Operator: Hello, and welcome to the Daqo New Energy Second Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anita Chu, Investor Relations Director. Please go ahead.

Anita Chu: Hello, everyone. I’m Anita Chu, 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 2024, which can be found on our website at www.dqsolar.com. So today, attending the conference call, we have our chairman and CEO, Mr. Xiang Xu; our CFO, Mr. Ming Yang, and myself. The call today will begin with an update from Mr. Xu on market conditions and company operations, and then, Mr. Yang will discuss the company’s financial performance for the quarter and the year. After that, we’ll 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 statement. 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. Mr. Xu will make his remarks regarding current market conditions and company performance in Chinese, which I’ll translate into English after he finishes. So now, I’ll turn the call to our CFO — to our CEO. [Foreign Language]

Xiang Xu: [Foreign Language] Hello, everyone, this is Anita. I’ll now translate our CEO Mr. Xu’s remarks. [Interpreted] The solar industry experienced significant challenges during the second quarter, as market prices fell across the solar value chain to below production costs for nearly the entire industry. As end-of-quarter polysilicon ASP fell below our production cost, we were required in accordance with accounting rules to record a non-cash inventory impairment expense of $108 million because our inventory market value fell below book value. This had a significant negative impact on our cost of revenue, gross loss, operating loss and net loss. Nevertheless, we continued to maintain a strong balance sheet free of financial debt.

By the end of the quarter, we had a cash balance of $997 million and a combined cash and bank note receivable balance of $1.1 billion. To take advantage of higher interest rates compared to bank savings, we purchased $1.4 billion of short-term investments and fixed term deposits during the quarter. Inclusive of short-term investments and fixed term deposit, we had adequate liquidity with a balance of quick assets in the amount of $2.5 billion. On the operational front, during the second quarter, we started initial production at our 100,000 metric tons Phase 5B polysilicon project in Inner Mongolia as planned, which contributed approximately 12% of our total production volume. Overall, the total production volume of our two polysilicon facilities for the quarter was 64,961 metric tons, exceeding our expectations and representing an increase of 2,683 metric tons compared to our production volume for the previous quarter.

Through continued investments in R&D and dedication to purity improvements at both facilities, our overall N-type product mix reached 73% during the quarter. Remarkably, even our Phase 5B, which was still in the ramping up stage, had 70% N-type in the product mix, strengthening our confidence in achieving 100% N-type by the end of next year. In addition, our production cost trended down further in the second quarter, decreasing by 3% from Q1 2024 to an average of $6.19/kg. In light of the current market conditions and pricing, we have adjusted our target production utilization rate for the third quarter and our production plan for the full year. We expect our Q3 2024 total polysilicon production volume to be approximately 43,000 metric tons to 46,000 metric tons, as we started maintenance and lowered our production utilization rate to manage support pricings and reduce our cash burn.

As a result, we anticipate our full year 2024 production volume to be in the range of 210,000 metric tons to 220,000 metric tons. During the second quarter, solar market sentiment was depressed and customers showed little interest in purchasing for products. As a result, polysilicon prices kept setting new lows, below production costs and even below cash costs. Polysilicon prices plummeted from slightly above RMB60 per kilogram on average in early April to RMB40 to RMB55 per kilogram in late April, and further dropped below RMB40 per kilogram near the end of May through the end of June. Overall, sales pressure intensified as industry-wide polysilicon inventory increased from approximately 18 days to 20 days of production in early April to more than 1 month of production by the end of June.

With prices declining for weeks to below the industry’s cash cost and inventory accumulating, we began to see maintenances and production cuts across the industry. Based on industry statistics, the total polysilicon production volume in China dropped about 16% from approximately 192,000 metric tons per month in April to approximately 162,000 metric tons in June. However, the supply of polysilicon still exceeded the wafer customer demand, which has dropped to around 50 gigawatts in June due to lower utilization rate. In July, although there have been further industry polysilicon production cuts, an uptick in demand from downstream manufacturers will be needed to drive inventory reduction and price recovery. The solar industry has gone through multiple cycles in the past, and based on our previous experience, we believe the current low prices and market downturn will eventually result in a healthier market, as poor profitability, losses and cash burn will lead to many industry players exiting the business, with some possible bankruptcies.

This will bring the inevitable capacity rationalization, eventually solve the current overcapacity, and ultimately bring the solar PV industry back to normal profitability and better margins. This year will be challenging for China’s solar PV industry, as solar manufacturers along the value chain experience weak margins driven by oversupply, excessive inventory, and lower prices. At this point, we may have reached a cyclical bottom but do not yet see clear signs of potential improvement. We believe that the current situation of selling below cash cost is unsustainable and that many solar firms are facing significant cash flow challenges leading to delays in loan repayment and order deliveries. Therefore, we are likely to see market consolidation with higher-cost manufacturers gradually phasing out capacity and exiting the business.

