Daqo New Energy Corp. (DQ) Q2 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Daqo New Energy 2016 Second Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations Officer. Please go ahead.

Hello, everyone. I am 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 second quarter of 2016, which can be found on our website at www.dqsolar.com. To facilitate today’s conference call we also have 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, and then Mr. Yang will discuss the company’s financial performance for the second quarter of 2016, 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 provision 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 maybe 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 for the audience. Without further ado, I now turn the call over to our CEO, Dr. Yao.

Hello, everyone, and thank you for joining our call today. First of all, I would like to thank our entire team for their hard-work and the dedication to deliver phenomenal operation and the financial performance for the second quarter of 2016. During the quarter, we produced a record-high 3,570 metric ton of polysilicon, which surpassed our annual nameplate capacity of 12,150 metric ton. With our continuous efforts on cost reduction, we implemented a process improvement, which reduced our energy usage even further and reached our lowest ever cost structure with $9.43 per kilo in total cost and $7.42 per kilo in cash cost. Our current cost structure is 27% below Q2 of 2015 level, which at the time was already one of the lowest in the world. We believe we continue to be one of lowest cost producers of polysilicon in the world in the second quarter 2016. We have also identified further technology upgrades and process improvement with a roadmap to reduce our cost even lower. In the second quarter 2016, the demand for polysilicon was very strong. We saw substantial increase in polysilicon orders and shipments across wide range of customers. With a tight supply environment, market ASPs improved meaningfully, from $13.72 per kilo in the first quarter to $17.24 per kilo in the second quarter of 2016. For the second quarter of 2016, we not only delivered the best ever quarter for the company in terms of operation performance, but also excellent financial results. We achieved revenue of $71 million, with non-GAAP gross margin of 43.9%, EBITDA margin of 48.9%, and GAAP earnings per basic ADS of $1.90. In particular, we generated strong cash flow from operating activities of $66.6 million in the first-half of this year. Entering into the third quarter, we continue to see strong demand and robust orders from customers. The market for polysilicon within China remains tight supplied, with low level of inventory across the domestic suppliers and customers. Based on current market and customer order trend, we are seeing a stable pricing environment, and we anticipate Q3 ASP to be similar to Q2 levels. Considering several of the major Chinese polysilicon producers including Daqo plans to conduct annual facilities maintenance during the third quarter. We anticipate that tight-supply situation for polysilicon sector with China should continue in 2016. Now I would like to provide some color regarding the downstream solar market and effects on the polysilicon sector. Despite the recent low product pricing for downstream solar products, we believe downstream suppliers including wafer manufactures are still making positive gross margin and positive cash flow for their operations. Moreover the past years, we have developed and improved our customer base. Most of our customers now are Tier 1 integrated solar manufactures that produce wafer set and modules and have wide distribution capability to serve both Chinese markets and the markets outside of China. Volume demand for those types of customers remains healthy and robust. We believe companies seeing the most impact in the current market cycle are pure-play solar cell manufactures that accounted to outflow in the market, during this strong market cycle. And we have limited exposure to these supplies. Furthermore, with our high-quality semiconductor-grade silicon, we have developed for the new customers that require these higher grade polysilicon for high efficiency wafers and solar product, which has positively resulted in additional demand for our products from those new high-efficiency solar customers. Now, let me provide a quick update our Phase 3A polysilicon manufacturing capacity expansion. Construction is progressing smoothly and it is now more than 50% completed. We expect the civil [ph] structure construction will be substantially completed before year-end. We anticipate that new facility to come online and begin initial production in the first-half of 2017, which will bring our annual capacity to 18,000 metric ton. With our expanded product capacity, we expect to continue to deliver compelling financial performance and results to our shareholders. Now, let me provide outlook for the third quarter of 2016. Since the ramp-up of our Phase 2B capacity at the end of June 2015, we have produced a total of over 13,200 metric ton of polysilicon over the past four quarters, above our nameplate capacity of 12,150 metric ton. As our Xinjiang polysilicon manufacturing facilities have been operated continuously for more than 12 months, it is necessary that we conduct our scheduled annual maintenance during the third quarter to ensure safe and smooth operations for future. We also plan to take this opportunity to do preparation work for the interconnecting between existing facilities to our new Phase 3A facilities which are expecting to start pilot production early next year. The entire annual maintenance schedule is expected to result in approximately 15 to 20 days of impact of polysilicon production for 2016. Due to the long lead-time for procuring the specialty materials and equipment required for the annual maintenance, we anticipate that we would start annual maintenance work in the second-half of September 2016. However, the starting date of annual maintenance work is dependent on the scheduled delivery of such specialty materials and equipment. Therefore, it is possible that annual maintenance start date may be delayed to end of September to early October. As a result of above mentioned factors, the company expects to sell approximately 2,550 metric ton to 2,600 metric ton of polysilicon to external customers during Q3 of 2016. The external sales guidance exclude the shipments of polysilicon to be used internally by our Chongqing solar wafer facility, which is expecting to utilize approximately 550 metric tons of polysilicon during the quarter for its wafer manufacturing operation. Wafer sales volume is expected to be approximately 24 million pieces to 25 million pieces for Q3 2016. Now, I would turn the call to our CFO, Mr. Ming Yang for financial updates.

