Daqo New Energy Corp. (NYSE:DQ) Q3 2023 Earnings Call Transcript

Daqo New Energy Corp. (NYSE:DQ) Q3 2023 Earnings Call Transcript October 30, 2023

Daqo New Energy Corp. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $1.7.

Operator: Good morning, and welcome to Daqo Energy Third Quarter 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I’d like to turn the call over to Ms. [Anita Zhu] (ph), Investor Relations Director. Please go ahead.

Unidentified Company Representative: Hello, everyone. I’m Anita Zhu, 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 2023, which can be found on our website at www.dqsolar.com. Today, attending the conference call, we have our Chairman and CEO, Mr. Xiang Xu; CFO, Mr. Ming Yang; and myself. The call today will begin with an update from Mr. Xu on market conditions and company operations. And then, Mr. Yang will discuss the company’s financial performance for the quarter and the year. After that, we’ll 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 U.S. Private Securities Litigation Reform Act of 1995.

These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding these and other risk is included in the reports or documents we have filed with were 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 amount in the U.S. dollar terms.

Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. So, now we would like to welcome our CEO, Mr. Xiang Xu, for the opening remarks.

Xiang Xu: [Foreign Language] [Interpreted] Thank you, everyone, for joining the conference call today. Anita will serve as my translator during the call. And if you have any questions addressed to the company or to me, please address the questions at the end of the call. So, now on behalf of Mr. Xu, I’ll now read off his remarks regarding current market conditions and the market — and the company performance. So, during the third quarter, continued optimization of operations at our two polysilicon facilities resulted in total production volume of 57,664 metric tons, an increase of 12,358 metric tons or 27% compared to the previous quarter. Our Inner Mongolia 5A facility, which is now in full production, contributed approximately 40% of our total production volume.

So meanwhile, our production costs further decreased by 5.8% from quarter — second quarter to US$6.52 per kilo, primarily due to improvements in manufacturing efficiency, as well as a reduction in the cost of raw materials, particularly metallurgical-grade zircon. So compared to our first quarter average production cost of US$7.55 per kilo, cost has declined by more than US$1 per kilogram. So, based on the company’s most recent production data, we expect our fourth quarter cost to continue to trend downwards from the third quarter levels. So, we shipped a total of 62,967 metric tons of polysilicon in third quarter, an increase of 9,465 metric ton over our second quarter shipments, and significantly higher than our quarterly production volume.

This has resulted in significant decrease in a polysilicon product inventory across our two facilities, now at a level of less than one week of production volume. So for the third quarter, the company generated US$70 million in EBITDA. Net cash provided by operating activities for the first nine months of the year totaled US$1.5 billion, with more than US$711 million in third quarter. The company continues to maintain a very strong balance sheet with no financial debt. At the end of the third quarter, the company had a cash balance of US$3.3 billion and a combined cash and bank note receivable balance of US$3.6 billion. So, our total annual polysilicon nameplate capacity has reached 205,000 metric tons across our two facilities. For fourth quarter, we expect total poly production volume to be approximately 59,000 metric tons to 62,000 metric tons, a continued increase over our third quarter levels.

Full year production is expected to be approximately 196,000 metric tons to 199,000 metric tons, representing an increase of 46% to 49% compared to 2022 levels. With more than a decade of experience in poly production, as well as a fully digitalized and integrated production system that optimizes operational efficiency. We are confident that we can strengthen our position as one of the dominant polysilicon manufacturers in the industry. At the end of the second quarter, after poly prices reached bottom, customers began reordering and taking delivery of products, significantly reducing industry inventory levels. Polysilicon pricing recovered gradually over the third quarter. And in July, as module makers intensified competition, module prices fell from RMB1.5 per watt in June to RMB1.3 per watt in July.

