LDK Solar Co. Ltd. Q1 2009 Earnings Call Transcript

May.21.09 | About: LDK Solar (LDK)

LDK Solar Co. Ltd. (NYSE:LDK)

Q1 2009 Earnings Call

May 21, 2009; 5:00 pm ET

Executives

Xiaofeng Peng - Chairman & Chief Executive Officer

Jack Lai - Chief Financial Officer

Nick Sarno - Senior VP of Manufacturing

Pia Kristiansen - Investor Relations of The Blueshirt Group

Analysts

Vishal Shah - Barclays Capital

Sunil Gupta - Morgan Stanley

Sanjay Shrestha - Lazard Capital Markets

Jesse Pichel - Piper Jaffray

Edwin Mok - Needham & Co.

Sam Dubinsky - Oppenheimer

Paul Leming - Soleil Securities

[Simran] - Cowan & Co.

Charles Yonts - CLSA

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to LDK Solar’s first quarter 2009 earnings conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

At this time I’d like to turn the conference over to Ms. Pia Kristiansen.

Pia Kristiansen

Good afternoon and thank you for joining us on today’s conference call to discuss LDK Solar’s first quarter 2009 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of LDK Solar’s website, www.ldksolar.com for 90 days. On today’s call are Xiaofeng Peng, Chairman and Chief Executive Officer; Jack Lai, Chief Financial Officer; and Nick Sarno, Senior VP of Manufacturing.

After the market closed in the U.S. today, LDK Solar issued a press release discussing results for its first quarter 2009. We also filed the press release and Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company’s website, as well as the SEC’s website or you can call The Blueshirt Group at 415-217-4961 and we will fax or e-mail you a copy.

We would like to remind you that during the course of this conference call, LDK Solar’s management team, may make projections or other forward-looking statements, regarding future events or the future financial performance of the company made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Although, LDK Solar believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

We refer you to the documents that LDK Solar files from time-to-time with the SEC, specifically the company’s most recent Form F-20 and any Form 6-K. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

Now I’d like to turn the call over to Mr. Jack Lai, Executive Vice President and CFO, to go over LDK Solar’s first quarter 2009 financial results. Jack.

Jack Lai

Thank you, Pia. Good afternoon and thank you for joining us to discuss LDK Solar’s first quarter 2009 financial results. Net sales for the first quarter were $283.3 million, down 33.6% sequentially from $426.6 million in the fourth quarter of 2008.

Total wafer shipments, including our processing service business, decreased to 206.0 megawatt in the first quarter from 254.3 megawatt in the fourth quarter. Wafer sales for the first quarter, which exclude the processing service business increased slightly to a 170.2 megawatt, from 167.6 megawatt in the fourth quarter of 2008.

The ASP per watt was $1.54, a decrease of $0.64 or approximately 29.4% from the prior quarter. During the first quarter, we experienced intense preview on all ASPs, resulting in this significant design from the fourth quarter.

Sales returned made in the first quarter of 2009 was $2.5 million, increase from approximately $1.2 million in the fourth quarter of 2008 and the sales return rate was maintained at approximately 1.0% compared to the prior quarter. OEM shipments were approximately 35.8 megawatt in the first quarter as compared to 86.7 megawatt in the fourth quarter of 2008.

By geography, revenue was 9.9% generated from China; 31.7% from Europe; 49.7% from Asia Pacific, excluding China and 8.7% from North America in the first quarter. Our top ten accounts in the first quarter accounted for 76.5% of our total revenues. Top three accounts totaled approximately 50.1%, while customers number four through 10, each averaged approximately 3.8% of our total revenues.

Gross margin during the first quarter of 2009 was 1.7%, up from negative 49.6% in the fourth quarter of 2008. We would like to remind you that during the course of the preparation of our 2008 annual report, we determined that a further write-down of approximately $87.5 million to our inventories and an additional provision for total recoveries of approximately $12.3 million for our prepayment to suppliers at December 31, 2008 are required to properly adjust previously announced preliminary unaudited financial results for the fourth quarter and fiscal year ended December 31, 2008.

In addition, our previously reported unaudited fourth quarter 2008 financial result have been revised to reflect an increase in interest expense from $8.3 million to $9.7 million in the fourth quarter of 2008, due to adoption and retroactive application of Financial Accounting Standards Board Staff Position Accounting Principles Board 14-1, FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion, Including Partial Cash Settlement. As a result of this, gross loss and loss from operations for the fourth quarter of fiscal year 2008 were adjusted accordingly.

Operating margin for the first quarter of 2009 was negative 5.7% compared to negative 59.0% in the fourth quarter of 2008. During the first quarter, we had a foreign currency exchange loss of $508,000, compared to a foreign currency exchange gain of $5.0 million in the fourth quarter of 2008. Also our government subsidies declined to $3.2 million in the first quarter from $5.4 million in the fourth quarter of 2008.

