Earnings Call Transcript - DQ Q1 2024

Operator, Operator

Good day, and welcome to the Daqo New Energy First Quarter 2024 Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Xiang Xu, CEO. Please go ahead.

Anita Zhu, Investor Relations

Hello, everyone. I'm Anita, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. So Daqo New Energy just issued its financial results for the first quarter of 2024, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our Chairman and CEO, Mr. Xiang Xu; our 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. 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 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 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. Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I'll translate into English after he finishes. Now I'll turn the call to our CEO.

Xiang Xu, CEO

Now I'll turn the call to our CEO.

Anita Zhu, Investor Relations

Hello, everyone. This is Anita. Thank you for joining the call. So I'll now translate our CEO, Mr. Xu's remarks. During the first quarter, we continued to optimize our manufacturing operations and made improvements in both yield and throughput at our two poly facilities. Total production volume for the quarter was 62,278 metric tons, which was above our expectations and represented an increase of 1,264 metric tons compared to the previous quarter. Our Inner Mongolia 5A facility contributed 46% of our total production volume for the first quarter. Through achievements in R&D and significant purity improvements at both facilities, we further increased our entire product mix from 60% in December last year to 72% in March. Compared to the end of last year, production costs trended down over the quarter, decreasing further by 2% from the fourth quarter of 2023 to an average of USD 6.37 per kilogram in the first quarter of 2024. For the quarter, we generated $77 million in EBITDA. By the end of first quarter 2024, the company maintained a strong cash balance of $2.7 billion and a combined cash and bank note receivable balance of USD 2.9 billion. We expect second quarter 2024 total poly production volume to be approximately 60,000 metric tons to 63,000 metric tons, similar to that of first quarter 2024, as the company maintains full production. We expect to finish construction and begin initial pilot production at our new Inner Mongolia Phase 5B facility in the second quarter of 2024, and expect to ramp up to full production level by the end of third quarter 2024. As a result, we anticipate full year 2024 production volume to be in the range of 280,000 metric tons to 300,000 metric tons, approximately 40% to 50% higher than that of 2023. With more than 15 years of experience in poly production as well as a fully digitalized and integrated production system that optimizes operational efficiency, we'll continue to increase our N-type production in the product mix. During the first quarter, the solar market initially showed signs of strength as we headed into the Chinese New Year holiday in February. Despite production cuts and downtime, as usual during the holidays, polysilicon demand has been strong pre-holiday as wafer manufacturers kept utilization rates unchanged or even higher in anticipation of higher demand and better product pricing post-holidays. The general polysilicon price range was RMB 65 to RMB 70 per kilogram for N-type and RMB 55 to RMB 60 per kilogram for p-type during the period. However, with weaker-than-expected production plans downstream starting March, the wafer sector faced significant pressure from accumulated inventories and negative margins. Market sentiment shifted significantly in mid-March with widespread expectations of falling prices throughout the value chain, particularly for polysilicon. As a result, downstream manufacturers began to lower utilization, reduce inventory and delay orders to minimize the impact of falling prices. In April, further pressure on polysilicon prices emerged as an issue of excess inventory among the wafer manufacturers worsened and wafer customers further delayed orders and product delivery. Therefore, polysilicon prices dropped further by late April to RMB 47 to RMB 54 per kilogram for Tier-1 producers at the industry's cash breakeven cost. At this level, we believe the entire solar value chain, including polysilicon, is likely to be loss-making in general and that a large number of polysilicon producers are currently unprofitable. The solar industry has gone through multiple cycles in the past, and based on our previous experience, we believe that the current low price as a market downturn will eventually result in a healthier market as poor profitability and losses as well as cash burn will lead to many market players exiting the business with some possible bankruptcies. This will bring the inevitable capacity rationalization and solve the overcapacity issue we're currently experiencing. And as demand growth resumes after excess inventories are depleted in the short term and on the backdrop of positive policies pushing renewable installations in the long run, the solar PV industry will return to normal profitability and achieve better margins. We believe that at the end of the quarter, we had one of the industry's lowest levels of finished goods inventory with approximately 2 weeks of production. Overall, 2023 marked a significant change for renewable power growth with China's newly installed solar PV capacity reaching a record high of 216.9 gigawatts, representing 148% year-over-year growth. We continue to see strong growth in solar PV installations in China during the first quarter of 2024, which reached an aggregate of 45.7 gigawatts, representing a 36% year-over-year growth rate. Solar has become one of the most competitive forms of power generation and continuous cost reductions in solar PV products, along with associated reductions in solar energy generation costs, are expected to create substantial additional demand for solar PV. With 2023 setting the stage for gradually phasing out p-type products, we believe that 2024 will mark the year where N-type products dominate the industry. We are optimistic that we'll capture the long-term benefits of the growing global solar PV market and maintain our competitive advantage by enhancing our higher efficiency and type technology and optimizing our cost structure through digital transformation and AI adoption. As one of the world's lowest cost producers with the highest quality N-type product, a strong balance sheet, and no financial debt, we believe we're very well positioned to weather the current market down cycle and emerge as one of the leaders in the industry to capture future market growth. Now I'll turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter.

