Good day and welcome to the Daqo New Energy Second Quarter 2020 Results Conference Call. All participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kevin He, Investor Relations. 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 2020, 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 Mr. Longgen Zhang, our Chief Executive Officer; and Mr. Ming Yang, our Chief Financial Officer. The call today will feature an update from Mr. Zhang on market and operations, and then Mr. Yang will discuss the company's financial performance for the second quarter of 2020. 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 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 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 views 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 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. Without further ado, I now turn the call over to our CEO, Mr. Zhang, please.

Thank you, Kevin. Hello, everyone, thank you for joining our conference call today. The second quarter of 2020 was a particularly challenging time for the polysilicon industry. Beginning in late March, the global spread of COVID-19 and related lockdowns, particularly in the U.S., Europe, and certain emerging markets, resulted in significant disruptions to demand for solar PV products. End-market customers delayed module orders and shipments due to uncertainties about the duration and economic impact of the pandemic, as well as logistical challenges. This led to short-term market uncertainty and volatility across the entire solar PV industry during the second quarter. As a result, our major wafer customers also delayed orders and product delivery in the month of April, creating a temporary oversupply in the market at that time. This abnormal market environment, with its sharp and sudden drop in demand, resulted in significant negative impacts on polysilicon pricing for the quarter. Fortunately, the impact was temporary, and the market began to recover in May with orders and demand normalizing in June, supported by a strong end-market in China and abroad. We are pleased that despite the challenges faced by the industry during the period, Daqo New Energy was able to generate positive net income for the quarter, further demonstrating the strength and resilience of our business model and our proven low-cost structure. Towards the end of the second quarter, we began to see very positive momentum in solar PV demand in both domestic and overseas markets, supported by additional capacity expansions by downstream mono-wafer customers. This has translated into meaningful demand improvement for polysilicon, which has driven a significant increase in polysilicon ASPs recently. From feedback from customers, their order book for the third quarter is full and the module order volumes look strong throughout the year-end. This strong volume demand has led to a shortage in the polysilicon market. Current market ASPs for mono-grade polysilicon are approximately $11 to $12 per kg, a significant improvement from approximately $7.5 per kg in the second quarter. Our latest signed customer orders and contracts reflect this pricing trend. We expect the polysilicon market to be extremely tightly supplied over the coming months, as there will only be very limited additional supply of polysilicon coming online over the next 15 months, while the end market demand for PV solar continues to be strong and growing. In particular, there continue to be significant new additions of mono-wafer production capacity. In the second quarter, we produced and sold 18,097 metric tons and 18,881 metric tons of polysilicon, respectively, exceeding our guidance. We conducted annual maintenance for our manufacturing facilities in the second quarter. However, some technology upgrade projects, as well as equipment modification, have been rescheduled to August due to the delayed delivery of some key equipment and long-lead time maintenance parts. This will have some impact on the third quarter production volume. As a result, we expect to produce approximately 17,500 metric tons to 18,000 metric tons of polysilicon during the third quarter. We expect to resume to a 100% utilization rate in September after the completion of such projects. Our expected annual production volume for 2020 remains unchanged at 73,000 metric tons to 75,000 metric tons. During the quarter, we continued to make strong progress towards quality improvement and cost structure. Approximately 95% of our polysilicon production reached mono-grade quality during the quarter. At the same time, we continued to improve our cost structure, with further reductions in energy and material usage per unit of production. Despite the impact of annual maintenance during the quarter, we achieved a historically lower cash cost of $4.87 per kg. In particular, we are making great progress in optimizing our process and manufacturing parameters for our new high flow polysilicon reactors, improving production volume per hour and leading to lower unit energy usage. We expect costs to go even lower in Q4 as we ramp back up to full production levels. We believe the solar PV market has entered a new phase of sustained growth as grid parity has been achieved in many countries and regions around the world. Solar PV is one of the very few energy resources that are clean, sustainable, and cost-effective, even compared with traditional fossil fuel power generation methods. It is playing an increasingly important role in meeting the growing global energy demand and addressing critical environmental issues such as climate change and sustainable development. We will continue our commitment to provide high-quality polysilicon products to better serve the fast-growing demand for solar PV energy. Let's move into our outlook and guidance for the company. The company expects to produce approximately 17,500 metric tons to 18,000 metric tons of polysilicon and sell approximately 17,000 metric tons to 17,500 metric tons of polysilicon to external customers during the third quarter of 2020. For the full year of 2020, the company expects to produce approximately 73,000 metric tons to 75,000 metric tons of polysilicon, inclusive of the impact of the company's annual facility maintenance. Now I will turn the call over to our CFO, Mr. Yang, who will discuss the company's financial performance for the second quarter of 2020.

