大全新能源 (DQ) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Daqo New Energy Corp earnings call. My name is Tanya, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the conference over to Jimmy Lai.

Thank you, Tanya. Thanks, everyone, for joining us today, for Daqo New Energy's first quarter 2011 financial results conference call.

A few hours ago, Daqo New Energy issued its first quarter 2011 earnings release, which can be found on the Company's website, at dqsolar.com. On the call today from the Company are Dr. Gongda Yao, our Chief Executive Officer, and me.

The call today will feature a short presentation from Dr. Yao, covering the business and operational developments, and then I will take you through a discussion of the Company's financial performance for the quarter. After that, we will open the floor to questions from the audience.

Before we begin, we would like to remind the audience again that this presentation contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, and as defined in the US Private Securities Litigation Reform Act of 1995. Daqo New Energy does not undertake any obligations to update any forward-looking statements, except as required under the applicable law. All information provided in this press release and in the attachment is as of the date of the press release, and Daqo New Energy undertakes no duty to update such information, except as required under the applicable law.

Now, I will turn the call over to Dr. Yao. Gongda?

Thank you, Jimmy. Hello, everyone, and thank you for joining us today. I'm pleased to announce that, in the first quarter of 2011, we achieved yet another record operational result in revenue and net income, which [itself creates a template] for a successful year in 2011.

We were able to increase our polysilicon output to just below 1,100 metric tons for the quarter, which we benefited from the debottlenecking project completed in December of 2010. The demand for the polysilicon was still strong in Q1, which leads to a higher spot price environment. On the tailwind of the strong demand, we are now trying to secure polysilicon output for 2012 through 2014 by signing supply contracts with customers with advanced deposits.

Our wafer facilities in Wanzhou commenced production, with the first 125 megawatts capacity, and initial product quality meets our expectations. The module operating is ramping up as expected, and we will be at 200 megawatts capacity in the second half of the year.

Lastly but not least, our phase 2 polysilicon construction project started in Shihezi, Xinjiang, and is on track according to the plan.

I will now turn the call to Jimmy to discuss our financial performance. Jimmy, please.

Thank you, Gongda. Let's walk through this financial performance.

Revenue. Revenue in the quarter was $87.3 million, an increase of 6.6% from the fourth quarter of 2010, and 93.6% increase from the first quarter of 2010. The increase was primarily attributable to the increase from sales of polysilicon.

We sold approximately 1,089 metric tons of polysilicon for $77.7 million in the first quarter of 2011, compared to $73.4 million, or 966 metric tons of polysilicon, in the fourth quarter of 2010, and $42.3 million, or 815 metric tons, in the first quarter of 2010.

The increase from the fourth quarter of 2010 was primarily due to the higher sales volume for the polysilicon product, partially offset by the low average selling price. The increase from the first quarter of 2010 in revenue was also primarily due to the higher average selling price of polysilicon product combined with the higher sales volume.

Also, in the first quarter of 2011, we generated $8.6 million revenue from sales of PV modules, and $1 million from sales of wafers.

Gross profit and gross margin. Gross profit in the first quarter of 2011 was $44.5 million, decrease of 2.8% compared to $45.8 million in the fourth quarter of 2010, and an increase of 214.9% compared to $14.1 million in the first quarter of 2010. Gross margin was 51% in the first quarter of 2011, compared to 55.9% in the fourth quarter of 2010, and 31.3% in the first quarter of 2010.

The decrease from the fourth quarter of 2010 in gross profit and gross margin was primarily due to lower average selling price of the polysilicon product, combined with higher production cost per kg for the polysilicon product. In our [current site], the electricity rate is highest season during Q1.

The increase from the first quarter of 2010 in gross profit, and the gross margin, was mainly due to higher average selling price of the polysilicon, higher shipment volume, combined with a lower production cost per kg for the polysilicon product.

