大全新能源 (DQ) 2016 Q2 法說會逐字稿

Good morning, and welcome to the Daqo New Energy 2016 second-quarter results conference call. (Operator Instructions). Please note this event is been 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 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 markets 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 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 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 Security 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 predictions 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 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 tonnes polysilicon, which surpassed our annual name plate capacity of 12,150 metric tonnes.

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 kilogram in total cost and $7.42 per kilogram 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 improvements, 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 a wide range of customers. With a tight supply environment, market ASPs improved meaningfully, from $13.72 per kilogram in the first quarter to $17.24 per kilogram 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 the revenue of $71 million, with non-GAAP gross margin of 43.9%, EBITDA margin of 48.9%, and GAAP earning per basis ADS of $1.90. In particular, we generated strong cash flow from operational 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 with China remains tightly supplied, with low levels of inventory across the domestic supply and the customers. Based on current market and customer order trend, we are seeing a stable price environment, and we anticipate Q3 ASP to be similar to Q2 levels.

Considering several of the major Chinese polysilicon producers include Daqo plan to conduct annual facility maintenance during the third quarter, we anticipate that the tight supply situation for polysilicon sector with China should continue in 2016.

Now I will like to provide some color regarding the downstream solar market, and effect on the polysilicon sector.

Despite a recent low projected pricing for downstream solar products, we believe downstream suppliers, including wafer manufacturers, are still making positive gross margin and a positive cash flow for their operations.

Moreover, over the past years we have developed and improved our customer base. Most of our customers now are Tier 1 integrated solar manufacturers that produce wafers and and modules, and have wider distribution capacity -- capability to serve both Chinese market and the markets outside China.

While the demand for those type of customers remained healthy and robust we believe companies seeing the most impact in the current market cycle are pure play solar sale manufacturers that accounted to upflow on market during a strong market cycle. And we have limited exposure to these suppliers.

Furthermore, with our high-quality semi (technical difficulty) silicon, we have developed new customers that require these higher-grade polysilicon for high-efficiency wafers and solar products, which has positively resulted in additional demand for our products, from these new high-efficiency solar customers.

Now let me provide a quick update of our Phase 3A polysilicon manufacturer capacity expansion. Construction is progressing smoothly, and it's now more than 50% completed. We expect the (inaudible) structure construction will be substantially completed before year-end. We anticipate that new facility to come online and beginning initial production in the first half of 2017, which will bring our annual capacity to 18,000 metric tonnes. With our expanded product capacity, we expect to continue to deliver compelling financial performance and result 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 tonnes of polysilicon over the past four quarters, above our nameplate capacity of 12,150 metric tonnes.

As our Xinjiang polysilicon manufacturing facilities have been operating 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 3 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 the impact of polysilicon production for 2016.

Due to the long lead-time for procuring and the special materials and equipment required for the annual maintenance, we anticipate that we would start the 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 the above-mentioned factors, the Company expects to sell approximately 2,550 metric tonnes to 2,600 metric tonnes of polysilicon to external customers during Q3 of 2016.

The external sales guidance excludes shipments of polysilicon to be used internally by our Chongqing solar wafer facility, which is expecting to utilize approximately 550 metric tonnes 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 will 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 (technical difficulty) an update for the second quarter 2016.

Revenues were $71 million, representing a 23% increase from $57.7 million in the first quarter of 2016 and then 107% 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 tonnes in the second quarter of 2016, compared to 2,905 metric tonnes 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 25.0 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 29.0% 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 $0.09 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.

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 payables 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.

That concludes the official part of our presentation. Now we will like to have the Q&A session.

(Operator Instructions) Philip Shen, Roth Capital Partners.

Hi. T. Thank you for taking my questions.

Hello Phil. Good to hear from you.

So with modular 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 databases down maybe 8% to 9% from peak levels at the end of Q2. How do you expect the downstream overcapacity 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 can you just talk about poly pricing beyond Q3, given what's happening further downstream and with the Chinese government. Thank you.

Yes, Phil, let me try to answer your questions. First of all, I think we stated that Q3, the price was stable and similar to Q2 by the fact of two reasons. First of all that peak price for the poly in Q2 appeared in the end of Q2 in the peak time in the first months April, relatively is not higher as in June. We saw that our price in July is very similar to June. We do not know exactly September performance, but we are expecting maybe price will slightly decline a little bit 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. We knew that downstream pricing is very weak compared with Q2 as well.

So we get the possibility we will see some price decline in the Q4. That's from our current point of view to look in the future. But as we said, we still see the Q3 price may be more or less similar to Q2. Q4 maybe there's a possibility of weaker for the poly pricing.

I don't know if we answered --

You definitely answered the question. Thank you. And then Gongda, in terms of they -- give us an update on how China is enforcing the imports or restricting the imports. Is there any new information about that?

As publicly I think that there's some talking with -- they will enhance the custom, the management for the imports from foreign countries, regions like Taiwan. Regarding the new development for further restriction is not such a result announced yet but we are still waiting for government to update us. There's not much change.

Okay, not much change. You guys are doing a great job reducing your cost structure and it seems like there's even more opportunity ahead. Can you update us on how much lower your costs could go, especially after the Phase 3A expansion is fully ramped up?

