Earnings Call Transcript - DQ Q4 2022

Operator, Operator

Good day, and welcome to the Daqo New Energy Fourth Quarter and Fiscal Year 2022 Results Conference Call. All participants will be in a listen-only mode. Please also note today’s event is being recorded. And at this time, I would like to turn the conference call over to Kevin He, Investor Relations. Please go ahead.

Kevin He, Investor Relations

Hello, everyone. I’m Kevin He, the Investor Relations of Daqo New Energy. Thank you for joining our conference call today. The Company just issued its financial results for the fourth quarter and fiscal year of 2022, 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, available on our website. Today, attending the call, we have Mr. Ming Yang, our Chief Financial Officer; Mr. Longgen Zhang, our Chief Executive Officer; and myself. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, excluding expected future operational and financial performance and industry growth, are forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties, and several factors could cause actual results to differ materially from those contained in any forward-looking statements. More information regarding these risks is included in the reports or documents we have filed with or provided to the Securities and Exchange Commission. These statements reflect our current and preliminary view as of today and may change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's conference call is as of today, and we undertake no duty to update such information, except as required under applicable law. 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. Now I will turn the call over to our CEO, Mr. Zhang.

Longgen Zhang, CEO

Thank you, Kevin. Good evening, everyone. We are very pleased to report a record result for the year 2022. We would like to thank our entire team for achieving such a strong financial and operational performance. Our annual polysilicon production volume was 33,812 metric tons in 2022, exceeding our guidance of 130,000 to 132,000 metric tons and a 54.5% higher than the 86,587 metric tons produced in 2021. Our sales volume was 132,909 metric tons in 2022, 76.4% higher than 75,356 metric tons in 2021. Thanks to the robust demand for solar PV products globally, polysilicon ASPs increased by approximately 50% year-over-year from $21.76 per kg in 2021 to $32.54 per kg in 2022. As one of the most profitable and fastest-growing polysilicon manufacturers in the world, we achieved strong financial results with revenue of $4.61 billion in 2022, an increase of 175% compared to $1.68 billion in 2021. Gross margin improved to 74.0% in 2022 from 65.4% in 2021, and net income attributable to our shareholders was $1.86 billion in 2022, an increase of 148.4% compared to $749 million in 2021. We generated approximately $2.47 billion in operating cash flow for the year and ended the year with a very strong balance sheet with $4.65 billion in combined cash, cash equivalents, restricted cash, and bank notes with maturity within 6 months. For the year of 2022, approximately 99% of our production volume was mono-grade polysilicon. We continue to be one of the world’s leading suppliers of ultra-high purity N-type mono polysilicon, the foundation for next-generation N-type solar cell technology. Towards the end of 2022, a temporary seasonal slowdown in the solar PV market caused inventory adjustments across the value chain, similar to the year-end of 2021. As a result, the downstream sectors, especially wafer, cell, and module manufacturers, reduced