Thank you, Dr. Yao, and good day, everyone. Thank you for attending our call today. Now, I will provide financial updates for the second quarter of 2016. Revenues were $71 million representing a 23% increase from $57.7 million in the first quarter of 2016 and 107% increase from $34.3 million in the second quarter of 2015. Revenues from polysilicon sales to external customers were $50.5 million compared to $39.9 million in the first quarter of 2016 and $21.7 million in the second quarter of 2015. External sales volume was 2,931 metric ton during the second quarter of 2016, compared to 2,905 metric ton in the first quarter of 2016. ASP of polysilicon was $17.24 per kilogram in the second quarter of 2016, increasing from $13.72 per kilogram in the first quarter of 2016. The increase in polysilicon revenues from the first quarter was primarily due to higher external sales volume and higher ASP. Revenues from wafer sales were $20.5 million, compared to $17.8 million in the first quarter of 2016 and $12.6 million in the second quarter of 2015. Wafer sales volume was 25 million pieces, compared to 22.1 million pieces in the first quarter of 2016 and 18.3 million pieces in the second quarter of 2015. The increase in wafer revenues from the first quarter was primarily due to higher sales volume. Gross profit was $29.4 million, increasing 76% from $16.7 million in the first quarter of 2016 and up 717% from $3.6 million in the second quarter of 2015. Non-GAAP gross profit, which excludes costs related to the non-operational polysilicon operations in Chongqing, was approximately $31.2 million, compared to $18.8 million in the first quarter of 2016 and $6.7 million in the second quarter of 2015. Gross margin was 41.4%, compared to 29% in the first quarter of 2016 and 10.5% in the second quarter of 2015. In the second quarter of 2016, total costs related to the non-operational Chongqing polysilicon plant, including depreciation were $1.8 million, compared to $2 million in the first quarter of 2016 and $3.1 million in the second quarter of 2015. Excluding such costs the non-GAAP gross margin was approximately 43.9%, compared to 32.6% in the first quarter of 2016 and 19.6% in the second quarter of 2015. Selling, general and administrative expenses were $3.7 million, compared to $4.1 million in the first quarter of 2016 and $2.8 million in the second quarter of 2015. R&D expenses were approximately $0.1 million, compared to $0.1 million in the first quarter of 2016 and $0.2 million in the second quarter of 2015. Other operating income was $0.6 million, compared to $0.7 million in the first quarter of 2016 and $0.7 million in the second quarter of 2015. Other operating income mainly consists of unrestricted cash incentives that the company received from local government authorities, the amount of which varies from period to period. Income from operations was $26.1 million, increasing 96% from $13.3 million in the first quarter of 2016 and was almost 21 times as compared to $1.2 million in the second quarter of 2015. Operating margin was 36.8%, up from 23.1% in the first quarter of 2016 and 3.6% in the second quarter of 2015. Interest expenses were $3.5 million, compared to $3.9 million in the first quarter of 2016 and $2.6 million in the second quarter of 2015. EBITDA was $34.7 million increasing 58.5% from $21.9 million in the first quarter of 2016, and increasing 313% from $8.4 million in the second quarter of 2015. EBITDA margin was 48.9%, up from 38% in the first quarter of 2016 and 24.6% in the second quarter of 2015. Net income attributable to Daqo New Energy shareholders was $19.8 million, increasing 138.6% from $8.3 million in the first quarter of 2016. The company incurred net loss attributable to Daqo New Energy shareholders of $0.9 million in the second quarter of 2015. Earnings per basic ADS were $1.90, increased 137.5% from $0.80 in the first quarter of 2016. The company incurred loss per basic ADS of $0.90 in the second quarter of 2015. Now on our financial conditions, as of June 30, 2016, the company had $42.9 million in cash and cash equivalents and restricted cash, compared to $35.7 million as of March 31, 2016. As of June 30, 2016, the accounts receivable balance was $10.1 million, compared to $15.4 million as of March 31, 2016. As of June 30, 2016, the notes receivables balance was $14.8 million, compared to $25.3 million as of March 31, 2016. As of June 30, 2016, total bank borrowings were $227.9 million, of which $118.4 million were long-term bank borrowings, compared to total bank borrowings of $241.3 million, including $114.8 million of long-term borrowings as of March 31, 2016. As of June 30, 2016 the notes payable balance was $26.1 million, compared to $28.1 million as of March 31, 2016. For the six months ended June 30, 2016, net cash provided by operating activities was $66.6 million, compared to $32.1 million in the same period of 2015. For the six months ended June 30, 2016, net cash used in investing activities was $37.6 million, compared to $56.2 million in the same period of 2015. For the six months ended June 30, 2016, net cash used in financing activities was $13.5 million, compared to net cash provided by financing activities of $75.7 million in the same period of 2015. And that concludes the official part of our presentation. Now, we will like to have the Q&A session.

