大全新能源 (DQ) 2010 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Daqo New Energy call, third quarter 2010 results conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. (Operator Instructions) I must advise you that this conference is being recorded today, November 17, 2010.

I would now like to hand the conference over to your first speaker today, Mr. Calvin Lau. Please go ahead.

Thank you, operator, and thank you everyone for joining us today for Daqo New Energy's third quarter 2010 financial results conference call. A few hours ago, Daqo New Energy issued its third quarter 2010 earnings release, which can be found on the Company's website at dqsolar.com.

On the call today from Daqo New Energy are Dr. Gongda Yao, Director and Chief Executive Officer, and Mr. Jimmy Lai, Chief Financial Officer. The call today will feature a short presentation from Dr. Yao covering business and operational developments, and then Mr. Lai will take you through a discussion of the Company's financial performance. After that, we will open the floor to questions from the audience.

Before continuing, Daqo New Energy's management team would like to remind the audience that this presentation contains forward looking statements, which in the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. Daqo New Energy does not undertake any obligation to update any forward looking statement, except as required under applicable law.

All information provided in this presentation is as of the date of this presentation, and Daqo New Energy undertakes no duty to update such information, except as required under applicable law.

I would now like to turn the call over to Dr. Gongda Yao; Gongda, please?

Hello, everyone, and thank you for joining us today. I will first discuss business highlights from the third quarter of 2010 before handing the call over to our CFO, Jimmy Lai, who will take you through our financial results.

I am pleased to announce that in the third quarter of 2010, we achieved record shipment in polysilicon production volume, thanks to a combination of strong customer demand and the improved operational efficiencies of our polysilicon plant.

Our team in Wanzhou did a tremendous job, being continuously refining our production process, and we were able to reduce our polysilicon manufacturing cost per kilogram through ongoing efficiency gains linked to our cost reduction program. We are continuing to look for ways to improve our cost efficiencies.

We shipped approximately 973 metric tons of polysilicon during the third quarter of 2010, an increasing of 8.6% over the second quarter of 2010 and 118% over a year ago.

I will now hand the call over to Jimmy Lai, our CFO, who will take you through the financial results of the quarter.

Thank you, Gongda, and thanks everyone for joining us for today's call. Earlier today we reported our earnings for the third quarter 2010, and are proud to share substantial progress we have made today advancing our business.

Total revenues were $63.2 million, representing an increase of 20.5% over $52.5 million in the second quarter. Gross profit was $26.9 million, an increase of 38.6% from $19.4 million in the second quarter of 2010. The increase in net revenue was primarily due to higher polysilicon shipment volume and a better pricing environment in Q3.

Gross margin in the third quarter was 42.5%, up from 37.0% in the second quarter. The increase in gross margin was primarily due to higher average selling price of polysilicon and lower polysilicon production cost of sales per KG, which was below $30 during the quarter.

Total operating expenses in the third quarter of 2010 were $2.9 million, a decrease of 2% over the second quarter 2010. As a result, operating income in the third quarter of 2010 was $24 million, compared to $16.5 million in the second quarter 2010 and $8.1 million in the third quarter 2009. Operating margin was 37.6% (sic - see press release), compared to 31.4% in the second quarter 2010 and 26.7% in the third quarter of 2009.

Net interest expense in the third quarter of 2010 was $2.5 million, compared to $2.6 million in the second quarter 2010, and $1.5 million in the third quarter 2009.

Income tax expense in the third quarter of 2010 was $3.0 million, compared to $2.1 million in the second quarter of 2010 and $0.9 million in the third quarter of 2009. This was primarily due to higher profit before tax generated by the Company.

Net income for the quarter was $17.7 million, versus $11.7 million in the second quarter and $5.8 million in the third quarter of 2009.

Earnings per share, EPS, was $0.13. The exchange ratio between the ordinary shares to ADS is 5 to 1, so the pro forma EPS per ADS shares was $0.64. Please also keep in mind that in October at the time of the IPO, we issued 9.2 million additional ADS shares.