inventories and significantly lowered production utilization rates. This led to widespread price declines across the value chain. In February 2023, lower module prices effectively stimulated market demand, and downstream production utilization rates quickly ramped up back to normal levels, reducing channel inventory significantly and leading to a meaningful recovery of polysilicon ASPs. Current polysilicon prices of approximately RMB230 to RMB250 per kg are very healthy and reflect the strong demand for solar modules in the range of RMB1.7 to RMB1.8 per watt. Global solar PV installations were approximately 268 gigawatts in 2022, a 53% annual increase from approximately 175 gigawatts in 2021, growing faster than most had forecasted at the beginning of the year. The increase in polysilicon supply, in conjunction with supportive global climate change policies as well as favorable economic conditions driven by grid-parity, made 2022 one of the industry’s fastest growing years. Meanwhile, solar module prices increased from approximately RMB1.8 per watt in Q1 2022 to RMB2 per watt in Q4 2022. Despite higher solar module market pricing that many expected would lead to a slowdown in China’s PV installations, the Chinese PV end-market also saw robust growth for the year, with installations of 87 gigawatts, an increase of 59% compared to 2021. These market conditions suggest that the global PV market demand was actually limited by supply, specifically polysilicon. Key global trends, including the urgent need to address climate change, the drive for greater energy independence as well as positive economic conditions driven by grid-parity, have led to strong demand momentum for renewable energies, including solar PV. We believe energy transformation is still in its early stage and has opened a huge potential market for solar PV, which is likely to be far beyond expectations. The high-purity polysilicon sector will continue to benefit strongly from these positive developments. Daqo New Energy is well-positioned to benefit from the above trends and deliver continued growth. The construction of our Phase 5A 100,000 metric ton polysilicon capacity expansion project in Inner Mongolia is progressing smoothly. We expect to complete construction and start pilot production in April 2023 and ramp up to full capacity by the end of June 2023. Therefore, we expect to produce approximately 190,000 to 195,000 metric tons of polysilicon in 2023, 38% to 46% more than in 2022. Furthermore, our Phase 5B project for an additional 100,000 metric tons of polysilicon in Inner Mongolia will start construction in March and is expected to be completed by the end of this year. Solar PV will continue to play a critical role in transforming the global energy infrastructure by powering the world with sustainable, cost-effective, and renewable energies at a pace much faster than thought possible. As a leading player in the polysilicon industry, we outperformed most of our peers in terms of unit profitability, cost structure, and product quality in 2022. We believe our focus on our core competitiveness, solid growth roadmap, and our strong balance sheet will allow us to benefit from the long-term growth of the global solar PV market. For the future outlook and guidance, we expect to produce approximately 31,000 metric tons to 32,000 metric tons of polysilicon in the first quarter of 2023 and approximately 190,000 metric tons to 195,000 metric tons of polysilicon in the fourth quarter of 2023, inclusive of the impact of the company’s annual facility maintenance.

