LDK Solar Co., Ltd. Q1 2010 Earnings Call Transcript

May.11.10 | About: LDK Solar (LDK)

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

Q1 2010 Earnings Call Transcript

May 10, 2010 5:00 pm ET

Executives

Pia Kristiansen – IR, The Blueshirt Group

Jack Lai – EVP, CFO & Secretary

Xiaofeng Peng – Chairman & CEO

Xingxue Tong – President & COO

Yuepeng Wan – SVP & Chief Technology Officer

Analysts

Vishal Shah – Barclays Capital

Sunil Gupta – Morgan Stanley

Edwin Mok – Needham & Company

Hendi Susanto – Gabelli & Company

Sanjay Shrestha – Lazard Capital Markets

Paul Leming – Soleil Securities

Lu Yeung – Banc of America/Merrill Lynch

Mahaveer Sanghvi [ph] – UBS

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the LDK Solar’s first quarter 2010 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) The conference is being recorded today, Monday, May 10th, 2010. And at this time, I would like to turn the conference over to Pia Kristiansen.

Pia Kristiansen

Good afternoon and thank you for joining us on today’s conference call to discuss LDK Solar’s first quarter 2010 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 Xingxue Tong, Chief Operating Officer; and Dr. Yuepeng Wan, Chief Technology Officer.

After the market closed in the US today, LDK Solar issued a press release discussing the results for its first quarter 2010. We also filed a press release on Form 6-K with the US Securities and Exchange Commission. This 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 providing future events or the future financial performance of the company made pursuant to the Safe Harbor provisions of the US 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 risk and uncertainties that could cause actual results to differ materially from those projected. We refer you to the documents that LDK Solar filed from time to time with the SEC, specifically the company’s most recent Form F-20 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.

I would now like to turn the call over to Mr. Jack Lai, Executive Vice President and CFO, to go over LDK Solar’s first quarter 2010 financial results. Jack?

Jack Lai

Thank you, Pia. Good afternoon and thank you for joining us to discuss the results of LDK Solar for the first quarter of 2010. Net sales for the first quarter was $347.6 million, up 40% from $304.6 million in the fourth quarter. Wafer shipments, including our processing service business, increased 25% sequentially to 426.7 megawatts from 340.4 megawatts in the fourth quarter.

Wafer sales which exclude the processing service business decreased from 288.1 megawatts in the fourth quarter of 2009 to 256.7 megawatts in the first quarter of 2010. The average selling price for wafers was $0.83 per watt in the first quarter of 2010. Sales returns made in the first quarter of 2010 were $1.8 million. OEM shipments were 170 megawatts in the first quarter. This increase in the first quarter was due to a one-time OEM order from a customer.

Module shipments were 31.3 megawatts in the first quarter of 2010, up from 23.2 megawatts in the fourth quarter of 2009. By geography, revenue in the first quarter was 41.8% generated from China; 25.6% from Asia-Pacific, excluding China; 21.5% from Europe; and 11.1% from North America. Our top 10 accounts in the first quarter accounted for 56.9% of total revenues, with the top three accounts combined accounting for 28.6%.

Gross margin in the first quarter was 15.7%. The sequential improvement in our gross margin in the first quarter was due to strong wafer and OEM sales during the quarter. We anticipate that the improvement in ASP trends throughout the year should allow us to expand our gross margin in the next few quarters.

Our wafer conversion cost was $0.31 per watt, and the average cost of polysilicon we consumed was $64 per kilogram. Operating expenses were $21.6 million in the first quarter of 2010, down from $33.7 million in the fourth quarter of 2009. Our fourth quarter operating expenses included $12.2 million associated with the settlement of our class action lawsuit and related legal expenses. Our share-based compensation expenses were approximately $1.9 million in the first quarter of 2010.

Operating margin in the first quarter was 9.5%. Net income for the first quarter was $7.2 million, and earnings per diluted ADS was $0.06. Approximately 125.8 million shares were used in completing the diluted EPS. Depreciation and amortization was $33.6 million for the first quarter. Capital expenditures were $100.8 million in the first quarter, which includes $65.3 million for wafers and the modules and $34.6 million for polysilicon.

Our wafer manufacturing capacity reached 2 gigawatts in April and we achieved total installed polysilicon production capacity of 6,000 metric tons. Following the capital intensive investments over the past two years, we expect our capital expenditures to be more modest going forward. We continue to expect capital expenditure in 2010 to be in the range of $200 million to $300 million. Company headcount was 16,022 at the end of the first quarter. This figure includes the 2,491 employees we acquired from Best Solar's crystalline module operations.

