DAQO New Energy's CEO Discusses Q2 2012 Results - Earnings Call Transcript

DAQO New Energy Corporation (DQ)

Q2 2012 Earnings Call

August 17, 2012, 08:00 am ET

Executives

Bing Sun - CFO

Gongda Yao - CEO

Analysts

Presentation

Operator

Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to Q2 2012 Daqo New Energy Corp. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Bing Sun, CFO of Daqo New Energy Corp. you may begin your conference.

Bing Sun

Thank you. Thanks everyone for joining us today for Daqo New Energy’s second quarter 2012 financial results conference call. Daqo New Energy issued its financial results for the second quarter earlier today. To facilitate today’s conference call we put together a PPT presentation which can be found on the company’s website. Today attending the conference call, we have Dr. Gongda Yao, our CEO and myself. The call will feature a remark from Dr. Yao, covering business and operational developments and then I will take you through a discussion of the company’s financial performance.

With no further delay, I will turn the call over to Dr. Yao.

Gongda Yao

Thank you, Bing. In the second quarter of 2012, we were running our Wanzhou polysilicon plant smoothly at full capacity. We have also successfully reduced our production costs thanks to several technology improvements and the lower seasonal electricity rate. We exceeded our shipment guidance for polysilicon; nevertheless for wafer and modules we have not met the upward set in the last quarter.

However, the solar PV industry continued its downward motion and the average selling prices for polysilicon wafer and module continue to go down. The international trade conflicts also negatively impacted market demands. In Wanzhou, we have a successfully conducted the several technology improvement in Q2.

For example, we have Convert 2 reactors to hydrogenation furnaces to optimize the balance for the capacity of the reactors in hydrogenation systems so as to minimize the raw material costs such as liquid chlorine and the metallurgical silicon powder etcetera. Besides that we also adopted some other technology improvement and process optimization in distillation system, hydrogen recovery system and the condensation system and etcetera to further lower the cost of our production.

As for the Xinjiang Phase II project, we have already completed 97% of total construction by the end of July, several units include liquid chlorine system, utility system and the TCS system and the distillation system have already have been tested and ready for pilot production; because of the improvement of technologies and equipment we will be able to achieve high efficiency and low cost in Xinjiang new plant than the facility Wanzhou.

In Xinjiang, we will produce liquid chlorine by ourselves to lower the cost and secured supply. The hydrogenation system we use in Xinjiang is three times more efficient in output than Wanzhou. The new reactors are from domestic supplies with a 24 pairs compared to the ones in Wanzhou with average about 15 pairs.

As for now, we have recruited more than 700 employees in Xinjiang. We also have a team consisted of most experienced engineers from Wanzhou to support Xinjiang to make sure the pilot production is successful. Additionally, the much low electricity rate will help us significantly reduce our manufacture cost in Xinjiang. With our operational experience and process knowledge in Wanzhou we are confident to achieve our original plan to start pilot production in September 2012. We expect to do our 500 metric ton polysilicon at a competitive cost in Xinjiang in the last four months of 2012.

As for wafer business, in the third quarter, we expect to ship about 8 megawatts to our OEM customer. We will work with them to improve our wafer manufacture technology so as to achieve better quality with lower cost. We plan to gradually increase the utilization rate of wafer plant progressively to delever our full capacity, so that we will able to minimize the loss then breakeven and eventually obtain positive cash flow in wafer business.

Recently our high quality electronic grade polysilicon has been qualified for semiconductor customer and we have obtained the first order in the second quarter, 90% of polysilicon met the standards of electronic grades. Although, the first order from our customer is not significant in terms of volume, but we think this is new opportunity for the company to expand our business to a new market with higher margin.

For the third quarter of 2012, the company expected to ship about 1,000 to 1,200 metric ton polysilicon, approximately 6 megawatts of wafers, 8 megawatts of wafers OEM and 3 megawatts of modules. In addition, the company expected to provide 200 metric tons of ingot and block manufacturing outsourcing service to our customers. This outlook refers to our current and preliminary view and maybe subject to change. Our ability to achieve this project is subject to risk and uncertainties of course.

I will now turn the call to Mr. Sun Bing for financial performance update.

Bing Sun

Thank you Dr. Yao. Let’s look through the financial performance. As you can see, we only have two page of financial data in this Q2 PPT for investors. For more detailed financial data and the related analysis, you may look at our Q2 annual release and I'll be happy to answer your questions. I will first to give an overview of our Q2 financial performance and then I will discuss areas management focuses most such as gross margin, working capital and CapEx.

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