Good day, and welcome to the Daqo New Energy Second Quarter 2019 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 2019, which can be found on our investor relations website at ir.xjd.qsolar.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 2019. 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 the preliminary view as of today and maybe 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’ll now turn the call over to our CEO Mr. Zhang..

Hello everyone, and thank you for joining us today for our earnings call. We are pleased to report a solid quarter in which we made good progress in capacity increase and quality improvement. During the second quarter we continued our capacity debottlenecking project on time which allowed us to increase our annual capacity to 35,000 metric tons.

At the same time, we also completed the scheduled annual maintenance of our Xinjiang facility which was already scheduled in the third quarter.

While our production volume was temporarily impacted by the debottlenecking project and the annual maintenance of our facilities, we were still able to produce 7151 metric tons of polysilicon in the second quarter to the total production cost $8.12 /kg and a cash cost of $6.65/kg.

Even with these impacts the company recorded adjusted net income of $2.3 million for the second quarter with $66 million of operating cash flow from continuing operations for the first half of this year.

With the project ramp up at our newly debottlenecked facilities we anticipate our production volume in the third quarter to be approximately 9,200 to 9,500 metric tons of polysilicon, with the total potential costs returning to normal levels of approximately$7.60/kg.

So far, for the month of July, both our production volume level and the cost reduction is tracking well and are reflective of these trends. During the second quarter we also significantly improved the quality of our products. Out of our entire sales volume during the quarter approximately 80% of our polysilicon was sold to mono customers.

With the completion of our debottlenecking project and annual maintenance, we expected the percentage of mono-grade polysilicon of our production to further increase to approximately 85% in the third quarter.

In addition, we are now working closely with some leading mono wafer producers to test our ultra-high purity polysilicon for application in potential N-type mono wafer market. The expansion of our Phase 4A project is progressing smoothly and remains on schedule.

The equipment installation has already begun and will continue through to the end of the third quarter of 2019. Based on [indiscernible] - assessment, we expect to complete the Phase 4A project by the end of 2019 and ramp up to the full capacity of 70,000 metric tons by the end of the first quarter of 2020.

Upon the full ramp up, we expect that 90% of our total production volumes will be sold to mono customers, including 40% for the N-type mono wafer market. In early July this year, China's National Energy Administration released a list of 22.8 gigawatts of approved solar projects that secured the government subsidies for 2019.

Combining these approved subsidized projects, residential distributed-generation projects, top-runner projects and poverty alleviation PV projects, China is expected to install approximately 40 gigawatts to 45 gigawatts of new solar PV projects in 2019.

During the first half of this year, China has already installed 11.4 gigawatts, which means the installation volumes could triple in the second half of 2019.

Realistically, it will take some time to complete the preparation work for these recently approved subsidized solar projects, which includes detailed designs and rounds of procurement bidding and procurement contract negotiations. All of these stages have to be completed before the actual modules can be shipped.

Based on our discussions with downstream customers, some project procurement biddings have already begun. All in all, we anticipate China's solar demand to pick up significantly starting from early September.

The second quarter of 2019 was a challenging time for the polysilicon industry as the prices dropped to their lower levels in history, particularly for multi-grade products, while prices for mono-grade products declined sequentially they were relatively stable.

We expect the polysilicon supply and demand dynamic could improve when Chinese project developers begin to place orders by the end of the third quarter. Incremental demand for China is expected to [indiscernible] the supply in the current market.

We believe polysilicon ASP will begin to improve in the third quarter of 2019 to the level that the majority of marginal high cost to players are able to breakeven on the cash cost basis, which we estimated to be approximately $10.50 to $11 per kg.

Moreover the pricing spread between mono-grade and multi-grade polysilicon products will likely remain significant because upward of mono-grade polysilicon still lags behind the market demand and new capacity of our mono [indiscernible] are still growing significantly.

In early August, we signed a three-year supply agreement with LONGi Green Energy to supply 112,800 MT of polysilicon products. LONGi is our long time strategic partner with strong balance sheet and growth momentum in mono wafer sector. This is the second long term supply agreement between us.