Now let’s turn to the balance sheet. We ended the first quarter with $347.4 million of cash and cash equivalents and $96.3 million in short-term pledged bank deposits. We continue to operate with negative net working capital. Accounts receivable declined to 54 days, while payables were equivalent to 61 days.

Inventories increased to $498.7 million, including a $5.6 million non-current portion. The inventory increase is primarily caused by acquisition of module operations from Best Solar at the end of the first quarter. This increase in inventory is in part related to increased OEM sales in the quarter as well as increase in work-in-process as we commenced our module production. Moving forward, we expect inventory to be reduced in the next two quarters as our polysilicon production becomes stable.

In addition, we expect to improve our production efficiency of our newly acquired module operations. Our polysilicon inventory at the end of the first quarter was approximately 3,092 metric tons at an average cost of approximately $65 per kilogram, reflecting procurement of materials during the first quarter under previous purchase commitment. We expect the cost to trend lower, as we saw small material at spot prices and realized the benefit of in-house production. Total interest-bearing borrowings were approximately $1.91 billion, including $1.06 billion of short-term bank borrowings and $853.2 million of long-term interest-bearing borrowings. We will continue work with our China-based banks to replace short-term loans with long-term loans.

We continue to focus on improving our working capital and cash balance. We will continue to evaluate the private and public financing opportunities for our polysilicon business as we achieve operational milestones. We will also continue to concede having additional short-term and long-term funding sources for LDK Solar.

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

Xiaofeng Peng

Thanks, Jack. Thank you again for your interest in LDK Solar. During the first quarter, we were pleased to see a continued improvement in operating environment for our solar industry. Projected growth for the global PV market remains strong. LDK Solar is continuing to gain traction as a top PV brand and a preferred partner. We are Number 1 solar wafer manufacturer globally and we continued our market leadership by expanding our annual wafer manufacturing capacity to 2 gigawatts in April.

Our efforts to diversify our business within the module market tracked well during the quarter. Having brought crystalline module manufacturing in house, we continue to see strong demands for our module and signed several new supply contracts during the quarter. We are continuing to ramp up module manufacturing capacity to meet our growing customer demand and expect to more than double module capacity to 1.5 gigawatts by the end of 2010.

We continue to focus on further improving our cost structure through increasing our manufacturing efficiencies and reducing our raw material costs. During the first quarter, we tightly managed expenses and we significantly improved our profitability. We will continue to work diligently to improve our liquidity and strengthening our financial position.

In summary, we are encouraged by the continuous strong global demand in the solar industry. We are seeing increasing contribution from our efforts to diversify our business. We believe we will continue changing industry dynamics our diversification strategy will be even more benefit to the company. Our diversification will not only come from our vertical integration strategy, but also with continued expansion into new geographies. And we will now turn the call over to Xingxue Tong, Chief Operating Officer to provide the manufacturing and operations update. Tong?

Xingxue Tong

Thank you, Chairman Peng. I will first provide an update on our wafer business, module business and then discuss our polysilicon business. As previously mentioned, demand levels continue to be healthy in the first quarter. We remained focused on improving our cost structure by optimizing productivity, yield, material costs and realizing economies of scale.

Our wafer production costs in the first quarter of 2010 declined to approximately $0.31 per watt. We remain on track towards our goal of reducing wafer conversion cost to as low as $0.25 per watt in the next eight quarters. We reached 2 gigawatts wafer manufacturing capacity in April 2010. We will expand our wafer manufacturing facilities by minor investments and equipment upgrade in the context of demand levels and capital expenditure constraints.

For our module operations, we acquired crystalline module operations from Best Solar at the end of first quarter of 2010. We shipped 31.3 megawatts in the first quarter, and we are ramping up the module production capacity. We expect to ship 60 to 70 megawatts modules in the second quarter of 2010. We are reducing module shipment guidance for the full-year 2010 by 100 megawatts to between 200 megawatts and 300 megawatts. This is because our OEM customers cannot source enough crystalline cells in the market. However, we will ship more modules without the key brand, which typically has higher ASPs and therefore the revenues of module business are expected to increase in 2010.