Ming Yang, CFO

Hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's first quarter 2024 financial performance. Revenues were $415.3 million compared to $476.3 million in the fourth quarter of 2023 and $709 million in the first quarter of 2023. The decrease in revenue compared to the fourth quarter of 2023 was primarily due to a decrease in average selling prices and lower polysilicon sales volume. Gross profit was $72 million compared to $87 million in the fourth quarter of 2023 and $506 million in the first quarter of 2023. Gross margin was 17.4% compared to 18.3% in the fourth quarter of 2023 and 71.4% in the first quarter of 2023. The decrease in gross margin compared to the fourth quarter of 2023 was primarily due to lower average selling prices, which was partially mitigated by lower production costs. Selling, general and administrative expenses were $38.4 million compared to $39 million in the fourth quarter of 2023 and $41.3 million in the first quarter of 2023. SG&A expenses during the first quarter included $19.6 million in noncash share-based compensation costs related to the company's share incentive plan compared to $19.6 million in the fourth quarter of 2023. R&D expenses were $1.5 million compared to $3.3 million in the fourth quarter of 2023 and $1.9 million in the first quarter of 2023. R&D expenses vary from period to period and reflect the R&D activities that take place during the quarter. Our R&D activities currently focus on processes and technologies that improve purity for polysilicon and remove contamination to increase our N-type polysilicon percentage. As a result of the foregoing, income from operations was $30.5 million compared to $83.3 million in the fourth quarter of 2023 and $463.8 million in the first quarter of 2023. Operating margin was 7.3% compared to 17.5% in the fourth quarter of 2023 and 65% in the first quarter of 2023. Foreign exchange loss was $0.3 million compared to a loss of $0.8 million in the fourth quarter of 2023, and this is attributed to the volatility and fluctuation of the U.S. dollar to our renminbi exchange rate during the quarter. Net income attributable to Daqo New Energy shareholders was $15.5 million compared to $53.3 million in the fourth quarter of 2023 and $278.8 million in the first quarter of 2023. Earnings per basic ADS were $0.24 compared to $0.76 in the fourth quarter of 2023 and $3.56 in the first quarter of 2023. Adjusted net income attributable to Daqo New Energy Corp. shareholders, excluding noncash share-based compensation costs, was $36 million compared to $74.3 million in the fourth quarter of 2023 and $310 million in the first quarter of 2023. Adjusted earnings per basic ADS was $0.55, compared to $1.06 in the fourth quarter of 2023 and $3.96 in the first quarter of 2023. EBITDA was $76.9 million compared to $128 million in the fourth quarter of 2023 and $490 million in the first quarter of 2023. EBITDA margin was 18.5%, compared to 26.9% in the fourth quarter of 2023 and 69% in the first quarter of 2023. Now on the company's financial condition. As of March 31, 2024, the company has $2.689 billion in cash and cash equivalents compared to $3.05 billion as of December 31, 2023, and $4.1 billion as of March 31, 2023. As of March 31, 2024, the notes receivable balance was $194 million compared to $116 million as of December 31, 2023, and $791 million as of March 31, 2023. Note receivables represent bank notes with maturity within 6 months. For the 3 months ended March 31, 2024, net cash used in operating activities was $115.9 million compared to net cash provided by operating activities of $807 million in the same period of 2023. Net cash used in operating activities for the quarter was a result of changes in operating assets and liabilities, primarily related to the company's payment of approximately $75 million in tax payables that is due during the first quarter, as well as an increase in notes receivable balance of approximately $78 million. Other items that used cash include payments to suppliers in conjunction with the period related to the Chinese New Year holidays as well as the increase in inventory. For the 3 months ended March 31, 2024, net cash used in investing activities was $190.5 million compared to $268.9 million in the same period of 2023. Net cash used in investing activities in the first quarter of 2024 was primarily related to the capital expenditures on the company's Phase 5A and Phase 5B polysilicon expansion projects in Baotou City, Inner Mongolia. Due to the recent changes in market conditions, the company's Board and management team have decided to temporarily postpone the company's non-polysilicon manufacturing capacity expansion plans to reserve capital. As such, the company's capital expenditure plan has been reduced to approximately $700 million for the year, which is related to the company's Inner Mongolia polysilicon project. This represents a significant decrease from the previous capital expenditure plan for the year of approximately $1.1 billion to $1.2 billion. For the 3 months ended March 31, 2024, net cash used in finance activities was $6 million compared to net cash provided by finance activities of $59.9 million in the same period of 2023. Net cash used in finance activities in the first quarter of 2024 was primarily related to approximately $5 million that was used for the company's share repurchase. And that concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.

