Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q3 2010 Earnings Call Transcript

November 8, 2010 5:00 pm ET

Executives

Grace Reyes – IR, The Blueshirt Group

Jack Lai – EVP, CFO and Secretary

Xiaofeng Peng – Chairman and CEO

Sam Tong – President and COO

Yuepeng Wan – SVP and CTO

Analysts

Vishal Shah – Barclays Capital

Brandon Moller [ph] – ThinkEquity

Edwin Mok – Needham & Company

Min Xu – Jefferies & Company

Ahmar Zaman – Piper Jaffray

Sanjay Shrestha – Lazard Capital Markets

Lu Yueng – UBS

Sunil Gupta – Morgan Stanley

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the LDK Solar Company’s Third Quarter 2010 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Following the presentation, instructions will be given for the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, Monday, November the 8th of 2010.

I'd now like to turn the conference over to Ms. Grace Reyes. Please go ahead.

Grace Reyes

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

After the market closed in the U.S. today, LDK Solar issued a press release discussing the results for its third quarter 2010. We also filed a 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, 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 risk 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-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 would like to turn the call over to Mr. Jack Lai, Executive Vice President and CFO, to go over LDK Solar’s third quarter 2010 financial results. Jack?

Jack Lai

Thank you, Grace. Good afternoon and thank you for joining us to discuss the results of LDK Solar for the third quarter of 2010. Net sales for the third quarter were $675.6 million, up 19.5% from $565.3 million in the second quarter.

Wafer sales increased to $426 million from $321.7 million. Module sales increased to $164.7 million from $130.8 million. Polysilicon sales decreased to $29 million from $31.3 million due to the increase of internal consumption during the quarter. OEM sales for wafer decreased to $41.7 million from $68.4 million, while OEM sales for module increased to $3.4 million.

By geography, net sales in the third quarter was 31.4% generated from China, 17% from Asia-Pacific excluding China, 46.1% from Europe, and 5.5% from North America. Our top 10 accounts in the third quarter accounted for 50.2% of total revenues, with the top three accounts combined accounting for 27%.

Wafer shipments including our processing business increased 11.6% sequentially to 569.5 megawatts from 510.5 megawatts in the second quarter. Wafer sales, which exclude the OEM business, increased 29% to 487 megawatts from 377.6 megawatts in the second quarter of 2010. The average selling price for wafers was $0.87 per watt in the third quarter of 2010.

Sales returns provision in the third quarter of 2010 was $2 million. OEM shipments were 82.5 megawatts in the third quarter, which was sequentially down from the second quarter, since we have used most of our capacity to address the wafer sales demand.

Module shipments including our processing business were 94.1 megawatts in the third quarter of 2010, up from 73.9 megawatts in the second quarter of 2010.

Gross margin in the third quarter was 22.2% compared to 18% in the second quarter. Our gross margin for our wafer business was 27.9% in the third quarter, which increased from 21.8 in the second quarter of 2010. Gross margin for our polysilicon business also increased in the third quarter to 30.3% from 17.4% in the second quarter of 2010. Gross margin for our module business declined to 4.6% in the third quarter from 7.6% in the second quarter, due to tight supply of cells and higher cost of raw materials in the third quarter.

With the continued ramping up of our cell production facilities, we believe our margin on modules will increase substantially in the near future. Overall, the sequential improvement in our gross margin in the third quarter was due to improved ASP trends, supported by strong demand. We anticipate that continued improvement in ASP trends together with expected reduction in our overall manufacturing costs should allow us to expand our gross margin in the next few quarters.

Our wafer conversion cost was $0.33 per watt and the average cost of polysilicon we consumed was $50.1 per kilogram in the third quarter of 2010. The increase in processing cost was due to a one-time expenditure on spare parts and maintenance to equipment to improve future yield. Excluding this one-time impact, our wafer processing cost in the third quarter was approximately $0.30 per watt.

Operating expenses were $30.5 million in the third quarter of 2010, up from $23.2 million in the second quarter of 2010. Our share-based compensation expenses were approximately $2.8 million in the third quarter of 2010. Operating margin in the third quarter was 17.7%, up 3.8 percentage points from the second quarter.