Now, I would like to discuss our progress in our polysilicon business. Polysilicon production in both of our facilities progressed as planned during the first quarter, producing a total of 692 metric tons of polysilicon. In our 3,000-metric ton polysilicon plant in Sichuan, we continued to ramp up production and 237 metric tons of polysilicon was produced in the first quarter. We anticipate that this facility will produce approximately 250 metric tons in the second quarter of 2010. Our principal goal is to continue to optimize the process to lower the production cost.

We entered commercial production in the first 5,000 metric tons train of the 15,000 metric tons facility in the first quarter and produced 455 metric tons of polysilicon. Currently, we are in full capacity closed loop system production, starting from HCL and TCS production down to offset the recovery.

The second train will commence production in the second half of 2010. We anticipate that approximately between 850 metric tons and 950 metric tons of polysilicon will be produced in the second quarter of 2010 in our 15,000-metric ton poly plant in Mahong. In summary, combining the two poly plants, we expect to produce between 1,100 metric tons and 1,200 metric tons of polysilicon in the second quarter of 2010.

Now, let’s turn the call to Dr. Wan, our Chief Technology Officer. Dr. Wan, please.

Yuepeng Wan

Thank you, Tong. I would now like to provide you with an update on our research and development progress. First, we continued our work to produce larger ingots and successfully made 500 kilograms of ingot with our parent ingot furnaces. This process can increase the capacity of existing furnaces by 10% to 13%. Second, we have worked with newly developed additives that enable increased usage of recovered slurry while maintaining the same level of effectiveness in slicing. The newly developed additives allow 20% more recovered carbon films and silicon carbide comparing to the current mixing ratio of recovered and new slurry.

Third, we started the development of diamond wire squaring technology by modifying our current squaring machines with diamond wire technology where you enhance squaring throughput significantly and reduce the capital expense on the machine. Fourth, we submitted additional patents during the first quarter and to date have submitted a total of 41 patents. I will now turn the call back to Jack Lai.

Jack Lai

Thank you, Dr. Wan. Based upon current business conditions, for the second quarter of 2010, LDK Solar estimates its revenue to be in the range of $460 million to $490 million with wafer shipments between 460 megawatts and 480 megawatts, and module shipments between 60 megawatts and 70 megawatts. For fiscal year 2010, we expect our revenue to be in the range of $1.6 billion to $1.7 billion, with wafer shipments between 1.7 gigawatts and 1.8 gigawatts, and module shipments between 200 megawatts and 300 megawatts.

And now, we would like to open the lines for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And our first question is from the line of Vishal Shah with Barclays Capital. Please go ahead.

Vishal Shah – Barclays Capital

Yes, thanks for taking my question. Congratulations on good numbers. I wanted to understand your comments on pricing. You said that wafer pricing will be relatively strong. Can you maybe give us some indication on where prices are going in the second quarter and then also in the back half of the year? And then secondly, on your production costs, you have produced about 1,100 tons of dolly internally, what’s your production costs going to be in the second quarter?

Jack Lai

We have experienced ASPs improving from March. For second quarter, we see that wafer price increasing. We see the prices are around $0.85 to $0.90 per watt at the moment for second quarter, and also we see the demand for quarter three is also very strong. The price will be similar level to quarter two, and we also have seen the module price also increasing repeat from quarter two. So, we see, also have a strong demand in quarter three for the module. For the second quarter, for production costs of polysilicon, already we see our production costs – poly plant already for production from quarter four, and the production costs already below market price from quarter four.

And also, our Mahong plant, first 5,000-ton poly plant, already we have a full production, have a close look in May, and we see that production cost in the second quarter also below market price. And we expect in second half of our production cost in both poly plants will be significantly lower than market price. We expect it should be – our original expectation to trading down $35 range in our original explaining for our expected. So, both poly plants, production costs doing well as expected.

Vishal Shah – Barclays Capital

Okay, that’s very helpful. Now, when you look at your two business segments, what kind of margins do you achieve right now in the module segment given that the cell prices are also relatively high, what kind of margins are you looking out in that segment for Q2?

Jack Lai

Currently, our wafer business, we enjoy probably mid-teen, our gross margin and that’s our primary business. We just entered module business for two quarters. Right now, our module business probably running at approximately 8% to 10% gross margin at the present time.

Vishal Shah – Barclays Capital

Okay, would you say that in the second quarter, given the rising wafer ASPs, your gross margins in the wafer business could exceed 20%?