Now, let's move on to the balance sheet highlights. As of September 30, 2010, we had $75.2 million in cash and cash equivalents and restricted cash. Accounts receivable was $31.3 million as of September 30, 2010 compared to $51.9 million as of June 30, 2010. Our debt level was $166.7 million versus $177.5 million as of June 30, 2010.

With that, I will now turn to the outlook for the fourth quarter of 2010. The Company expects to ship between 825 to 850 metric tons of polysilicon in the fourth quarter of 2010, due to two weeks of shutdown in December for maintenance and capacity enhancement projects. And the Company also expects to ship between 4 megawatt to 5 megawatt of modules in the fourth quarter of 2010.

The Company expects its revenue range to be between $65 million to $69 million.

I would now open the call to questions; Operator?

(Operator Instructions). Mark Bachman from Auriga.

Thank you so much. Gongda and Jimmy, congratulations on great execution here in Q3 and your first conference call as a public company. If I just knock out some maintenance numbers here in Q3, if I did my math correctly, it looks like you averaged just over $59 a kilogram ASP-wise in Q3, while cost came in just under $30. Can you confirm those numbers here for us?

Mark, I think your ASP number might be a little bit too high. Keep in mind that we also have other revenue. We also ship about 4 metric tons in terms of wafer, and we also have 4 megawatt of the module shipment. So you probably need to take that into consideration as well.

Can you tell us the ASP that you were getting on your modules then in Q3?

The module is pretty much the market price.

Mark, in this case we do not specify any ASP in the earnings release. And what we do is we have three segments. The primary is on polysilicon, second one is wafer, which is through tooling, and thirdly modules.

And we also, in earning release, if you notice, we separate the revenue separately, like, if I remember correctly, the module would be $7.4 million net revenue.

and then, what was the megawatt, the modules that you shipped?

A little bit more than 4 megawatts; 4.2 megawatts.

Okay, perfect. I'm guessing that the headline that you put up today of the $0.13 of EPS probably spooked a few investors. That tends to -- the news reporting services tend to grab that number when people are looking for something around $0.50; the $0.13 probably spooked them. But I think you cleared it up there by talking about the earnings per ADS actually coming in at $0.64. Can you just -- just so that everybody's clear, can you give us an idea of where diluted share count can be for Q4?

Okay. Let's just make it simple. In terms of ADS, in the Q4 post IPO, you are looking at the total outstanding shares of $35.1 million ADS.

Perfect. And then on the income statement, there's those deemed dividends that go to the Series A convertible. Does that go away as well?

Yes, exactly. That goes away upon IPO. So you'll probably not see that in Q4.

Okay. On your guidance, how do we think about you achieving 850 metric tons of production? Can we just assume that you're going to run the factory here into the latter part of Q4 until you've met your targets, and only then take the factory offline for the two weeks?

Yes, we're targeting the time line, it's about December 15 and, right now, it looks that everything's on schedule.

Okay. And then lastly, ASP-wise, it looks like you're assuming just over $70 on the ASP side for your poly in Q4. Is that a fair assessment?

Yes.

Excellent. Thanks again and congratulations.

Thank you, Mark.

Ahmar Zaman from Piper Jaffray.

Hello Dr. Gongda and hello, Jimmy, how are you? Congratulations on a great quarter and your first earnings call.

Thank you.

Thank you, Ahmar.

You're welcome. I guess just looking at your -- my first question is your poly pricing for the fourth quarter, how should we think about the trend in your poly price going into the first quarter into 2011? This is my first question.

Ahmar, the -- it's hard to predict the poly price, as investors are fully aware of that. Currently, the spot market price is still very favorable, what we're seeing in the market is between $75 to $80. We don't have a fixed view on the 2011 yet and -- but the poly spot market prices have been stabilized at this level for almost two months now.

Let me ask it another way then. So in terms of your 2011 polysilicon shipments, what percentage of those shipments will be based -- will be contract versus spot sales?

Okay, so it's about among all the contracts we sign, among them, it's about half of them, a little bit less, about half is with a fixed price long-term contract and another half is variable market price, depends on the quarter-to-quarter. We discuss the -- we determine the price with the customer. But the volume is fixed.