It's also a testament to our supply stability and excellent quality of polysilicon product for mono-applications. We are confident that the combination of our premium product quality and competitive cost structure will set a benchmark for the polysilicon industry and solidify our position as the market leader.

Our competitive advantage will be further strengthened once the Phase 4A project is completed and ramped up to full capacity in the first quarter of 2020, which will double our capacity and drive our production cost even lower.

The Company expects to produce approximately 9,200 to 9,500 MT of polysilicon with a total production cost of $7.50/kg during the third quarter of 2019 and sell approximately 9,000 to 9,300 MT of polysilicon to external customers during the third quarter of 2019.

For the full year of 2019, the Company expects to produce approximately 37,000 to 40,000 MT of polysilicon, 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 of this press release and may be subject to change.

With that, I will hand the call over to Ming, our CFO who will go over our financials for the quarter. Ming, please go ahead..

Thank you, Longgen, and good day everyone. Thank you for joining our earnings conference call today. Revenues in the second quarter of 2019 were $66 million compared to $81.2 million in the first quarter of 2019. The decrease in revenue was primarily due to lower polysilicon sales volume and lower ASP.

Gross profit was $8.6 million, compared to $18.3 million in the first quarter of 2019. Gross margin was 13% compared to 22.6% in the first quarter of 2019.

The sequential decrease was primarily due to lower average ASP and higher polysilicon production costs caused by the annual facility maintenance and ramp-up process of the Company's debottlenecking project. Selling, general and administrative expenses were $7.8 million, compared to $7.9 million in the first quarter of 2019.

This quarter's SG&A expenses include $3.9 million of non-cash share-based compensation costs related to the Company's share incentive plan. R&D expenses were $1.5 million, compared to $1.3 million in the first quarter of 2019. R&D expenses reflect R&D activities that took place during the quarter and could vary from period to period.

For this quarter we primarily conducted R&D projects and experiments related to polysilicon quality improvement including methods to reduce carbon and metal content within our manufacturing system. As a result of the forgoing loss from operations was $0.4 million compared to income from operations of $9.2 million in the first quarter of 2019.

The company recorded an operating loss for the second quarter compared to operating margin of 11.3% in the first quarter of 2019. Interest expense was $1.9 million, compared to $2.0 million in the first quarter of 2019. EBITDA from continuing operations was $10.2 million, compared to $20 million in the first quarter of 2019.

EBITDA margin was 15.5%, compared to 24.6% in the first quarter of 2019. During the third quarter of 2018 the company decided to continue its solar wafer manufacturing operations. Net income from discontinued operations was $0.5 million in the second quarter of 2019, compared to $0.8 million in the first quarter of 2019.

Net income from discontinued operations during the first and second quarter of 2019 resulted from the disposal of fixed assets which were impaired in 2018 and previous years. Net loss attributable to Daqo New Energy Corp.

shareholders was $2.2 million in the second quarter of 2019 compared to net income attributable to Daqo New Energy shareholders of $6.6 million in the first quarter of 2019. Loss per basic ADS was $0.16 in the second quarter, compared to earnings per basic ADS of $0.50 in the first quarter of 2019.

Non-GAAP adjusted net income attributable to Daqo New Energy shareholders was $2.3 million in the second quarter of 2019 compared to $11.1 million in the first quarter of 2019. Adjusted earnings per basic ADS was $0.17 compared to adjusted earnings per basis ADS of $0.83 in the first quarter of 2019.

As of June 30, 2019, the Company had $79.6 million in cash, cash equivalents and restricted cash, compared to $113.7 million as of March 31, 2019.

At the end of Q2 we had low levels of accounts receivable balance of $0.1 million because our customers only paid us cash upon sales contract signing and prior to order delivery further demonstrating the superior quality ensuring customer preference for our high quality polysilicon products.

