Daqo New Energy Corp. (NYSE:DQ) Q2 2023 Earnings Call Transcript August 3, 2023
Daqo New Energy Corp. misses on earnings expectations. Reported EPS is $1.6 EPS, expectations were $5.79.
Operator: Good day, and welcome to the Daqo New Energy Second Quarter 2023 Results Conference Call. [Operator Instructions]. I’d like to turn the call over to Ms. [indiscernible], Investor Relations Director. Please go ahead.
Unidentified Company Representative: Hello, everyone. I’m , 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 2023, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our new Chairman and CEO, Mr. Xiang Xu; our former CEO, Longgen Zhang; CFO, Mr. Ming Yang and myself. So the call today will begin with an update from Mr. Zhang and our new Chairman and CEO, followed by his comments on market and operations, and then Mr. Yang will discuss the company’s financial performance for the quarter and the year. And after that, we’ll open the floor to Q&A from the audience.
So 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’ll 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. So now I’ll pass it on to Mr. Zhang.
Longgen Zhang: Thank you, . Good morning, good evening. Efficient operation of our polysilicon facilities in the second quarter of 2023 resulted in the production volume of 45,306 metric tons, representing an increase of 11,458 metric tons as compared to the previous quarter. As our Phase 5A 100,000 metric tons polysilicon project in Inner Mongolia reached full production capacity in June. Our production cost decreased by 8.3% from Q1 to $6.92 per kg, primarily due to improvements in manufacturing efficiency as well as a reduction in the cost of metallurgical grade silicon. For the quarter, we generated $230 million in EBITDA with strong operating cash flow and continued to maintain a strong balance sheet with no financial debt.
At the end of the quarter, the company had a cash balance of $3.2 billion and a combined cash and banking notes receivable balance of USD 4 billion. With an addition of our new Inner Mongolia Phase 5A facility, our total annual polysilicon nameplate capacity has expanded to 205,000 metric tons. For the third quarter, we expect our total polysilicon production volume to be approximately 55,000 metric tons to 57,000 metric tons, representing an increase of 21% to 26% as compared to Q2 2023. Full year production is expected to be approximately 193,000 metric tons to 198,000 metric tons of polysilicon, representing an increase of 44% to 48% as compared to 2022. In addition, based on our [Technical Difficulty] figure, our new semiconductor grade polysilicon project with 1,000 metric tons annual capacity is expected to start pilot production by the end of September of this year.
With our fully digitized and highly automated production system that optimizes operational efficiency, improves cost structure and further enhances production product quality for the N-type polysilicon product. We are confident that our Inner Mongolia project will further enhance the company’s competitive edge. The polysilicon industry experienced increased challenges and substantial price volatility during the second quarter. Several new polysilicon facilities and new entrants finally started production with some reaching full capacity — production capacity in the first half of this year. The shortage of polysilicon of the past 2 years came to an end. The increased supply ultimately led to relatively oversupply and excess industry inventory.
In an effort to gain market shares with inferior quality products, new entrants and some established industry players engaged in aggressive pricing, expectations of lower future pricing in the market led to delays and reductions of downstream customer orders, as well as aggressive pricing required by customers. The situation wasn’t significantly in the second half of May, as inventory reduction efforts by leading producers led to race to the bottom that saw polysilicon prices decline by approximately 70% at the end of the second quarter compared to Q1 levels. In the second half of June, polysilicon prices reached bottom and customers began ordering aggressively at the lower prices. By middle of July, we saw an approximately 15% to 20% price recovery compared to the bottom reached in June.
Recently, we have also seen an increase in the ASP premium for N-type polysilicon with a meaningful increase in demand volume. We expect that this trend will further benefit us as the industry transitions to next-generation N-type technology. We shipped 53,502 metric tons of polysilicon in Q2, meaningfully more than our production level and a substantial increase over Q1 shipments. Polysilicon inventory at our original Xinjiang facility decreased to less than a week’s production volume, as our facility in Inner Mongolia is newly established its products require customer qualification before we can ship meaningful volumes to customers, and the qualification process took longer than anticipated due to market volatility during the period. At the end of the quarter, with customer orders on hand that covered all our inventory, we had practically sold all shippable products, the customer qualification process for the products of our Inner Mongolia facility completed successfully in July.