Jack Lai

While at present time, we think that with the current type of environment that we do believe that the gross margin were spent from a company operating model, we expect probably 2 to 3 percentage points expense in gross margin this quarter.

Vishal Shah – Barclays Capital

Okay and what was your blended polysilicon cost as of last quarter?

Jack Lai

We had about $64 per kilogram.

Vishal Shah – Barclays Capital

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Sunil Gupta with Morgan Stanley . Please go ahead.

Sunil Gupta – Morgan Stanley

Thank you. Jack, if I could start with the understanding of the inventory situation, so you said inventory increased in Q1 and some of that was because of your module activities. So, could you help us understand what’s the breakup of your inventory as you exited Q1 in terms of polysilicon work-in-process finished goods, and if you could separate finished goods for perhaps wafers and modules?

Xiaofeng Peng

Our reported inventory for the quarter was $498 million. Out of that, raw material is about $207 million, work-in-process $130 million and the remaining the supplies and finished goods and some PV projects that we have still in progress.

Sunil Gupta – Morgan Stanley

And in terms of your finished goods inventory, what’s the split between modules and wafers?

Xiaofeng Peng

We have about $56 million worth of wafers our stock, and we have some modules of about $88 million [ph], and we have some modules that are waiting for – we have some sales about $20 million waiting for process to become module cells.

Sunil Gupta – Morgan Stanley

Okay. And also I missed your commentary on the CapEx, did you say that you spent $100 million in first quarter and you expect to spend $200 million to $300 million additional or is it for the full year, including $100 million that you have spent?

Xiaofeng Peng

So, up to $300 million is our expectation to spend for the entire year for 2010, which means that we expect to spend additional $200 million between now and end of the year.

Sunil Gupta – Morgan Stanley

Okay. And where would most of this CapEx go?

Xiaofeng Peng

Between polysilicon operations and also our wafer and module operations. From the polysilicon side, as we have four operational places, 5,000-ton train, so we are in a process of starting up the second 5,000-metric ton probably in the end of this quarter or beginning of next quarter, which we anticipate we may need to spend up to $100 million to bring additional capacity for polysilicon operations. In the meanwhile, we still try to optimize our wafers manufacturing and at the same time, we are spending some module operations, which of course is much lower CapEx expense, CapEx amount. So, we do anticipate that between now and end of the year, we probably would spend a total of roughly $200 million.

Sunil Gupta – Morgan Stanley

Okay. And I also wanted to understand perhaps your achievements, Tong could address this, in terms of your capacity plans. So, with this kind of CapEx particularly for wafers, what kind of capacity do you expect to have as you exit 2010, and then I have just one follow-up on the polysilicon business?

Xiaofeng Peng

You mean, our capacity for the wafers?

Sunil Gupta – Morgan Stanley

Yes, that’s right.

Xiaofeng Peng

2.2 gigawatts end of this year.

Sunil Gupta – Morgan Stanley

Okay. And how much CapEx would that require, because you are already at 2 gigawatts right.

Xingxue Tong

Wafer is more, because this CapEx expansion mainly from equipment upgrades and the efficient improvement and also some CapEx we already spent. So, the CapEx expansion for the wafer is very, very small, because lots of the CapEx we already spent. Most of the facilities already ready there adjusted though as more upgrades.

Sunil Gupta – Morgan Stanley

Okay. And then in terms of your earlier commentary about ASPs, particularly in the module ASP, what is the kind of ASP that you are achieving in Q2, and did you say that in Q3, you would expect ASP to go up or would you think it’s similar level as Q2?

Xingxue Tong

We see Q2 compared to Q1 ASPs increasing a little bit for module, and it should be similar level for Q3, and we experienced the current price for module $1.70 to $2.00 range.

Sunil Gupta – Morgan Stanley

Okay. And your polysilicon manufacturing cost, you mentioned $35 per kilogram; I guess that this for the total cost for both the plants combined, is that assumption correct? And also where are we right now in terms of, say in Q2, what kind of average will you achieve for the blended costs, if you just add both the plants together?

Jack Lai

Both plants, we have together, in quarter two, we have a few below market prices, I mean, below $50. And we believe are now trading well and almost every month, our average total production costs is going down, especially the Mahong plant, the 15,000 [ph] ton poly plant. So, we have waivered to check pricing, the average cost to be $35 in the next few quarters.