Operator, Operator

The first question today comes from Phil Shen with ROTH MKM. Phil, your line is open if you'd like to ask your question. We seem to be unable to connect to Phil Shen audio. The next question comes from Alan Lau with Jefferies. Please go ahead.

Alan Lau, Analyst

So I think the first question that I've received after the announcement is about the buyback. So I wonder if there's any guidance from the management in regards to buyback or dividends planned in this year?

Ming Yang, CFO

Okay. So the Board actually had a discussion about potentially continuing the share repurchase program. But I think in light of the current market condition, where the industry overall is actually looking like it's going to be making losses, and we're uncertain how long this might last. So the Board does feel that it's more prudent to conserve capital for now to weather the market downturn. And then they would like to see how the market would perform, and if the market does improve perhaps later in the year, I think the Board would definitely consider a program at a later date as appropriate. I think just because of the market condition, I think the Board does feel that we need to conserve capital, right? I think including we significantly reduced our capacity expansion plans. And separately, I think the company is also strategically looking at potential expansions overseas outside of China, including areas in the Middle East, where we're actually looking at several locations pretty actively, and then also potentially in other areas in Southeast Asia as well. So that also represents a potential use of funds for the company. So the Board is also making some considerations because of that as well.

Alan Lau, Analyst

I have a question about the sales volume. The company has unexpectedly increased its production volume, but the sales appear to be lower than that production. Can you provide the current inventory level at the company? Additionally, in relation to the sales volume for the first quarter, was this connected to the reduced utilization rate in the wafer segment?

Ming Yang, CFO

Okay. Yes. I think operationally, the company actually was doing very well this quarter. I think if we exclude the impact of the market condition in the second half of March, I think we produced more than 52,000 metric tons, increase over the previous quarter. So this is a pretty good improvement. But particularly on the quality side, we made very significant improvements in quality, particularly in Inner Mongolia facility. So N-type as of March is now north of 70% of our mix. And at the same time, we also saw further reduction in production costs. I think just to start, since mid-March, the industry conditions declined significantly. I think customers delayed their orders. They delayed the delivery of polysilicon for production to lower the utilization, I think in anticipation of lower polysilicon pricing, but also because of the significant wafer inventory that was occurring at the time. Yes. So actually, this situation persisted more or less through mid- to late April. I think now we're shipping normally, but at a much lower pricing. At the end of the quarter, we had approximately slightly less than 2 weeks of production of finished goods inventory. So we think that's probably one of the lowest within the industry.

Alan Lau, Analyst

2 weeks of inventory is actually quite impressive. So I had a question on the other operating income. So the quarter-on-quarter change is relatively significant. So I would like to know, is it related to the change in the subsidies provided in terms of power tariff?

Ming Yang, CFO

So actually, I believe we had another expense for the quarter rather than income. This is related to some of the older equipment that we replaced. The equipment that is no longer being used amounted to about $1.6 million, which is not too significant. This kind of situation happens maybe once a year or so.

Alan Lau, Analyst

I see. Understood. So in the first quarter, there isn't any subsidies coming in, like in 4Q?

Ming Yang, CFO

Yes. So we would expect some subsidy potentially in the second quarter and then more subsidy likely in the fourth quarter. Usually, it's in the second half of the year.

Alan Lau, Analyst

I see. So I think my last question is in regards to the industry, like how do you see the poly price going forward this year? And then when do you see a turnaround in the industry?

