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LDK Solar Co., Ltd. (NYSE:LDK)

Q1 2013 Results Earnings Call

June 11, 2013 8:00 AM ET

Executives

Ellen Davis - The Blueshirt Group, IR

Xiaofeng Peng - Chairman

Sam Tong - President and CEO

Jack Lai - Chief Financial Officer

Dr. Yue Peng Wan - Chief Technology Officer

Analysts

Edwin Mok - Needham & Company

Larry Ge - D.E. Shaw

Paul Strigler - Esplanade

Nitesh Joshi - Barclays

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the LDK Solar Company First Quarter 2013 Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for question. (Operator Instructions)

This conference is being recorded today, June 11, 2013. I would now like to turn the conference over to Ellen Davis with The Blueshirt Group. Please go ahead, ma’am.

Ellen Davis

Good morning. And thank you for joining us on today’s conference call to discuss LDK Solar’s first quarter 2013 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section at LDK Solar’s website at www.ldksolar.com for 90 days.

On today’s call are Xiaofeng Peng, Chairman of LDK Solar; Sam Tong, President and Chief Executive Officer; Jack Lai, Chief Financial Officer; and Dr. Yue Peng Wan, Chief Technology Officer.

Earlier today, LDK Solar issued a press release discussing the results for its first quarter 2013. We also filed the press release on 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.

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 20-F and any Form 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

And now, I’d like to turn the call over to Mr. Xiaofeng Peng, Chairman of LDK Solar to go over LDK Solar’s business update for the first quarter. Chairman Peng, please go ahead.

Xiaofeng Peng

In the first quarter opening environment for the solar industry remained challenging. We began to see some signs of stabilization of ASP, the rate of decline in ASP slowly from previous quarter across our production categories. Revenue was within our guided range for the first quarter.

While we experienced some improvements, our business continue to reflect the negative effects of industry oversupply and our results were again impacted by inventory write-down and reduced margins for the period as reflected in our ASPs.

We are beginning to see early signs that industry consolidation is positive affecting the supply/demand imbalance. We are cautiously optimistic and we will continue navigating the current unstable market environment by streamlining our manufacturing operation, reducing production costs and improving utilization.

We are undertaking a number of initiatives forecast on the restructuring of our business. We are working closely with our stakeholders under relevant government agencies to negotiate solutions.

Furthermore, we have remained committed to improving our cost structure by drawing down production cost, tightening operating expenses and adapting our overall business to evolving demand environment to position LDK Solar for long-term growth.

We are pleased to announce that our shareholders approved our issuers on the share of 25 million of our ordinary shares to Fulai Investments Limited. We look forward to continue working together with Fulai Investments as one of our largest shareholders and we believe that their investment in LDK Solar is related to our long-term growth strategy.

Our collaboration with Heng Rui Xin, our second largest shareholder has been very productive in last seven months. We are cooperating via marketing sales activities as well as manufacturing programs.

The LDK management team is fully engaged in strengthening our operations and tightening our cash flow management by seeking strategic equity investors to optimize our share structure and increase our capital position to lower our debt equity ratio. Working with bankers on strategy to bring in more fresh capital to meet our working capital needs.

Working closely with our customer to resolve the challenge around long-term supply agreement, minimizing capital expenditure to only spend on manufacturing process improvement projects, expediting the consumption of our inventory on hand and sale of completed PV project in order to generate cash flows and controlling and reducing and operating expenses on ongoing basis.

Now, let me turn the call to Sam Tong, our President and the Chief Executive Officer.

Sam Tong

Thank you, Chairman Peng. I will provide an update on LDK Solar business and operations in the first quarter as well as discuss our operation strategy for 2013. We generated US$104.3 million in revenue with a negative 57% gross margin.

In addition to the first quarter historically been a softer quarter in China, our financial performance was also affected by lowering utilization of manufacturing capacity, inventory write-downs and the financial expense impact. Market challenges include transitions in traditional feed-in-tariff markets and PV project executing delays due to permits and subsidies from our customers.

I would like to provide some color on some of the key markets and regions. While there still remains a great deal of regulatory uncertainty in New York, we believe that China continues to represent strongest global growth opportunity for us. Additionally, we believe that South East, Africa, India and U.S. are amongst several emerging markets with additional growth potential.