So, recently, the China Photovoltaic Industry Association has urged central and local governments, financial institutions and companies to coordinate to accelerate industry consolidation. Chinese policymakers are also calling for the healthy expansion of the solar industry. China’s Ministry of Industry and Information Technology issued a draft in early July that sets rules for solar projects, such as meeting specific electricity consumption requirements and minimum capital ratio for new and expansion projects, to ensure the high-quality development of the solar PV industry and eliminate outdated capacity. On the demand side, we continued to see strong growth in new solar PV installations in China during the first half of 2024, which reached 102.48 gigawatts, representing a 30.7% year-over-year growth rate.

Overall, in the long-run, solar PV is expected to be one of the most competitive forms of power generation in China, and the continuous cost reductions in solar PV products and the associated reductions in solar energy generation costs are expected to create substantial additional demand for solar PV. We believe we are well-positioned to weather the current market downturn and emerge as one of the leaders in the industry to capture future growth. So now, I’ll turn the call to our CFO, Mr. Ming Yang, who will discuss the company’s financial performance for the quarter. Ming, please go ahead.

Ming Yang: Thank you, Mr. Xu and Anita. Hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company’s second quarter 2024 financial performance. Revenues were $220 million, compared to $415.3 million in the first quarter of 2024 and $637 million in the second quarter of 2023. The decrease in revenue compared to the first quarter of 2024 was primarily due to a decrease in the ASP, as well as decreased sales volume. Gross loss was $159 million, compared to our gross profit of $72 million in the first quarter of 2024 and $259 million in the second quarter of 2023. Gross margin was negative 72%, compared to 17.4% in the first quarter of 2024 and 40.7% in the second quarter of 2023.

For the second quarter of 2024, the company recorded $108 million in inventory impairment expenses as the company’s inventory’s market value falls below book value. The decrease in gross margin compared to the first quarter of 2024 was also due to lower ASP, which was partially mitigated by lower production cost. SG&A expenses were $37.5 million, compared to $38.4 million in the first quarter of 2024 and $43.3 million in the second quarter of 2023. SG&A expenses during the second quarter included $19.6 million in non-cash share-based compensation cost related to the company’s share incentive plans compared to $19.6 million in the first quarter of 2024. R&D expenses were $1.8 million, compared to $1.5 million in the first quarter of 2024 and $2.2 million in the second quarter of 2023.

R&D expenses vary from period to period and reflect R&D activities that take place during the quarter. Most of our R&D activities has been around increasing our N-type percentage. As a result of the foregoing, loss from operations was $196 million, compared to income from operations of $30.5 million in the first quarter of 2024 and $214 million in the second quarter of 2023. Operating margin was negative 89%, compared to 7.3% in the first quarter of 2024 and 33.6% in the second quarter of 2023. Foreign exchange loss was $1.4 million, compared to $0.3 million in the first quarter of 2024, which is attributable to the volatility and fluctuation of the U.S. dollar and Chinese Yuan exchange rate during the quarter. Net loss attributable Daqo New Energy shareholders was $120 million, compared to net income of $15.5 million in the first quarter of 2024 and $103.7 million in the second quarter of 2023.

Loss per basic ADS for the quarter was $1.81, compared to earnings per ADS of $0.24 in the first quarter of 2024 and $1.35 in the second quarter of 2023. Non-GAAP adjusted net loss attributable to Daqo New Energy shareholders, excluding non-cash share-based compensation cost, was $98.8 million, compared to adjusted net income non-GAAP attributable to Daqo New Energy shareholders of $36 million in the first quarter of 2024 and $134.5 million in the second quarter of 2023. Adjusted loss per basic ADS was $1.50, compared to adjusted earnings per basic ADS of $0.55 in the first quarter of 2024 and $1.75 in the second quarter of 2023. EBITDA was negative $145 million, compared to $76.9 million in the first quarter of 2024 and $230 million in the second quarter of 2023.

EBITDA margin was negative 66%, compared to 18.5% in the first quarter of 2024 and 36% in the second quarter of 2023. Now, on the company’s financial condition. As of June 30, 2024, the company had $1 billion in cash and cash equivalent and restricted cash, compared to $2.7 billion as of March 31, 2024 and $3.17 billion as of June 30, 2023. And as of June 30, 2024, the notes receivables balance was $80.7 million, compared to $194 million as of March 31, 2024 and $798 million as of June 30, 2023. Notes receivables represent bank notes with maturity within six months. And as of June 30, 2024, fixed term deposits within one year balance was $1.2 billion compared to nil in previous periods. For the six months ended June 30, 2024, net cash used in operating activities was $278.6 million compared to net cash provided by operating activities of $786 million in the same period of 2023.