Sunil Gupta – Morgan Stanley

And would you still expect that to happen before end of this year, $35 or you think it might be sometime next year?

Jack Lai

$35 is our midterm target. So, probably two years.

Sunil Gupta – Morgan Stanley

Okay, all right. Thank you very much.

Jack Lai

Thank you.

Operator

Thank you. Our next question comes from the line of Edwin Mok with Needham & Company. Please go ahead.

Edwin Mok – Needham & Company

Hi, thanks for taking my question. First question is regarding tolling, Jack, you mentioned that you guys had a one-time contract for the quarter. So, does that mean that tolling will come down in the coming quarter and how big was that contract, and was that contract an average price or how do you look at that?

Jack Lai

Our capacity, the capacity so tight, at the same time that we also increased our tolling service charges. For our operating model, normally we forecast about 20% to 25% capacity to service our OEM customers, while remaining capacity that we have to dedicate to our wafer sales. So, I think the model we should expect 20% to 25%. So, Q1 was high quarter in OEM business because of one-time and one big customer creates a big order and we have to (inaudible) that order and so that cost one-time increase in Q1.

Edwin Mok – Needham & Company

So, you expect to go back to this 20% to 25% range in the second quarter?

Jack Lai

Yes, we expect to come back to that range.

Edwin Mok – Needham & Company

Okay. And then I guess second question is on your full-year guidance, as I look at your full year, revenue guidance and wafer shipment guidance and compare your second quarter, it seems like your second quarter run rate will be higher than your full year. Is it just concerned to some, is it concerned to Germany FYP might cause a fall towards the end of the year? Why do you provide more to the guidance?

Jack Lai

(inaudible) that we see the Q2, Q3, the demand very, very healthy, and we expect that the revenue should be very strong, and the company, the management still looking at Q4, which we still kind of try to watch illustration in Q4. At present time, that was not that much clear for Q4. So, maybe tolling in the middle of the year, we can provide more color on Q4 situation as that we may be able to provide you a little bit more detail on the entire year 2010 guidance outlook. Right now, that’s the way that the company is looking at the year.

Edwin Mok – Needham & Company

I see. So, you just state here that they would be only for two quarters of that figure, right. So, then I have a question regarding your poly production. So, given that you guys are ramping a second train, if you are successful in doing that, will your production be at or above your own consumption, will you be considering selling poly? If you are successful in second train [ph], will you consider selling poly out towards the end of the year or in 2011?

Jack Lai

In May, we successfully ramped here the first 5,000 ton in Mahong plant to full production and also close look from the material to the products. And also in quarter two, we are starting to ramping up our second line, which expect that there would be production in the second half of 2010. In this quarter, the second quarter, we are also starting to selling our polysilicon to the market especially – we are already selling some polysilicon to a local semiconductor company to testing our material. So, we see the polysilicon, virgin polysilicon we will be selling to manufacturers, especially some semiconductor manufacturers from quarter two, and also we are selling some virgin polysilicon to the market. And this polysilicon selling we will continue in quarter three and continue improving quarter-by-quarter.

Edwin Mok – Needham & Company

I see. So, it sounds like near term that’s more just testing the market that you might ramp that up to become a more meaningful value to the business, is that how we should think about that?

Jack Lai

Yes, the polysilicon we would be selling will be meaningful continually quarter-by-quarter. And we are already starting to sell our polysilicon from quarter two.

Edwin Mok – Needham & Company

Great. And then one last question I have. On your sell capacity, you guys talked about potentially adding just 60 megawatts test line for your efficiency cell, any update there as to the target, any plans or any change in plans there?

Yuepeng Wan

Everything is going very well, and we still expect to start production in August, as original planning. So, it’s moving very well and the equipments are just arriving at the facility, and facility is now – and its construction everything going very well. We expect to starting the R&D testing, production from August.

Edwin Mok – Needham & Company

Just quickly for Jack, what CapEx should we model in for that line?

Jack Lai

I think right now we are probably in the range of spending $20 million to $35 million for this project. And by the end of the year, we may have more update, but right now, it’s fairly small operation that we try to kick start it for R&D and also try to work on these lines.

Edwin Mok – Needham & Company

Great, that’s all I have. Thank you.

Jack Lai

Thank you, Edwin.

Operator

Our next question comes from the line of Hendi Susanto with Gabelli & Company. Please go ahead.