Meanwhile, the high demand in the module sector coupled with lower utilization rate for poly due to a power rationing and system maintenance drove a marginal recovery in polysilicon prices. According to industry statistics, mono-grade polysilicon prices rebounded from the lowest level of less than RMB60 per kilo in June to RMB63 to RMB68 per kilogram by end-July, and an average of RMB87 per kilogram by the end of September. Furthermore, as the current price range is unlikely to be profitable for new entrants given their cost structure, we have seen delays in the production plants. Going into the fourth quarter, production volumes in poly sector are unlikely — are likely to increase marginally as some new capacities come online. During the third quarter, we saw an acceleration in the transition from P-type to N-type cell technology with strong growth in N-type product demand volume and the N-type products’ average selling price premium expanded to RMB10 to RMB12 per kilo in the third quarter.

Going forward, we expect this transition to further accelerate as N-type products expand market share, leading to continued demand growth. To give an update on the company’s US$700 million share buyback program announced in November 2022. By the end of this September, the company had already purchased 8.1 million ADS for approximately US$328.8 million, with an average cost of approximately US$40.58 per ADS. Combined with the program completed in 2022, in aggregate, the company has already purchased approximately 10 million ADS for approximately US$448.8 million. While basic weighted average ADS outstanding for the third quarter were 74 million shares, total outstanding shares at the end of the third quarter were approximately 71.8 million shares, after fully reflecting our recently completed share repurchases.

With the urgent need to address climate change, we’re still at the very early stage of the energy transition from fossil fuel to renewable energy for human’s energy needs on Earth. As one of the most competitive forms of power generation, the continuous cost reduction in solar PV products and the associated reduction in solar energy generation costs are expected to create substantial additional green energy demand, which we believe is unlikely — is likely to exceed most analysts’ expectations. Solar PV is generally expected to eventually become one of the most important energies to power the world. In addition, as solar PV technology keeps evolving, we believe that the increasing needs for very high purity poly, such as our N-type polysilicon, will help differentiate us from most of our competitors.

While many of our competitors will likely struggle in the current market environment, Daqo New Energy has one of the best balance sheet in the industry with no financial debt, and we, as a whole, are confident that we will navigate the near-term market volatility successfully. We’re optimistic that as the solar end market continues to grow, and as our customers continue to transition to higher-efficiency N-type technology, we will benefit from this trend. Daqo will continue to strive to maintain solid growth and capture the long-term benefit of the growing global solar PV market. So, regarding future outlook and guidance, we expect to produce approximately 59,000 metric tons to 62,000 metric tons of poly during the fourth quarter of 2023. And for full year 2023, we expect to produce approximately 196,000 metric tons to 199,000 metric tons of polysilicon.

So now I’ll turn the call to our CFO, Mr. Ming Yang, to delve deeper on the financial performance. Ming, please go ahead.

Ming Yang: Thank you, Anita, and hello, everyone. Thank you for joining our third quarter earnings conference call today. Now, I will discuss the company’s third quarter financial performance. Revenues were US$484.8 million compared to US$636.7 million in the second quarter of 2023 and US$1.2 billion in third quarter of 2022. The decrease in revenue compared to the second quarter of 2023 was primarily due to the decrease in average selling prices mitigated by an increase in sales volume. Gross profit was US$67.8 million compared to US$258.9 million in the second quarter of 2023 and US$978.6 million in the third quarter of 2022. Gross margin was 14% for the quarter compared to 40% in the second quarter of 2023 and 80% in the third quarter of 2022.

The decrease in gross margin compared to the second quarter of 2023 was primarily due to lower average selling prices, which was partially mitigated by our lower production cost. Selling, general and administrative expenses were US$89.7 million compared to US$43.3 million in the second quarter of 2023 and US$280 million in the third quarter of 2022. I will give a little bit more details about the increase in SG&A expenses for the quarter as compared to the previous quarter. And this is primarily related to the resignation expenses and the recognition of the remaining share-based compensation expenses led to the company’s recent management change. The recognition of the remaining non-cash share-based compensation expenses consists of approximately 330,000 shares, which will be vested based on the vesting schedule over the next two years.