Thank you, Longgen, and hello, everyone. Thank you for joining our call today. Now I will discuss our financial performance for the second quarter of 2020. Revenues were $133.5 million, compared to $168.8 million in the first quarter of 2020 and $66 million in the second quarter of 2019. The sequential decrease in revenues was primarily due to lower ASP combined with lower polysilicon sales volume. Gross profit was $22.7 million, compared to $56.6 million in the first quarter of 2020 and $8.6 million in the second quarter of 2019. Gross margin was 17%, compared to 33.5% in the first quarter of 2020 and 13% in the second quarter of 2019. The decrease in gross margin was primarily due to lower average selling prices for the quarter despite the improvement in production costs. Selling, general, and administrative expenses were $10.1 million, compared to $8.9 million in the first quarter of 2020 and $7.8 million in the second quarter of 2019. SG&A expenses during the quarter included $4 million in non-cash share-based compensation costs related to the company's share incentive plan. Research and development expenses were $2 million, compared to $1.7 million in the first quarter of 2020 and $1.5 million in the second quarter of 2019. R&D expenses vary from period to period and reflect R&D activities that take place during the quarter. As a result of the foregoing, income from operations was $10.8 million, compared to $45.8 million in the first quarter of 2020 and a loss from operations of $0.4 million in the second quarter of 2019. Operating margin was 8.1%, compared to 27.1% in the first quarter of 2020. Interest expense was $6.7 million, compared to $6.3 million in the first quarter of 2020 and $1.9 million in the second quarter of 2019. EBITDA from continuing operations was $26.8 million, compared to $63.1 million in the first quarter of 2020 and $10.2 million in the second quarter of 2019. EBITDA margin was 20%, compared to 37.4% in the first quarter of 2020 and 15.5% in the second quarter of 2019. Net income attributable to Daqo New Energy's shareholders was $2.4 million in the second quarter of 2020, compared to net income of $33.2 million in the first quarter of 2020 and a net loss of $2.2 million in the second quarter of 2019. Earnings per basic ADS was $0.17 in the second quarter of 2020, compared to earnings per basic ADS of $2.37 in the first quarter of 2020, and a loss per basic ADS of $0.16 in the second quarter of 2019. As of June 30, 2020, the company had $115.8 million in cash and cash equivalents and restricted cash, compared to $120.8 million as of March 31, 2020. As of June 30, 2020, the notes receivable balance was $8.2 million, compared to $4.4 million as of March 31, 2020. And as of June 30, 2020, total bank borrowings were $264.8 million, of which $116.9 million were long-term borrowings, compared to total borrowings of $265.6 million, including $149 million of long-term borrowings, as of March 31, 2020. For the six months ended June 30, 2020, net cash provided by operating activities was $47 million, compared to $67.8 million in the same period of 2019. For the six months ended June 30, 2020, net cash used in investing activities was $60.4 million, compared to $145 million in the same period of 2019. The net cash used in investing activities in 2020 and 2019 was primarily related to the capital expenditures on Xinjiang Phase 3B and Phase 4A polysilicon projects. For the six months ended June 30, 2020, net cash provided by financing activities was $16.2 million, compared to $61.3 million in the same period of 2019. And that concludes our prepared remarks.

Thank you. We will now begin the question-and-answer session. The first question today comes from Philip Shen with ROTH Capital Partners. Please go ahead.

Everyone, this is Justin Clare on for Phil today. Thanks for taking my question.

Hello, Justin.

So, I guess, first off, you indicated in the release that ASPs that you're seeing right now are $11 to $12 a kilogram compared to $7.50 in Q2. So I was wondering what are you expecting for your overall polysilicon ASP in Q3? And then could you speak to the demand increase that you're seeing as well as we've seen an issue with supply with one of your competitors, given what's going on with that dynamic, what are your expectations for ASPs in Q4 and then how long could ASPs actually be elevated?

Justin, this is Longgen. Starting, I think, from July, demand and supply are basically higher due to downstream demand. As the wafer capacity also continues to increase, especially since most companies want to vertically integrate, including wafer sales into the module to increase the gross margin. Some companies' actions on supply have caused silicon prices to dramatically bounce back. For example, last week the price returned to RMB98 per kg. We see this situation may continue. Recently, another piece of news came out about floods in Sichuan that caused a major player’s plant to temporarily stop supply. While that might contribute to the situation, the major reason is that in the next 15 to 18 months, we do not expect any significant increases in silicon supply. Demand continues to skyrocket as we approach grid parity, and wafer capacity expansion will continue. That’s why I believe supply will rebound quickly. For August, we expect the price to be around RMB90 to RMB98. For this quarter, while I won't give an exact figure, I think the silicon price in September might exceed RMB100. For Q4, the price may be between RMB85 to RMB100.