Hendi Susanto – Gabelli & Company

Hi, thank you for taking my questions. First question, do you expect tolling ASP to increase also as we are seeing like tight demand and what some of tolling ASP pricing trend, do you expect going into Q2 and Q3?

Xiaofeng Peng

We see solar graded polysilicon price increase a little bit in Q2 also, and if we are selling to the semi-grid market, our ASP accounted a little premium [ph] than solar material. So, we see that both solar and especially in quarter two the prices increasing than before,

Hendi Susanto – Gabelli & Company

For your tolling ASP?

Xiaofeng Peng

You mean for ASP tolling?

Hendi Susanto – Gabelli & Company

Yes.

Xiaofeng Peng

Tolling, we see also, tolling costs, the price also increasing in quarter two and – it’s increasing the tolling costs, it’s increasing significantly than quarter one and the quarter before for wafer tolling costs.

Hendi Susanto – Gabelli & Company

And is it fair to assume it’s like a low-single digit increase?

Xiaofeng Peng

ASP for tolling, we are increasing, maybe further increasing in quarter two and quarter three. (inaudible) normal level of our wafer production.

Hendi Susanto – Gabelli & Company

Okay. And in your module shipments, may I know whether there is some mix within module cells and poly, and if you have, what the mix will be going forward for the rest of 2010?

Xiaofeng Peng

Originally, we are planning OEM and own brand 50-50 for our module shipments, because our major OEM module customers, they cannot source enough for that sales from market. When this OEM order is delayed, and now, we expect it that our own solar brands, module shipment increasing. We believe most of our shipments is major mainly for our module selling.

Hendi Susanto – Gabelli & Company

Okay. And then considering that customers cannot get enough solar cell, what is your strategic reason of keeping your cell capacity significantly below your module capacity, or in other words, will you consider increasing your cell capacity further to be closer to your module capacity?

Xiaofeng Peng

We have very close relations with most of solar cell manufacturers. (inaudible) modules and we will increase our solar module shipments quarter-by-quarter.

Hendi Susanto – Gabelli & Company

Okay. And then last question for me, may I know what’s your cell processing costs and module processing cost in Q2 and what we should expect in the second quarter?

Xiaofeng Peng

Solar panels, tolling costs –?

Hendi Susanto – Gabelli & Company

No, your internal cell processing costs and module processing costs in Q1 and Q2?

Xiaofeng Peng

We have no in solar cell processing production yet, so we have no experience.

Hendi Susanto – Gabelli & Company

Okay.

Xiaofeng Peng

And for module, because we just acquired Best Solar crystalline module facility in March, I think because of one month, I think next quarter, we will give you more update for the numbers, but this won’t be adjusted one month numbers, it will be not enough information.

Hendi Susanto – Gabelli & Company

Okay. Thank you. Congrats on good results.

Xiaofeng Peng

Thank you.

Operator

Thank you. Our next question comes from the line of Sanjay Shrestha with Lazard. Please go ahead.

Sanjay Shrestha – Lazard Capital Markets

Great, thank you. Lot of questions have been answered. Just a couple of quick questions. Number one, on the balance sheet side, are you guys in active discussion at this point in time because you guys always are to sort of convert some of your short-term debt into long-term debt, and on a quarter-by-quarter basis, short-term debt did go up a bit. So, can you guys talk about that a little bit as to what’s going on here to give us really sort of strengthen the balance sheet further?

Xiaofeng Peng

Sanjay, we continue to have dialog with various investment banks to come up with proposals to help us to resolve our balance sheet conditions, and continuously we still work with China-based banks that which efforts that in shifting the short-term loss to a long-term, and as a matter of fact, in the last three quarters, as we accomplished about $250 million, in the first quarter, because we acquired the new operation from Best Solar for the module operations, and it is just for the first quarter that we have a steady increase in the short-term debt. And of course, those are prior-approved, previously approved (inaudible) operations.

Sanjay Shrestha – Lazard Capital Markets

Got it. And one last question to me. So, in terms of – so the market environment certainly seems to be improving here and it looks like ’10 is going to be a much better year than the expectation was few months ago. So, now is the thinking that the polysilicon business and potentially looking as a way to sort of increase some cash as well, is that off the table now or you guys are having other ways to sort of show up the balance here, is that still a potential consideration provided that there’s a right value you might be able to get for another portion of that business?

