大全新能源 (DQ) 2015 Q3 法說會逐字稿

Good day and welcome to the Daqo New Energy Company third quarter 2015 earnings conference call. (Operator Instructions). Please note, today's 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'm Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the third quarter of 2015, which can be found on our website at www.dqsolar.com. To facilitate today's conference call, we have also prepared a PPT presentation for your reference.

Today, attending the conference call, we have Dr. Gongda Yao, our Chief Executive Officer, and Mr. Ming Yang, our Chief Financial Officer.

The call today will feature an update from Dr. Yao on market and operations, and then Mr. Yang will discuss the Company's financial performance for the third quarter of 2015. After that, we will open the floor to Q&A from the audience.

Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth, are forward-looking statements that are made under the safe harbor provisions of the US 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 containing any forward-looking statements. Further information regarding these and other risks is included in the reports or documents we have filed with, or furnished to, the Securities and Exchange Commission.

These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information except as required under applicable law.

Also, during the call, we will occasionally reference monetary amounts in US dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into US dollars solely for the convenience of the audience.

Without further ado, I now turn the call over to Dr. Yao. Please.

Thank you, everyone, for joining our call today. First, let me provide some updates on our recent industry developments.

According to data released by China National Energy Administration, China added 9.9 gigawatts of solar PV installations in the first three quarters of 2015, which has brought China's cumulative solar PV installation to 38 gigawatts.

We believe China is on track to achieve its annual installation target of 17.8 gigawatts, which would signify an additional 8 gigawatts of installation in the fourth quarter, representing approximately 45% of the annual target. China would soon overtake Germany to become the world's largest solar power generating countries.

Based on feedback from our customers, demand for solar products across the value chain in the fourth quarter is expecting to be strong. Most downstream players are running at full capacity, and ASPs of downstream solar products, particularly for solar wafer and solar sales, are on the rise.

Many of our customers have sold out of their capacity for the remaining of the year. And some have been sold out their capacity through the first quarter of next year. As a result, we expecting to see stable demand for polysilicon.

Polysilicon imports into China in Q3 was around 29,000 metric tons, a 12% decreasing from 33,000 metric ton in the Q2 of 2015, due to antidumping and the countervailing tariffs.

The imports from US decreasing 78% in Q3, as compared to Q2, 2015. However, imports from Korea is increasing, which makes the overall supplies still sufficient.

While overall volume demand for polysilicon remains strong, near-term pricing has been impacted by inventory adjustments, both in the channel and at some of our competitors.

We have seen encouraging signs that industry poly inventory situation improving and is expected to come down further in Q4. We anticipate polysilicon ASP to remain stable, as at the current level.

Despite a 6% polysilicon ASP decline sequentially, we achieve a 14% reduction in the production cost and improved our gross margin, EBITDA margin, operation margin and profitability across all key financial metrics.

Our goal is to continue to lower our polysilicon production costs at a faster rate than ASP decline and achieve a margin and a profitability improvement.

While Daqo can continue to generate positive and strong cash flow at the current polysilicon price level, we are seeing a sign that some of our competitors are struggling and going into distressed situation. Some are now operating at significantly reduced EBITDA levels, or even at a negative EBITDA, and also at operational losses.

We expect to see some significant plant closings and shutdowns over the next several months which, long term, will benefit the overall supply/demand situation for polysilicon.

Now, let me provide you with the update of the Company's operational performance for the third quarter. Our strong third quarter results reflect the success of our Phase 2B polysilicon capacity expansion in Xinjiang, which have successfully ramped up to its full capacity of 12,150 metric tons at the end of the third quarter.

The ramp up from initial production to full capacity take only three months, which was the best ever achieved for the Company. We executed well on the key technology upgrades and process enhancements, delivering cost reductions that were ahead of our expectations and exceed our key financial and operational targets.

In the third quarter of 2015, we produced 2,689 metric tons of polysilicon at the average total production costs of $11.15 per kilo, and a cash cost of $8.71 per kilo, a significant decrease in our total production cost of $12.98 and a cash cost of $10.60 in the second quarter.

Through proprietary technology enhancements, our newly commissioned hydrochlorination system and CVD reactors are operating well, at better than their design specs in terms of production volume and output efficiency.

As a result, we significantly reduced unit electricity consumption, raw material usage and unit labor costs, achieving a 17.8% reduction in cash cost in the third quarter, as compared to the second quarter of 2015. We believe, as we continue to optimize our manufacturing operation and production process, we'll be able to continue to improve our cost structure.