We will now begin the question-and-answer session. [Operator Instructions] our first question comes from Philip Shen of ROTH Capital Partners. Please go ahead.

Hi, Gongda and Ming, thank you for taking my questions.

You’re welcome.

Hello, Philip, good to hear from you.

So with module ASPs downstream falling quickly, you guys are talking about Q3 ASPs being similar to Q2 as the polysilicon sector or the supply situation remains tight. I think, we’ve seen poly prices from public pricing database is down maybe 8% to 9% from peak levels and at the end of Q2. How do you expect the downstream over capacity situation to impact poly prices, especially beyond Q3? Are your customers applying pressure, perhaps you can comment on the import situation if China continues to enforce the restriction of imports strongly? And yes, just talk about poly pricing beyond Q3, given what’s happening further downstream and with the Chinese government? Thank you.

Yes, Philip, let me try to answer your question. First off, I think we stated that Q3 the price was stable similar to Q2, by the fact of two reasons. One, first of all, the peak price for the poly in the Q2 has appeared in the end of Q2, is the peak time and the first month of April relatively is not high as in June. And we saw that our price in July is very similar to June and we do not know exactly September performance. But we’re expecting maybe price will gradually decline little bit and compared with the peak time for July and August. Now, beyond the Q3 it’s hard to see, but as we said we heard that many poly makers in China will have shutdown maintenance during end of Q3, second-half of Q3 and Q4, before Q4. So we do know that poly supply within China will be weaker than Q2. And we knew that downstream pricing is very weak compared with the Q2 as well. So we have a possibility, we will see some price decline in the Q4. That’s why I commented from a current point of view to look in the future. But as we said that we still see the Q3 price maybe more or less similar to Q2 and Q4 may be - there is a possibility it’ll be weaker for the poly pricing. I don’t know if we answered, yes.