Net loss for the first quarter of 2009 was $22.5 million as compared to the net loss of $219 million in the fourth quarter of 2008. Loss per diluted ADS for the first quarter was $0.21, including the loss per diluted ADS of $2.5 in the fourth quarter of 2008. Total diluted ADS shares, excluding the interdilutive effect of convertible senior notes for the first quarter of 2009 was 180 million shares as compared to 109.1 million shares for the first quarter of 2008.

Operating expenses were $21.1 million in the first quarter of 2009, down from $40.2 million in the first quarter of 2008. First quarter operating loss was $16.1 million, compared to an operating loss of $251.6 million in the fourth quarter. Our share based compensation expenses were approximately $4.4 million in the first quarter. This share based compensation expenses are primarily linked to pre-IPO option grants, as well as to the build-out of our organization in anticipation of future growth.

We ended our first quarter with $184.4 million of cash and cash equivalents, $114.4 million of short term pledged bank deposits, $972.3 million of short term interest bearing bank borrowings, and $139.6 million of long term interest bearing bank borrowings. Our short term interest bearing bank borrowings increased in the first quarter, as we continue to invest in the construction of our polysilicon manufacturing facilities.

In April, we announced that we had secured RMB 200 million loan from China Development Bank and received approval for a RMB 1 billion credit line from the Agricultural Development Bank of China. Further improving the financial resources that we have available to us in an environment spread by tight credit market.

Capital expenditure were $274.4 million in the first quarter, of which $54.0 million was for our wafer manufacturing facilities and the $220.4 million was for all polysilicon plants, which include our second trend of the 15,000 metrics in polysilicon plants ahead of schedule, compared to our last updates.

Depreciation and amortization was $16.2 million for the quarter. We will control our CapEx to the minimum level. We’ll continue to watch this environment to ensure our future development is inline with the expansion.

Inventories decreased to $548.8 million as of March 31, from $616.9 million as of December 31. Our capacity was increased to 1.5 gigawatts in the first quarter. Our polysilicon inventory is comprised of raw material silicon inventory and inventory in transit. We continue to expect our average polysilicon costs, could be reduced over the next few quarters.

Prepayments to suppliers which stood at $133.7 million as of March 31 were up from $104.8 million as of December 31. Our advanced payment from customers was $709.3 million, down from $744 million in the fourth quarter of 2008, which represents a net decrease of $34.7 million. Prepayments to suppliers which stood at $173.7 million as of March 31 were up $104.8 million as of December 31.

As the global economic crisis continues, we continue to expect prepayment to suppliers and advance payment from customers to decline sequentially going forward, especially after we commenced our own polysilicon production.

The company head counted was 13,287 at end of the first quarter, compared to 14,130 at the end of the fourth quarter of 2008, a net decrease of 843. We will monitor our headcounts inline with capacity requirement for 2009. LDK Solar will continue its efforts to build a strong team; increase its R&D capability and enhance its infrastructure to support our future growth.

Now let me turn the call to Mr. Peng, our Chairman and Chief Executive Officer. Mr. Peng.

Xiaofeng Peng

Thank you, Jack. Thank you and again welcome to LDK Solar’s first quarter 2009 earnings conference call. We appreciate your interest and the support of LDK Solar. As expected, the operating environment remains very challenging during the first quarter, where we remained focused on positioning the company for long term success. We implemented a number of initiatives to manage the difficult near term conditions.

We continue to concentrate on monitoring capture spending, enhancing cost saving and advance our cash position in the first quarter. We adjusted our expansion plan in order to most effectively reduce near term capital expenditure outlays and to best align this decrease in demand seen industry wide. I would like to now discuss some of the highlights from the first quarter.

As Jack mentioned, we secured a loan for RMB 200 million from the China Development Bank and received approval for RMB 1 billion credit line from the Agricultural Development Bank of China in April. We replaced and enhanced our financial resources at a time where the credit remains retroactive and we believe the support from China reflected the continuous commitment to fostering growth within the local solar industry.

During the first quarter, we shipped 206 megawatt of wafers, which was an increase of 72.8% year-over-year. As expected, our annualized wafer capacity remains largely unchanged at 1.5 gigawatts at the end of this quarter. We will continue to closely monitor the demand environments and determine the timing for further expansion.

We were very pleased to announce the formation of our joint venture with Q-Cells, focusing on PV systems and market development in Europe and China. We believe this joint venture will be mutually beneficial, as we leverage our complementary core business model and regional market expertise. We intend to take advantage of value chain optimization and integrate cost reduction.

The first project at 41.5 megawatt PV power planted in Germany is underway and expected to come through in the second half of 2009. The project of this joint venture will utilize solar wafer from LDK Solar and solar cells from Q-Cells and we do not require additional working capital finance or out of funding from the two companies.

In the European market, we have recently expanded our presence of PV project in Italy, Greece and other countries. We are in the process of assembling a team to explore and develop the PV project in Europe. We have several projects under negotiations now. We continue to make progress on further enhancing our lean cost structure in May.

We expanded our in-house recycling system, commencing production in our freelance slow recovery facility, which utilized technology developed by LDK Solar. It is the second largest conference of our production costs after polysilicon, we are very pleased to expect a significant cost savings contribution from this facility once it becomes fully operational.