As of June 30, 2019 the notes receivable balance was $9.4 million, compared to $0.7 million as of March 31, 2019. As of June 30, 2019, total bank borrowings were $243.2 million, of which $151.5 million were long-term borrowings, compared to total borrowings of $193 million, including $149.7 million of long-term borrowings, as of March 31, 2019.

The increase in bank borrowings was primarily related to capital expenditure for our Phase 4A expansion project. For the six months ended June 30, 2019, net cash provided by operating activities was $67.8 million, compared to $67.1 million in the same period of 2018.

For the six months ended June 30, 2019, net cash used in investing activities was $144.9 million compared to $52.5 million in the same period of 2018. The net cash used in investing activities in 2019 and 2018 was primarily related to the capital expenditures of Xinjiang Phase 3B and 4A polysilicon projects.

For the six months ended June 30, 2019, net cash provided by financing activities was $61.3 million, compared to net cash used in financing activities of $93.2 million in the same period of 2018. This concludes our prepared remarks. We would now like to turn the call over to the operator to begin the Q&A session. Operator, please begin..

Thank you. [Operator Instructions] Our first question today comes from Philip Shen with ROTH Capital Partners. Please go ahead..

Hi every one, thanks for the questions. The first one is on China's demand. I know we talked about volumes ramping up in September and how that could impact poly pricing positively, especially mono poly pricing.

How do you expect the momentum of demand to trend into Q1? Do you expect some strength in Q1 as well or and also Q2 and then on additionally, when do you expect the government to provide the next subsidy package for the 2020 timeframe? Thanks..

Okay. Thank you. I than Philip from Roth Capital. For the first question, the China part of this year, part of subsidized, part of mono fixed is RMB 3 billion. As you see that the 22 gigawatt product is already done. So only thing is how to implementation and installation, that we think will happen or occur after September.

Maybe majority were installed in Q4. So that's why I think China is a key major, one of the major driver for the market right now, of course, including the out of China, international market demand.

So we will see that the silicon demand is not only from the any market but also from the middle stream, the capacity continued expansion, this is at LONGi has announced another 15 gigawatts and we'll finish by the end of 2020. Then [indiscernible] second one we're double the capacity, - the overall capacity from 25 gigawatts to 50 gigawatts.

Jinko also announced that, [indiscernible] is another 25 gigawatts. So then also two Asia company [indiscernible] is also announced that within the next two years, 25 gigawatts .Then [indiscernible], it also is the furnace manufacturing company in Mongolia also announced maybe 25 gigawatts.

So we can see a lot of capacity will come out to prepare for the strong demand for next year, even year 2021. So we believe, I think as the downstream capacity continued expansion for the working capital in the processing because we are the upstream. So we see the demand for mono-silicon will be higher in fourth quarter, even in Q1 to Q2.

So that's why we think, for this quarter we will see mono-silicon price is stable almost. So we believe, okay in Q4, the price will come back, will go up a little and Q1, Q2, maybe will stay there higher. So basically, I'm not worried about that mono-silicon price. The reason is because we compete with the imported silicon.

If you're looking imported silicon, their cost structure is around like $10 to $12 cash basis. So as the market, you see that mono-silicon continue to – the percentage of mono-silicon -- mono-module, continued demand percentage is going to increase. So the mono-silicon demand is hot. But meantime, we see that, the multi price is weak.

The reason is the demand is weak, then also supply is a lot. So that's why Daqo is focused on mono-silicon. In the third quarter, we believe we were about 85%. In the fourth quarter, we were above 90%. The next year, even higher. So that's our plan.

Ming, do you have any comments?.

Thank you, Longgen. Yes. Perhaps, so do you think what does demand look like in Q1? Could we see a reduction in demand and when do you expect China to issue the next policy? Is there, I haven't heard any details around or hints about when that could come out. I was wondering if you might have some information about that..

I think China, - you see it, in the history, let's say that way. This year, actually is the bidding system because of the new policy. The implementation processing is a little slow, the reason because for whole of this year, the new policy is new, but for next year, definitely, I think we have experience. So we're speed up.