As such, we expect to further reduce our average total production cost to less than $10.50 in the fourth quarter of 2015 and to less than $10 per kilo in the year of 2016, with a similar level of reduction to cash cost.

Now our wafer subsidiary, we are seeing very strong customer demand for our wafer products. We are seeing demand for far greater than our capacity and cannot produce enough to meet the strong customer demand. We are also seeing good ASP improvements in recent months.

At the same time, we have been working hard to improve our wafer manufacture efficiency and reduce costs. The gross margin of the wafer manufacturing facility, on a stand-alone basis, improved significantly, up from 11.2% in the second quarter to 17.4% in the third quarter of 2015. Based on preliminary numbers, we see wafer gross margin to improve to about 20% in Q4.

As such, we have recently launched a wafer technology enhancement project, which is expected to further reduce our wafer costs and increase wafer capacity from 72 million pieces per year to about 100 million pieces per year by the second quarter of 2016. We believe this technology enhancement project will help further reduce costs, improve margin and profitability.

Now for the fourth quarter outlook. For the fourth quarter of 2015, we expect to sell about 2,800 to 3,000 metric tons of polysilicon to external customers, which excludes internal sales of polysilicon to our wafer manufacturing subsidiary.

This implies a production level above our current nameplate capacity. For solar wafers, we expect to sell about 20.5 million to 21 million pieces of solar wafers. This outlook reflects our current and preliminary view as of the date of this press release and may be subject to change.

Now, I will turn the call to our CFO, Ming Yang, for a financial update.

Thank you, Dr. Yao, and good day, everyone. The solid execution of our capacity expansion project [and] technology upgrade enabled us to post strong financial results for the quarter.

Although polysilicon ASPs declined by approximately 6% in the third quarter, as compared to the second quarter of 2015, we were able to return to profitability and expand our gross margin, operating income and EBITDA in the third quarter, as a result of a reduction in manufacturing costs and increase in production volume.

We achieved non-GAAP gross margin of 23.4% in the third quarter, as compared to 19.6% in the second quarter (technical difficulty).

We are proud of what we have achieved in the third quarter. We have successfully increased our capacity, further reduced our cost structure that is already highly competitive, and achieved substantial improvements in margins and profitability.

We believe we're on track to achieve our goal of becoming a highly profitable and fast growing top tier solar raw material provider in the world.

Now, I will provide financial updates for the third quarter of 2015. Revenues were $46.6 million, an increase of 36% from revenue of $34.3 million in Q2, 2015. Revenue from polysilicon sales to external customers were $34.1 million, an increase of 57% from $21.7 million in the second quarter.

External polysilicon sales volume were 2,277 metric tons, an increase of 67% from 1,363 metric ton of polysilicon sold in the second quarter. The increase in polysilicon revenue, as compared to the second quarter, was primarily due to the increase in polysilicon sales volume, partially offset by lower ASP.

With the ramp up of the Company's Phase 2B polysilicon expansion, the Company produced 2,689 metric tons of polysilicon in the third quarter, an increase of 55% from 1,734 metric tons of production in the second quarter.

Polysilicon ASP were $14.98 per kilogram in the third quarter, and $15.95 per kilogram in the second quarter of 2015.

Revenue from wafer sales were $12.5 million in the third quarter, compared to $12.6 million in the second quarter. Wafer sales volume were 19.1 million pieces in the third quarter, compared to 18.3 million pieces in the second quarter.

The slight decrease in wafer revenue, as compared to the second quarter of 2015, was primarily the result of the increase in mix of wafer volumes through OEM services.

Gross profit was approximately $8.6 million, compared to $3.6 million in the second quarter. Non-GAAP gross profit, which excludes costs, related to the non-operational polysilicon assets in Chongqing, was approximately $10.9 million, compared to $6.7 million in the second quarter of 2015.

Gross margin was 18.4%, compared to 10.5% in the second quarter. The improvement in gross margin was primarily due to our continuous cost reduction efforts in polysilicon manufacturing, partially offset by polysilicon ASP decline.

In the third quarter of 2015, total costs related to the non-operational Chongqing polysilicon plant were $2.3 million, compared to $3.1 million in the second quarter. Excluding such costs, the non-GAAP gross margin was approximately 23.4%, compared to 19.6% in the second quarter.

Selling, general and administrative expenses were $2.9 million, compared to $2.8 million in the second quarter of 2015.