No, you definitely answered the question. Thank you. And then, Gongda, in terms of the - give us an update on how China is enforcing the imports or restricting the imports. Is there any new information about that?

As publically, I think there are some talking with - they will enhance the custom in management for the imports from countries - regions like Taiwan. Regarding the new development for few of the restriction is, not such result announced yet, but we are still waiting for government to update us. And there is no much change, yes.

Okay, no much change. You guys are doing great job reducing your cost structure and it seems like there is even more opportunity ahead. Can you update us on how much lower your cost could go especially after the Phase 3 expansion is fully ramped up?

Okay, so great. I think, we originally we set our goal for 2016 is go up - go down to like $9.50. We achieved that certainly in the second quarter. Now, at Q3 we originally - our costs, due to the shutdown maintenance overall depreciation per kilo of polysilicon were slightly increasing, because shutdown, that our volume will be reduced slightly. But, overall, I think after we ramp-up total 18,000 metric ton, I think our cost can be - will between like $9 and $9.50 for next year. That’s our operational goal.

So let me just add some more color to what Dr. Yao just said. So we are implementing new process and new techniques to manufacturing of poly, where we think it can actually reduce our energy usage even further and also reduce our silicon metal usage as well. So these two combined, we think that we have a very good roadmap to lower our costs. And at the same time the new process improvement actually allow us to produce higher quality polysilicon with better purity, with higher percentage of polysilicon, that can be semiconductor grade, which we can use for the N-type or the high-efficiency monotype of wafers enough to - when you factor these manufacturers, so that will actually help us to capture more market share as well.

Great, no, no, I think that’s a meaningful trend that we’re seeing in the industry as well, the shift from multi to higher-efficiency, N-type and mono technologies. Can you give us an update as to how much of your poly supply is high efficiency today. And then, what’s that mix today, is it 20%, is it 50%? And then, how do you expect that shift as we go through 2017?

Okay, when we exit in Q2 we’re probably roughly 10% to 15% using for mono. And we were increasing on the second half to about 20%. And we’re expecting there would be additional 10% increasing for next year for mono-wafers application.

Okay, great. The Hemlock case has been - Hemlock/SolarWorld case has been moving along. And I was wondering if you guys had any thoughts and comments on what you expect next? I mean, do you see an opportunity for potential trade agreements or removal tariffs? Is this even really a possibility? Is there motivation on the side of the Chinese to get a deal done and what’s your view in general of the tariff situation between the two countries?

Yes, we noticed the deal between Hemlock and SolarWorld. But at China, we’re looking for - we also [indiscernible] from Chinese government yet regarding this. So we also didn’t see any substantial change from U.S. module makers to take any action. As you know there are several companies started this case with U.S. government. SolarWorld is only one of them. So we don’t see any substantial change from U.S. side. So we’ll be - I don’t believe any substantial change from China side will happen in 2016.

Okay, one last quick question here. I think on the last call you mentioned 70% of your total output have been sold for 2016. Can you talk about what percentage has been committed for the back-half of the year now? And then, how much of your 2017 output may be booked?

Actually, the demand for 2017, according to some mono customers, demand is very, very high. And I think at this time and we’re very relatively conservative with that 30%. But if our quality upgrade program is successful, then we’d probably provide more. Right now, it’s - with still same is the long-term contract for lack of volume commitment from customer is more than 70% to already booked for our product for next six months. And we also are, in the time, to talking about the additional volume for 2017. But that we’re waiting for exactly ramp schedule is fixed. So we will see after our construction and the installation finished, we will immediately work with our major customers to account that. As I said, we don’t believe demand is an issue, especially with additional capacity increase will be not enough for more and more capacity increase in China for our major customers. So that - yes, that we don’t want to worry about that yet.

Great, well, I want to extend congratulations on the strong Q2 results and execution of your cost structure and capacity expansion. I’ll jump back in the queue. Thanks.

Thank you, Philip.

Thank you, Philip.