Operating expenses. Our net operating expenses in the first quarter of 2011 were $1 million, a decrease from $4.5 million in the fourth quarter of 2010, and $3.5 million in the first quarter of 2010. The decrease from the fourth quarter of 2010 was primarily due to a $2.1 million increase of government subsidy we received during the quarter, and $808,000 expenses related to the scheduled shutdown during the fourth quarter of 2010. The decrease in operating expense from the first quarter of 2010 was primarily due to a $2.7 million charge related to the withdrawn IPO project during the first quarter of 2010.

Operating income in the first quarter of 2011 was $43.5 million, compared to $41.3 million in the fourth quarter of 2010, and $10.6 million in the first quarter of 2010. Operating margin was 49.8%, compared with 50.4% in the fourth quarter of 2010, and 23.5% in the first quarter of 2010.

Net interest expense in the fourth quarter of 2011 was $1.8 million, the same as the fourth quarter of 2010, and $2.6 million in the first quarter of 2010. The decrease from the first quarter of 2010 was primarily due to a reduction of the Company's bank debts, and some interest expense capitalized in the first quarter of 2011.

Income tax expenses. Income tax expenses in the first quarter of 2011 was $6.9 million (sic - see press release) compared with $6 million in the fourth quarter of 2010, and $1.7 million in the first quarter of 2010. The decrease from the fourth quarter 2010 and the first quarter 2010 was primarily due to the higher income before tax in the first quarter of 2010.

Net income attributable for the Daqo New Energy shareholder was $35 million in the first quarter of 2011, compared to $32.8 million in the fourth quarter of 2010, and $6.3 million in the first quarter of 2010.

Net margin was 40.1% in the first quarter of 2011, constant with the fourth quarter of 2010, and 13.9% in the first quarter of 2010.

Earnings per fully diluted ADS were $0.99 compared to $0.95 in the fourth quarter of 2010, and $0.20 in the first quarter of 2010. Earnings per fully diluted ordinary share were $0.20, compared with $0.19 in the first quarter of 2010, and $0.04 in the first quarter of 2010.

On the financial condition side, as of March 31, 2011 we had $182.2 million in cash, cash equivalents and restricted cash, compared to $203.7 million as of December 21, 2010. Accounts receivable was $22.8 million, compared with $15.2 million as of December 31, 2010, and the total borrowing was $146.2 million. Out of that $75.3 million were long-term borrowing, while total borrowing were $154.6 million, of which $83 million were long-term borrowing, as of December 31, 2010.

Now let's turn to the outlook for Q2 2011. For the second quarter of 2011 the Company expects its total revenue to be in the range of $92 million to $95 million. The Company expects to ship between 950 metric tons to 1,000 metric tons of polysilicon, and generate revenue from the sales of polysilicon between $64.5 million to $67.5 million in the second quarter 2011. The Company also expects to ship approximately 7 megawatts of wafers, and generate about 4.5 million of revenue.

The Company further expects its PV module sales to be approximately $23 million with sales of approximately 14 megawatts under the Company's own brand name, and approximately 2.5 megawatts outsourcing for its customers.

Of course, the outlook reflects our current and preliminary view and may be subject to changes. Our ability to achieve this outlook is subject to significant risk. Please see our forward-looking statement at the end of our press release.

With that I will open the floor for questions. Operator, we are ready for our question and answer.

(Operator Instructions) Philip Shen, Roth Capital Partners.

My first question is [with reference] your longer term contracts. Can you give us an update on your conversations with partners and customers about 2012 and beyond? What is the range of ASPs that you guys are targeting? Perhaps you can give us a sense of percentage of volumes that you expect to be exposed (inaudible) variable pricing.

For the long-term contract for the next three years after 2011, primarily is we are talking to customers with a variable price reflecting the future polysilicon ASP with the market. As you know, many of them are expecting the price will change in the next few years, so the contracts more secure the volume and with a certain percentage of prepayment. So all the contracts -- I cannot update any particular contract yet, and we are expecting all the contracts will be closed during the Q2 of this year.

Okay, great. And then regarding your wafer business, can you give us an update on how that capacity expansion is going, and what your latest expectations are in terms of wafer processing costs, and what do you expect it to be perhaps by the end of 2011?