Research and development expenses were approximately $0.1 million, compared to $0.2 million in the second quarter of 2015.

Other operating income was $1.1 million, compared to $667,000 in the second quarter of 2015.

Net interest expenses were $3 million, compared to $2.5 million in the second quarter.

EBITDA was $15 million, compared to $8.4 million in the second quarter. EBITDA margin was 32.1%, compared to 24.6% in the second quarter.

Net income attributable to Daqo New Energy shareholder was $3.1 million, compared to net loss of $0.9 million in the second quarter of 2015.

Earnings per basic ADS were $0.29, compared to a loss per basic ADS of $0.09 in the second quarter of 2015.

Non-GAAP adjusted net income was $6.3 million in Q3, 2015, compared to $2.7 million in Q2, 2015. Our non-GAAP net income includes adjustments for costs related to the non-operational polysilicon assets in Chongqing, which were primarily non-cash depreciation costs, and also excludes costs related to share-based compensation, which is a non-cash expense that varies from period to period. We believe these adjustments provide investors with a basis to measure the Company's core operating performance and earnings.

Adjusted earnings per basis ADS, non-GAAP, were $0.60, compared to $0.26 in Q2.

As of September 30, 2015, the Company had $68.7 million in cash and cash equivalents, and restricted cash, compared to $95.1 million as of June 30, 2015. The decrease in cash and cash equivalents, and restricted cash, was primarily due to a loan repayment.

As of September 30, 2015, the accounts receivable balance was $15.4 million, compared to $7 million as of June 30, 2015. As of September 30, the notes receivable balance was $16.5 million, compared to $38.3 million as of June 30.

As of September 30, total borrowings were $259 million, of which $144 million were long-term borrowings, compared to total borrowings of $266 million, including $100 million long-term borrowings as of June 30, 2015.

For the nine months ended September 30, 2015, net cash provided by operating activities was $65.6 million, compared to $47.7 million in the same period of 2014.

For the nine months ended September 30, net cash used in investing activities was $82.7 million, compared to $81 million in the same period of 2014.

For the nine months ended September 30, net cash provided by financing activities was $38 million, compared to $38 million in the same period of last year.

That concludes the official part of our presentation. Now, we would like to open for Q&A.

(Operator Instructions). Philip Shen, ROTH Capital Partners.

Congratulations on the success of ramping your facility. For ASPs, I know, Dr. Yao, you talked about a stable outlook for ASPs, but can you provide some more color on ASPs you see ahead? And specifically, what's your view on the Korean imports; do you expect this to continue and when, if at all, does it end?

Okay. We said, look at the numbers from Korea, especially for OCI, our typical largest poly makers, as significant imports increasing. We said that. And for the US, it's offsetting what the US (inaudible). Meanwhile, also in last -- actually, from this month, we heard some manufacture poly maker in China, they will start manufacturing.

But we don't have verified names so I cannot disclose this. But they see, some competitors, difficult times, so they probably will reduce their capacity production. So we believe that demand for Q4 in China will be as strong as Q3, so we don't see any slowdown for the downstream.

And I think that the balance between demand and supply is really depends on all the poly makers in China and also in Korea, how to solve the inventory issues they, right now, some of them have.

We believe that Q4 will be stable, the price, and next month will be stable or maybe slightly changed because some players may be out of the game.

Do you expect the Korean imports from OCI and others to continue at these levels for the foreseeable future?

Yes. I think that the current Q3 data indicate that maybe there are some clean from inventories in their channels. So we believe that will be maybe reduced next year, Q1, but we do not have very clear, accurate information about that. But we think -- it seems like Q3 and the current import in recent months, they accelerated some import to China. Maybe they are just cleaning the inventory they have.

As you also know, that recent data for [IEC] indicated they have huge inventories, maybe more than one quarter's production inventory in hand because of tariff issues with China. Some Korea also has some inventories in the last few quarters; maybe they are trying to sell those inventories right now. Probably we'll see some, maybe, lower inventory in Q1 next year.

Okay, great. Shifting to demand, it sounds like your customers are all doing well in terms of being sold out through even Q1. With your expansion, can you talk about your customer base? Have you added some new customers? If you can you give us some names that would be great. Or have you mostly expanded with the existing customers that you've had? Thanks.

Yes. We do two areas. So there's existing customers we increased the shipping quantities.