The Chinese government announced a subsidy program at the end of March for solar projects. This subsidy shows the Chinese government’s strong support for the solar industry. We believe China will start to begin a new solar application market. We have built a team applying for the solar project in Xinyu City, Jiangxi and other provinces now. To-date we have applied for 13 projects, with a total insulation capacity of more than 30 megawatts.

As we have previously discussed, in response to the challenging environment we have aggressively adjust our capacity expansion and capital spending plans, after extensive assessments of how the current economic conditions could impact near term market demands. We believe we are taking prudent steps to sustain our abilities and to position the company for future growth.

As per the continued challenge in this environment near term, we remain optimistic of our long term outlook for the solar industry. There are a number of global industry dynamics that we continue to be excited about and we are pleased with the recent progress we have made in expanding our business in new geographies.

I will now turn the call over to Nick Sarno, our Senior Vice President of Manufacturing. Nick.

Nick Sarno

Thank you, Mr. Peng and thank you to everyone for participating in today’s earnings call. I would now like to provide an update on the progress of LDK Solar’s current operations, including polysilicon plant construction and production updates and polysilicon supply and R&D efforts.

For our operations following a year of benchmark growth for LDK Solar, the current economic environment represents continued challenges for 2009. In light of these conditions, we have made adjustments to the focus and the strategy of our current operations and scale back our operations and expansion plans to best reflect current demand levels as we continue to focus on strengthening our leadership position through cost reduction activities and quality improvements.

We remain committed to implementing yield improving initiatives, to further reduce or eliminate production defects; our scrap, broken wafers, kerf loss. We recently expanded our in-house slurry recycling systems. With a new line commencing production in May, we look forward to efficiencies, that this expanded system will contribute once it is fully operational.

While our 180 microns thick wafers continues to be the bulk of our business, our diligent attention to the customer specific needs also remains a priority for LDK Solar and we continue and we are actively developing new processes and working on introducing new products to our customers. We recently sampled 170 micron wafers and look forward to the future opportunities to deliver further improvements over 180 micron wafers.

For our wafer expansion progress, as we announced during the last earnings call, we decided to hold our annualized wafer production capacity for the next several quarters to approximately 1.5 gigawatt. We will continue to monitor the market demand to determine the timing to lift this hold and engage on further wafer capacity expansion.

By curtailing our expansion plans, we have also lowered our CapEx overhead, which enables us to conservatively manage our cash usage during the downturn, while continuing to do our best to position LDK Solar for the long term growth as the market recovers.

Polysilicon plant production and construction update. Now for our 1,000 metric ton facility, as previously announced we began polysilicon production in our 1,000 metric ton plant during the first quarter. Poly production levels were low as we made additional adjustment to the production line during the first quarter and we expect to reach full production capacity of the initial 1,000 metric ton in mid-2009.

At the moment we are focusing on improving our production cost structure as we expand production levels. We continue to monitor market conditions and reconsider our current expansion plans an ongoing basis. For our 15,000-ton plant, our focus remains on the constructions and installation of the first 5,000-ton train. We have begun commissioning for the first train and are on track to achieve mechanical completion by the end of the second quarter of 2009.

As previously announced, we have delayed the construction schedule of the second and third 5,000-ton trains due to the challenging business environment; however, we expect the second train to reach mechanical completion by the end of the third quarter of 2009. We’ll continue to monitor the market demand and evaluate the appropriate timing to move forward with the installation of the remaining trains.

We are pleased with our continued progress from the construction of the first train. We have completed the installation of all 20 reactors in the first train, 10 converters have also been installed. Off gas recovery has been turned over to LDK and the TCS train one are being finalized. Commissioning has been completed for nitrogen, DI water, fire water, plant water, boiler and fuel oil systems.

For 2009 our forecast for combined production between our two poly plants remains between 2,000 and 3,000 metric tons of polysilicon. We will continue to revisit our 2009 targets quarterly, to ensure that they are reflective of the ongoing solar market dynamics and we look forward to providing you with updates on incremental progress we make.

Now on polysilicon supply, I would like now to provide an update on this item. Taking the current polysilicon market dynamics, overall economics environment and our forecast for internal poly production into consideration, we believe that we will benefit from a stabilization of the operation of operating variables and cost reduction as we move forward in 2009.

We are pleased to have commenced polysilicon production in our 1,000 metric ton poly plant and to have made significant process in constructing the first train of our 15,000-ton plant, but we do not expect in our polysilicon production to have a meaningful impact on our manufacturing costs until 2010. This is due to current availability and pricing on the market of silicon. We continue to receive additional polysilicon shipments from contracts signed in 2006, a considerably lower cost on current spot market pricing.

Now our R&D efforts continue to be at priority for LDK. These initiatives are an important component of our long term growth strategy. We continue to develop the next generation wafers with R&D efforts aimed at manufacturing thinner wafers, reducing kerf loss and expanding our lines of P type and N type mono wafers.

