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Daqo New Energy Corp. (DQ)

Q3 2014 Earnings Call· Thu, Nov 13, 2014

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Transcript

Operator

Operator

Good morning and welcome to the Daqo New Energy Third Quarter 2014 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to CFO, Mr. Bing Sun. Please go ahead.

Bing Sun

Analyst · ROTH Capital Partners

Thank you, everybody, for joining us today for Daqo New Energy's third quarter 2014 unaudited financial results conference call. Daqo New Energy just issued its financial results for the third quarter 2014, which can be found on the company's website. To facilitate today's conference call, we have also prepared a PPT presentation for your reference. Today, attending the conference call we have Dr. Yao, our CEO, and myself. The call today will feature an update from Dr. Yao on business and operational developments, and then I will discuss the company's financial performance for the third quarter. After that, we will open the floor to Q&A from the audience. Without further delay, I will now turn the call over to Dr. Yao.

Gongda Yao

Analyst · ROTH Capital Partners

Thank you, Bing. Thank you, all, for joining the conference call. We are excited to report another successful quarter, which delivered the best ever results in our Xinjiang polysilicon facilities in terms of cost of structure, production volume and shipments and the record third consecutive profitable quarter. In the third quarter of 2014, our operation team in our Xinjiang facilities did excellent job to further optimize the manufacturing process and improve production efficiency and as a result achieved a record high quarterly production volume of 1,748 metric tons without adding any additional equipment in such quarter. As a result, our total production cost was recorded to $13.05 per kilo with the cash cost of $10.72 per kilo. We expect to continue to produce polysilicon in our Xinjiang facilities at this output level, which exceeds our nameplate capacity by 9%. We believe we will continue to maintain this level of production cost until our existing capacities are upgraded to our new hydrochlorination system, which we expect will further lower our production cost to $12 per kilo by end of the second quarter of 2015. In the third quarter of 2014, we shipped 1,598 metric tons polysilicon, increasing from 1,436 metric tons in the previous quarter. We also shipped 18.5 million pieces of wafer, increasing from 17.6 million pieces in the previous quarter. We achieved EBITDA margin of 34.7% and positive operating income of $9.5 million. Our net income attributable to Daqo shareholders was $5.9 million, up from $4.5 million in the second quarter of 2014. As for polysilicon expansion project in Xinjiang, we are on track with the construction and installation work. We expect to fully ramp up the capacity to 12,150 metric tons by end of second quarter 2015 and thereafter reduce our cost to about $12 per kilo. In…

Bing Sun

Analyst · ROTH Capital Partners

Thank you, Dr. Yao. Let's move through the Q3 financial performance. Revenue was $47.3 million, increasing from $43.7 million in the second quarter. The company generated revenue of $32.8 million from polysilicon, increasing from $31 million in the second quarter. The increase from the second quarter was primarily due to higher sales volumes offset by lower ASP. While ASP decreased from $22.04 per kilo in Q2 to $21.50 per kilo in Q3, sales volume increased from 1,406 metric ton in Q2 to 1,528 metric ton in Q3. The company generated $14.5 million from sales of wafers compared to $12.7 million in the second quarter. The increase from the second quarter was primarily due to the increased proportion of sales of internally produced wafers versus wafer OEM. In Q2, we sold a total 18 million pieces of wafer, including 7.6 million pieces of wafer OEM. In Q3, we sold a total of 17 million pieces of wafer including 1.2 million pieces of wafer OEM. Note that after the end of Q3, we have 104 million pieces of wafer in general, which was not including in Q3 revenue. Gross profit was $11.6 million compared to $10.1 million in the second quarter. Gross margin was 24.5% compared to 23.1% in the second quarter. In spite of the ASP decrease, we were still able to expand our gross margin due to our continuous cost reduction efforts In the third quarter of 2014, total costs related to non-operational Chongqing polysilicon plant including depreciation were $3.4 million compared to $3.4 million in the second quarter. Excluding such costs, the non-GAAP gross margin was approximately 31.7% compared to 30.9% in the second quarter. On a standalone basis, non-GAAP gross margin for Xinjiang polysilicon facilities was 42.5% in Q3 compared to 39.6% in Q2. Non-GAAP gross margin for…

Operator

Operator

(Operator Instructions) The first question comes from Philip Shen of ROTH Capital Partners.

Philip Shen - ROTH Capital Partners

Analyst · ROTH Capital Partners

I'd like to start off with understanding where ASPs might go in Q4 and Q1. Given the demand outlook you have for Q4 and the early part of next year along with the poly being imported into China under the processing trade rules, how do you expect poly ASPs to trend in Q4 and into Q1?