And for the six months ended June 30, 2024, net cash used in investing activities was $1.7 billion compared to $496 million in the same period of 2023. The net cash used in investment activities in the second quarter was primarily related to purchase of short-term investments and fixed term deposits, which amounted to $1.4 billion. And regarding the company’s purchase of property, plant and equipment, for the first six months of this year, this amounted to $292 million. We currently anticipate full year capital expenditures in the range of $550 million to $600 million, which is a further reduction from our earlier plans. Capital expenditure for the second half of 2024 is, therefore, expected to be in the range of $260 million to $310 million.

Capital expenditure for the year is primarily related to our Inner Mongolia polysilicon project, Phase 1 and Phase 2. And for the six months ended June 30, 2024, net cash used in finance activities was $43 million compared to $477 million in the same period of 2023. The net cash used in financing activity in the second quarter of 2024 was primarily related to dividend payments and share repurchases by our company’s finance subsidiaries. And that concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin.

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Phil Shen with ROTH Capital Partners. Please go ahead.

Matt Ingraham: Hi, this is Matt Ingraham on for Phil. Thank you for taking our questions. Looking ahead, can you give us a sense of pricing and cost structure beyond this year? Do you think that there could be some recovery in price next year? And how much room — how much more room do you have to lower the cost structure?

Ming Yang: Hello. This is Ming, CFO of Daqo New Energy. Thank you for your question. I think in recent months, particularly in August, we’ve already seen some pickup and recovery of pricing. As Anita said at the bottom, I guess, in terms of June and July, pricing was below RMB40 per kilogram. And as of now, pricing is in the range of RMB41 to RMB42 per kilogram. So, we saw a range somewhere in between RMB2 to RMB3 per kilogram in terms of price recovery. And this is primarily a result of the industry’s production reduction and a slight uptick in demand from customers. So, we do not think the current pricing is sustainable. We do believe that, say, over the rest of the year, we should continue to see likely between RMB2 to, let’s say, RMB4 kind of price recovery as production continue to remain at a lower level.

And while for next year, we do believe that as demand continue to improve, especially from new markets like Middle East, Latin America, Africa and, again, I think, further market developments in China and Europe, for example, so we do think that pricing should recover to at least production costs or maybe normalize to higher production costs — higher than production costs. So, we think maybe mid next year is when we will see normalized pricing for polysilicon.

Matt Ingraham: Great. Thank you.

Ming Yang: And then, quickly following up on your cost structure, sorry, we do think there continue to be opportunity to reduce cost. I think we’re seeing very successful cost trends from Inner Mongolia Phase 2 facility. I think you saw approximately 3% reduction of cost from Q2 to Q1. And we do expect that Q3 costs should be flat to slightly lower than Q2. So, we think in the second half, we should — overall we should see costs somewhere around $6 or even slightly lower than $6. And we think this cost structure should continue through next year.

Matt Ingraham: Really appreciate the color there. And then, can you just talk about the channel inventory in the market? Do you expect that to continue to grow near term? And where do you think that peaks?

Ming Yang: Okay. Actually, channel inventory has already peaked. So, inventory is actually coming down as of August, and we think this should continue to go down, I think primarily as a result of continued reduction in supply. So, we think it should probably reduce to a much more reasonable level by, say, Q4 or by the end of the year, right? So, unless we see some kind of meaningful price recovery, at least above the industry cash cost, we’re very unlikely to see improvements in production.

Matt Ingraham: Okay, great. Thank you for the color. I’ll pass it on.

Ming Yang: Great. Thank you.

Operator: The next question comes from Alan Lau with Jefferies. Please go ahead.

Alan Lau: Thanks for taking my question. So, I would like to know about what is the breakdown on the impairment of $108 million, because — and also the inventory level at the end of 2Q, because it appears that the production volume is higher than sales volume for 20,000 metric tons. So, is 20,000 metric tons a fair assumption on the inventory level by end of 2Q? And if that is the case, an impairment of $108 million seems huge. So, we’d like to know the basis on that.

Ming Yang: Okay. So, the reality is, the $108 million is a reduction in not just finished goods, but also work-in-process inventory and raw material, which reduces our cost from our production cost, say, around $6.19 per kilogram to, really, the current market pricing, which is below RMB40 per kilogram. And about 60% of that is related to finished goods inventory. Okay. And then, looking at our inventory at the end of the quarter — give me a minute, let me just quickly look that up. Okay. Approximately 28,000 metric tons, okay? So, we built roughly 20,000 metric ton of inventory, like you said, during the quarter because of the market conditions and the weak demand. Although I think, starting in August, we’re starting to see reduction in inventory right now.