The wafer cost, manufacture costs around between $0.30 to $0.34. Currently I think we updated the wafer business plan during the IPO and also after in the last quarter's earnings release, is for 250 megawatts by end of this year. We will ramp up [a whole] 250 megawatts wafer capacity by November of 2011, and everything is on track.

And also for first half of this year, we just started the first phase, which is 125 megawatts; it's half of total capacity for this year's plan. So it's in production right now.

Okay, great. One other question here, in the quarter Q1 you guys had a government subsidy; I think bottom line contributed about (inaudible). Is this a one-timer, or do you expect this government subsidy to persist, and give us a sense -- ?

On the government subsidy issues, for the last two or three years we've been getting around $5 million a year government subsidy. Of course, there's no guarantee this will be ongoing. And another thing that's hard to tell is when will the governments subsidy come in, because according to US GAAP accounting treatment, you can only recognize the offsetting to expenses when we actually receive it. But in our past experience the amount has been around $5 million a year.

Great. I'll get back in the queue, thanks.

Ahmar Zaman, Piper Jaffray.

Congratulations on executing in what has been a very challenging quarter for the industry. Just a couple of questions from me. Number one, can you share with us what your cost per kilogram was in the first quarter?

Of course, Ahmar, you know that, in the first quarter, electricity costs is the highest in our region, so typically our Q1 production cost traditionally has been highest, and what I can tell you, it's a little bit above $30, but not much.

Okay, so we should expect it to go down in 2Q again?

Correct, yes. That's our expectation as well.

Thank you. And can you just remind us what your expectation is for your cost estimates for the year, or by the end of the year?

I think in our case Q2 will be lower than Q1, probably between a reduction of $1 to $2, and Q2 probably another reduction of $1 or $2, and Q3 would peak -- Q4 will pick up and, of course, go back to Q1 will be high. So that probably will be the trend we're expecting.

And I have something adding on, Ahmar. So according to cost reduction roadmap, we do expect some percentage of reduction in addition to the regular seasonal high and low price for electricity costs. So we do expect at least $1 to $2 reduction from the last year, for example for Q4. So we do expect that happening with the second half of this year.

Okay, that's good. And then in terms of your -- can you give us some more color on your new JV with JNE in North America here, how should we think about that JV?

So we just now signed the agreement between -- JNE is a consulting engineering company, so it's locating in Canada. So they are starting to take the project [on] the new energy; it's particularly in PV solar related contracts with local business. And we see is a tremendous business opportunity there because lack of the local manufacture the PV modules, so with existing capability of what Daqo had. And JNE have been working with Daqo Group for some particular projects in China and before. So we just signed a contract with a very, very small scope of project at the beginning, and we will see how to extend our market.

So at the beginning we just set the plan, and we will execute the plan and hopefully, we think, because this is different territory in the different countries, so we do expect in Q4 we will start moving this project [in reality] and starting produce modules, and all the equipment should be in line with local content, according to Canadian (inaudible) [approval]. So we were trying to work with JNE to catch the Canadian market with crystal silicon modules over there.

Thanks for that added color. And then just a few follow-ups from me here, and then I'll get back in the queue. In terms of your wafer processing costs that are $0.30 to $0.34 right now, how should we think about processing costs when you get to full capacity at 250 megawatts for the year?

So we do expect the ramp up -- this year's job is trying to fully ramp up the margin with -- of course, the average price cost for this wafer line should be still high compared with matured lines we have. We do expect in the line, within manufacturing costs very competitive from the Q1 or Q2 next year, which should be around $0.30 or so.

And which means that we need to do more work, not only ramp up; need to have to recycle the (inaudible) or those things to further reduce the cost, and then increasing the capacity with the existing theoretical capacity of each furnace, as well as (inaudible).

We have those plans in hand. So right now we still focus this year's task, which means that it's bringing the 250 modules reach full capacity as quickly as possible.