We recently run out a 63 megawatts module supply contract with leading PV project developer in Thailand which is a testament to the continued demand of solar modules. We continue to believe that China will see improved demand in the near term with China’s improving market policies.

Our strong presence in China has long been a competitive advantage and has advanced our effort to expand our PV project to our point of business. In May, we spend a 500 megawatt wafers supply contract with China’s Realforce Power Company. We expect to see continued growth of opportunities throughout China market this year and the years to come.

Turning to operations, we are focused on delivering higher quality and higher efficient wafers for our customers. Over the past year and half, we provided update on the new generation of LDK M2 high efficient wafers. We have started promoting our third generation M3 wafers to customers who need primarily efficiency product.

We have received a positive feedback from our major customers and increased the manufacturing capacity of M2 wafers and M3 wafers to almost 100% of our total wafer production.

Despite of the challenged market situations our wafer shipment increased by 30% from 184.3 megawatts in the first quarter of 2012 to 240 megawatts in the first quarter of 2013. Meanwhile, we have substantially reduced our wafer processing costs to a historic low level.

We expect that our wafer shipment will continue to grow in the coming quarters. We will also continue to work the loss we are going to reduce our wafer converting cost in the next few quarters. Last month at SNEC, we announced our new generation M4 high-efficiency wafers and we are planning market promotion in the next few quarters.

As reported in last quarter’s conference call, we have substantially reduced our solar cell and solar module production volume in the first quarter of 2013 because of impact of anti-dumping issues from the United States and the continued regulatory uncertainty in Europe.

We have also disposed our cell and module production facility located in Hefei City, Anhui Province as part of our business reconstructing plan. Despite of this negative impact, we anticipate our module shipment volume will increase in the next few quarters because of the increase demand from China and other developing markets. We will focus on production of new generation high-efficiency modules to enhance our profitability and make our product more competitive.

During the past several years, we have been developing our photovoltaic systems or PV system business all over the world. We currently operate our PV system business through [SBI] in North America, FTT in Europe and our China-based EPT entities.

Going forward, we will continue to expand our PV system business by integrating the resources our strategic partners and customers. We’ll provide more color on our PV system business in next few quarters.

During the first quarter of 2013, our polysilicon production remained temporarily suspended due to the installation of hydrochlorination systems to achieve future low production cost.

In summary, while the business environment remains tough, our management team is working diligently to build leaner and strong operations. Notwithstanding the current industries to its conditions, we are encouraged through success of improve demand of our product in key market. We continue to believe there is still a substantial market opportunity to address global energy need with solar power.

I will now turn the call over to Jack Lai, our Chief Financial Officer, to discuss financial results from -- for the first quarter. Jack, please.

Jack Lai

Thank you, Sam. Good morning. And thank you for joining us to discuss LDK Solar’s first quarter 2013 results. Net sales for the first quarter were $104.3 million from 23.2% from $135.9 million in the first quarter.

Wafer sales increased to $54.4 million from $45.6 million. Cell and module sales decreased to $19.2 million from $40.4 million. Polysilicon sales increased to $1.6 million from $55,000 last quarter.

By geography, net sales in the first quarter was 34.8% generated from China, 33.1% from Asia-Pacific excluding China, 31.1% from Europe and 1.0% from North America. Our top 10 accounts in the first quarter accounted for 56.5% of total revenues, with the top three accounts combined accounting for 28.5%.

Wafer shipment increased to 240 megawatt from 184.7 megawatt in the fourth quarter. The average selling price for wafers was $0.23 per watt in the first quarter down from $0.25 last quarter.

Cell and module shipments were 31.4 megawatt in the first quarter, down from 69.1 megawatt in the fourth quarter. The average selling price for modules was $0.69 per watt in the first quarter.

During the first quarter, LDK Solar had an inventory write-down of $15.1 million due to continuous weakness in market price for solar products caused by industry-wide overcapacity and intense competition. As a result, gross margin and operating results for the first quarter were negatively impacted.

Gross margin in the first quarter was negative 57% compared to negative 71.4% in the fourth quarter. Our gross margin for our wafer business in the first quarter was negative 16.5%, up from negative 61.5% in the fourth quarter. Gross margin for our cell and module business increased to negative 63.6% in the first quarter from negative 97.6% in the fourth quarter.