And based on the current share price, there’s an approximately US$8 million in terms of expense. However, U.S. GAAP rules requires that the company recognize the related expenses based on the share price at the time of grant and this would be approximately US$23 million. And in addition, our SG&A expenses during the third quarter includes a total of US$46.3 million in non-cash share-based compensation costs, which includes the above expense related to recent management changes as I had mentioned. And so — and this compares to a total of US$27.5 million of share-based incentive expenses in the second quarter of 2023. For the fourth quarter, we would expect our SG&A expenses to normalize and will be in the range of approximately US$35 million to US$38 million per quarter, inclusive of non-cash share-based compensation costs.

Research and development costs were US$2.8 million compared to US$2.2 million in the same quarter of 2023 and US$2.5 million in the third quarter of 2022. R&D expenses vary from period to period to reflect R&D activities that take place during the quarter. And most of our R&D activities currently is focused on increasing the percentage of N-type polysilicon for the company’s product mix. Foreign exchange change was US$3.1 million for the quarter compared to a loss of US$19.7 million in the same quarter of 2023. And this is attributed to the volatility and fluctuation in the U.S. dollar and RMB exchange rate during the quarter. And as a result of the above mentioned, income from operations was US$22.5 million compared to US$213 million in the second quarter of 2023 and US$693 million in the third quarter of 2022.

Operating margin was 4.6% compared to 33.6% in the second quarter of 2023 and 56.8% in the third quarter of 2022. Net loss attributable to Daqo New Energy shareholders was US$6.3 million compared to net income of US$103.7 million in the second quarter of 2023 and US$323 million in the third quarter of 2022. Loss per basic ADS for the quarter was US$0.09 per share compared to earnings per basic ADS of US$1.35 in the second quarter of 2023 and US$4.28 in third quarter of 2022. Adjusted net income, a non-GAAP, attributable to Daqo New Energy shareholders, excluding non-cash share-based compensation costs, was US$44 million compared to US$134.5 million in the second quarter of 2023, and US$590.4 million in the third quarter of 2022. Adjusted earnings per basic ADS was US$0.59 compared to US$1.75 in the second quarter of 2023 and US$7.81 in the third quarter of 2022.

EBITDA was US$70.2 million compared to US$230 million in the second quarter of 2023 and US$720 million in the third quarter of 2022. EBITDA margin was 14.5% compared to 36.1% in the second quarter of 2023, and 59% in the third quarter of 2022. Now I would like to provide some additional color related to our operations. So, from a pure operation perspective, this would exclude the impact of the one-time resignation costs and the non-cash share-based compensation costs of the U.S. [ListCo] (ph). For our operating subsidiary Xinjiang Daqo, in the quarter, pre-tax earnings of RMB888 million or approximately US$121 million. A net income of RMB689 million or approximately US$94 million. Daqo New Energy currently owns approximately 72.4% of Xinjiang Daqo and Daqo New Energy shareholders allocation of the operating net income should be approximately [US$32.4 million] (ph), excluding the above mentioned GAAP accounting related expenses.

And now on the company’s financial condition. As of September 30, 2023, the company has US$3.28 billion in cash and cash equivalents and restricted cash compared to US$3.17 billion as of June 30, 2023, and US$3.05 billion as of September 30, 2022. And as of September 30, 2023, notes receivable balance to the company was US$276 million compared to US$799 million as of June 30, 2023 and US$1.57 billion as of September 30, 2022. Note receivable balance represent bank notes with maturity within six months. And now the company’s cash flow. For the nine months ended September 30, 2023, net cash provided by operating activities was US$1.49 billion compared to US$1.7 billion in the same period of 2022. And for the nine month ended September 30, 2023, net cash used in investing activities was US$954 million compared to net cash used in investing activities of US$605 million in the same period of 2022.

