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DAQO New Energy Corp. (NYSE:DQ)

Q3 2012 Earnings Call

November 30, 2012 8:00 am ET

Executives

Bing Sun – Chief Financial Officer

Gongda Yao - Director and Chief Executive Officer

Operator

Good day and welcome to the DAQO New Energy Third Quarter 2012 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. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Sun Bing, CEO of Daqo New Energy. Please go ahead.

Bing Sun

Sorry, I’m the CFO actually. Thanks everyone for joining us today for Daqo New Energy’s third quarter financial results conference call. Daqo New Energy issued its financial results for the third 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. Yao, our CEO and myself. The call today will feature a remark from Dr. Yao, covering business and operational developments, and then I will discuss the company’s financial performance for the third quarter. After that we will open floor to Q&A from the audience.

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

Gongda Yao

Thank you, Bing. Although the global Solar PV market remains weak in the third quarter, and we are still facing increasing pricing pressure. We see many positive signs and policies showing China governments determination to develop the domestic market.

These positive sectors will stimulate the domestic demands, which will partially offset the uncertainty from the international market. We expect to see the market recovering in the second half of 2013.

Just a few days ago, China Minister of Commerce announced the active tariff investigation against the solar-grade polysilicon from United States, Korea and Europe. We are expecting that news can stop the irrational and unfair low pricing company in China market. We have successfully completed the construction of Xinjiang Phase II polysilicon plant in the third quarter and already started pilot production. As of November 20, we have produced the 285 metric ton polysilicon in our new plant.

Our progress of ramp-up is in line with our original schedule. We are confident that we will meet our targets regarding annual capacity, quality and cost structure by the end of the first quarter of 2013. In our Wanzhou polysilicon plant, we continue to successfully lower our production costs in the third quarter. We have starting annual maintenance and initiated equipment upgrades and the technology improvements to further lower the cost.

We were restarting production after we completed the projects. Moreover, its summary seasons on May to September when the hydro electricity rate is lowest in the whole year. We do expect that the improved cost structure with the lowest electricity rate will enable Wanzhou facility to generate positive cash flow when we resume the production.

We have spun off our module business to Daqo Group. We believe the module business with the further enhance with Daqo Groups expertise in the electricity system integration and the more abundance resourcing to sale force, especially in the domestic market. Meanwhile, we will be able to concentrate our valuable resources on our core business in order to pull through this challenging period.

As we announced in October, our Board of Director has a performance of our four senior management positions has shown on the slide. These four management team members have demonstrate their expertise and the capability during their past tenure with us and made a significant contribution in their respected positions. I believe they will achieve even greater success in euros and create a more value for the company.

As for shipment, we met our target for polysilicon and wafer shipment. For the first quarter 2012, the company expects to ship 550 to 600 metric ton of polysilicon and about 10 megawatts of wafers. In addition, the company expects to provide 100 to 120 metric tons of ingot and block manufacturing outsourcing service to our customers.

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

Bing Sun

Thank you, Dr. Yao. Let’s look through the financial performance. We have two pages of financial data in this Q3 PPT to investors and P&L summary and the other one is balance sheet summary. I will first give you an overview of our Q3 financial performance and then I will discuss areas management focuses most. First, overview, revenues were $21.1 million, compared to $27.6 million in the second quarter. Gross loss was $10.8 million, compared to gross loss of $5.7 million in the second quarter. Gross margin was negative 51.1%, compared to negative 20.7%.

SG&A expenses were $5.1 million in the third quarter, compared to $3.6 million in the second quarter. Loss per fully diluted ADS from continued operation was $0.43, compared to $0.18 in the second quarter.

Gross margin, gross loss was $10.8 million, compared to $5.7 million in the second quarter of 2012. Gross margin was negative 51.1%, compared to 20.7%. The non-GAAP gross margin, which excludes the non-cash charge of $5 million inventory write-down is negative 27.5% in the third quarter.

The increase in gross loss and deterioration in gross margin from the second quarter was primarily due to the inventory write-down of $5 million. The decrease in average selling prices of polysilicon is partially offset by our cost reduction efforts.

Also, due to the increased credit risk in the wafer business, management decided to adopt a more conservative approach to recognize wafers revenue upon payment receipt. The revenue of about 10 megawatt wafer shipment has been deferred during Q3.

Cash, cash equivalents and restricted cash as of September 30, the company had $53.8 million in cash, cash equivalents and restricted cash, compared to $90.2 million as of June 30. The decrease of $36.4 million was primarily due to CapEx of $32 million related to Xinjiang project and debt repayment of $13.4 million.

Cash inflow for operating activity increased by $12.3 million in Q3. Accounts receivable, as of September 30, the net accounts receivable balance was $26.4 million compared to $33.3 million as of June 30.

The decrease was primarily due to the removal of $5 Nanjing Daqo’s accounts receivable as a result of the spin-off and the $2.1 million bad debt provision in Q3.

Financial condition, here is our operating cash flow is positively in Q3, but because of our CapEx in Xinjiang, our net cash flow is negative for the quarter. Management has been working on improving the cash flow performance and has a more strict control over cash.

We will continue to make every assets to attract outstanding accounts receivable and still our inventory to improve working capital structure. In the first quarter of next year, we expect Xinjiang to start generating positive cash flow, which could be one of the resources for our debt repayment. There was the annual debt repayment for Xinjiang project alone on Q 2014.

In addition as always, our transit company Daqo Group will provide us with full financial support. Daqo Group has the ability and will to financially support Daqo New Energy when necessary. As of the loan for Xinjiang project, the total project loan from Bank of China is RMB980 million. So far we have received RMB750 million in aggregate. We’re still working with Bank of China to get the remaining RMB230 million.

Last was summary of Xinjiang project of CapEx. We’ve already paid RMB1.85 billion as of October 31, of 2012. For the remaining CapEx, we plan to pay another RMB340 million in 2013 and the remaining amount will be paid in 2014.

And that’s pretty much my presentation and we’re ready for Q&A session.

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

At this time, I’m not showing any questions. Just to conclude our question-and-answer session, I’d like to turn the conference back over to Mr. Sun Bing for any closing remarks.

Bing Sun

If anybody has any questions, please feel free to contact myself or Kevin at any time and we will be more willing to answer any of your questions that you may have. And thanks to everybody for joining our conference call today. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Question-and-Answer Session

[No Q&A session for this event]

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