Okay. And then in terms of your cell business or how you -- typically total cells are by third party cells, given the declining ASPs for cells through the quarter, and current ASP is around [$1.10 to $1.15] a watt, in the past, you've articulated that you expect your split, your mix between total cells and third party cells to be around 50/50. How should we think about that, going forward, given the decline in cell prices in the market?

Actually, that plan is not much changed due to the ASP because either way, we found that tolling costs, as well as ASP of the cell per watts, both are declining. So this is reflecting the end market, which the module price is also declining right now from the first quarter to now.

So we don't have any plan right now more deviate from the original plan. Actually, we can either buy cells in the market, with the more favorable ASP price right now and take advantage, as well as we can tolling through either partner. We are looking for several partners for cell manufacturing, outside of the Company.

Of course, at Daqo New Energy actually, we do not have any cell manufacture capability for right now. So we do see as a benefit of getting cells with a more favorable ASP, as well as tolling costs, which is we will continue to look and compare which one is making more sense for the Company to getting high quality cells with low cost. And this is a good market for us to choose and pick.

Thank you very much, and I'll get back in the queue.

Thank you, Ahmar.

Edwin Mok, Needham & Company.

Congrats for a good quarter. First question on your phase 2 polysilicon plant; I'm just curious, how much CapEx do you expect to spend, and in terms of when do you expect to spend that CapEx?

The CapEx will be, what we are planning right now, is probably $80 per kg. For example, so for the 3,000 metric tons, that'll be $240 million. Out of that, probably 50% to 60% will be sent in the year 2011, and another 30% will be 2010, and the final 10% probably will be spent in the year 2013.

Then in terms of [Xinjiang] production, there's no change in terms of Xinjiang production, is that right?

It's on track.

On track, okay great, very helpful. And then, on the poly market, [clearly], if I look at your price and what [you said] in your guidance, you expect the price to come down a little bit. Is that just because spot price is coming down, or is just because some of your longer term contracts have started to kick in and obviously you're signing contract at a lower price? How do you think about that?

Actually, our long-term contracts already kick in Q1. This is more reflective of some weakness in the spot market price we see lately.

I see. And can you remind us what is the mix of your contract prices and spot price, or are you all --? From what I remember you have a percentage of it that is long-term contract price?

Edwin, I think it's still the same as in the amount of the long-term contracts we signed last year. It's about 40% with fixed price.

And also, I'd remind you is this year's slightly different because we're able to increasing our output as a result of debottlenecking process finished in December 2010. So we also were using a portion of the polysilicon for our wafer manufacture as well.

So all of this cased together, so you have absolute number of increasing from original planning for the polysilicon output and also, the amount the spot market price, probably the total polysilicon we have about 40% originally planned for the fixed cost.

Yes, Gongda, [that's my] my next question. So as you grow your module business, which is where you are planning to do that in the second quarter and beyond, wouldn't you use more of your poly for your own use and, as a result, that fixed price portion would have increased, because you will sell less in the spot? Is that how we think about that in terms of pricing?

Not necessarily. Actually, as of today, you can buy cell in the market, and people are not asking for you [as a return of your cell] or polysilicon. And as you see, the market for the cell is more stressful compared with Q1. So you can get a cell in the market as well.

So we do try to optimize the maximum benefit for the Company to stretch, how to sell spot market or just using us and long-term contracts. And we rely on our strategy is use as much as possible with the contract with customers through, not only 2011 as well as 2012 and '13 and 2014, with long-term contract with customers. So those policies were not changed. Of course, those contracts were incurred in some fixed price contracts as well for 2011.

And looking forward, we're more flexible with variable price and to reflect a possible future the price change [down the road].

Well, I understand that. Great, very helpful color there.

One last question I have on the module sales. So you guys are planning for higher sales in the coming quarter. I'm just curious, is that just [proven] customers? Are you just increasing the number of distributors? Or are you selling through your parent company? What is driving that increase module sales? And how do we look at that, your module volume, in the second half of this year? Thank you.