I would now like to take this opportunity to provide an update on the recent research and development achievement and to reiterate our key objectives for R&D in the near term. We have recently added the capability of computer simulation for crystal growth process and polysilicon CVD processes. We have also successfully produced Gallium arsenide [Dopietad] monocrystalline silicon wafers for customer evaluation during this quarter.

We are also pleased to report two of the R&D projects we have been developing, past the Jiangxi provincial project determination. One, is the patented recharge system, allowing us to increase the production throughput of the current DSS furnaces by more than 10%, and at the same time reducing the energy consumption by about 8%.

We have a new silicon nitride coating technology under development with preliminary results showing an improvement in coating performance for ingot production. In the first quarter we also submitted three new patent applications. In the near term we will continue to invest our resources on polysilicon research, new ingot development and quality improvements and continued collaboration with domestic equipment manufacturers in developing lower cost equipment.

Again, thank you for your support of LDK solar. I look forward to providing further updates on our operation and R&D efforts, and I will now turn the call back to Jack Lai. Jack.

Jack Lai

Thank you, Nick. Even the limited visibility and volatility in the PV market, projected revenue is quite challenging, therefore we have decided to only provide guidance on wafer shipment at this time. Based upon current business conditions, we expect our second quarter 2009 shipments to be in a range of 200 megawatt and 220 megawatt.

Now we will like to open the lines for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Vishal Shah - Barclays Capital.

Vishal Shah - Barclays Capital

Jack, I was hoping if you can help us understand the gross margin performance in the quarter. You took some additional write-down; I would have imagined that would have helped your gross margins, so maybe you can provide some color there. Secondly, on your outlook for polysilicon prices, how do you think prices are doing right now and what do you think prices will do in the second half? Thank you.

Jack Lai

Okay. First on the gross margin performance; inventory write-down was performed in the fourth quarter of 2008, so in the first quarter of 2009 it is a normal calculation of gross margin, which were about 1.7% in gross margin and of course that is very much caused by the ASP decline and that we have a low gross margin situation.

As far as the ASP is concerned, right now we are seeing the price somewhere between $1.10 to about $1.30 per watt. It is kind of ranging pretty wide because of certain market conditions. In the short-term, we are still looking at this low price range; however, maybe towards the end of the second quarter and beginning of the second half, as the market condition improves, we believe that the price was stabilized and maybe we’ll be coming back in the second half of the year.

Vishal Shah - Barclays Capital

What are your thoughts on polysilicon prices?

Jack Lai

On the polysilicon prices, we are also experiencing a wider range. At this moment, we are experiencing prices between 100 to 150. We see the price coming down to below 100, and we believe in the near term that the price will be somewhere below 100 levels, and still a pretty wide range at this moment.

Operator

Your next question comes from Sunil Gupta - Morgan Stanley

Sunil Gupta - Morgan Stanley

Jack, I just wanted to understand some of the items on your balance sheet such as receivables and also in terms of inventory and if I could start with perhaps just receivables. I see that they have gone up a lot, despite smaller revenue that you had in Q1. Is there a change in payment terms to your customers or were there any specific issues why receivables have gone up?

Second, on your inventory, could you help us understand the mix of your inventory in terms of how much is from raw materials, how much is finished goods, and within raw material how much is just polysilicon feedstock and other raw materials?

Jack Lai

Okay. On the receivable, because of certain market conditions, the market behavior already changed. I think last year we were very much in the status market, which of course to give open terms to our customers was not really a practice in 2008; however since December as the market turned and we’re now with certain market conditions, that our customers, they have been more challenging to get working capital than as discussed with us. So we decided to selectively provide open terms for some of our long term customers and that’s the reason that increase in the accounts receivable for the quarter.

Sunil Gupta - Morgan Stanley

Do you think these payment terms could continue for the rest of the year or would they revert back to the kind of terms that you were earlier seeing? How many days are you offering to these customers now?

Jack Lai

Well, at this moment our AR actually is sitting at about 180, which is roughly two months of operations, so we are close to a 55 days to 60 days of DSO.

Sunil Gupta - Morgan Stanley

Okay, and how about the inventory?

Jack Lai

The inventory is still primarily raw materials, still that the bulk of our inventory value. So, the majority still comes from raw material.

Sunil Gupta - Morgan Stanley

How many metric tons of raw material do you have right now in inventory?

Jack Lai

Normally we keep about 1,700 to 1,800 metric tons of raw materials in our warehouse or in transit.

Sunil Gupta - Morgan Stanley

My last follow-up question; in terms of your CapEx, particularly on the polysilicon plants, could you tell us to-date how much have you spent on your polysilicon plants and how much more do you need to spend this year and what kind of capacity will it give you as you exit 2009?

Jack Lai

Okay. At this moment we have 1,000 tons which is completed and as Nick mentioned that the first 5,000 on the 15,000 plant will be completing mechanical completion at the end of Q2, and the second 5,000 at this moment we are expecting to complete at the end of the third quarter.