As you can see that even though the RMB 3 billion subsidized were announced still we have a lot of money available and we think, the second chance will be soon, I think announced.

And even next year, the reason is because we think it is not only right for now, this industry is not only we push because the government [indiscernible], wanted the blue sky see, they are cutting the coal power plant capacity.

So they are asking you see the traditional CO2, whatever, the power generator, a company, especially those SOE [ph], they have to own or have to have the quarter of the clean energy [ph]. So right now is a lot of push them to adding the green energy.

For example, we are located in [indiscernible] they are actually is not state the grid, they are local grid, but they also and now the government is planning to add in the next three years 5 gigawatt solar project.

Those - is not to have any government subsidize, it is just the free subsidized and the generators invested in our channel, just connected with the local grid. So right now, we have seven company, including, some bigger one, the Chinese, a bigger one by now is bidding - so the bidding system.

So what I see that is we see strong demand in China, maybe in Q1, Q2 will happen..

Okay, great. So moving on to your comment about 40% of your shipments could be untied.

That's interesting, who would be the primary untapped customer? Will it be LONGi or somebody else and what percentage of N-type, well, how many gigawatts of N-type shipments do you think the industry could have in 2020?.

Okay, to answer your question here is because N-type in the history, we're only shipping to one of the company, actually the overseas company of [indiscernible] in China, OEM. I'm not going to go ahead and announce the name, but you maybe know that.

And they use our N-type silicon and the reason is because they worry about is the overseas supply then the cost [indiscernible]. Then right now, one out of the bigger Chinese, I think a producer right now past our N-type.

And so far is going okay but still is not commercially, - order right now, because they just the base on right now testing to sell and module everything is okay. But so far, we're still in selling you see large quantities of N-type to our clients. Only one client, only like in the history [ph] every month maybe is like a 110.

But we see the future, because N-type compare the P-type, really the conversion efficiency rate will increase 2% to 3% on a sale settlement. So, that's maybe the feature on the mono - I think a kind of PV panel settlement, the next technology..

Great..

But right now, we are around 40% is N-type and we're selling this as mono-silicon..

Got it. Okay, thanks. In terms of the LONGi announcement that you recently had, it's maybe a bit more than half of your capacity or about half of the past two to three years. Can you talk about the prepayments that came with that? I noticed your advances and customers on your balance sheet increased to about 20 million.

But obviously this contract happened after that. So, I can imagine that that balance is higher now.

So, talk us through the prepayments and then also looking beyond LONGi do you expect any other kind of new agreements that you could put together or announce in the near term as well?.

Okay, the LONGi contract, because you know that the first contract was to have one year supply for year 2020, right. So these contracts actually is almost a 112,000 tons, it's cover from next year to 2022. So basically [indiscernible] is around – it cannot be announced by - between us and LONGi, but you will see from the financial statements later.

So the price is based on the market price and every month determined. I think that before history. So as LONGi contract will account for all of our capacity from - if we are to continue to expansion 4B is run more than 40%. Now besides that, we already have the current long-term contract with JinkoSolar.

So basically, we're in the future maybe we will sign or extend another contract, but we have potential, still have potential - another two companies, once is Asia company and it's mostly likely will be signed soon. So we are working on that. So all the long term contracts we have from 2% to 4% deposits..

Great. That's good color. One more from me. You mentioned Phase 4B.

What are your thoughts, the latest thoughts on the 4B potential expansion? When do you expect to - when will you expect to know about or make a decision?.

Philip, I think, first of all, we have to focus out 4A and to speed up or even put out 4A in tri production as soon as possible. And also we need to run the 4A ramping up to full capacity. And we also need to consider our financial statements and all cash flow and the whole industry, the situation.

So right now, to make a decision about 4B is too early, but we are focused on 4A then also on the quality..

Great. Okay, thank you. I'll pass it on..

[Operator Instructions] As there are no further questions in the queue, this concludes our question-and-answer session. I would 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..

The conference is now concluded. Thank you for attending today's presentation, you may now disconnect..