Our next question comes from Sheng Zhong of Morgan Stanley. Please go ahead.

Thank you very much for taking my question and congratulations on the very strong results. So my first question maybe a follow-up on the - over sales to mono customers. Do we see the price difference on the sales to the mono customers versus to the multi customers?

Actually, it’s about the same saying, because we don’t see the price difference. But as you know, the mono customer requirement for polysilicon material is quite - is a high standard compared with multi wafers. The company set a program to work with those customers to ensure us our future, make sure the customer transition also show meaningful volume when switching to mono-wafers. So as of today, we still ship majority materials of more than 85%, is for multi wafers customers, but above 15% to the mono-wafers. As of today, all the mono-wafer use prices same as the first-grade solar silicon - polysilicon price for multi wafer customers. There is no price change yet.

And do we expect that we’ll be some price difference in the future on the…?

Yes. So a company majority almost like 99-point-some-percentage is that we call the solar grade 1. And they are - we market at same price. And then all the - basically all the mono-wafer customer would require is for them a storage [ph] of the polysilicon will be more smooth or more dense compared with the multi wafer customers. So we also only can be using ready-to-using kind of grade instead of some customer can require some - we have some very small amount is not-ready, so need to be treated or cleaned. So I do not expect any difference in the future as well, and because generally speaking is mono-wafer customer also their operation cost-wise compared with multi wafer is still high in today’s market. And there are some leaders doing very well in China. But this market is still small as today. We’re expecting we’re growing maybe next two, three years, to a meaningful size, yes.

Yes, yes, thanks. So the next question is also about the value change on price, because we see some significant decline in order wafers here and the modules. So as we also have some wafer capacity and we expanded wafer capacity. But currently it’s likely that wafers margin will keep going down in second-half of this year. But as you mentioned the polysilicon price will be very - will still be relatively stronger. So if the margin gap is keep widening, so will we consider to sell more polysilicon to external customers, while cut a little bit of wafer production to, yes, to - I think maybe this can help to improve the overall process.

Yes, you’re definitely right. So company keep flexibility, we will judge the market. And as Ming already mentioned, currently the wafer margin definitely is going down. But we still have a positive cash flow, that’s the minimal requirement. If the situation is going beyond that, we have a right to reduce that volume production and the increase of sales for our polysilicon customers, yes, in order to improve the margin, yes, for whole company.

Yes, may I ask more about this, how much more room for the wafer price to going down before you consider to cut the wafer production?

Probably I would say it’s different for each company. Look at the market. I think still have like 5% to 10%, maybe 10% pricing going down. That would be getting almost like there is no margin. Basically if you look at the current price, we still have like maybe 10% to go.

Okay.

Yes, as a manufacturer, I think we already heard some wafer customers starting some - restricted some volume already.

Yes.

But I think - Sheng?

Yes.

I think long-haul, if you look at wafer margin right now it’s still in the mid- to high-single-digit range. So I think right now it is still profitable and contributing positive cash flow and positive cash profit. So there is still room that the price can fall, yes.

Yeah, I understand, very helpful. And, last question is about our listing on the [Three New Board] [ph] in China Mainland market. So do we have any plan to raise capital from the market?

Hi, Sheng, yes, so we officially listed our Xinjiang Daqo polysilicon manufacturing operation on China’s New Third Board. So we will certainly look at the opportunity in further market to see if there is possibility to access the China capital market, which if you look at valuation of solar companies within China that are listed in China, the valuation is much higher. So we think we will probably explore the opportunity in the third quarter, third and fourth quarter of this year, by talking to some of the investors here that they invest in the New Third Board. So the answer is, yes, we will look into that.

Great. So, yes, very helpful. Thank you very much and congratulations again.

Great. Thank you.

Thank you, Sheng.

This concludes our question-and-answer session. I would now like to turn the conference back over to Kevin He for any closing remarks.

Yes, thank you everyone again for joining the call today. Should you have any query, please feel free to contact us after the call. Thank you. Bye-bye.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.