Ming Yang, CFO

Okay. So the most recent price decline, we believe, actually is more of a result than the inventory adjustment that's happening, right? So customers delaying orders and with the expectations of lower pricing in future periods, right? So some people then want to take a wait and see mode. And now at the lower price, we're starting to see orders returning also at a lower level. We think the pricing level where the industry is having now is actually money losing probably for, I would call, 70% to 80% of the industry. So I think almost a majority of the players are losing money right now, and this certainly cannot be sustainable. I think if this price starts to persist, it's a matter of time, a number of players will likely need to shut down or some may even exit the business or go bankrupt. I think we're likely to see that if price stays at this low level. But then that will bring the eventual capacity rationalization, right? I think that people are expecting. And at the same time, you'll have a lot of opportunity on demand. So also we think China is likely to be very strong this year because of where the panel price is right now. So it's offering a very high return for the solar project in China? I think globally as well. So we are optimistic that we could see a very significant end market this year. So I think it's the balance of these two. And the timing is hard to tell. I think we could see some improvements in the second half of this year.

Alan Lau, Analyst

Okay. Another thing to consider is that many players are actually losing money. Are you planning to delay your Phase 5B? What will the capital look like this year, especially in light of current prices?

Ming Yang, CFO

We are postponing nearly everything else except for 5B, which is ready to begin production since it has been under construction for over a year. As of now, we still plan to start initial production of 5B in this quarter, specifically in Q2, and then increase production in Q3.

Operator, Operator

The next question comes from Leo Ho with Daiwa Capital Markets.

Leo Ho, Analyst

My first question is regarding the FBR on granular silicon. We noticed that there are several major module makers, including, for example, Longi and JKS, suggesting that the FBR doping ratio, now they can do around 50% for N-type wafer. I just wonder if we can share any update on this FBR user situation and what's happening and then why we're seeing such a sudden increase in the doping ratio?

Ming Yang, CFO

Based on our customers' feedback, the FBR continues to have high levels of contaminants, as well as increased surface metal, hydrogen, and carbon. This creates challenges for many wafer producers since the hard carbon content can lead to breakage of the wafers. Additionally, the issues with contamination and hydrogen jumping mean that less poly can be utilized in each run. Consequently, using FBR results in a slight reduction in production yield per run on the ingot. This is primarily why customers seek discounts and tend to use it in a mixed approach, which usually ranges from 10% to 30%. However, each producer may have a slightly different mix. Major players, who are also our customers, are looking to diversify their sourcing or reduce costs, so it’s expected that they are exploring lower-cost options. In China, agreements are typically structured as framework agreements, with volume and pricing adjusted on a monthly basis.

Leo Ho, Analyst

Understood. That's clear. My next question is regarding the price gap for different types of polysilicon, say, for example, N-type versus p-type, and then also for N-type high-quality polysilicon that we produce against FBR, what are the price gaps going to look like right now and also looking forward?

Ming Yang, CFO

I think consistently, the N-type poly has had price premium in the range of maybe RMB 5 to RMB 10 per kilogram, I think currently, it's somewhere in the RMB 7 to RMB 8 per kilogram still, even at the current pricing. While FBR is generally priced at a discount to the p-type poly, generally, above the FBR has different grades, right? But within N-type and p-type, there are also different grades generally related to the form factor of the surface structure. Yes. So it's not like 1 single price, it's usually a range of price.

Leo Ho, Analyst

And my last question is regarding electricity tariff for our Baotou and Xinjiang capacities. Would there be any electricity tariff changes that we expect for this year or for next year?

Ming Yang, CFO

No. We are not expecting any electricity tariff adjustments on the electricity rates. For Xinjiang, we're expecting the rate to be very stable. I think the rate has been fixed. The previous adjustment was mostly related to a policy issued by NDRC that kind of forbids a single entity type of energy price structure. At the same time, we also closed at a time where the coal prices were at a higher price. So our utility company actually lost money on the power sales to us on the power they generate. So after the real adjustment, that's no longer the case. And we continue to have the most favorable utility rate for that local utility for the region. And we're still competitive, but we don't expect that to change, or the rate to change. I think similarly for Inner Mongolia, Inner Mongolia already had an adjustment, I think, around in the first half of 2023, I believe, also based on the NDRC rule. So now the Inner Mongolia rate structure is actually a market-based structure, where actually the rate is not fixed, it's actually floating based on market supply and demand for the utility market. But because we buy a significant portion of our power from renewables, renewable pricing utility is lower than coal for the Inner Mongolia grid. And also we have the most preferential pricing for the whole local grid there. So we do think we have a very, very competitive utility price there, and we don't expect that to change. It's already been adjusted.