Net income for the third quarter was $93.4 million and earnings per diluted ADS was $0.72. Approximately 136 million shares were used in computing the fully diluted EPS. Depreciation and amortization was $40.4 million for the third quarter. Capital expenditures were $192.1 million in the third quarter, which includes $94.1 million for wafer, cells, and modules, and $97.9 million for polysilicon.

Our wafer manufacturing capacity reached 2.6 gigawatts in September and we achieved total installed polysilicon production capacity of 11,000 metric tons with 6,000 metric tons in full production. In light of a strong demand and backlog we have experienced, we will continue our integrated business model and we'll continue to ramp up our cell, module, and polysilicon manufacturing capacity. We will also tightly manage capital expenditure requirements of continued wafer capacity expansion, which will continue to primarily be done through equipment upgrade and debottlenecking.

Going forward, we anticipate CapEx of approximately $50 million to $70 million in the fourth quarter of 2010 and $500 million to $600 million in 2011, to expand our wafers, polysilicon, cell, and module capacity. Company headcount was 19,427 at the end of the third quarter, an increase of 2,147 from the second quarter.

Now, let's turn to the balance sheet. We ended the third quarter with $571.9 million of cash and cash equivalents and $254 million in pledged bank deposits. Although we continue to operate with negative net working capital, our operating cash flow was significantly improved to approximately $140 million and turnover days of our accounts receivable declined to 25 days, while payables were equivalent to 49 days. Inventories slightly increased to $440.1 million due to our prolonged manufacturing process for downstream module business.

In addition, we have several PV projects in the final stages of completion, which will be sold in the next couple of quarters. Our polysilicon inventory at the end of the third quarter was approximately 2,300 metric tons at an average cost of approximately $54 per kilogram. We expect the quantity and the cost to trend lower as we realize the benefit of in-house production.

Total interest-bearing borrowings were approximately $2.2 billion, including $1.6 billion of short-term bank borrowings and convertible senior notes, and $640 million of long-term interest-bearing borrowings. With increased cash flow from operations, a higher cash balance, and our recent financial agreement with the China Development Bank, we are in process of reducing our short-term borrowings.

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

Xiaofeng Peng

Thank you, Jack. Thank you again for your interest in LDK Solar. We were very pleased to report better-than-expected results for third quarter. Demand across all segments of the solar industry continued to strengthen throughout the quarter. Our business momentum continues to expand across key metrics. Once again, we achieved record quarterly revenue, robust year-over-year and sequential growth in wafer and module shipments, higher ASP, and improved gross margin.

Our vertically integrated business model and our innovation along the PV value chain have been effective in driving growth, as evidenced by the increasing contribution we are seeing from our polysilicon, module, and cell business. Operationally, our team continued to execute strongly. We continue to strengthen our market leadership as the largest solar wafer producer and expanded our annual wafer manufacturing capacity to 2.6 gigawatts at the end of September, which was ahead of our original plan. We are achieving this expansion in wafer capacity, mostly through our equipment upgrade to minimize our CapEx in this area.

We expect to expand our wafer manufacturing capacity to 2.8 gigawatts by end of 2010 and 3.6 gigawatts by end of 2011. I am pleased with our team's ability to expand our crystalline module manufacturing in such a short term of time. We currently have 760 megawatt of module capacity installed. We anticipate achieving better economy of scale in the fourth quarter in this new business line and seeing a positive impact to our margins.

Demand for our modules remains robust and we signed several new supply contracts in Europe and China during the third quarter. We expect to expand our module manufacturing capacity to 1.5 gigawatts by end of 2010 and 2.5 gigawatts by end of 2011.

Production at both our polysilicon plants is ramping up as planned. Our second 5,000 metric ton train commenced commercial production. We will evaluate the timing of ramping up a third 5,000-ton train in 2011 to coincide with our customer demand. As expected, we commenced production in our solar cell manufacturing facility in September. Our current annualized production capacity for solar cell is 120 megawatts. We expect to expand our sales manufacturing capacity to 180 megawatts by end of 2010 and 1.26 gigawatts by end of 2011.

To further strengthen our leadership position in the solar industry and extend our stature throughout the PV value chain, we are expanding our solar cell and module capacity, with a planned manufacturing facility in Hefei High-Tech Industrial Development Zone. This facility is being supported by local government with some financing over the next three years and is expected to significantly increase our manufacturing capacity for both cells and module, beginning in the second quarter of 2011. By creating more completely vertically integrated manufacturing capabilities, we expect to further improve our overall profitability.