Edwin, I think it's a combination of two reasons. One is increased customer base. The other one is a deeper relationship with existing customers. Some of the customers, when they work with us initially, the volume is smaller. But now that they see the quality we produce, they're getting more and more confident in us, and so they're increasing their order.

This year, we're still aiming for a total output of 125 megawatts and that goal still stays the same, for the module side.

Great, that's all I have. Thank you.

Thank you.

Sam Dubinsky, Wells Fargo.

A couple of quick questions for you. If I look at your 2Q guidance for wafers and panels, I think I get an ASP around $0.64 per watt for wafers and $1.40 per watt for panels. Number one, is this correct?

Number two, are you pricing below market to gain share? Or is this actually where market pricing is today? And then I have a follow-up.

Sam, we always try to be conservative on the guidance side. So that's probably the most comment I'm going to make on that now.

Yes. So Sam, still for Q2, we have more than half to go. So we really don't know now the price for June. If we know, we probably would do another business, you know.

We have to forecast according to current trend and according to -- many of the market situation is expecting, maybe, some price correction for the PV product. So this is the best that we can do. We do not know exactly June price will be.

Well, perhaps you can help me. Where is wafer and panel pricing today? And do you plan to price in line with that, or at a slight discount?

Well, of course, Sam, we're trying to do in line with the market, right? We do not [play] higher, of course, you cannot sell. And I think right now the [module is below EUR1.10]. So it seems like the mean price probably is EUR1.05. That's module price.

And if you track back, actually, it doesn't make sense for the upstream if the polysilicon price stays too high compared with downstream. So it's a very complicated situation. We don't know.

And some people say the pricing will be coming back for the next two months because of Italy, if this situation's settled. So we really do not know about that.

So what we try to do is try to moderate the best that we can to suit the market situation, to respond for some inventories for the customer base we [understood] from our customers. So that's the situation.

And so currently, I think the price is slightly higher than the guidance we give. But we're expecting prices to continue to change. We do not know exactly how deep it will go. But we do expect price will be weak for the remaining of the quarter.

Okay. And then where is spot market price today?

And I know a lot of your competitors and you are still looking to lock up long-term contracts. What's the difference between spot and long-term contract? What type of discounts are customers looking to have?

Sam, are you talking about polysilicon?

Yes, polysilicon, yes.

Polysilicon price is kind of wide ranging right now because it depends on -- as you know, the people are still trying to work out their inventory in the line. I think the bigger customers still take polysilicon as of today, as of right now. And I think the market is still good for polysilicon.

Of course, the spot market price and for very high price range, for example, above $80, we do not see many of customers taking more than $80 right now. Probably right now, it's more like around $70 to $75, something like that is a favorable price for customers. But above $75, you still can sell sometimes, but it's not always as strong as it used to be.

But what about long-term contract pricing? What type of pricing are customers looking for, let's say, two years out?

Two years out is a harder question. Because even the fixed price for our customers, they hesitate to reach the agreement, because customers believe the current price environment is not sustainable. So they do not want to set the future price using today's reference, so they prefer to talking about quarter to quarter to talking about the price from now on. So that [seems to be] the tone of the customer wants to be.

Okay. And my last question is, what are your cell ASPs ,or your cell costs? And what are your tolling costs for cell, for your purchased cells, for your panel business?

Sam, if we buy from third parties, it's a market price. Today it's probably, what, between $1.10 and $1.05. And it's probably --

It's approximately $1.05, something like that for a while. But the tooling price is lower, of course. It just mainly depends on every manufacturer's cost. So it's a wide range for manufacture for the [mature ones].

Are you seeing tolling below $0.30 per watt?

$0.30 per watt is -- yes, of course, you can get those quotations from maybe a few customers, yes.

Okay, great. Thank you, just curious.

Thank you.

(Operator Instructions) Sunil Gupta, Morgan Stanley.

