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Daqo New Energy Corp (NYSE:DQ)

Q4 2012 Earnings Conference Call

April 1, 2013 08:00 ET

Executives

Gongda Yao - Chief Executive Officer

Bing Sun - Chief Financial Officer

Operator

Good day and welcome to the Daqo New Energy Fourth Quarter 2012 Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded.

And I would now like to turn the conference over to Sun Bing, CFO. Please go ahead.

Bing Sun

Thanks, Emily. Thanks everyone for joining us today for Daqo New Energy’s fourth quarter and the fiscal year 2012 unaudited financial results conference call. Daqo New Energy issued its financial results for the fourth quarter earlier today, which can be found on the company’s website. To facilitate in today’s conference call, we put together a PPT presentation.

Today, attending the conference call, we have Dr. Yao, our CEO and myself. The call today will feature our remarks from Dr. Yao covering business and operational developments. And then I will discuss the company’s financial performance for fourth quarter. After that, we will open the floor to Q&A section 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 endured a significant downturn in 2012, we are encouraged to see that solar market has begun to stabilize across the value chain since the end of 2012. We do see the demand for polysilicon is picking up. The average selling price is increasing and the payment terms are improving. We believe the worst days have passed and the industry needs some time to recover through capacity rationalization, merger and acquisition, and a further technical improvement.

As for our Xinjiang facilities, we started a pilot production in September 2012. Thanks to the dedication and hard work of our technical and operation teams. We produced 617 metric ton of polysilicon in our Xinjiang facility in the fourth quarter of 2012. We shipped 323 metric ton to our customers and 139 metric ton internally to our wafer manufacturing business in the fourth quarter of 2012. We successfully reached our targets in terms of capacity and cost structure by end of March 2013. Our total production cost of polysilicon in Xinjiang was already below $20 per kilo in February. And we believe there is still some room for further improvement. Now, we are working intensely to maximize the output and further reduce the cost in Xinjiang plant.

We have also entered into long-term supply agreements with its top tier downstream players. We estimated that polysilicon outputs from Xinjiang will be around 1,000 metric ton shipments will be around 720 metric ton. All polysilicon inventory in Xinjiang has been booked out. We expect our Xinjiang facilities will start to generate positive cash flows in the first quarter of 2013. We believe we are well positioned in the current challenging market with Xinjiang facility’s low cost and high quality of polysilicon products.

As for our facilities in Wanzhou, we have successfully conducted annual maintenance in the fourth quarter of 2012. We have completed a hydrogen vent gas recovery and technical improvement project. For cost reduction results, we calculate it’s about $0.38 per kilo, and we are in the process of conducting two other projects, which are DCS recovery and electrical system modification for CVD reactors. In addition, we are also evaluating various technical improvement options for further cost reduction for our Wanzhou facility.

In the fourth quarter, we shipped 592 metric ton polysilicon to our customers, but sales proceeds from Xinjiang facilities is about 323 metric ton polysilicon were not recorded under revenue, because Xinjiang facilities were still in the process of a pilot production. We shipped the 5.9 megawatts wafers and the 33 metric ton polysilicon ingot in the fourth quarter.

As for the outlook for the first quarter of 2013, we estimate the shipment of polysilicon to be around 720 metric tons, wafer of 3.6 megawatts, and the ingots of 150 metric ton. In addition, we will ship 200 metric ton polysilicon to our internal wafer manufacturing business.

In the fourth quarter, due to the continued challenging supply and demand condition in the wafer segment, we recognized an impairment of long-lived assets of our wafer facility in the amount of $42.9 million. The recording of the impairment charge was to reflect the less than expected profit-generating ability of our wafer assets. Nevertheless, we are still going to gradually increase the utilization of the wafer facility by adopting optimized process, as recently price of the wafer is recovering and we see possibility for potential profits in our wafer business. In addition, considering the uncertainty in the solar market, the company determined it was more likely than not that our deferred tax assets would not be utilized before they expire and recorded a valuation allowance for deferred tax assets recognized in the prior periods in the amount of $19.9 million.

Last but not the least, although it is still early to say the downturn is over, we believe that 2013 will be a year of growth, especially in Asia, where China, Japan and India will make the great contribution, and other emerging markets like Africa, South America, and the Middle East. We expect the solar market will start to recover in the second half of 2013.

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

Bing Sun

Thank you, Dr. Yao. Let’s look through the financial performance. As we can see in our third page of financial data in our PPT to investors P&L summary and the balance sheet summary. For more detailed financial data and the related analysis, you may look at our Q4 and the fiscal year 2012 earnings release, and I’ll be happy to answer your questions.