Net cash used in investing activities in the three quarter of 2023 was primarily related to capital expenditures on the company’s polysilicon project in Baotou City, Inner Mongolia, inclusive of both Phase 1 and Phase 2. And for the nine month ended September 30, 2023, net cash used in financing activities was US$602 million compared to net cash provided by financing activities of US$1.47 billion in the same period of 2022. Net cash used in financing activities for the first three quarters of 2023 was primarily related to US$322 million in share repurchases and US$303 million in dividend payments made by the company’s Xinjiang Daqo subsidiary to its minority shareholders. The company continue to maintain a very strong balance sheet with significant cash balances and no financial debt as well as healthy operating cash flow.

And with that, concludes our prepared remarks. Operator, we will now open the line to questions from the audience.

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Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] First question will be from Philip Shen, ROTH MKM. Please go ahead, sir.

Philip Shen: Hi, everyone. Mr. Xu, Ming, thanks for taking my questions. Wanted to explore your view on polysilicon pricing for Q4. You came in with about US$7.70 for Q3 per kilogram. And I wanted to see what your expectations are for Q4. And then, also for the beginning of next year, and then by year-end ’24, do you see a recovery, or do you expect polysilicon pricing to remain at current levels? Thanks.

Ming Yang: Okay. Mr. Xu will provide commentary first and then Anita will provide a translation.

Xiang Xu: [Foreign Language] [Interpreted] Hi, Philip. So, Mr. Xu has commented that, for the fourth quarter, the price should stay somewhat similar to now. And for P-type, it should remain around RMB70 per kilo, and for N-type, there’s a RMB10 premium, which is around RMB80 per kilogram. And in December, the price should stay somewhat consistent as of now. And going into the first quarter, because of demand, the price should lower to around RMB65 to RMB70 per kilogram, around that range. But going to second quarter and beyond, it should go right above RMB70 and plus.

Philip Shen: Okay, great. So, the price to RMB65 to RMB70 kilograms lower in Q1, what is driving that? And is that price, are you talking about P-type? And so should we expect N-type to be RMB10 higher? And what will cause the price to go higher in Q2? And what does he think the year-end ’24 price might be? Thanks.

Xiang Xu: [Foreign Language] [Interpreted] The price of the first quarter around RMB65 to RMB70, the price range, is primarily driven by seasonality. So, Christmas and Chinese New Year, that causes lower demand. So that’s primarily the price in January and February, but price should recover starting in March. And that’s the price for P-type. For N-type, we see a price premium of around RMB5 to RMB10 per kilogram.

Philip Shen: Okay. Got it. Thank you. One more question for me and then I’ll pass it on. As it relates to the industry structure and given these low prices, there are a lot of companies that might be having trouble with driving profit. So, just curious if you can talk about what he sees ahead? And can he talk through, does he expect certain companies to stop production or even accelerate the stoppage of production shutdown? What does he see for the evolution for the industry in the coming six months? Thanks.

Xiang Xu: [Foreign Language] [Interpreted] In terms of the industry structure, first of all, we want to highlight that we have a very competitive cost advantage in producing polysilicon and we see that if price goes down to RMB65 to RMB70, there’s roughly a 50,000 to 60,000 of production volume that’s at the — that are not going to be profitable. And for the new entrants, their costs are obviously a lot higher than us, which is around 75,000 to 80,000. So, given that they don’t have enough cash — not enough cash, and the financing route is relatively limited now, they will be struggling in the coming quarters.

Ming Yang: So, we certainly see industry supply adjustments going forward in the coming months, as well as the industry rebalancing and normalize.

Philip Shen: Okay, got it. Thank you for the color. I’ll pass it on.

Ming Yang: Great. Thank you, Phil.

Operator: Thank you. Next question will be from Alan Lau of Jefferies. Please go ahead.

Alan Lau: Thanks a lot for taking my question. Thanks, Mr. Xu and also Ming for the prepared remarks. So, I would like to have more clarity on the share-based expense. This seems to be the item which has a major change quarter-over-quarter. So, I would like to know what is the breakdown on the US$89.7 million of SG&A, because in the prepared remarks, you have US$46.3 million of non-cash share-based compensation, but in your reconciliation, it’s US$50 million. So, I would like to know like how much is the original share-based compensation and how much is related to the resignation of Mr. Longgen Zhang?