Okay. So great, I think originally we said our goal for 2016 is go up to -- down to $9.50. We achieved this, certainly in the second quarter. Now Q3, we originally -- our cost due to the shutdown maintenance overall depreciation per kilo of polysilicon was slightly increasing, because shutdown, our volume would be reduced slightly.

But overall, I think after we ramp up total 18,000 metric tons, I think our costs can be -- will be built in like $9 and the $9.50 for next year. That's our operation goal.

Phil, let me just add a little more color to what Dr. Yao just said. So we are implementing new process we can actually reduce our energy usage even further and also will reduce our silicon metal usage as well. So these two combined, we think that we have a very good roadmap to lower our costs.

At the same time, a new process improvement actually allow us to produce higher quality polysilicon with better purity with a higher constant percentage of polysilicon that can be semiconductor grade, which we can use for the entire or other high-efficiency mono type of wafers to manufacture these manufacturers. So that will actually help us capture more market share as well.

Great. I think that's a meaningful trend that we are seeing in the industry as well, the shift from multi to higher efficiency type and mono technologies. Can you give us an update as to how much of your poly supply to high efficiency today and then what is that mix today? Is it 20%, is it 50%? How do you expect that to shift as we go through 2017?

Okay, when we exiting Q2, we probably roughly 10% to 15% using it for mono, and we will increase in the second half to about 20%. We are expecting will be additional 10% increasing for next year, on the wafers application.

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

Yes, well not just a deal between Hemlock and SolarWorld, but as China we are looking for we also (technical difficulty) Hemlock Chinese government yet regarding this. So we also didn't see any substantial change from US module makers to take any action. As you know, there are several companies started this case with the US government. SolarWorld is only one of them. So we don't see any substantial change from US side. So it will be -- I don't believe any substantial change from China side will be happening in 2016.

Okay. One last quick question here. I think on the last call you mentioned 70% of your total output had been sold for 2016. Can you talk about what percentage has been committed for the back half of the year now? 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 I think at this time and we're relatively conservative. We said 30%, but if our quality upgrade program is successful, then we probably provide more. Right now is we're still saying is long-term contract for like volume commitments from customer is more than 70% to already booked for our products for next six months.

We also in the time to talking about the additional volume for 2017, but that we're waiting for exactly in the ramp-up schedule is a fixed. So we will see after our construction and installation finished. We will immediately work with our major customer to account that.

As I said, we don't believe demand is the issue, especially with additional capacity increase will be not enough for mono capacity increase in China for our major customers. So that, we do not worry about that yet.

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

Thank you, Phil.

Thank you, Phil.

Sheng Zhong, Morgan Stanley.

Thank you very much for taking my question and congratulations on the very strong results.

So my first question, maybe a follow-up 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, because we don't see the price difference. But as you know, the mono customer requirements for polysilicon material is quite -- is a high standard compared with the multi-wafers.

But a company set a program and to work with those customers to ensure our future, make sure that customer transition also, so meaningful volumes were switched to mono wafers. So today we still ship the majority materials, more than 85%, but is for multi-wafers customers, but about 15% to demand wafers.

As of today, all the mono wafer use price is same as the first grade solar silicon polysilicon price for multi-wafer customers. There is no price change here.

Do we expect there would be some price difference in the future on the --

Yes, so a company majority, almost like 99 point some percentage is what we call the solar grade 1 and we market it at the same price. Then all the -- basically all the mono wafer customer required is for the majority of the polysilicon would be more smooth or more dense compared with the multi-wafer customer. So we also only can be using ready to using counter grade instead of some customer can require some -- we have some very small amount. It is not ready to need to be treated or cleaned.

So I do not expecting any difference in the future as well. And leader's doing very well in China. But this market is still small as today, we are expecting we are growing maybe next two, three years to the meaningful size. Yes.

Yes, thanks. So the next question is also about the value chains of price because we see some significant decline in all the wafer sale and modules. So we also have some wafer capacity and we expand that wafer capacity. But currently it's likely that wafers module will go in -- 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, I think maybe this can help to improve the overall profit.

Yes. You're definitely right. So company keep flexibility. We will judge the market and as Ming already mentioned, currently the wafer margin definitely going down. But we still have a positive cash flow. That's the minimum requirement. If a situation going beyond that, we have a right to reduce that volume production and increase our sale -- up sales for our polysilicon customers, yes in order to improve the margin, yes, for the 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 we still have 5% to 10%, maybe 10% pricing going down. That would be gaining almost like there's no margin basically. If you look at the current price, they have like maybe 10% to go.

Okay. (Multiple speakers).

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

Yes.

But I think Sheng, I think if we look at wafer margin right now, it's still in the mid to high single digit range. So I think right now it's still profitable and contributing positive cash flow, positive cash profit. So there's still room that the price can fall, yes.

Yes, I understand. Very helpful. And last question is about our listing on the renewables in China mainland market. So do we have any plan to reschedule from the market?

Hi Sheng, yes. So we officially listed our Xinjiang.co polysilicon manufacturing operation on China's new third board. So we will certainly look at the opportunity for the market to see if there's possibility to access the China capital market, which if you look at the valuation of solar companies within China that are listed in China, the valuation is much higher.

So we think we'll probably explore the opportunity in the third quarter, third and fourth quarter of this year by talking to some of the investors here that 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.

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 has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.