In summary, we are very pleased with our business performance. Our third quarter results demonstrate the current robust industry dynamics, as well as our continued strength, strong execution, and business momentum. We remain optimistic that positive industry trend will continue into 2011.

I will now turn the call over to Sam Tong, our President and Chief Operating Officer, to provide manufacturing and operational results. Thank you.

Sam Tong

Thank you, Chairman Peng. I will provide an update on our wafer, module, cell, and polysilicon operations. Reflecting the strong demand levels, wafer ASPs continued to increase in the third quarter. We have seen continued stability in wafer pricing so far in the fourth quarter and we believe wafer prices will slightly increase from current levels through the end of the year.

Our wafer processing cost in the third quarter was $0.33 per watt. We will continue to work towards our goal of reducing wafer conversion cost to as low as $0.25 per watt over the next five quarters.

As mentioned earlier on the call, we reached 2.6 gigawatts of annualized wafer capacity at the end of the third quarter. We are able to accelerate our wafer expansion plan with minimal investment and then we expect that our continued expansion to 2.8 gigawatts by year-end will be made with the equipment upgrade with minimal capital expenditure.

Our module operations have scaled drastically and our shipments in the quarter were in line with our recent guidance. We are continuing to focus on enhancing our cost structure as we ramp up manufacturing of this newly acquired operation; expect to see processing costs begin to decline in the fourth quarter, resulting in an improvement of our gross margin for modules.

We have also seen – we have also been pleased with our progress made to date on the installation of our cell manufacturing line. By increasing our vertical integration to include in-house cell production, we expect to reduce the cost of our modules and attain a more stable supply of cells for module manufacturing. We also anticipate that by being able to integrate R&D efforts for polysilicon, wafer, cells, and modules, we expect to continue to drive down the total cost of modules in the next few quarters.

As planned, we commenced our cell production in September and reached a manufacturing capacity of 120 megawatts. We have produced 3.7 megawatts of solar cells at the processing cost of $0.27 per watt, and we expect to reduce to $0.24 per watt in the fourth quarter and further reduce to $0.20 per watt by the end of 2011.

Total polysilicon production tracked at expected levels during the third quarter and approximately 1,228 metric tons of polysilicon was produced. In our 3,000 metric ton plant in Xiacun, we produced approximately 179 metric tons of polysilicon. The decline in the production is due to the small incident caused by a subcontractor in the third quarter and we expect our production in Xiacun plant will be back on track in the fourth quarter.

At our 15,000 metric ton plant in Mahong, we produced approximately 1,049 metric tons of polysilicon during the third quarter from 951 metric tons in the second quarter. We commenced production of second 5,000 metric ton train and the line is ramping up as expected. The production cost in the third quarter was slightly increased to $43 per kilogram as compared to $42 per kilogram, mainly due to initial ramp-up of second 5,000 metric ton train in the later part of third quarter.

We expect the cost of polysilicon production will be reduced as our second 5,000 metric ton train continues to ramp-up. Combining the two plants' production, we expect to produce between 1,700 metric tons and 1,900 metric tons of polysilicon totally in the fourth quarter of 2010.

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

Yuepeng Wan

Thank you, Sam. I would like to provide an update on our research and development programs. We analyzed the throughput of our Mahong polysilicon production line and through debottlenecking, the production capacity can be increased from 15,000 metric tons per year to about 20,000 metric tons per year.

We are developing and implementing an advanced hydrochlorination process to further reduce the cost of polysilicon production. The commercialization of our proprietary silicon separation system has resulted in a great improvement on the sorting efficiency of silicon from other materials. A machine has replaced hundreds of operators.

We developed a smart process for DSS furnaces that can shorten the cycle time by 15% and increase ingot price [ph] ratio, while reducing consumption of energy, oil and gas, and cooling water. This process is expected to be commercialized at the end of the year and should result in an increase of approximately 17% in production capacity without increasing of capital investment on ingot furnaces.

We have implemented our high mechanical process in mass production. The resulting wafers have been proved to have 27% lower risk [ph] rates in cell production lines. We are progressing on our R&D road map for solar cell technology and R&D cell lines with selective emitter technology being set up for high efficiency solar cells. We have optimized our lamination process in our module production and increased the lamination throughput for about 30%. We have implemented new coated glasses in module product and this new improvement has resulted in about 2% increase in the power output.