And secondly, also we are expand to new customers and we have several key customers on the qualification phase. So I cannot disclose name yet, but we will [be firm] after qualification finish. We expecting we'll be finishing this quarter, so we are planning shipping significant amount for them.

Downstream, we see the demand is so strong because we see the wafer price and the sale prices rising also, so that's the indication of the market and it's very strong downstream.

Great. In terms of your costs, you guys did a great job reducing your cost structure and you've shared that you expect to get 2016 all-in costs below $10. Can you give the breakdown of what that $10 is? How much is electricity? How much is depreciation? It should be about $2.50, I guess. But going down the line, what's the mix there, please? Thanks.

Yes, so for Q3 data, we are not reach 100% for full quarter for capacity yet. So after reach full capacity, we expecting the depreciation will reduce and, the same time, also the electricity consumption will reduce too because we optimize the process.

So roughly speaking, normally depreciation is around -- I don't have accurate breakdown yet, so I don't want to give breakdown, give you information. But typically, it's same as before, but I want to give you idea is about among all the savings. We saved about 30% of consumption of electricity compared with the Q2 data, so that's probably the best roughly about the electricity's point of view.

And also, we have some labor and materials and depreciation savings. So it's almost proportional, but electricity will be, I would say, give you a much larger percentage-wise for saving from now to next year.

Okay, great. Thank you. Congrats again, and I will jump in the queue. Thanks.

[Mai Wong, SWS Research].

I just have one additional question regarding the finance cost, because I see that our finance cost in the third quarter has reduced at some point year over year. Was that mainly caused by a [drop] of interest rate cost this year, and do we still have room for further cost reduction in this respect in the next quarter or in 2016?

We think our financing cost interest expense will be roughly stable for next quarter and our overall financing cost is somewhere between 5.5% to 6% of interest rate. And then you can look at our overall total debt is roughly $260 million, in that range.

All right. Thank you.

(Operator Instructions). Paul Strigler, Esplanade.

Any update on the US-China trade case? As I understand it, the module guys had their agreement in place, but on the poly side there's a little bit of friction between China and the US. Can you share anything on that?

Hi, Paul, this is Gongda. We do not have similar information because, apparently, the module guys are talking and polysilicon group is doing separately. So my understanding is US poly companies and China module companies very eager to work out some kind of solution. But I don't think we believe there's no significant US module guys and no China poly guys participate in this kind of talk.

So officially, they trying to get some agreement in October when Chinese President visits the US, but apparently there's no such agreement happening. There's some news regarding this in China, and GCL also, the Chairman announced that there was no such solution recently will be reached out between China and the US, so that's all the public knowledge. So we didn't hear anything where we have -- where will soon be reached between US and China. So we don't believe there will be some big result yet, Paul.

And then, on the Korean front, so obviously OCI is a large player there, but are you also seeing supply from Hankook or the SunEdison plant or Hanwha entering the market in China as well, or is it largely just OCI?

We see Hankook, but we don't see SunEdison. I don't believe their manufacturing started. And that's according to some channels checking. The Hanwha's material is not significant because Hanwha only provide polysilicon for their subsidiaries in China which used to be solar [firm] called the Hanwha Solar Company in China. Not significant sale to other customers, as we know.

Great. Congratulations on the cost structure, guys. Really impressive and good luck.

Thank you, Paul.

Sheng Zhong, Morgan Stanley.

Very impressive cost reduction. Congratulations. Beside the polysilicon business, I also want to ask on your wafer business as the industry actually saw some tight capacity on the wafer and cell. So just want to know, as your balance sheet is now very healthy, just want to know if you have any plan to maybe expand some wafer capacity in the future.

Okay. We said that we probably would do some debottlenecking with fully utilize existing facility to increase the wafer production efficiency. But we are not significantly expanding our wafer site, for example, or increasing our capacity for other purpose, because we are going on to upgrade our furnace from G5 to G6. At the same time, is resolve some bottlenecks as a result of that increasing.

So our wafer business is very, very healthy and we are reduce our costs to manufacture, [cumulative] cost. Same time also because on the cash cost side as well as in the (inaudible) shipments, so our margin increased almost from 12% to about 18%. We believe Q4 would be around 20% level, yes.

I got it. Thank you much. That's helpful.

As this concludes our question and answer session, I'd like to turn the call back over to the management team for any final remarks.

Thank you, everyone, for joining the conference call today. Should you have any further questions, please feel free to contact the Investor Relations of the Company. Thank you. Bye, bye.

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