Operator, Operator

The next question comes from Phil Shen with ROTH MKM.

Philip Shen, Analyst

Sorry about the technical difficulties earlier. I'd like to explore price just a little bit more. Can you give us a sense of pricing beyond this year as well? Do you think there could be some recovery next year? And we've seen price declines recently. And some of the experts that we've been consulting with suggest that prices will continue to decline as we go through the year. So wondering if you can give us a view of 2025?

Ming Yang, CFO

We believe pricing is likely at or very close to the bottom. Many producers are already below their cash breakeven price. In the next couple of months, we anticipate seeing shutdowns, and we are already witnessing some. If this situation continues through the third quarter, some producers may face cash flow issues. Looking ahead to next year, there is a possibility of major shutdowns, similar to what OCI experienced in the past, where they had to pull back significantly. If prices remain low, we could see similar conditions arise. We do not expect prices to stay this low into next year; if they do, poly production will significantly decrease, which won't meet market demand. Current market conditions are partly influenced by inventory adjustments. Ultimately, downstream customers will have to restart their purchases since they accumulated more inventory than necessary in the first half of the quarter. When their expected demand or price increase did not happen in late March, they reduced their orders, contributing to the market volatility we're observing.

Philip Shen, Analyst

Got it. And can you talk about the amount of channel inventory that's in the market now? And then do you expect that to continue to grow for the near term? And then when do you think that peaks?

Ming Yang, CFO

We've received various estimates regarding the current channel inventory, which is believed to be between 150,000 and 180,000 metric tons. Our share of that is very small, and many of our competitors also hold significant inventory at this time. We'll see how this situation unfolds.

Philip Shen, Analyst

Okay. And then you talked about 70% to 80% of losing money. What's your guess as to what percentage of the industry could be shut down by the end of the year? I mean do you think it could be as much as 1/4 of the industry could be shut like, well, what percentage of the business of the industry could go out of business and maybe go away? Or what are your thoughts on that?

Ming Yang, CFO

This is a very ballpark. I think about half would shut down.

Philip Shen, Analyst

Yes, I think capacity that is not competitive is definitely not competitive at the current market. Additionally, some capacity in Inner Mongolia is also not competitive at the current price. Okay. What are your thoughts on the Chinese government stepping in to influence or regulate maybe setting price caps or something like that. We were reading and seeing some potential for that for the module industry. Do you think there could be something like that for poly where the government steps in to avoid this overcapacity in the future?

Ming Yang, CFO

We haven't heard about that at all. We haven't seen any government actions related to that.

Operator, Operator

The next question comes from Alan Hon with JPMorgan.

W. L. Hon, Analyst

This is Alan from JPMorgan. I have questions on the amount of capacity in the system right now? And also like the outlook in the next 1 or 2 quarters, I mean other than who else would be adding capacity. That would be my first question.

Ming Yang, CFO

Understanding of capacity in the system is around maybe 1.8 million to 2 million tons per year.

W. L. Hon, Analyst

Got it. And my second question is what do you expect your cost structure to be with the new plant management in the second quarter? Additionally, what do you anticipate the cost structure will be for the new plant?

Ming Yang, CFO

Okay. I think, at least as of today, we are expecting our costs to continue to decline. So I think preliminarily, because we're ramping up Inner Mongolia Phase 2. So cost for Q2 is probably similar to slightly less than in Q1. And then we think costs will continue to trend down for Q3 and Q4.

W. L. Hon, Analyst

Well, I guess like 1 driver of the cost down with the management of the new plant in the second quarter, that will be fully ramped up in Q3, right? So do you have like a target for the cost structure of the new plant?

Ming Yang, CFO

Okay. So I don't think we've discussed this earlier. So for the first time, Inner Mongolia cost is now below our Xinjiang cost. I don't know if you remember. So the Inner Mongolia cost design was to be below Xinjiang, but was higher than Xinjiang in Q3, Q4 until this quarter. Also we had very significant improvements in quality as well. So I think that gave us further confidence that once Inner Mongolia Phase 2 starts, it should be able to see similar or even better trajectory in terms of cost reduction and quality improvement, right? Because now we've done this once already, so we know where all the issues are.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Anita Zhu for any closing remarks.

Anita Zhu, Investor Relations

Thank you, everyone, again for participating in today's conference call. If you have any further questions, please don't hesitate to contact us. Thank you and have an awesome day. Goodbye.

Operator, Operator

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