Ming Yang, CFO

Thank you, Longgen, and hello, everyone. Thank you for joining our earnings conference call today. Now I will discuss the company's financial performance for the quarter and for the year. Revenues were $864 million compared to $1.22 billion in the third quarter of 2022 and $295.5 million in the fourth quarter of 2021. The decrease in revenue compared to the third quarter of 2022 was primarily due to a lower sales volume, which was somewhat offset by an increase in the average selling price. Gross profit for the quarter was $668.9 million, compared to $978.6 million in the third quarter of 2022 and $239.8 million in the fourth quarter of 2021. Gross margin was 77.4% compared to 80.2% in the third quarter of 2022 and 60.6% in the fourth quarter of 2021. The slight decline in gross profit compared to the third quarter was mainly due to lower sales volume and higher production costs. Sales, general and administrative expenses were $44 million, compared to $280 million in the third quarter of 2022 and $10.2 million in the fourth quarter of 2021. SG&A expenses during the fourth quarter included $28.4 million in non-cash share-based compensation costs related to the company's share incentive plan, compared to $263.4 million in the third quarter of 2022 for similar non-cash share-based compensation costs. Research and development expenses for the quarter were $2.7 million, compared to $2.5 million in the third quarter of 2022 and $1.3 million in the fourth quarter of 2021. R&D expenses fluctuate from period to period based on the R&D activities that occur during the quarter. Currently, most of our R&D is focused on our entire technology research as well as efforts to reduce production costs. Income from operations was $623 million, compared to $693 million in the third quarter of 2022 and $228 million in the fourth quarter of 2021. Operating margin was 72% compared to 56.8% in the third quarter of 2022 and 57.7% in the fourth quarter of 2021. Consequently, net income attributable to Daqo New Energy Corp shareholders was $372.9 million, compared to $223.4 million in the third quarter of 2022, and $1.13 million in the fourth quarter of 2021. Earnings per basic ADS was $4.78 compared to $4.28 in the third quarter of 2022, and $1.90 in the fourth quarter of 2021. Adjusted net income attributable to Daqo New Energy shareholders, excluding non-cash share-based compensation costs, was $403.3 million compared to $590.4 million in the third quarter of 2022, and $143.6 million in the fourth quarter of 2021. Adjusted earnings per basic ADS was $5.17 compared to $7.81 in the third quarter of 2022 and $1.93 in the fourth quarter of 2021. EBITDA for the quarter was $648.5 million, compared to $720 million in the third quarter of 2022 and $251.1 million in the fourth quarter of 2021. EBITDA margin was 75% compared to 59% in the third quarter of 2022 and 63.5% in the fourth quarter of 2021. Now for a review of our full year 2022 results. Revenue for the year 2022 was $4.6 billion, compared to $1.68 billion in 2021. The increase was attributed to higher polysilicon average selling prices and significantly increased production volume. Gross profit was $3.4 billion compared to $1.1 billion in 2021. Gross margin for the year was 74% compared to 65.4% in 2021. The rise in gross profit stemmed from higher sales volume and increased selling prices. SG&A expenses for the year were $354.1 million compared to $39.9 million in 2021. The rise in SG&A expenses for 2022 as compared to 2021 was mainly due to our non-cash share-based compensation costs related to our share incentive plan, which totaled $299 million for 2022 compared to $8.4 million in 2021. R&D expenses were $10 million compared to $6.5 million in 2021. Income from operations for the year was $3.04 billion, compared to $1.05 billion in 2021. Operating margin was 66% compared to 62.6% in 2021. Interest income for the year was $14.5 million, compared to $24.5 million in net interest expense in 2021. The rise in interest income was due to our higher cash balance. Income tax expense for the year was $537 million, compared to $170 million in 2021. The net income attributable to Daqo New Energy shareholders for the year was $1.86 billion, compared to $748.9 million in 2021. Earnings per basic ADS for the year was $24.51 compared to $10.14 in 2021. Adjusted net income attributable to Daqo New Energy shareholders was $2.16 billion, compared to $759 million in 2021. Adjusted earnings per basic ADS were $28.50 per share compared to $10.28 in 2021. EBITDA for the year was $2.15 billion, compared to $1.13 billion in 2021. EBITDA margin for the year was 68.4% compared to 67.5% in 2021. As of December 31, 2022, the company has $3.52 billion in cash, cash equivalents, and restricted cash compared to $2.05 billion as of September 30, 2022 and $724 million as of December 31, 2021. As of December 31, 2022, the bank note receivable balance, redeemable for cash, was $1.1 billion compared to $1.57 billion as of September 30, 2022, and $386 million as of December 31, 2021. The bank notes typically mature within a 6-month timeframe. For the 12 months ended December 31, 2022, net cash provided by operating activities was $2.46 billion, compared to $639 million in the same period of 2021. The increase was largely due to higher revenue and gross margin. For the 12 months ended December 31, 2022, net cash used in investing activities was $1 billion, compared to $782 million in the same period of 2021, mainly related to capital expenditures on the company's polysilicon project in Baotou City, Inner Mongolia. Net cash provided by financing activities for the 12 months ended December 31, 2022 was $1.47 billion, compared to $736 million in the same period of 2021, primarily from net proceeds of $1.6 billion from our private offering in China's A share market. That concludes our prepared remarks, and now we will open the call for questions from the audience.

Operator, Operator

Our first question today comes from Philip Shen from ROTH MKM. Please go ahead with your question.

Philip Shen, Analyst

Hi, everyone. Thanks for taking my questions. Wanted to start off with your latest drive on pricing. So specifically, Longgen, I think you talked about the rise of modular prices stabilizing, polysilicon prices. How do you expect polysilicon prices to trend by quarter for the rest of the year? Thanks.