Overall, the positive impact to our gross margin for our wafer business in the first quarter was primarily attributed to 32% decrease in our wafer processing cost and an 8% decrease in our average cost of polysilicon consumed.

Operating expenses was $33.7 million in the first quarter, down from $326.5 million in the fourth quarter. Loss from operations for the first quarter of fiscal 2013 was $93.2 million, compared to loss from operations of $423.5 million for the fourth quarter. The significant decrease in operating expenses was due to various impairment losses and provisions that were recorded in the fourth quarter of 2012.

Our share-based compensation expenses were approximately $0.8 million in the first quarter of 2013. Operating margin in the first quarter was negative 89.4% versus negative 311.7% in the fourth quarter.

Net loss available to our shareholders for the first quarter was $187.1 million and loss per diluted ADS was $1.21, and approximately 155.1 million shares were used in computing the fully diluted EPS.

Depreciation and amortization was $58 -- $59.8 million for the first quarter. Capital expenditures were $6.6 million in the first quarter, which mainly includes $4.5 million for wafers. Going forward, we anticipate CapEx for the second quarter of 2013 will continue to be relatively low.

Our headcount was 8,168 at the end of March 2013, a reduction of 1,677 compared to 9,845 at the end of the fourth quarter. Facing the highly competitive solar market, we implemented strategies to optimize our organizational structure, increase our productivity, enhance production management and align our production plan and labor requirement which result in increase of productivity and operational efficiency. We have been rightsizing our production output in order to build a sustainable capacity, with a responsive scale to match our customers demand.

Now, let’s turn to the balance sheet. We ended the first quarter with $174.1 million in cash and cash equivalents, and $168.4 million in short-term pledged bank deposits. Inventories decreased to $230.2 million from $270.8 million in the fourth quarter of 2012.

Our turnover days or our accounts receivable decreased to 140 days and the payables increased to 163 days. We have sold one PV project in the first quarter of 2013. We expect the remaining several PV project in the final stage of completion or be sold in the next two quarters. Our polysilicon inventory at the end of the first quarter was approximately 328 metric ton at an average cost of approximately $16.2 per kilogram.

Total interest bearing borrowings were approximately $2.9 billion at the end of the quarter, including approximately $2.8 billion of short-term borrowings and $109.8 million of long-term borrowings.

As we announced last quarter, due to a temporary cash flow shortage, LDK Solar was not able to make full payment to each quarters of its 4.75% convertible senior notes in 2013 with an aggregate principal amount of approximately $23.8 million plus interest, otherwise due at a payable on their maturity date of April 15, 2013.

LDK Solar has, as of today, privately and individually negotiated with the holders of such convertible notes in the aggregate principal amount of approximately $21.7 million and reach settlement with them till the maturity date through a partial payment in cash and effectively a loan facility to postpone the repayment of the remaining indebtedness. We will continue to work with our holders to settle the remaining $2.1 million.

Now, let me turn the call to Dr. Wan, our Chief Technology Officer, to provide you with an R&D update. Dr. Wan, please.

Dr. Yue Peng Wan

Thank you, Jack. I would like to provide an update on our research and development programs. The development of high-efficiency multicrystalline silicon wafers has reached a new milestone.

The new generation of wafers which is the M4 wafers according to our technology roadmap has been successfully developed in our R&D facility with average cell conversion efficiency up more than 0.2% to 0.3% comparing to our new generation of M3 wafers. Further development is being carried out on the reduction of the process costs and on the transfer and the implementation of this new technology into a mass production.

Our optimization of module product has led to a new series of modules with the reduction of material cost, the packaging and the shipping cost, and the increase of module conversion efficiency. This new series of products will be launched at upcoming Intersolar Europe in Munich.

Our R&D center received RMB1.1 million in grants from the government in this quarter. During the first quarter four finance were granted and eight finance were applied for.

I will now turn the call back over to Jack.

Jack Lai

Thank you, Dr. Wan. Based upon current business conditions, we are only providing outlook for the second quarter. For second quarter of fiscal year 2013, LDK Solar estimates its revenue to be in the range of $100 million to $150 million, wafer shipment between 250 megawatts and 300 megawatts, cell and module shipment between 30 megawatts and 40 megawatts.