Congratulations on very strong results. I just wanted to understand the debottlenecking of the polysilicon plant where you've done a very good job in Q1. We have seen some of the other companies continue debottlenecking. So I wanted to understand, do you have room for further debottlenecking at your existing plants? If yes, what kind of capacity could you squeeze, and what could that do to your cost?

Okay, Sunil, thank you for your question. But this debottlenecking is not like a continuous effort. But we planned this, as you know, from first half 2010. And we very detailed designed the process, which we improved several areas, not only for the capacity improvement, as well as the energy savings, but on several areas.

So we do see benefit not only from the output point of view, as well as we see the quality improvement, as well as energy consumption improvement.

So we do not have plans to have similar debottlenecking this year. However, we do not rule out any possibilities. Our technical group are still working on detailed planning for the next phase if any capacity or quality improvement can be done. So I have no detailed plan today to share with you, unfortunately.

So this year, we'll continue to driving our output. Its target is for 4,300 metric tons output for 2011.

Okay. And in terms of your cost roadmap; earlier in response to one of your questions, Jimmy mentioned that it could go down by about $1 to $2 in Q2, and another $2 or so in Q3, partly because of [restricted] prices. So I guess that will take us down to about $26 or something in that ballpark, $26 or $27 in Q3.

Can you do anything else based on the experience that you had with the existing debottlenecking? Can you do anything better than that, because I guess some of your competitors are talking about lower costs?

Yes, Sunil, I think when talking costs today, I need to be cautious about certain things, especially we express in dollars, because any foreign exchange change for the value of the RMB. So we are more working on the roadmap is on the RMB basis. As you know, there are several risks we talking on for every polysilicon manufacturer in China.

First, for any possible inflation for energy cost, we already put some calculation inside. And also, there's a possible for variation of the RMB going higher towards dollars, so this is included in that. So we've been saying that I think that we still have some, I would not call it debottlenecking, I would call the operational enhancement to do in our second half of this year. But we do expect our costs in the RMB base will continue going down as our planning.

Now of course, this is more tough when you're going forward after you have a great cost basis established, so we still working for any other way how to improve our cost structure for existing facilities in Xinjiang area.

Okay. In terms of your polysilicon contracts, you have a strategy of signing some fixed price contracts, and some you sell on a quarterly spot. Have you fixed any of the contracts for 2012 delivery now? If yes, what percentage of your output have you signed, in terms of fixed price contracts, and if you will be able to talk about what kind of level have you signed those contracts at?

Actually, Sunil, as I mentioned before, unfortunately, we are in the process doing that, so I strongly believe we were closing all those long-term contracts in Q2 of this year. So the majority of contracts still in the process and I do not have a much details, but likely, I think, the ASP will be most contract will reflect the real time ASP, as we discussed, either on the quarterly basis renewed market price with our customer. So it will be -- (inaudible) do not need negotiate the [review] price, the ASP as moving forward.

Are any of your customers willing to sign fixed price contracts for 2012 for the full-year basis, or do they all prefer quarterly?

Yes, well, depends on which current price [we are]. Of course, some of customer prefer to have a fixed price, but of course, in that case, the preferred price is much lower than the current price, and some of them is even hesitated to sign the price with our expectations. So basically, I would say majority customers like to sign the variable price, according to the real time market price, with often a discount of [the current spot], yes, go ahead, sorry.

Just hypothetically, you said even if customers were to sign contracts for 2012, they obviously try to negotiate overly low price. What kind of price -- if you were to sign those, what could you achieve in terms of, say, certain volume logged into fixed price for 2012?

For 2012, certainly we can -- actually, right now would say our contract would be fixed and probably in Q2 100% fixed. Right now is the intention for sign the contract with us already is 100%, for our available capacity for spot market or contract market, which means like we said in the earning release, our next three years, the capacity is already signed out, with the intention. It's not the full contract yet, but will be fixed with contract for next 1.5 months.

Okay, great. Thank you very much.

Thank you.

We have no additional questions at this time. I would now like to hand the call back over to management for closing remarks.

Okay, again, thank you very much to attend today's conference, and we looking forward to see you next quarter.

Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.