And at the end of July, with brisk customer orders and demand, we had further reduced our polysilicon inventory to a very healthy level of approximately 1-week of production across our 2 facilities. For the second quarter, we recorded approximately USD 19.7 million in foreign exchange loss, or approximately $0.26 per ADS. Near the end of April, the company received approximately RMB 4.96 billion in cash dividends from its subsidiary Xinjiang Daqo, which was approximately USD 716.7 million based on the exchange rate on the date the dividend funds were received. During the quarter, the company converted approximately RMB 1.85 billion to U.S. dollar to fund our share repurchase program, as the USD to Renminbi currency — Chinese currency exchange rate fluctuated significantly during the month of May and June.
And as required by accounting standards, we recorded an unrealized foreign exchange loss, primarily related to our quarter end cash balance of RMB 3.1 billion held by the company in an offshore accounts. Regarding the company’s share buyback program. At the end of July, the company had already repurchased 4.16 million ADS for approximately USD 188.7 million under the current program with average cost of approximately USD 45.32 per ADS combined with the program completed in 2022. In aggregate, the company has already repurchased 6 million ADS for approximately USD 308.6 million. 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 is likely to exceed most analysis expectations.
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It is generally expected that solar PV will eventually become one of the most important energies to power the world. In addition, as the solar PV technology keeps evolving, we believe that the increasing needs for polysilicon of very high purity, such as N-type polysilicon will help differentiate us from our competitors, while most of our competitors will likely struggle with the current market environment. Daqo New Energy has one of the best balance sheets in the industry with no financial debt, and this will help us with the current market environment successfully. We are optimistic that as the solar end market continues to grow and as our customers continue to expand capacity, particularly for N-type solar products, prices will improve. We will continue to maintain solid growth and capture the long-term benefits of growing global solar PV market.
Moving to outlook and guidance. The company expects to produce approximately 55,000 metric tons to 57,000 metric tons of polysilicon during the third quarter of 2023. The company expects to produce approximately 193,000 metric tons to 198,000 metric tons of polysilicon for the full year of 2023, inclusive of the impact of the company’s annual facility maintenance. This outlook reflects Daqo New Energy’s current and preliminary view as of the date and this press release and may be subject to change. The company’s ability to achieve these projections is subject to risks and uncertainties. See safe harbor statement at the end of this press release. Now I will turn to — the call to our CFO, Ming. Please go ahead.
Ming Yang: Thank you, Longgen, and hello, everyone. Thank you for joining our earnings conference call today. Now I will discuss our financial results for the second quarter of 2023. Revenues were $636.7 million compared to $709.8 million in the first quarter of 2023 and $1.24 billion in the second quarter of 2022. The decrease in revenue compared to the first quarter of 2023 was primarily due to a decrease in average selling prices, mitigated by increase in sold volume. Gross profit was $258.9 million compared to $506.7 million in the first quarter of 2023 and $947 million in the second quarter of 2022. Gross margin was 40.7% compared to 71.4% in the first quarter of 2023 and 76% in the second quarter of 2022. The decrease in gross margin compared to the first 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 $43.3 million compared to $41.3 million in the first quarter of 2023 and $14.4 million in the second quarter of 2022. The slightly higher SG&A expenses compared to the previous quarter was due to higher shipment volume that resulted in higher shipping expenses. SG&A expenses during the second quarter also includes $27.5 million in noncash share-based compensation costs related to the company’s share incentive plans compared to $28 million in the first quarter of 2023. R&D expenses were $2.2 million compared to $1.9 million in the first quarter of 2023 and $2.7 million in the second quarter of 2022. R&D expenses vary from period to period and reflect R&D activities that take place during the quarter.
And most of our R&D activities for the quarter related to product purity improvement-related activities. Foreign exchange losses were $19.7 million compared to 0 in the first quarter of 2023 and also in the second quarter of 2022. The significant volatility and fluctuation in the U.S. dollar to Chinese New Year exchange rate during this quarter resulted in primarily an unrealized foreign exchange loss related to our quarter end cash balance of RMB 3.1 billion held by the company in an offshore account. And as a result of the above mentioned, income from operation was $214 million compared to $463.8 million in the first quarter of 2023 and $927.6 million in the second quarter of 2022. Operating margin was 33.6% compared to 65.3% in the first quarter of 2023 and 74.6% in the second quarter of 2022.
Net income attributable to Daqo New Energy shareholders was $103.7 million compared to $278.8 million in the first quarter of 2023 and $627.8 million in the second quarter of 2022. Earnings per basic ADS was $1.35 compared to $3.56 in the first quarter of 2023 and $8.36 in the second quarter of 2022. Adjusted net income, non-GAAP attributable to the Daqo New Energy shareholders, including noncash share-based compensation costs, was $134.5 million compared to $310 million in the first quarter of 2023 and $630 million in the second quarter of 2022. Adjusted earnings per basic ADS was $1.75 compared to $3.96 in the first quarter of 2023 and $8.39 in the second quarter of 2022. EBITDA was $230 million for the quarter compared to $490 million in the first quarter of 2023 and $955 million in the second quarter of 2022.