Alan Lau: Thank you. So, if 60% is finished goods, so it’s basically around, I guess, $60 million to $70 million of the impairment is related to the impairment on 28,000 tons, right? So that’s still like around $2 to $3 per kilogram. So, does this seem huge? Because the production cost — the spread between the ASP and the production cost appears to be only $1 per kilogram. So, I would like to know did I miss anything from this front.

Ming Yang: Okay. I think, realistically, if you look at pricing, especially, what it looks — where we have to reduce our inventory to, like somewhere in the range of, say, RMB37 to RMB38 per kilogram. So, that’s what — let me do a quick math.

Alan Lau: Okay. So, the ASP is RMB37 or RMB38, but your production cost is only at around RMB40-something. So, if the impairment…

Ming Yang: Right now, RMB45, right, RMB45 per kilogram…

Alan Lau: Yeah. So that’s around — yeah, so that’s around RMB12. And then — but if it’s 28,000 metric tons, then it’s still — at most, it should be like $300 million maybe. So, since the impairment amount…

Ming Yang: [indiscernible]. Well — and then, there’s also raw materials, right? And then, work-in-process inventory, that’s also being reduced.

Alan Lau: I see. So, maybe, we’ll move on to the guidance. So, I have noted that the production volume guidance on 3Q and second half has reduced significantly. So, would like to know, first of all, the thinking behind this, is this to preserve cash? And secondly, what do you see — like, the utilization rates of your peers, do they also cut their production volume as well?

Ming Yang: I would say, yes. So, for most of our peers, I think with the exception of maybe one — of the main one, I think most have reduced utilization significantly, I think, in light of the current market pricing environment. I think, certainly, the — I think in the current market condition, I think we have to balance, right, I think in the most economical way in terms of maintaining production while at the same time minimizing cash burn and cash loss. So, we do believe that the current utilization level that we have in — that we’re operating in, in light of pricing remains at below cash cost is the most prudent, I think also the most effective way of minimizing the cash burn on the company.

Alan Lau: So, there is effectively around 70% of utilization, right? So, will this impact the production cost or is okay — is fine?

Ming Yang: It’s actually, I would say, overall, very minimal impact on production cost. I think only RMB1 to RMB2, because almost 80% of our cost is what we call variable costs, which is electricity and energy and other consumables like steam and graphite and the silicon seed rod.

Alan Lau: Understood. So, regarding to the fixed deposit of an investment in — of RMB1.4 billion, so would like to know, how long is those investment and how liquid are those? So, basically, the question is related to buybacks, because I’d like to know the liquidity of the company on that front.

Ming Yang: Okay. Almost all of the fixed investment and term loans were purchased by the Xinjiang Daqo subsidiary, right? So, in terms of the U.S. ListCo and our cash balance, it’s — virtually all of it is in liquid savings account or money market funds. So — and then that $1.4 billion is primarily in either six months, I could call it, fixed term deposits with Chinese domestic banks or a higher interest savings product offered by the banks.

Alan Lau: I see. So…

Ming Yang: And those [maturity age] (ph) is within three months.

Alan Lau: Oh, within three months, right?

Ming Yang: Yes.

Alan Lau: I see. So, my last question is basically on the buyback. So the company has launched $100 million buyback program. So, I’d like to know if the company is going to continue on the buyback and what is the planning of the buyback. Like, which price do you think it’s appropriate or do you think the current stock price is to the level where you think the company will actually accelerate the buyback?

Anita Chu: Yeah. Thank you, Alan. So, in terms of the share repurchase program, so we are authorized in the amount of $100 million back in July. So, in terms — so we definitely think that our stock is undervalued, but in terms of the pace, I would say that it will be contingent upon the market conditions and we’ll be more opportunistic in terms of the repurchase.

Ming Yang: So, we’re going to look [opportunities] (ph) to repurchase as many shares as possible for the company to maximize the money that we spend in terms of its effectiveness.

Alan Lau: I see. And yes, you have explained, so the cash is already there in the U.S. level. So, probably, it’s going to still go ahead in this year, right?

Ming Yang: That’s our current assumption, yes.

Alan Lau: I see. Thank you. So, I’ll pass on. Thank you.

Ming Yang: Great. Thank you, Alan.

Operator: [Operator Instructions] The next question comes from Rajiv Chaudhri with Sunsara Capital. Please go ahead.