Yes. And we also have some allocation for our wafer project. Yes, we're looking and it's about 800 metric ton will be allocated for our own internal wafer need.

Okay, great. No, I understand about the allocation to the wafer, internal wafer need. In terms of -- so going into your vertical integration strategy, in terms of your wafer shipment, and specifically on your modules for next year, the module plant that you're ramping, how should we think about the percentage of modules that will use tolled cells versus third party cells? Can you give some clarity on that?

The cells -- the module business cells will be 100% for tooling from outside. It's not within company. We don't have a cell manufacturer planned for next year.

No, I understand that. But in terms of cells that -- so in terms of your module capacity for next year, is 100% of that -- 100% of the cells for your modules shipment for next year, will they be tolled or will you have to go and buy from any third party cells externally?

We will do both because our internal wafers produced in 2011, 100% will be multi crystal silicon wafers. Our module production based on current customer demand will be mixed between the mono and multi crystal modules. So if we form any model wafers, we probably will start tolling the wafer and the cell. And for the multi crystal wafers, we can do -- produce the wafers by ourselves including the cells for onsite.

Okay. Can you give us some idea of how -- what that percentage breakout will be between multi or mono modules?

We do think it would be more than half, more than 50% would be multi crystal wafers because the market is still -- demand is high and with the limited capacity of the modules, we believe we -- we think we would do more than 50% is multi crystal wafer module than the mono crystal wafer.

So more than 50% of your shipments will be using tolled cells rather than third party cells?

Right.

Okay, great. And then I guess the final question I have is you benefit from low cost polysilicon with your -- through your vertical integration strategy into wafers and then modules. How should we think about the possibility of bringing cell manufacturing in-house? What sort of timeframe is that? Is that a couple -- is that a number of years out, two years out, three years? How are you thinking about that?

At this moment, the Company will focus our resource with second phase, which is about 3,000 metric ton polysilicon we announced during the road show. We will do this IPO proceeds for the second phase, so for polysilicon. So this project will last about 1.5 years. Until then, we will consider if we will add the other capacity for downstream. Before that, we don't have any plan to -- going forward for cell manufacturing for this Company.

Okay. Thank you. And then finally, if I could squeeze one last question in. Have you -- can you provide us any update on your direct electricity contract, any updates there?

No, no update since last time we discussed with the investors in the road show. It's -- currently, the situation is still on the Office of Central Government, no any update yet from them. We do not see this would be approved likely in this year.

Okay. And then in terms of your cost per kilogram, you're below $30 a kilogram now, which is really great progress. How should we think about modeling your cost per kilogram going forward? I understand because of the two weeks' shutdown in the fourth quarter, it's probably going to go up a little bit. But for next year, can you give us some guidance as to your cost per kilogram?

On an annual basis, our goal, Ahmar, is to bring the annual production costs at the $30 or below. But you're going to see a little bit of fluctuation based on the electricity rate fluctuation throughout the year. But for the whole year, our goal is to be at $30 or below.

Okay. Thank you very much and congratulations again.

Thank you.

Thank you, Ahmar.

Sam Dubinsky from Wells Fargo Security.

Hi guys; congrats on your first quarter as a public company. Just some housekeeping questions; could you disclose where your long-term contract pricing is for polysilicon today and how that differs from spot pricing?

Long-term contract, we think it's not 100% with the fixed price. And price range we signed is about $50 with the price ASP.

Okay. And where is spot pricing today?

Today, it varies; it's spot price with a small quantity. Jimmy just disclosed before, it's about the $70 --

$75 to $80.

$80, yes.

Yes, okay. And could you just give an update. I wasn't involved in the IPO process so just some housekeeping. Where is polysilicon capacity in Q1? And what is it also for module and wafer capacity in Q1?

Are you referring to Q1 2011?

Yes. Where should we -- how should we think about polysilicon capacity in Q1? And also, what will module and wafer for capacity be then?

Yes, Q1 will be 4,300 metric tons and -- after debottlenecking process in Q4. And the module will be about close to -- Q1 will be close about 200 megawatts capacity.