So from this work schedule, exit 2009, we are looking at about 11,000 metric tons at the end of 2009. Most of the spending is already scheduled and have made payment already, so the dollar amount to complete the two trends or the 10,000 tons capacity should be relatively small.

Sunil Gupta - Morgan Stanley

Jack, what would be the total cumulative CapEx that you have spent on polysilicon by the time you reach your 11,000 ton capacity?

Jack Lai

Our total budget between the two poly plants is between $1.4 billion to $1.5 billion.

Operator

Your next question comes from Sanjay Shrestha - Lazard Capital Markets

Sanjay Shrestha - Lazard Capital Markets

Just a couple of quick questions guys. Kind of following-up on that inventory question, what is sort of the price of that raw material that makes up that inventory number at the end of the last quarter? What I’m trying to get at is, is there any risk to more inventory write-down, given what’s going on in the poly market?

Xiaofeng Peng

Well, we assess. The inventory value during the quarter and also of course in the end of 2008, we already considered in the current market price as well as the future price to be. So at this moment, based on the current market price range, that’s between the $1.10 to $1.30, we don’t feel that we have additional needs to write-down any more inventory value.

Sanjay Shrestha - Lazard Capital Markets

One other thing guys; so in terms of this jump in your short term bank borrowings and current installments of long term bank borrowings and current installments or long term bank borrowings from 666 to 972 from year end to Q1 ’09. Can you talk about that a bit? What was that jump related to; and two with your cash position being at 184, how do you guys sort of plan to kind of address that out, sort of that big portion of that current debt?

Nick Sarno

There are several things that we have been working on. Number one of course is to obtain long term financing to replace the short term borrowings and also, we are working with our commercial banks to replace the somewhat short term debt of the longer term facilities, so that we can better structure our financial condition.

In addition that the company is looking at the current capital markets and if the market condition improves, then we may go out to raise additional funding to restructure the financial position that increased equity and reduced the liability accordingly. We are at this moment still researching, but we don’t really have a decision at this moment of when we are going to do this capital funding?

Sanjay Shrestha - Lazard Capital Markets

I apologize if you guys talked about this, but did you guys give us what was the wafer ASP during Q1?

Jack Lai

It was $1.54 in Q1. By the way, that seems that LDK is different from all peers, because we have maintained long term contract with our customers and our customers, they are top of 20 sale and margin methods, with very good name brand and we believe their price also is better than average and our ASP actually is slightly above the market average at this moment.

Sanjay Shrestha - Lazard Capital Markets

So then when we sort of try to put two and two together and take into consideration, when it appears the last competitors talking about wafer ASP getting down to $1 by the end of the year, how should we think about that implication to you guys? Where do you see your wafer ASPs by the end of the year?

Jack Lai

Well certainly we are part of the market. The market trend is going down, and we cannot be avoided from this kind of situation. However again, because of the long term contract we have signed with our customers, we have certain price already set up in the contract.

At the same time, of course we are working with our customers very closely and we do want our customer to offer additional wafers out of contract price, which of course are much lower than the market to help every time, but the average price is somehow still better than overall market average.

So it’s between the contract price, which of course is higher than the market. We do sweeten our deals with our customers to provide some lower price to help them to stay competitive, but we do believe that we are above the market average for the time being.

Sanjay Shrestha - Lazard Capital Markets

One last question then guys, two parts. I think, if my memory serves me right, you guys talked about actually doubling the capacity out of that 1,000 metric ton poly plant if you would and two, given this environment, why not basically make a decision that might as well postpone the additional 5,000 metric ton ramp and come back and revisit how things play out in 2010? Can’t you do that and maybe even that become an incremental way of preserving cash right now?

Nick Sarno

I think Sanjay, this is Nick and as we mentioned before, we already spent a considerable amount money and as a management group we believe it doesn’t make a lot of sense not to continue at this point, at least with the development and startup portion of this poly plant and our plan right now is to continue to do that.

Sanjay Shrestha - Lazard Capital Markets

Okay and what about the 2,000 metric ton versus 1,000 metric ton for the smaller one that you guys talked about?

Nick Sarno

Our objective in both plants is to set the plants up, so that we are cost competitive in being able to produce silicon in the $30 plus range. Of course in order to get there, we must include and install the necessary equipment in the poly plants and move forward with the cost reduction activities that will eventually, we hope in the very short term, move us from being cost competitive versus incumbents to producing polysilicon. So even at this kind of market conditions, it’s possible to produce polysilicon at lower than what the market price is.

Operator

Your next question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

When is your annual audited report going to be made available?

Jack Lai

It’s on Friday your time, so which is tomorrow.

Jesse Pichel - Piper Jaffray

Regarding the Q4 adjustment, can you tell us what the poly basis price was before and after the $88 million revision?

Jack Lai

The price is somewhere in the mid 100 range.

Jesse Pichel - Piper Jaffray

Okay and how much poly inventory do you have now? I’m sorry if I missed that.

Jack Lai

We normally maintain in the range of 1700 to 1800 metric tons in the raw material inventory.