Xiaofeng Peng

Most definitely. I think just from business operations that the polysilicon in-house production certainly lower the cost of our overall cost structure. Our profitability has that our cash flow and our bottom line will be improved in the same time that we will be ramping up, very good ramping up of our polysilicon operation, so we expect that the company could realize our investment returns much better, we believe that the market will appreciate our long-term investment for the past three years and hopefully that we will get much better valuation from this point.

Sanjay Shrestha – Lazard Capital Markets

Okay. That’s helpful. Congratulations. Have a good quarter guys.

Xiaofeng Peng

Thank you, Sanjay.

Operator

Thank you. Our next question comes from the line of Paul Leming, Soleil Securities. Please go ahead.

Paul Leming – Soleil Securities

Good evening and thanks for taking my questions. Just a couple of housekeeping questions first. Jack, could you tell us what capitalized interest was in the first quarter?

Jack Lai

It’s relatively smaller now; it’s about $5 million. So, our run rate for total interest expenses are still around $100 million as we previously discussed.

Paul Leming – Soleil Securities

Okay. Second question, what was your consumption of polysilicon for watt in your wafering facilities in Q1?

Jack Lai

Based on our manufacturing operation report, at the present time, we are running between 6.1 watts to about 6.4 watts, grams per watt.

Paul Leming – Soleil Securities

Okay. And then final question, I think I heard either you or Xiaofeng Peng say that it looked right now like wafer pricing would be firm in the third quarter relative to second quarter pricing. I am just wondering if you could talk about that a little bit, and specifically are you in a position now where you have what I call firm contractual commitments from customers where you do have a high degree of certainty about what wafer pricing is going to be in the third quarter, or is pricing still an issue for the third quarter that is being debated and could that firmness that you are seeing now change as we get into the July and August and the market has to deal with the step-downs in feed-in tariffs in Germany?

Jack Lai

Yes, for quarter four, we have no visibility. But for quarter three, we have already got orders and due in prepayment for some module order and also for wafers. And wafer now is, in that case, almost sold out in the next few months. So, we have enough capacity to meet the demand in the next few months.

Paul Leming – Soleil Securities

And these orders and prepayments that you have already received for the third quarter, the terms are really pretty firm in terms of the pricing you think you will realize?

Jack Lai

You see, quarter three, the orders are firm and demand is very strong in quarter three.

Paul Leming – Soleil Securities

Okay, thank you very much.

Xiaofeng Peng

Thank you, Paul.

Operator

(Operator instructions) And our next question is from the line of Lu Yeung with Banc of America/Merrill Lynch. Please go ahead.

Lu Yeung – Banc of America/Merrill Lynch

Thanks for taking my questions. Congratulations. Jack, can you remind me what was the operating cash flow in the first quarter?

Jack Lai

I think we targeted about $45 million to $50 million for Q1.

Lu Yeung – Banc of America/Merrill Lynch

Do you have a target of operating cash flow for the year, and how should we think about cash generation once the polysilicon production starts and how much depreciation would you expect for the rest of the year?

Jack Lai

We do expect we continue to have focus on our operation for the remaining of 2010, and we do expect our cash flow of operations will improve. And also, our depreciation, we are trending up as we bring up our second train operation, and of course with our plan to reduce the inventory level, which could generate much needed cash for our operations. So, in the second half of 2010, we do expect and continue to have positive operating cash flow.

Lu Yeung – Banc of America/Merrill Lynch

I see. Also on your polysilicon plant, you have previously sold 15% of the stake. Are you still looking into selling additional stake of the polysilicon part or how should we think about that?

Jack Lai

At the present time, we have a couple of investment banks and (inaudible) firms. They are still in discussion stage with the company. We took about two months. We are still working on very detailed terms and conditions and at the present time, there are some offers on the table, but the company is still kind of trying to waiver the situation and try to see if we can come up with any kind of proposal that makes sense to the company, it’s good for our shareholders. And that we may make a public announcement, at the present time, it is still uncertain and still under discussion. So, I have no further information to share with you.

Lu Yeung – Banc of America/Merrill Lynch

Okay. Last question I have is can you share with us what’s the latest on the solar farm projects that LDK is doing at this time?

Xiaofeng Peng

On the PV project side that we started a couple of quarters ago, some projects primarily in Europe and also some small projects in China, and the company was using those efforts to learn how to do the business in a PV project, at the same time that also try to learn how the modules will be utilizing the project. We have done very good progress and our objective is to stay on those projects as we move on put in time that we have a small backlog of the PV project, which we still continue to do at the time of completion. Normally, (inaudible) at a time of completion when it is connected to the grid.

