
You mean the time duration from they receive the polysilicon to make modules?
Well, yeah. Well, no. When will your shipments and pricing reflect sort of the second half of Q3? That will be installed in the first half of the year. When will you start shipping polysilicon that reflects demand in the second half of the year?
That would be, I mean, immediately in the second half will be like, normally is, three weeks before.
two to three weeks before the end of the quarter.
Yeah.
Yeah. Like mid-June is like, likely be the cutoff.
Perfect. great job this quarter, guys. Congratulations.
Great. Thank you.
Again, if you have a question, please press star then one on a touch tone phone. 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 gonna be a big fall off in demand. Can you guys give us some sense of how you expect pricing trends to unfold in Q3? As well as, I guess, I guess you may have touched on this a bit, but what you expect your costs to do?
Okay. Originally, we think, you know, again, the forecast of a price is difficult job. You know, I wish to tell you what do we think. We think at the beginning, price would be Q1 is strong, Q2 is strong, Q3 were weak, Q4 is recovering. That's the original kind of, you know, V curve or whatever curve you saw. Right now, actually, what happens in the end of Q1, price suddenly dropped a lot. It's dropped like several dollars, $3 - $4 . Right now, recovering back $2 . It's hard to say. If we combine with original vision for next two quarters, we will see already like a kind of little bit W shape kind of thing.
It's, if you believe me, it's Q1 is strong, it end up when we exit the Q1 is weak, going down. Q2 started going up, everybody said the second half is weak because the tariff cut, we'll be going down a little bit, Q4, we're recovering. Definitely we know it's not straight line, it's not, it's not in a mono term of going up or mono term going down or, you know, flat. That's not the case. Fluctuation is always reflecting the demand and supply. When poly price going down below $12.30 or $12.50, manufacturer polysilicon were restrained, they were reduce production because some are manufacturer losing money or causing the supply tight and they're driving the price up.
Until so to some point, and then oversupply maybe too much high cost for the downstream producers, and they will buy less and then pull the price back. That's the always the mechanism of the market that will play. That give you some kind of instead of in a straight line into kind of W shape or M shape, whatever the shape is. It's a fluctuation. As we see, this time is the fluctuation is much less than in the history. It's like a $ 2 - $ 3 up and down. It's manageable for the industry. We do not see much problem for whole year as we enter the year.
We still believe, roughly is evenly distributed for first half and the second half. That's why we say that.
Okay, that's helpful. When we look at it, there's quite a bit of capacity coming online, new polysilicon capacity coming online. 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?
Not yet. No.
Looking into-
Nothing, nothing come out in first half. We probably the only guy really bring to the real thing, real polysilicon. You know, We heard a lot on the paper or news media, whatever, voice, but there's no polysilicon. They said they will start and produce polysilicon in the first half. We don't see those guys. They most likely will maybe, if lucky, be second half or maybe later. I know you what you're saying, and they announced a lot of things. It's announced like 200,000 MT , even higher some guys for They will do, but we don't see those polysilicon come out yet.
Okay. You're not concerned at all that that silicon maybe it's online now?
Oh, no. Yeah, well, they maybe can produce some silicon, but it's not high-purity silicon. We are totally different market, and they maybe can sell to some other people to using for some other purpose. You know, we know our Chinese market and manufacturer very well, and it's not as straightforward. We wish them good luck. If you just heard a lot of things, if you have any, please confirm that if they already have silicon to sell. As we know, there's no such sales in the market right now today.
Okay. 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, you know, 20,000 MT , those kind of things. If we added, like, a few thousand metric ton, we obviously cannot see from the market. I talking about the new suppliers. Okay. We know that several projects has been delayed for, like, a Yichang project with IEC has been delayed for to next year. This year's will not happen. Okay. Other things we heard is the delay for trial production, but it's not officially announced, so I cannot quote those things. You can find out.
If, if anybody from downstream customers, if they any shipment from those, new suppliers, you will find out.
All right. 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 to, you know, 30% -40% curtailments and a lack of FIT payments? Thanks for the question.
No, actually, we do not see a significant change from the situation. Actually, last year, we saw some payment from historical, due to payment, but, this situation is still lasting, I think. They're trying to find a way for trading, new trading market for those things. 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, bye-bye.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.