That's really helpful. So then I guess turning to your production, if we just look at your Q3 guidance and then the full-year production guidance, it implies Q4 production of about 18,400 metric tons at the midpoint. In Q1, you were able to produce 19,800 metric tons. So just wondering given the elevated level of pricing, do you have any ability to reach Q1 levels of production in Q4 and take advantage of that pricing?

Justin, we always strive to produce more products to meet the demand of our downstream clients. However, our forecasts are always conservative. So, to answer your question, we will make every effort. For this quarter, we've given guidance as you can see.

Okay. And then just one last one for me on your cost structure. Q2 cost structure decreased about 3% relative to Q1. This is despite your annual maintenance and lower production volume in the quarter. So, I was wondering if you could just share a little bit about what enabled you to lower costs in the quarter despite the lower volume? And then could you give an outlook for costs in Q3 and Q4? I know in Q4, you said, you expect costs to be lower. So, could you provide any more quantification in terms of how much lower? Thank you.

Okay. Hello, Justin. This is Ming. Regarding our cost, certainly our Q2 costs came out to be lower than we anticipated. Even given the impact of our annual maintenance with lower production volume and you could see there is higher contribution from depreciation expenses, for example. We were still able to lower our production costs, largely due to a reduction in our energy usage. We're making progress in optimizing our process and improving throughput from our manufacturing facilities. So in terms of energy usage, we're seeing very promising reductions, and that should continue throughout the end of the year. Additionally, a lot of our procurement due to our scale and efforts is yielding savings; for example, reductions in costs for packaging materials, silicon powder, and graphites. Overall, we expect Q3 to have similar or slightly lower costs compared to Q2. Looking to Q4, we believe there could be another 3% to 5% reduction compared to our Q2 level.

Okay, great. Thank you very much.

Just want to add a little more. The cost of goods sold is partially due to the foreign exchange rate as well, given the appreciation of the renminbi. Regarding costs, we will continue to cut costs, mainly by increasing efficiency and scaling, and second, from reducing raw material costs. However, we must also consider that prices may rise for some of the materials, but we expect to control costs around $5.80, maybe $5.60, to continue to go down by 2% to 3% by the end of the year.

Okay, thanks. Thanks very much guys.

Okay. Thanks, Justin.

The next question comes from Gary Zhou with Credit Suisse. Please go ahead.

Hello, thank you to management for taking my questions. I have three quick inquiries. First, could management share their perspective on the polysilicon price outlook for next year? Second, if the polysilicon price remains high, would there be concern that even lower-tier producers might choose to expand their capacities? Lastly, could management provide any updates on the stockholder listings for your subsidiaries? Thank you.

Okay. Gary, to answer your question, first of all, regarding the polysilicon price for 2020, we believe that there may not be any new additional capacity coming in. In the meantime, as we can see, especially at this time, the polysilicon price has jumped back. A lot of companies are going to adopt a strategic policy of vertical integration, particularly for wafer segments. For example, Jinko, a U.S. listed company, announced a significant capacity increase recently. We estimate that by the end of next year, the wafer capacity should reach around 270 gigawatts and will require about 800,000 tons of polysilicon. So demand and supply will indeed be very tight. I cannot give you an exact polysilicon price, but I think next year's price should be in the range of RMB85 to RMB95. Regarding your second question, I don't think that the current situation would lead to low-tier producers significantly increasing production. They will face challenges in keeping costs down and maintaining product quality. I believe that while some Tier 2 and Tier 3 companies may attempt to expand, they won't have the necessary resources. We’ve seen some announcements that, for instance, Asian Silicon is starting a 30,000 tons production project, but any new capacity won't meet the growing demand. Lastly, concerning the stockholder listing, we are indeed planning to list our Xinjiang New Energy subsidiary as a U.S. listed company, which aligns with our strategy to raise funds and support capacity expansions.

Yes. Thank you very much. That's all my questions. I'll now pass it on. Thank you.

Great. Thank you. Thanks, Gary.

The next question comes from Alan Hon with JP Morgan. Please go ahead.

Hi, this is Alan from JP Morgan. My first question is, with the recent price hike on the polysilicon side, and also the price hike along the silicon value chain into the module, how has feedback from the ultimate customers been? Is there any hurdle in terms of downstream PV demand because of the price hike?