Okay. And how should we think about your wafer and module processing costs? How will they start out? For instance, some of your peers on the wafer side can produce a wafer for $0.25 to $0.30 per watt. Where will you guys start out, and where -- by year end? And the same question on the module side?

At the beginning, average-wise, fully loaded cost per wafer for 2011 should be low 30s; $0.30 per watt conversion.

Okay, and what about for modules?

Modules is right now, conversion is major because we're tolling the cell price is right now high. So if we disclose the -- if we exclude the cells, probably like $0.40.

Okay, $0.40. And then on your module business, could you just run us through where these modules are ending up? Are any of them ending up in the domestic China market? Or are they all ending up in Europe?

For 2010, 100% going to European market. And in 2011 will be mixed, I don't have a percentage yet. I expect that some will be going to -- maybe a very small portion will go into the domestic right now on current plan, and the majority will go into the export to either Europe or North America. I'm not sure of the percentage yet at this moment.

Okay, are you selling into a distribution channel? Or are you selling to project developers?

Most right now is to distribution channels.

Okay. And then how many megawatts of modules and wafers are you targeting next year for shipment?

Modules and wafers, roughly, because we're doing the ramp up is -- each one it represents about a little bit more than 100 megawatts.

It will be between 100 megawatts/150 megawatts, depending on the market demand.

Okay. And my last question is, just with the production shutdown for Q4, how should we think about gross margins in that quarter?

Well, it's harder to project. But, like we stated earlier, the fourth quarter because the shutdown, number one/two weeks, and because of the electricity rate is higher in the winter time in our region, so you probably see production costs per KG above Q3 level; you're probably talking about 10% to 13% range higher, in that range.

Okay, great. Thanks, guys. And once again, congrats on your first quarter as a public company.

Thank you.

Thank you, Sam.

(Operator Instructions). Mark Bachman from Auriga.

Yes, hi, gentlemen. Thanks for letting me back on. Can you just talk a little bit about the idea of taking the factory -- it seems like things are running pretty well here in Q4 for the industry, and why you decided to take the factory offline for two weeks here in Q4, as opposed to maybe the seasonal slow period for solar that happens in Q1?

Okay, so the planning is annual maintenance normally requires shorter than two weeks. This time we will add some debottleneck equipment through the refinement and also through the off-gas treatment units. So, by doing that, we will make sure we have a material balance to supporting 4,300 metric tons annual production capacity for next year.

I just want to remind you, at the current level we're running more than designed capacity, but it's still off the balance of the materials with the operation of 3,300 metric tons capacity at this moment. But by doing the finish this project, we [will] able not only to reach the higher and 4,300 metric ton capacity, but also with much better materials balance.

With that, we will see the benefits are the following; one is the official capacity will be raised by 1,000 metric tons. Second is the cost of the consuming materials [where] it continues down will give us benefits for further to reduce our manufacturing costs; and third is improve our product quality. And raising the off-gas investment, we're able to further improve our polysilicon quality, the material quality, which is one of the major advantages in the competitive space today.

Okay. So, Gongda, all of those things are also achievable if you were to do this in Q1 as well. So what I was really trying to get a [quest] for is Q4 your normal maintenance period and you're just putting this debottlenecking on top of it? Once again, I had a question from a client that really wants to know why you chose to do this in Q4, rather than maybe in the Q1 timeframe when things are cyclically slower.

Yes, so, no particular business reason. I think it just is that because at the beginning we decide to the fourth quarter. And also, Mark, I want to remind you is we have -- we think the condition is we will achieve our 2010 operation goal, which is originally at the beginning of the year we said we'll make 3,300 metric tons. Now is we're committed to 3,700 metric ton of total production. We think that we will complete also the maintenance debottlenecking. I think it's a tremendous year for us to achieve those goals.

And with next year, our obligation of the business target is about 4,300 metric tons production for our poly plant operation. So we think completed this year, we have a full year's challenge to make the 4,300 metric ton production go as a company. We are very confident we can do -- achieve this year and next year.

And Gongda, has your confidence level been very high that you'll be able to achieve just short of 1,100 metric tons of production in Q1?