Bing Sun

Analyst · ROTH Capital Partners

Currently, as we just announced that the poly ASP is around $21.50 more or less. And you know that in the mid-August, China announced that starting from September 1st the application for solar grade polysilicon processing trade imports would be suspended and all existing agreements approved beforehand could remain valid until the end of 2014. So the foreign polysilicon makers significantly increased their supply into China recently. Even though the poly ASP does not increase much, we heard from our customers and other different channels that the end-market demand in the fourth quarter is very strong. Capacities of top-tier downstream manufacturers have almost been sold out. And the poly trend we believe will very much likely continue to early next year, as demand in the first quarter could be quite strong in the markets such as UK and Japan. Also we expect as Chinese government adopts the new regulation for polysilicon imports starting from next year and the market remains its positive trend, the poly ASP will be strongly supported at the current level. So in general, we don't see much additional poly supply will come to market in the next year. We believe the growth offering will keep the supply/demand in balance and we believe the polysilicon ASP will likely to remain in the range of $20 per kilo to $25 per kilo for the whole year of 2015, and I'm sure that Yao can expand on that.

Gongda Yao

Analyst · ROTH Capital Partners

In operation side, I think our Q4 we'll continue our efforts to the costs down. And as you know, we already achieved the level of $13 per kilo with the current technology before upgrading to hydrochlorination. We have a very limited to room to further keep costs down, but we still have our efforts to, at this cost level, increasing upward for Q4 from Q3 level. As we said, the level is 9% above the nameplate of the capacity for our first phase for Xinjiang facility. So it stays at 6,150 metric ton per year. So we will achieve that more than like almost 10%. So that's our plan so far. And looking for next year, if process trading, as Bing said, will be terminated by next year as the Chinese government indicated, so we expect the supply for polysilicon in Chinese market will be reduced next year from Q1, and in that sense, with the strong support for polysilicon price. And we still believe the demand for downstreaming will be strong in early next year.

Philip Shen - ROTH Capital Partners

Analyst · ROTH Capital Partners

Given the high-quality poly that you guys produce, we can imagine that tier-1 customers would likely do more business with you, especially as you expand to 12,000 metric tons. Can you update us on some of the discussions and dynamics you're experiencing with some of your existing customers and potential new customers?

Gongda Yao

Analyst · ROTH Capital Partners

Within the next year, because our second phase will be in line by second quarter, we're trying to ramp up the full capacity. So our 2015 capacity already booked with long-term contract by more than 50%. And in also 50%, our capacity in the 2016 also is secured with long-term contracts and with only three customers so far. So there are more customers talking with us to establish or continue our supply customer relationship. So we still have some room to sign more contracts for 2015 and 2016. But our experience is if more than 50% is signed, I think our demand in the market, as usual like 2013, 2014, we also signed a similar amount of contracts with customers so far. Our inventory level and the historical data shows that. So we believe next two years, our production volume can be securely signed off with our major customers we are doing business with right now. So very optimistic about the added capacity will be shipped in the future for next two years.

Bing Sun

Analyst · ROTH Capital Partners

We have already signed 60% of our 2015 capacity with long-term contracts with customers and 50% of our 2016 capacity.

Operator

Operator

The next question comes from Pranab Sarmah from AM Capital.

Pranab Sarmah - AM Capital

Analyst · AM Capital

Congratulations on cutting down your polysilicon product cost to very significant level. I'm a little bit curious, you have cut more than $1 cash cost over one quarter, so how could you manage to do that. Could you explain a little bit of tricks you have done so far?

Gongda Yao

Analyst · AM Capital

So what have we done from Q2 to Q3 is actually we increased our TCS production efficiency mainly with the hydrogenation process. Our converters, we call it, are converting the silicon chloride to TCS. Our efficiency and also our volume to conversion is both improved. So there are two effects by doing that. There's two good benefits. One is greatly reduced silicon consumption for the polysilicon manufacturer. We call it silicon MGS consumptions, reduced. Secondly, we also increased the production volume. As you see, we have been improving to the 9% above our nameplate capacity. So for the volume output improvement will reduce depreciation or the fixed costs and some of cost production cash cost as well. And for the TCS efficiency improvement will reduce silicon consumption in terms of cash cost were hugely reduced. Of course when you improve the output, you also reduce the labor cost, et cetera, to normally near increasing amount. So that's why we reduced like $1. But remember, if I compare with Q2, also Q2 had absorbed the shutdown maintenance cost for about one week. So within Q3, we did not have that shutdown as well. So if you compare with Q2 number, that's why we have about $1 reduction.

Pranab Sarmah - AM Capital

Analyst · AM Capital

You have done a very good job in cutting the product cost. Probably you are in target to get your whole production cost target by mid-next year. But still 2,000 ton capacity, you are relatively much smaller player compared the global peers. So what do we look at basically to get a visibility in the global market? It should have a much higher capacity than 12,000 tons. So what your management is thinking on the top level, on Board level, how should you go about that?

Gongda Yao

Analyst · AM Capital

We're just focusing on our current expansion trend. We want to execute this current expansion plan well and to get our cost down to $12 level by end of Q2 next year. So that's our current focus right now.

Bing Sun

Analyst · AM Capital

According to current cost, I think our hydrogenation process at this level is probably the best in the industry already. We've upgraded to hydrochlorination process. We still have at least $1 cost down by next year. So this is our focus. I think we already demonstrated that within even 6,000 metric ton capacity, we're doing a cost of about $13 level, so we have a high confidence that with 12,000 metric ton capacity, we can reduce to like at least to $12 per kilo level. That would put us truly in the leader of the cost for the polysilicon manufacturers worldwide.