Jesse Pichel - Piper Jaffray

Your G&A was reduced by 50%, did you have layoffs there or was it just becoming more efficient?

Jack Lai

The difference for the quarter-over-quarter difference was the provision for prepayments and some other expenses that reduced during the quarter. We do not have a layoff at this moment.

Jesse Pichel - Piper Jaffray

Are there any covenants associated with the RMB 200 million loan or the RMB 1 billion credit line?

Jack Lai

There are certain covenants that we are in compliance of and we are reviewing also in compliance with the bankers.

Jesse Pichel - Piper Jaffray

Will those covenants be published in your annual report?

Jack Lai

Yes.

Jesse Pichel - Piper Jaffray

Okay and for Nick. Nick, the last photograph on your website is from January 14, and I was just wondering, do you intend to keep the photographs updated or made available?

Nick Sarno

Yes Jesse, we’ll issue one in the coming days here. We continue to take photographs of course and we will make them available to you.

Jesse Pichel - Piper Jaffray

Jack, if you could bear with this question for just a second. So if your ASP was $1.54, and you were basically breakeven, so let’s say your costs were 1.50 and we know your non-silicon costs right, they have been running around $0.30 to $0.40, that means your poly price at 6 grams a watt, 6.5 grams a watt is something like mid 100s, which you seem to validate there.

Now you’re going to have ASPs go down a little bit, even though you can keep a premium, but what’s the outlook there for the poly price? Do you have to continue to write-down that inventory from 1.70 now to the low $100 level in order to maintain a breakeven gross margin? Am I thinking about that the right way or?

Jack Lai

At this moment, as you know the market price is probably somewhere below 100 and we are getting the new purchase at such a level. Based on the accounting method that we have, we believe that in the next few quarters, that the average cost of all polysilicon will continue to drop.

Jesse Pichel - Piper Jaffray

So, we can expect to write-off about $50 a kilo, times the, call it 1700 metric tons that’s in inventory? Is that the way to think about it?

Jack Lai

Well, write-down is already assessed and completed in Q4 of 2008. At this moment, at a current price range of $1.10 to $1.30, we do not expect to any further write-downs based on the current market price.

Jesse Pichel - Piper Jaffray

But you said that the cost in inventory was mid 100s right. So $0.15 a gram, lets just say times 6.5 grams is $0.97 just in poly, so how can there not be another write-down?

Jack Lai

Keep in mind that our price in Q1 was $1.54. So, if you based on your calculation, that even at say $100 cost for us will be somewhere $1.10, $1.20, which will make a very small gross margin, which exactly is the situation that we are facing today. So you’re right; our cost is very close to the ASP at this moment, hence we are talking about low single-digits gross margin until the market condition improves.

Operator

Your next question comes from Edwin Mok - Needham & Co.

Edwin Mok - Needham & Co.

On the G&A line, did you have any provision in the first quarter and how do you look at it in the second quarter?

Jack Lai

We review and we didn’t have provisions in the first quarter. In the second quarter of course we have continued to review and at a normal accounting process that we have to go through each of our GL accounts and review of course.

Edwin Mok - Needham & Co.

Then just kind of circling back on that inventory question, maybe I got confused a little bit. Are you saying that right now your inventory costs are around $100, because you have been buying below 100 and average is down to that level? Is that how you look at it and that’s why you don’t feel like you have to write-down any inventory?

Jack Lai

Again, at the end of Q1 we were close to meeting 100 and right now we are getting probably 100 or below. So once we go through the quarter that we probably average closer to 100, maybe $100, $110, at this moment I don’t have the number, but will be close to $100 rather than close to 150 for this quarter. Still based on the current market price, that still suggests that the gross margin will be somehow limited.

Edwin Mok - Needham & Co.

A question for you, Nick; actually I got a two-part question. First as you mentioned, I think on the last call you talked about lowering conversion costs and this time you talked about kind of slurry development there. Are you still talking conversion costs to go down to the $0.05 range that you talked about on the last call?

Nick Sarno

Absolutely, the current market environment has meant that of course we’re not exactly at full capacity to take advantage of our economies of scale, but again with the slurry that we just discussed, our own in-house slurry will contribute significantly to that, in addition to other projects that we have going right now with thinner wafers and focus on primarily production losses. We’re still on target I believe and must go down to that level.

Edwin Mok - Needham & Co.

Great and then one more follow-up question and that’s regarding your joint venture with Q-cell. I was just wondering, you guys actually consolidated that number into your financial once you started shipping on that. Second thing is, I think Xiaofeng talked about that you guys have applied for a 30 megawatts of opportunity in China, do you expect to see that recognize that revenue this year and do you expect more revenue to come in the second half of this year?

Xiaofeng Peng

The first question on the JV; JV is relatively new and just started very late in Q1. So far we don’t really have any financials yet, but do have a 51% of ownership, and so we do expect that will be consolidated to our financial reports.

For China we have signed more than 30 megawatts already and some more projects will commence very shortly or contribute some revenue to 2009 and we believe in the next two years that the China based revenue, based on the project available and with the project we’re applying, we believe in the next two years we’ll make a big contribution to our revenue base.