Yes.

Okay, excellent; thank you, gentlemen.

Satya Kumar from Credit Suisse.

Yes, hi. Thanks for taking my question. Congratulations on your first quarter. I was just wondering, Gongda, if -- in terms of the near-term market environment, I know that you guys mentioned that the spot prices are in the $75 to $80 range, I was wondering if you're seeing any sign of softness at all in the spot price on a weekly basis, or you expect -- if you have any color on that for the remainder of this quarter.

And on the module sales that you talked about for your calendar Q1 quarter, I was wondering if you can talk about what type of pricing visibility we have at this point.

Okay, thank you, Satya. For the spot market price, actually into -- when we entered November, we do not see much change as of today. We did expect some change in the middle of November, but according to my market information we do not see much change. Actually, we've still got a lot of requests for contacts for Q1, which we cannot fulfill every customer's demand, because our limited production capacity.

So, we were expecting some softening Q1, because the German market environment, [we found] the market information, but as poly price seems -- it's not reflecting that yet. So we're very cautious; we watch out. We -- only thing we can do about it is -- maintain our margin is trying to reduce our production cost.

On the second, talking about the module price, yes, we do not have a really long-term contact on the module with customer for next year whole year yet. We do have some -- it's volume commitment with some customers, but with variable price for module. We like to enter some solid contract for next year. So that's why Jimmy just said that the next year, our volume shipment is about 100 megawatts to 150 megawatts, depends on market needs.

I do not have a prediction for Q1 module price yet.

Okay, that's very helpful. And on the cost per kilogram, it was very helpful your commentary about Q4 costs. And for Q1, you talked about this 4,400 ton capacity. Is the depreciation expense going to come down and you're going to benefit from that in terms of cost per kilogram in Q1? What is the ultimate level of cost per kilogram that you think you can get with this first tranche of 4,400 tons of capacity?

I think with the current facility, our near-term goal is going -- we could be achieved in the near-term is about $28 per kilo.

All right, thank you.

Ahmar Zaman from Piper Jaffray.

Hi. Thanks for letting me back on; just a few quick follow-ups. Number one; have you made -- have you been able to secure all the equipment for your phase II polysilicon ramp?

Secure means you're talking about the set of [permanent] reactors, those things?

Reactor, yes. Have you been able to -- have you made the decision -- equipment decisions yet and have you signed (inaudible)?

Not 100%, but a certain portion we -- have been discussed with all the possible suppliers worldwide, and we are in the final stage trying to determine which equipment. It's a pretty complicated process, because it depends on the fit of the -- all equipment together, and it's much complicated than all the investor thinking.

Yes, we are in the process. We have our priority list with preference of the equipment standard identified, but we didn't put an order yet at this moment.

Thank you for that. And in terms of your wafering capacity, what lead times are you seeing for equipment there today?

We're expecting then should be less about five months lead time for the wafer equipment. And are we primarily chatting with those suppliers? I think we should be okay within five to six months' lead time for the equipment.

So you've already signed contracts with the equipment and everything is ordered and ready to go for the wafering capacity?

For the first phase of wafer, yes, it's already done a long time ago.

Yes. And the equipment will be delivered end of this month and beginning in the next months. So it will be here before year-end.

Great. Thank you for that. And then finally, just to follow-up on the prior question. The $28 cost per kilogram that you just mentioned as your ultimate goal, does that include -- is that dependent on getting the direct electricity contract?

No. Our goal is to get that level, even with the current electricity rate.

All right. So any -- the electricity contract would be update for that? The electricity contract would be upside to that.

Yes, right.

Okay. Great, thank you very much.

It appears there are no further questions at this time. Speakers, you may continue.

Once again, there are no further questions in the queue, speakers you may continue. I would now like to hand the call back to Mr. Calvin Lau for any concluding or additional remarks.

Thank you everybody for attending the third quarter 2010 earnings call for Daqo New Energy Corp, look forward to having you back on the next conference call when our results come in for the full year of 2010. Thank you and goodbye.

Thank you.

Thank you.

That does conclude our conference for today. Thank you for your participation. You may now all disconnect.