Lu Yeung – Banc of America/Merrill Lynch

All right. That’s very helpful. Congratulations. Thank you.

Xiaofeng Peng

Thank you, Lu.

Operator

Thank you. Our next question is a follow-up from the line of Edwin Mok with Needham & Company. Please go ahead.

Edwin Mok – Needham & Company

Hi, the first question is on foreign exchange, given the fall in Euros, do you see potential pressure on price as a result of fall in Euro, both for module and wafer?

Xingxue Tong

Most of our wafer selling space on RMB and Dollars. So, we have reverse more percentage in Euros, it’s almost very, very few in wafer selling. Our module business, also we have a proportion of selling in dollar, and we have some percent in Euro, and also the company have some raw material increment also payment in Euro. So, it’s nature hedging and also company doing some more Euro hedging in the last few months. And also if Euro price changes a lot, then the company also can change the price accordingly, some countries, the Euro price has changed too much.

Edwin Mok – Needham & Company

Great, that was very helpful. And then just one last question for Jack. And just last question for Jack, how should we think about tax rate? It was 33% [ph] this last quarter, how should we think about it going forward?

Jack Lai

Last quarter probably was not difficult. So, right now, our tax rate is 12.5. Next year, we are looking at 15, and then the year after, we might go back to a normal tax rate of about 25. So, this year should be 12.5 for the tax provision purposes.

Edwin Mok – Needham & Company

Great, that’s all I have. Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Paul Leming with Soleil Securities. Please go ahead.

Paul Leming – Soleil Securities

Thank you. I was wondering if you had any view at all, given your shipment level in the first quarter as to what happened with your market shares in the wafer business in the first quarter, do you think you increased share, held share steady, lost market share, and what I am really curious about is kind of your view of where solar cell production on a global basis is running in Q1 and Q2?

Xiaofeng Peng

We are gaining market share every quarter and you see our company have expanded capacity to 2 gigawatts in April. So, achieving and gaining market share for our wafer business.

Paul Leming – Soleil Securities

Any specific number you would be willing to share with us as to what you actually think your market share is at the present time?

Xiaofeng Peng

We don’t know because there are different numbers to calculation, how big their market and different source. So, we haven’t got any data at the moment for Q1, but we shall be – we are the largest wafer company, we have revenue a significant portion of the market shares.

Paul Leming – Soleil Securities

Thank you very much.

Operator

Thank you. And our final question comes from the line of Stephen Chin with UBS. Please go ahead.

Mahaveer Sanghvi – UBS

Hi, this is Mahaveer Sanghvi [ph] sitting in for Stephen Chin today. First of all, congratulations on a great quarter. I had a quick question on the module business. Trying to get some more color on the module business in terms of pipeline, you said 50% should be your own brand and 50% is OEM going forward. So, I was just trying to get an idea on your pipeline.

Xiaofeng Peng

It’s original expectation is 50% OEM, 50% own brand. And now, we target maybe most of our shipments will be our own brands in this year, except some condition change for the OEM business. So, now our guidance shipment is about 200 megawatts to 300 megawatts this year. Most of the shipments will be own brands.

Mahaveer Sanghvi – UBS

Okay. And where do we expect those shipments to be?

Xiaofeng Peng

The shipments will be mainly to Europe, to US, and some in Canada, and small in Australia, in Korea and some more in China also.

Mahaveer Sanghvi – UBS

Okay. That’s just helpful. And what was your assumption in terms of grams per watt for the poly this quarter?

Jack Lai

We have consumed between 6.1 to 6.4 grams per watt.

Mahaveer Sanghvi – UBS

Great, thanks. That’s all I have. Thank you.

Operator

Thank you. And at this time, there are no further questions. I will turn the conference back to management for any closing remarks.

Xiaofeng Peng

Thank you for participating in today’s quarterly earnings call. We appreciate your continued support to LDK Solar. We look forward to seeing you again in the coming finance conference and industry events. If you have a chance to travel to China, we will (inaudible) invitation to you to come to pay a visit to our plants. Wish you have a nice evening.

Operator

Thank you. Ladies and gentlemen, if you would like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030, using the access code of 4294955 followed by the pound key. This concludes the LDK Solar first quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.

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