And now we would like to turn the call to the operator to open up the lines for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the line of Edwin Mok from Needham & Company. Please go ahead.

Edwin Mok - Needham & Company

Hi. Thanks for taking my question. So, first question is, it sounds that your wafer price has come down this quarter sequentially from last quarter, but your wafer margin improved? Can you explain what happened there? Did you improve your cost or what happened there?

Sam Tong

Actually it was turbulence of the market. Actually the pricing has not changed, but because of our different combination of multi wafers and also mono wafers that exposed its average price ASP and also because of cost to cut progress we have originally decreased our processing cost and which allow us to provide our customers with more competitive advantage.

Edwin Mok - Needham & Company

What was your wafer production cost this quarter and if you can help me with cell and module production cost?

Sam Tong

Can you say it again?

Edwin Mok - Needham & Company

What was your variable cost of producing wafer this quarter and then what was your variable cost for module and cell?

Sam Tong

We are not exposing the detail of the cost but our cost has been significantly reduced during the last few months.

Edwin Mok - Needham & Company

Okay. And then I think on the prepared remark, Jack mentioned that you guys sold a PV project. How big was that project and I think you also mentioned that you guys have a few project that you guys are in the process of trying to sell, right. How big are those projects and/or I think, can tell valuable size it would be helpful? Thank you.

Jack Lai

Yeah. The project we sold, revenue was about $12 million in the first quarter and we have a couple of projects that is being presenting offers, we are receiving offers that we expect will be around $20 million an inch for our two projects.

Edwin Mok - Needham & Company

I see. Great and then, first thing is on the prepared remarks you guys mentioned that and I think last quarter you guys talked about was that you are upgrading your policy of plant with hydrochlorination rate. Any idea when you expect to complete that upgrade and if you expect to start production, when do you expect that to happen?

Jack Lai

So I think the key issue here would be the funding. We are in a very final stage of getting the funding and it is very likely we prior get a funding, I think it’s RMB440 million by the end of this month. If the funding coming in place, it will take may be somewhere about three, four months to complete the installation then we can start maybe engineering run by the end of this year and hopefully take a couple of months to get engineering as a turn down to commercial production, probably early next year.

Edwin Mok - Needham & Company

Okay. That’s helpful. And then last thing as you guys have this $204 million preferred share that you sold for the poly business last year. And I think the due day is some time around right now. Can you update us what happened? Have you discussed with your investor right now and anyhow update in terms of that situation will be helpful?

Jack Lai

Yeah. I think that our preferred shares, our investors, they are still very supportive to our ongoing operations. We have very detailed discussions for several runs. Final proposal is on the table of each of this four very important investors including, CDB, BOCI, CCBI and Blue Fund. And right now, they are going through with their respectable investment committee to try to get final proposal effect to us. We anticipate that restructuring plan, our refinancing plan will be completed probably within next 30 days.

Edwin Mok - Needham & Company

Is that RMB440 million part of that restructuring plan?

Jack Lai

No. Actually, the RMB440 million is part of RMB2 billion financing. This additional financing through the group of the banks including CDB and current creditors of the China-based banks. They are offering the aggregate amount of RMB2 billion and that including RMB440 million for the poly plant and also the RMB1.56 billion will be for working capital financing.

Edwin Mok - Needham & Company

Great. That’s all I have. Thank you.

Jack Lai

Thank you, Edwin.

Operator

Thank you. And our next question comes from the line of Larry Ge from D.E. Shaw. Please go ahead.

Larry Ge - D.E. Shaw

Great. Thanks for taking the question. I just wanted to see if we can get an update on the short-term loans, I see that on your bank debt, you saw a slight increase in the short-term bank facility which translates into an improved cash position. I was just wondering if you can explain the change there, whether it’s due to a new facility. Thanks.

Jack Lai

Well, yeah, I think that when the short-term borrowings increased debt is because of our working capital financing is still very much relying on the China-based banks and in many cases that we refinanced our mature short-term borrowings and our cost that continue and in many cases also the accrue interest probably to the principal amount as well and that caused the change over time.

Larry Ge - D.E. Shaw

So with the increased cash balance you see any issues paying the coupon in August with regards to the 2014 bonds and if you can just give us an update on how you are comfortable with that obligation?