Alan, basically, as the consolidation continues, yes, in some segments there are some bigger players right now. For example, in the wafer segments, LONGi, Jinko, and Tongwei are operating at large scales. In the module segments, you can see that companies like Jinko, Trina, and Canadian Solar have also become significant players. Each player has different profit margins, and we hope that all these players will aim for a healthy average gross margin to foster continued expansion to meet downstream client needs. However, it's important to note that the rise in wafer prices is putting pressure on module players, impacting their margins. We do see some adjustments happening with module prices as they negotiate with utility companies. While we may see some projects experience delays due to rising costs, I believe that these issues are temporary and the market will ultimately stabilize.

Let me add a little to that. If you consider the real downstream market, especially for project-side developments, the current lower interest rates and access to funding continue to support project development, even if they are slightly higher in cost. A lot of projects are moving forward with acceptable returns on investment. So, while there may be temporary disruptions, demand remains significant.

Yes, Alan, as I mentioned, the gross margins in different segments can vary. Currently, the mono-wafer segments have high margins while modules are industry averages. Some major wafer players also have module business aspects. We expect the current dynamics to evolve, but in the next 15 to 18 months, we don't foresee much additional polysilicon production coming online, which keeps demand high against supply constraints, thereby affecting pricing.

Thank you. This is clear. I have another question. This relates to the potential technical issues within the industry. If you have to shut down a poly plant for whatever reason and without damage, how long does it typically take to ramp back up production to 100%?

Well, for Daqo, I can speak to our processes. Currently, we have four production lines in Xinjiang, three are operational and one presently undergoing maintenance. Work continues on the third line, and we expect to resume production there before the end of this month, as per our scheduled guidance of 17,500 to 18,000 metric tons.

Thank you, Alan.

The next question comes from Colin Yang with China Securities. Please go ahead.

Hi, thank you management. This is Colin from Daiwa. I've got two questions. The first one relates to recent module pricing dynamics. Given that there are reports of some renegotiations underway, do you anticipate any impact on demand due to rising module prices?

The pandemic created disruptions in the solar projects pipeline early in the year. Following that period, we have seen a resurgence in demand and we anticipate a recovery in polysilicon prices based on that demand. If the module prices escalate significantly, it could potentially disrupt project timelines; however, the industry has its mechanisms in place to adapt, and we believe delayed projects will eventually come back online. On the positive side, the grid parity achieved means more projects, both larger utility installations and smaller distributed systems, will continue to move forward.

Thanks for that answer. My second question is about the sustainable gross margin. Given the current pricing outlook and supply constraints, do you estimate the gross margins to remain over 50%?

Indeed, given the historical volatility and current demand-supply dynamics, the average margins in our industry tend to hover between 25% and 35%. Good operators can achieve upwards of 30-45%. For our operations at Daqo, we believe we can operate in that upper range due to our efficiency and technological advancements.

Thank you for your insights.

The next question comes from Tony Fei with BOCI. Please go ahead.

Hi, management. Thanks for taking the questions. I have two questions. Firstly, regarding your ASP side. In Q3, we see the poly price actually increased very quickly. How frequently do you adjust your sales prices for your wafer clients?

Typically we adjust our sales prices based on market conditions and client contracts. Currently, we negotiate pricing on a biweekly basis due to the rapid changes in market prices. However, once the market stabilizes, we aim to return to monthly negotiations. We are actively monitoring this situation.

Regarding your second question on CapEx, for Q3, we expect about $5 million on new technology and equipment installation, with a total of around $25 million including payments for Phase 4A projects.

Okay. Great, that's very helpful. Thank you, management.

Great. Thank you.

The next question comes from Jun Liu with Citi. Please go ahead.

Hey, management. Thanks for taking my question. I think most of the questions have been asked by the previous analysts. So, I only have two questions. The first is, can you give us some details about the timeline to resume production in Xinjiang, considering the ongoing investigations?

Currently, we have one production line at back after maintenance, the third line, which had experienced some delays. However, we have received necessary approvals from local authorities and are optimistic about resuming full production by the end of this month.

Thank you for the update. My second question focuses on your capacity expansion strategy. Considering the current strong price environment, are you thinking about expanding capacity beyond Xinjiang?

Yes, we are evaluating all opportunities for expansion over the next three to five years, including potential projects outside of Xinjiang. Our progress in the solar sector allows us to keep access to funding for future expansions.

Thanks, Longgen. I have two follow-up questions. The first is, if we have to gain approvals from local governments to resume production, or can we get straight back into production?

Yes, we’ve already received the necessary approvals regarding safety checks and are working swiftly to resume our operations. We aim to have the final production line back in action shortly.

Thank you very much. That's all my questions.

Great. Thank you.

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 participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you and bye-bye.

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