Rajiv Chaudhri: Good morning. My question — the first question relates to the fully-loaded cost that you will incur in Q3 and Q4. If you are reducing the utilization rate, shouldn’t that actually increase your fully-loaded costs relative to the fourth — relative to the third quarter?

Ming Yang: Well, I think, interesting, that has to do with the cost structure of polysilicon production, right? So, roughly 35% to 40% is electricity and then another 35% is silicon metal. And then, majority of other costs is actually mostly consumables like graphite, with the silicon seed rod and the packaging. So, if I look at what these we would call — you can call it variable costs, where we don’t produce, right? We don’t buy silicon metal, we don’t buy the consumables. So, these represent actually more than 80% of the cost, okay? The remaining 20%, approximately 13% is depreciation, right, which is the non-cash portion. So, yes, right, depreciation will — the overall depreciation expense will be aggregated over a smaller volume, but I think the overall impact is not that much, right, because it’s not a huge portion of our costs and while — in terms of — the rest is labor.

Labor, let me see, is roughly 6% of our cost. And then, we’re reducing labor cost by between 10% to 20%. We’re optimizing our staffing level, for example. So, I think the overall impact is actually not that significant as we maintain production, right, because we’re reducing production by what, maybe 30%, 35%, something like that relative to previous levels, yeah.

Rajiv Chaudhri: A second question is related to the difference between production and sales. So, you will produce 210,000 tons to 215 — 220,000 tons, but the sales are likely to be higher than that, right? I mean, if you expect inventories to get back to normal by the end of the year, then sales are likely to be, I don’t know, 240,000 tons to 250,000 tons? Is that the right way to look — think about it?

Ming Yang: I can only say we — well, that’s — you’re talking about the full year, right? But I think, realistically, in the first half, we did build inventory, so volume was less than production. And we expect, the second half, we will see more sales than production, right?

Rajiv Chaudhri: Right.

Ming Yang: But, again, it’s early, right? It’s only August. So, it really depends on how much more sales we can achieve relative to production, yeah.

Rajiv Chaudhri: I see. But for the year as a whole, you expect sales to be greater than production, right?

Ming Yang: It’s difficult to tell, to be honest. Difficult to tell. It’s really up to Q4 performance.

Rajiv Chaudhri: I see. Okay. And can you give us any specific examples of companies that are of competitors who are actually closing shop as distinct from just reducing their output right now?

Ming Yang: Well, I think one well-known case that happened recently is a company called Runyang, which I think they have a nameplate of over 100,000 metric tons. And that company was in financial crisis, where they had problems repaying their bank loans. And they have major issues repaying their suppliers and pay interest. So, our understanding is they’re being consolidated by Tongwei. And Tongwei is doing due diligence on them right now, yeah. So, I think they have significantly reduced production. And then, we know of two other cases where — we’re not going to say the companies’ name, but one new entrant actually built a 50,000 metric ton facility, actually, never even started that facility. That facility remains idle. It’s complete and idle.

And then, there’s another peer competitor, I think they’ve built — they’ve claimed they built approximately 100,000 metric tons to 200,000 metric tons of capacity, but we — our understanding is, the volume that they’re selling to the market is actually fairly trivial. So, those are the cases that we know of right now.

Rajiv Chaudhri: So, when you look at — I mean, when you look at the year as a whole, 2024 as a whole, do you think that with the sales that you will do, which will be, let’s say, around your total production levels, that you would have gained or lost market share in 2024?

Ming Yang: I think, at least based on the latest industry production, so even though we reduced utilization, I think we’re still maintaining market share. I think based on our current production level we’re roughly, say, 15%…

Rajiv Chaudhri: And…

Ming Yang: Approximately 15% of the market.

Rajiv Chaudhri: But your total output would be about 10% higher than last year or, I should say, maybe your total sales will be about 10% higher than last year, right? So, do you think that is roughly the growth rate of the market this year, 10%?

Ming Yang: Well, I think it really depends on, especially, Q4, because if you look at our production and sales volume in the first half, especially for Q1, it’s still relatively healthy. It’s really — Q2, it came down. And then, at this point, we’re expecting our Q3 sales volume and shipment to be above Q2. And then, Q4 is looking — at least for now is looking at a positive trend. So, I would say, if I look at industry statistics, I think it’s still expecting roughly 20% kind of improvement.

Rajiv Chaudhri: Okay.

Ming Yang: Maybe more than 20%…

Rajiv Chaudhri: Thank you.

Ming Yang: Yeah. Okay, thank you.

Rajiv Chaudhri: Okay. Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Anita Chu for any closing remarks.

Anita Chu: 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 have an awesome day. Goodbye.

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

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