Jack Lai

Well, of course, the company is working very diligently to prepay all necessary cash flow to support the bonds that with the coupon payment coming and certainly the company is working on that including many, many different financing stages, including like some of the new share issuance and some other financing activities that we are undergoing.

Larry Ge - D.E. Shaw

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Paul Strigler from Esplanade. Please go ahead.

Paul Strigler - Esplanade

Hey, guys. Jack, I think you said ASPs were $0.69 in Q1. Is that correct?

Jack Lai

And that’s Paul our modules, yes.

Paul Strigler - Esplanade

And sort of how did you get there, can you talk about the different geographies?

Jack Lai

Well, this is the total revenue actually divided by the shipment number. And I do not have the -- by geography data with me, maybe we can do a follow-up call to provide you such information.

Paul Strigler - Esplanade

And then I guess after the early June ruling by the EU, have you seen any change to pricing or demands on pricing from any of your EU customers?

Jack Lai

From LDK corporate point of view that’s with the upcoming EU, I think add somewhere about 11% to the tax which implies that the future price will be increasing. We see maybe in the near future that the module price will increase by maybe somewhere in -- maybe 10% to 15%.

Paul Strigler - Esplanade

And then finally, did you guys have any inventory in Europe before June that you’ll be able to sort of sell without a tariff in the rest of Q2 or Q3 or all your shipments from China going directly to Europe and that’s sitting in the warehouse?

Jack Lai

Our inventory is relatively low at this moment now. We don’t really have such inventory available for that purposes.

Paul Strigler - Esplanade

Great. Thank you so much Jack.

Jack Lai

Okay.

Operator

Thank you. And our next question comes from the line of Nitesh Joshi from Barclays. Please go ahead.

Nitesh Joshi - Barclays

Hi. Thanks for taking my question. Just want a bit of clarification on the $2 billion line that you talked about earlier. I think this was also mentioned in the previous quarters call. Is that right?

Jack Lai

Yeah. We did.

Nitesh Joshi - Barclays

Okay. So this is the same line that we’re talking about. Okay, and the RMB440 million for polysilicon is a part of this and this is the same that company announced in February. Is that right?

Jack Lai

Yeah. The RMB2 billion financing, RMB2 billion financing, right?

Nitesh Joshi - Barclays

Yeah.

Jack Lai

It is being provide by a group of banks. And right now, we received the preliminary document. They are being reviewed and also being reviewed by the banks. And we anticipate that signatures will be furnished probably end of these months.

Nitesh Joshi - Barclays

Understood. Thanks for that. Also regarding the coupon for the bond I think, and also the bond maturity itself, which is not so far off. I understand that you just said that there is a lot of financing option that you are working on. But just one thing I want to get a clarification on that, there is still on the book that it shows 174 million of what I assume unrestricted cash, all right. I mean why would you need to think of financing options for the coupon in that matter?

Jack Lai

Well. As you know, our quarterly basis we still require working capital and those money is primarily working and also…

Nitesh Joshi - Barclays

Hello.

Jack Lai

Yeah. And the cash balance is primarily in -- I’m sure money which is in the Chinese entities. In order to support that coupon payment, we need to also be mindful that need cash balance, actually for offshore operations.

Nitesh Joshi - Barclays

All right. So at the moment, the $174 million is predominantly all onshore is it, is that right, other than perhaps the $20 million or $12 million sale of the PV project?

Jack Lai

That is correct.

Nitesh Joshi - Barclays

Okay. And is there any further plan to raise equity with the major shareholder or Fulai Investment?

Jack Lai

Well, we have some discussions with some potential FD offerings but at this moment proposal are being discussed but there is no fixed conclusion at this moment.

Nitesh Joshi - Barclays

Understood. Thank you.

Operator

Thank you. I’m now showing no further questions in the queue. I’d like to turn it back to management for any closing remarks.

Xiaofeng Peng

Thank you for participating in today’s quarterly earnings call. We appreciate your continued support and we look forward to meeting with you again soon. We wish you all a nice day.

Operator

Ladies and gentlemen, that does conclude the LDK Solar Company first quarter 2013 earning conference call. We’d like to thank you for participation and you may now disconnect.

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