Edwin Mok - Needham & Co.

Also, are you waiting for the result of the first round application to come out? Is that what you’re waiting for right now?

Xiaofeng Peng

Yes. We have submitted many, many proposals and first one will come back and the second one I think is in the process of applying.

Operator

Your next question comes from Sam Dubinsky – Oppenheimer.

Sam Dubinsky - Oppenheimer

What makes you feel so comfortable you can sell in a $1.10 to $1.30 range this year? It seems like some of your competitors are already selling well below $1 per watt and they’ve already written down inventory to much lower levels, maybe in the $80 to $90? Then I have just a follow-up.

Jack Lai

Yes. If you see, we still have large long term contracts pending with our customers, Take or Pay contracts and most of our customer is the top 20 solar sale manufacturers and they are leading the company in the industry. So most of our customers, they order the contract and of course we have very strong relations, and our product has a very strong quality and strong performance. They also qualify our wafer for the last three years. So, we should have a premium for them and most of our peers in the current environment.

Sam Dubinsky - Oppenheimer

Assuming that the macro stays a bit sluggish, when we look out in 2010, are these Take or Pay contracts mean pricing just set this year or is it negotiated per year? What I’m trying to get at is, at some point should we think of a wafer pricing as a sub $0.80 product per watt or a sub $0.90? How should we think about that going forward longer term?

Jack Lai

For this Take or Pay contract there are different conditions. Some Take or Pay contracts, the price is on wafer, some Take or Pay contracts, the price is on the polysilicon and have a mechanical coverage in the polysilicon to the wafer price. So there are different contract. Most of the contracts get priced on wafer, there’s a fixed price on the wafer price.

Sam Dubinsky - Oppenheimer

Now, the GT Solar deal you announced earlier is that totaling or is that megawatt or is that a straight wafer shipment?

Nick Sarno

We don’t disclose specific contracts. In GT Solar we have a contract of course, but every customer has different conditions, case-by-case.

Sam Dubinsky - Oppenheimer

I guess, how much totaling megawatts should we think of this year?

Jack Lai

Every quarter is different. So if you see, normally we pay about 15%, roughly 15% of our capacity.

Sam Dubinsky - Oppenheimer

Okay and I’m sorry, I got on the call a little late, did you discuss your cost structure for polysilicon? What do you expect that the cost per watt to be or cost per kilogram for poly out of the plant this year. It is still in the 10%?

Nick Sarno

As we said in the past, I think it’s a very difficult number to give out, simply because this year I expect that we’re in the start-up phase. Start-up phase I’m expecting polysilicon to be in the $80 region plus of course and our objective has got to be to move this number down to the design basis of the plant, which is $30 plus range. So this year I’m expecting if you will in the high $80 range for polysilicon production.

Sam Dubinsky - Oppenheimer

And if for whatever reason poly production proves difficult and you can’t get it below your targets or to your targets, are there any strategic alternatives? It seems like a lot of people have had many years, perhaps some difficulty trying to get the costs down in poly. I’m just trying to figure out, what you do in a macro like this where poly pricing is just extremely low?

Nick Sarno

Well, we know what our incumbent competition does and we understand that we’ve got to be at their level eventually in the short term as well, but this is one of reasons we’ve designed and we built the poly plant that we have built. It’s to make sure that we’re able to get down there at those levels technically and in addition most people that have visited our plant and met some of the engineers that we have hired with a lot of experience. So, we hope a combination of those two things will quickly get us down to levels that we can be competitive in polysilicon, in markets like this.

Operator

Your next question comes from Paul Leming - Soleil Securities.

Paul Leming - Soleil Securities

If I could just follow-up on that last question on your production costs on polysilicon, my presumption is when you talk about even beginning at a high $80 cost, that that’s a fully loaded cost, that depreciation is in there. Is that assumption correct?

Nick Sarno

That’s correct, Paul.

Paul Leming - Soleil Securities

I guess the thing, I kind of would like to try and get at is that depreciation is a sunk cost, you’ve already spent the money. Could you talk a little bit about in fact what you expect you’re true variable cost of production to be when you start the poly plant up and how you see variable cost declining overtime? Do you think you can get variable costs down pretty rapidly or is that even going to be a six, nine, twelve month process?

Nick Sarno

As I mentioned in the call here, we have already all the reactors are in place. It’s not as if we were to expect reactors later on. So they’ve already been purchased and they are replaced already. I think that we need a period of time where we got to stabilize the process. Polysilicon is going to be extremely difficult to begin with, we understand that, but we believe we can get that process down fairly quickly and start producing polysilicon at least at the level that we’re getting on the market right now, very quickly.

Paul Leming - Soleil Securities

In terms of variable costs?

Nick Sarno

Also in terms of variable costs, yes.

Paul Leming - Soleil Securities

Second question I wanted to touch on, actually for Jack, what will capital spending be for the full year 2009?