Pranab Sarmah - AM Capital

Analyst · AM Capital

What is the wafer ASP for 3Q? And do you have any plans for the wafer business, like are you likely to maintain the status quo or you want to expand a bit on there?

Bing Sun

Analyst · AM Capital

For now, we don't have any plans to expand our current wafer capacity. Regarding your question on ASP, ASP per wafer is about $0.87. So Q3 gross margin was 7.6%, which was down a little bit from 10.6% from the second quarter.

Gongda Yao

Analyst · AM Capital

So the ASPs are $0.87.

Operator

Operator

Our next question comes from Pierre Maccagno from Dougherty.

Pierre Maccagno - Dougherty

Analyst · Dougherty

To move from $13 to $12 per kilogram, what are the things that you have to do to achieve that?

Gongda Yao

Analyst · Dougherty

Pierre, according to our plan, we upgraded our technology for hydrogenation to hydrochlorination. So we've already reduced about 30% of electricity consumption, which is the major portion of our cash cost right now. As utility costs, electricity, water, steam is our 50% of cash cost. So if we reduced electricity by 30% or we easily can reduce around RMB10, which is equivalent to $1.5 for our current level. So if we can continue our current other performance, if we reduce our 30% of electricity cost, we can easily achieve $12 level. So that's our plan in the cost of structure for next year. Next year, we have two areas we have done before end of Q2. One is bringing our new technology hydrochlorination online for all 12,000 metric tons. And second, of course, we have additional 6,000 metric ton manufacturing capacity.

Pierre Maccagno - Dougherty

Analyst · Dougherty

So the hydrochlorination is not fully ramped as of the third quarter, correct?

Gongda Yao

Analyst · Dougherty

No, hydrochlorination would start running the early next year and would be ramped up 100% by second quarter of 2015.

Pierre Maccagno - Dougherty

Analyst · Dougherty

This third quarter, the cost reduction had nothing to do with the hydrochlorination?

Gongda Yao

Analyst · Dougherty

No, nothing to do with that. That's the current best performance compared with the second quarter, because we have about one week shutdown for maintenance. So that's why we have improvement. But our major is utilization for silicon or TCS production cost down, causing this cash cost down. And also, as I mentioned, we also improved output for Q3 compared with Q2. This brought our depreciation down too as well.

Pierre Maccagno - Dougherty

Analyst · Dougherty

And could you remind on the polysilicon gross margin?

Bing Sun

Analyst · Dougherty

Polysilicon gross margin, Pierre, like we just talked about, 42.5% on a standalone basis compared to 39.6% in Q2.

Pierre Maccagno - Dougherty

Analyst · Dougherty

And the CapEx for the quarter?

Bing Sun

Analyst · Dougherty

CapEx for the quarter, that's $35.2 million. We spent a total of $63.7 million. For this quarter, we spent $35.2 million. $35.2 million was included in the total of $63.7 million, Pierre.

Pierre Maccagno - Dougherty

Analyst · Dougherty

This $63.7 million includes the last quarter?

Bing Sun

Analyst · Dougherty

For the historical total, total we spent on the Xinjiang project.

Gongda Yao

Analyst · Dougherty

It's the total spend up to Q3. Within Q3, we spent $35.2 million.

Pierre Maccagno - Dougherty

Analyst · Dougherty

So regarding wafers, I guess the demand for stronger or do you see that demand increasing?

Bing Sun

Analyst · Dougherty

Wafer demand is very strong. And like this quarter, we believe all our production will be totally sold out.

Gongda Yao

Analyst · Dougherty

We also see a very slight increase in the ASP.

Operator

Operator

Our next question comes from Vincent Chi of SWS Research.

Vincent Chi - SWS Research

Analyst · SWS Research

You guys have spent a lot of cash in Q3, which means you have already pushed a lot of improvements here. So could you give us more details in terms of your capacity expansion side for next year?

Gongda Yao

Analyst · SWS Research

Right now we're still doing some on-site construction work. And at this moment, Xinjiang's temperature is very close to about zero. So we can do some welding things, but we still do some maybe not really critical welding. After minus-5 degree Celsius, we cannot do much welding, but we still can do other construction work right now. After Christmas, where most of work will be done in-house installation. So during the whole winter, a lot of in-house installation will continue until everything, installation is completed. So the construction, as we said, the project is still on track within the schedule, and we plan for something will be done before the cold weather happening, which we're expecting by end of November. And the all construction work should be completely finished. Expansion will on track. That's why Q3 spending is high, because we're trying to ship into on-site.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Bing Sun for any closing remarks.

Bing Sun

Analyst · ROTH Capital Partners

Okay. Thanks again, everybody. And as always if you guys have any questions, feel free to contact me directly or you may call Kevin He. Thanks again and bye bye.

Operator

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.