Now, let’s go through the financials. Revenue was $6.2 million compared to $21.1 million in the third quarter. The revenue in Q4 of our sales of Wanzhou polysilicon inventory up 266 metric ton, 5.9 megawatt of wafer, and the 33 metric ton of ingot. Sales proceeds from polysilicon made by the Xinjiang facility during pilot production period were excluded from our revenue recorded in Q4. The cost of the revenue was $17.2 million, which included the cost of the Wanzhou polysilicon facility of $9.5 million during its maintenance and the technology improvement period with no output. Expenditures related at the Xinjiang polysilicon facility in the pilot production period were not included in the cost of revenue in Q4.

Gross loss was $11.1 million, compared to $10.8 million in the third quarter. SG&A expenses were $1.6 million in Q4 compared to $5.1 million in third quarter of 2012. The company recorded a $2.1 million bad debt provision in the third quarter. There was no such provision in the fourth quarter of 2012. Also, the decrease was due to our assets on cost of reduction.

Long-lived asset impairments, in the fourth quarter of 2012, the company recorded $42.9 million long-lived asset impairments of our wafer facility. It was to reflect the market challenges that have an adverse effect on the expected profit-generating ability of these wafer assets. In the fourth quarter of 2011, the company recognized a long-lived assets impairment of $34.6 million for our wafer assets.

Income tax expenses in the fourth quarter of 2012 was $19.9 million, compared to income tax benefit of $5.5 million in the third quarter. Considering the uncertainty in solar market, the company determined it was more likely than not that our deferred tax assets would not be utilized before they expire, and as such, recorded a valuation allowance for deferred tax assets recognized in prior periods in the amount of $19.9 million.

Net loss attributable to our shareholders and the earnings per share, as a result of the above, net loss attributable to Daqo New Energy Corporation shareholders was $75.3 million compared to $15.5 million in the third quarter. Excluding the $42.9 million of long-lived asset impairment and the $19.9 million valuation allowance for deferred tax assets, the non-GAAP net loss attributable to shareholders was $12.6 million. Earnings per fully diluted ADS were negative $10.76 compared to negative $2.17 in the third quarter of 2012.

Now, let’s take a look at the balance sheet summary on page 12. Cash, cash equivalents, and the restricted cash. As of December 31, the company had $17.3 million in cash, cash equivalents, and the restricted cash compared to $53.8 million as of September 30. The decrease of $36.5 million was primarily due to debt repayment and the CapEx payment of our Xinjiang projects.

Accounts receivable as of December 31 was $27.8 million, compared to $26.4 million as of September 30. In the fourth quarter of 2012, Chongqing’s net accounts receivable decreased by $5 million due to management’s restructuring efforts while accounts receivable related to Xinjiang sales increased by $6 million.

Inventory as of December 31 was $15.1 million, compared to $12.7 million as up to September 30. In Q4, we sold off our poly inventory balance of (2094) metric ton from our Wanzhou facility. In addition, we saw the wafer inventory up 1.5 megawatts. Revenue from wafer sales was not recorded in Q4 until payment is to be received from our customers. Meanwhile, we have 428 metric ton of poly inventory as of December 31, which was produced from our Xinjiang facility. Our poly inventory as of December 31 was subsequently sold above the average in Q1 of 2013.

PP&E. PP&E as of December 31 was $677.7 million decreased from $722.2 million as of September 30. The decrease was due to the $42.9 million long-lived asset impairment of our wafer facility. As Dr. Yao previously discussed, the recording of the impairment of our wafer asset was to reflect the market challenges that have an adverse effect on the expected profit-generating ability.

Financial conditions. As of December 31 of our overall debt ratio was the 58%, which is above average. (It’s met) benchmark with industry data, but our working capital is negative $164 million. Working capital by definition, I am referring to current asset minus current liability. We are confident that we can renew our credit facility of $65 million in 2013 and obtain the remaining amount of $36.5 million project loan with Bank of China related to Xinjiang Phase II projects. And the working capital deficit that we might have, we have already got the commitment from Daqo Group. Daqo Group has the ability and the will to financially support Daqo New Energy when necessary. And that concludes my presentation. And now we open floor for Q&A section. Emily, please.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And at this time, I am not showing any questions, so I would like to turn the conference back over to Sun Bing for any closing remarks.

Bing Sun

Thanks everybody for your time. And if you have any questions after this conference call, please feel free to contact me directly or you can contact our Investor Relationship Manager, Kevin He. Thank you everybody for your time.

Operator

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

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