Jack Lai

Well for 2009, as you know, on the wafer facility side that we have currently 1.5 gigawatt, based on our current running rate, that’s probably between 200 megawatts to 300 megawatt. So we should have sufficient wafer capacity to run based on the current demand situation.

As far as the polysilicon trend as Nick mentioned, we focused on the first 5,000 trend and the second 5,000 trend is almost completed and will be probably just a quarter away to get everything ready. So the spending to touch up, to finishing the 10,000 and 15,000 facility, we’ve not spent too much of money as we spoke in the forecast.

Paul Leming - Soleil Securities

So, if I understood that answer right, you’re talking about very little additional spending on wafering facilities beyond what was spent in the first quarter and then a fairly minimal amount to get trained to mechanical completion. Rounded off, you spent $275 million in the first quarter. Is it possible that capital spending for the entire year is as low as $600 million?

Jack Lai

We believe so, yes.

Paul Leming - Soleil Securities

Could it be as low as $500 million?

Jack Lai

Because when we’re first trending, most of the first two trends is already signed and purchased. So relatively we are using some other part to do the completion. So the major equipment such as reactors, converters, they were purchased already since we announced the project, so the dollar amount will finish. I think we spent probably already $1.2 billion, $1.3 billion already for both two trends and to complete that, I will think that will be in the range you just mentioned.

Paul Leming - Soleil Securities

So, somewhere between $500 million and $600 million for all of 2009 is a reasonable guesstimate at this point?

Jack Lai

We believe that it’s going to be under that control, yes.

Operator

Your next question comes from Simran - Cowen & Co.

Simran – Cowan & Co.

This is Simran [Inaudible] for Raj Seth. Jack, could I know the cash flow from operations for the quarter?

Jack Lai

I’m sorry. Would you please repeat the question again?

Simran – Cowan & Co.

Could I have the cash flow from operations figure for your first quarter?

Jack Lai

From operations was negative $75 million.

Simran – Cowan & Co.

I had a question on your SG&A run rate and I know that you didn’t have any provisions for the quarter, but it seems to be up from Q4. So, are you sort of expecting like an $18 million to $19 million run rate in SG&A for the rest of the year?

Jack Lai

Current run rate probably is in that range.

Simran – Cowan & Co.

And you expect that going forward?

Jack Lai

At this moment, we are only enhancing our organization to focus on the start of poly plant. At the same time that we are solidifying our current wafer manufacturing, without adding anymore personnel in the current operations. So the only people we are hiring actually in the two portions; one, of course to have the smooth start operation for Nick’s poly plant, and also we are enhancing our PV project team for Europe and also in China.

Because of the new business opportunities, we are hiring just for low business development people and also project managed people, project financing people and of course to do that our construction and also do subcontracting. So those are the limited people we are hiring to develop more revenue for the company or to have the poly plant to be operational for the time being.

Simran – Cowan & Co.

Okay and I just wanted to find out if my thinking, sort of the range in which we are assuming conversion costs and your grams per watt is engrained, are you still kind of running at $0.30 conversion cost this quarter and about 7 grams per watt? Do you expect that changing this year with the work on technology that you’re doing?

Jack Lai

In the long run, of course like Nick said we’re improving our conversion cost there. However at this present time, that’s based on the capacity we have and based on utilization that we have, at this movement, especially in the Q1 that such cost is slightly higher than average, because of the running level of the facilities.

Simran – Cowan & Co.

Okay, but your grams per watt is still running close to 7 grams?

Jack Lai

Yes, that’s still a good estimate for the operation.

Operator

Your first question comes from Charles Yonts - CLSA.

Charles Yonts - CLSA

Could you just walk us through how the operations in your JV with Q-Cells will work in terms of revenue recognition, in terms of actual cash flow and sort of how it will look on your balance sheet? Thank you.

Jack Lai

Well for the JV, we do own 51% and first of all that we supply wafers to the JV and of course that will first generate sub revenue in terms of selling the wafers through the PV systems. Since we own 51%, so with the JV after the financial report, we will get 51% of the JV net income as LDK’s profit from JV.

Charles Yonts - CLSA

Right and for the JV then, could you give us maybe a target IRR or how will the JV evaluate projects?

Xiaofeng Peng

This IRR even now we have not depended on any funding. If we can successful get a project funding, the significant change and also our target is not really to keep the project. When we take a project, we are trying to sub-set in the project.

Operator

Thank you and at this time, I’d like to turn it back to management for any closing remarks.

Xiaofeng Peng

Yes, thank you to everyone for joining us today to discuss our first quarter 2009 results. We look forward to providing another update on our next earning calls and hope to see many of you when we present at upcoming investor conferences and our road shows. When you are traveling to our China, Silicon Valley, please do not hesitate to contact for a visit to LDK Solar. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, if you’d like to listen to a replay of today’s conference, please dial 1800-406-7325 or 303-590-3030 using the access code of 4069162 followed by the pound key. This does conclude the LDK Solar’s first quarter 2009 earnings conference call. Thank you very much for your participation and for using ACT Conferencing. You may now disconnect.

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