Longgen Zhang, CEO

Thank you, Philip. I think since last December, every year, I think since the year 2020, because all the fees is Thanksgiving holiday, New Year, plus Chinese New Year, the downstream is a wafer producer. Every year, they reduce their utilization rates. We saw the same thing happen last year. Because Chinese New Year was very close to New Year, basically, in December last year, we didn’t sell any silicon, not even 1 kg of silicon. The reason is that the players, wafer players, had almost their utilization expected down to something like zero -even at 10%- to clean up all the inventory. Then Chinese New Year came, and in early February, we also didn't sell anything. So in February, we started again. At the end of last year, we had inventory around 5,200 tons. We believe that we’ve given guidance. I think right now, the price, I think, has come back from last December, almost as low as RMB1.8 per kg. Right now, it has come back to normal levels ranging between RMB210 to RMB250 per kg. We sold I think more than 10,000 tons in February, as the price is higher. So we will continue selling. So we believe that in Q1, the selling price should be above RMB220. The reason is that there are not too many new players coming into the market. So it’s not too much new output to come out. So we think we will continue to digest or tolerate the prices to go to normal. So my forecast is that before mid-year, before the end of June, the selling price should be about RMB210, even higher to RMB250. For Q3, I think the only new capacity coming from our Mongolia Phase 1 is as the market demand continues to go up. So we believe we can keep the silicon price between RMB150 to RMB200. Q4’s picture is not clear. It's like a crystal ball. So the silicon price may even go down to RMB100 to RMB120. Overall, this year, we're still thinking it will be very profitable for Daqo. We do not think the module price will continue to go down, because we see that high-performance modules like PERC module, even today in Canada, we can sell at RMB1 or RMB2 per watt. And for overseas, our costs depend on different regions. I think, almost 80% overseas have fixed the price. So it’s very profitable. Yes, maybe the module price will go down in Q4 this year, but that's not a problem. If the module price is $1.70 per watt, it can support the polysilicon price above 200. So the only thing to watch is the gross margin allocation between the silicon, wafer, and the sales of the module. We believe the silicon segment is still a very capital-intensive investment, and the long-term construction period still creates a challenge. I do think that maybe next year, all the supply and demand will balance out but I also think all the wafer and module supply will also follow the same pattern. So maybe come back to see if the lowest module pricing will stimulate the whole market to get back to normal. So what I can say is this year, the polysilicon business is still very profitable, and we will continue to make money.

Philip Shen, Analyst

Great. Thanks for all that color, Longgen. It's really helpful. You mentioned you didn't sell any poly in December or January. And you said you sold 10,000 tons in February. If you're producing 10,000 at least are you saying that incrementally you sold another 10,000 and also did you still have any of that excess inventory leftover? Or have you already sold it all in the month of February? Thanks.

Longgen Zhang, CEO

Basically, I think for Q1, we've given guidance. We are anticipating a sales or new production for Q1. So at the end of Q1, we may still have inventory around 10,010 tons. But, yes, we were selling more than 10,000 tons in February and we will continue selling more.

Philip Shen, Analyst

Very good. Thank you. Regarding your bookings, I think on the last call you mentioned you were 90% booked for 2023. You can't really move much more than that. I was wondering if you can talk through what you’re contracted for '23 and perhaps even for '24. And then I have one more final follow-up. Thanks.

Longgen Zhang, CEO

Give me the last question. For this year, our planning is given guidance of 190,000 tons. For long-term contracts, we’ve already covered more than 90%. So I think we will continue working with our clients to sign long-term contracts. So for '23, we will have more than 90%. For '24, right now, we have covered at least 70%. I think for the year 2025, we will cover more than 65%. But the long-term contracts are a rollover.

Philip Shen, Analyst

Great. Okay. And then the final question I had was on your cost structure. Q4 was a little bit higher. Just curious how you expect your cost structure to evolve. Thanks.

Ming Yang, CFO

Okay. Hello, Philip, this is Ming. The increase in cost structure for Q4 compared to Q3 was primarily due to an increase in raw material costs, particularly the market costs for silicon metal, as well as an increase in electricity rates. So I think, as you know, and our investors are aware, China broadly did see an increase in electricity rates across the country, including areas like Inner Mongolia and Xinjiang as well. All the cost increases have been fully reflected in the Q4 cost structure. In terms of our cost trends, we do expect the overall cost structure for the first half of 2023 to be similar to our Q4 costs. While after we ramp up our Inner Mongolia facility, we expect our costs to trend down. I think based on our latest internal estimate, we do think, for example, our cost in Q4 for 2023 should be above 5% lower than our first half costs.

Philip Shen, Analyst

Great. Okay. Thanks very much guys. I will pass it on.

Ming Yang, CFO

Great. Thank you.

Operator, Operator

The next question comes from indiscernible from Daiwa Capital Markets. Please proceed with your question.