EBITDA margin was 36% compared to 69% in the first quarter of 2023 and 76.8% in the second quarter of 2022. Now on the company’s financial condition. As of the June 30, 2023, the company had $3.169 billion in cash, cash equivalents and restricted cash compared to $4.1 billion as of March 31, 2023, and $3.3 billion as of June 30, 2022. As of June 30, 2023, the noticeable balance was $798.5 million compared to $791 million as of March 31, 2023, and $1.27 billion as of June 30, 2022. Notes receivables represent bank notes with maturity within 6 months. And now on the company’s cash flow. For the 6 months ended June 30, 2023, net cash provided by operating activities was $786 million compared to $1.13 billion in the same period of last year. And for the 6 months ended June 30, 2023, net cash used in investing activities was $495.7 million compared to net cash used in investment activities was $80 million in the same period of 2022.
Net cash used in investment activities in the first half of 2023 was primarily related to the capital expenditures on the company’s polysilicon project in Baotou City, Inner Mongolia. And for the 6 months ended June 30, 2023, net cash using finance activities was $477.5 million compared to net cash provided by financing activities was $1.58 billion in the same period of 2022. The net cash used in financing activity in the first half of 2023 was primarily related to $174 million in the company’s share repurchases and $306.6 million in dividend payments made by the company Xinjiang Daqo subsidiary to its minority shareholders. And that concludes our prepared remarks. And operator, we will now open the floor for questions.
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Operator: [Operator Instructions]. First question will be from Philip Shen of ROTH MKM.
Philip Shen: Longgen, sorry to see you leave. And I was wondering if you could touch on your personal situation and give us some color as to timing and detail around what you might do next? It sounds like from the release that you’re leaving effective immediately, but you’re on the call today. So just curious, if there’s anything you can share?
Longgen Zhang: Thank you, Philip. I think I’m working for the company more than 5 years, and I know everybody well. And — then also, remember, our new CEO and Chairman, his stay in Daqo is longer than me. Basically, he also knows this industry very well. Even during the past 5 years, we were working together. And so I think giving personal — I think family personal reason, I’m leaving, but I think still I turn over the control to Mr. Xu. I think — I hope — I think he will direct the company to the next high step. Did I answer your question, Philip?
Philip Shen: Yes. Shifting over to pricing. You talked about the dynamics of how pricing fell in Q2, and then there was a bit of a recovery. Can you talk about what you see for polysilicon pricing in Q3, Q4 and also 2024? How much higher or lower could poly pricing go in 2024?
Longgen Zhang: I think in last year Q4, during the seasonal and also some downstream clients, I think they’re planning to stop demand, shut down the capacity. So almost the 5 bigger polysilicon plants have the inventory by the end of last year. And — but as the Q1, when — because Chinese New Year is coming in February, so demand immediately come up. So in Q1, the price continue to go up back from, I think, Q4, the bottom almost RMB 80 per kg to 240, but really, because I think new entrants, the inventory, I think, digested. So in Italy, I think to buy, I think in May and June, the price continue go down. especially, I think in June, the price almost go down to the bottom. Basically, I think breakeven even, I can call. RMB go to like RMB 55 to RMB 60.
Then for some reason, as you know that, by the end of last month, I think 2 companies, I’m not mentioning, okay, they have — I think the facilities have some sparing the bomb you see, almost one of the big players, almost stop Xinjiang all production. So I think right now, besides I think the market come back, the order is coming, I think, in the pipeline, especially some order in [indiscernible] is continuing, we see in Q3, Q4. So the demand right now is a little high. So the price right now back like N-type is around RMB 83 to RMB 85 per kg. The P-type, I think, is around like RMB 65 — RMB 63, RMB 65 per kg. So we think in Q3, we see is very profitable. I think in this situation will continue lasting to October. Then during November and December, another, I think, seasonal come up, the winter is coming.
The Western country maybe the Christmas Day, then Chinese New Year is coming. So I think during November, December or January and February, the price definitely go to deep again. Also, I think as other, if you like — like Daqo Mongolia, we have full capacity running. Then like TBEA, they also — the first project in Mongolia is not very successful, okay? Last year, they started trial production, still not full capacity running. But they will now tell the market, they were capacity running by next month. So we see the supply has continued to go up. So I think the next year, the polysilicon price, even next 2 years, especially, I think very clear, the polysilicon produced in China right now, is a different price from polysilicon produced outside of China.