We have developed a proprietary technology on the packaging of modules for shipment. This packaging technology can save 10% shipment cost. We are developing a solar power system for DC transmission and a DC application. The new system of 3 megawatts will be finished in six months.

During the third quarter, eight patent applications were submitted. To date, a total of 61 patents have been applied for and 11 patents have been granted.

Now, I'll turn the call back over to Jack.

Jack Lai

Thank you, Dr. Wan. Based upon current business conditions, for the fourth quarter of 2010, LDK Solar estimates its revenue to be in the range of $710 million and $750 million, with gross margins to increase approximately by 3 percentage points sequentially.

We anticipate wafer shipments between 580 and 600 megawatts, module shipments between 120 and 130 megawatts, silicon production between 1,700 and 1,900 metric tons, and cell production between 20 and 23 megawatts.

For fiscal year 2011, we expect our revenues to be in the range of $2.9 billion to $3.3 billion with gross margins between 22% and 28%. We expect wafer shipments between 2.5 and 2.8 gigawatts and module shipments between 700 and 800 megawatts. In addition, we expect silicon production between 9,000 to 10,000 metric tons, and cell production between 400 to 500 megawatts.

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

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will begin the question-and-answer session at this time. (Operator instructions) Our first question comes from the line of Vishal Shah from Barclays Capital. Please go ahead.

Vishal Shah – Barclays Capital

Yes, hi. Thanks for taking my question. Jack, two questions. First of all, can you provide us with some assumptions in your guidance for 2011? What kind of module pricing are you assuming for next year and then also, what kind of mix and OEM and third-party wafer sales? And then secondly, when you think about your polysilicon ramp, are you looking at a third ramp – a third train as well in your guidance for next year? And what kind of cost structure can you get in your poly production next year? Thank you.

Jack Lai

Thank you, Vishal. Let's start with the 2011 guidance, which we believe that the demand is still very strong and continue into at least the first half of 2011. We believe that the current price levels will be sustainable. Q4, we should see slightly increase for our ASPs. In the second half, in our model, we do expect maybe a 10% price erosion down the road, maybe sometime Q3, maybe sometime Q4 next year. So there is the 10% in our model which we consider.

As far as polysilicon ramp, as of today, we have 11,000 metric tons under production. So, the bulk of the guidance is coming from this current capacity. We are in the process of ramping up our train three. However, this train three will start commercial production probably mid – middle of 2011. At this moment, we have not accounted for this line's output. So the major contribution for the polysilicon will come from the current 11,000 metric tons of capacity. Of course if we can handle the train three schedule, maybe in the second half this third 5,000 train will contribute some more for our polysilicon output.

As far as cost wise, at the present time, our polysilicon production cost, fully-loaded cost, is at about $43. As we discussed before, LDK expects that our manufacturing cost for polysilicon exiting 2010 will be about $40 or a little bit better than $40. And during the course of 2011, we expect our cost to be further reduced to about $30 level exiting 2011.

Vishal Shah – Barclays Capital

So, just to clarify, you are saying 10% or less price erosion in the wafer segment in 2011, with most of the price erosion coming in the second half? Is that what you are saying?

Xiaofeng Peng

We see now the demand for wafer is still very strong and through the first half of 2011. And of course, in the model, we put a lower price model as well as the shipments now we see, the order is more strong than we expected for wafer department – for wafer demand in the first half of 2011. And so, we have so many long-term contracts. So we still see a very big demand in the second half of 2011. Of course, the market and ASP for the second half of 2011 now is not – we – still is – maybe we need to wait one or two quarters to see the visibility.

For the module, we see a slightly product price reduction in the first half of the year, but demand is still very, very strong. And of course, our module – the price is pretty much lower than our expected current price. But in the second half of 2011, we see – because now we are also waiting a few quarters, one quarter to see the visibility. Now, we have not too much visibility for the price for the second half of 2011. But in our model, we put a very low price, about $1.60 to $1.65.

Vishal Shah – Barclays Capital

Thank you very much.

Operator

And our next question comes from the line of Colin Rusch with ThinkEquity. Please go ahead.

Brandon Moller – ThinkEquity

Well, hello. This is actually Brandon Moller [ph] for Colin. Thank you very much for taking my call. I was actually wondering – for the contracts that you have for modules at this point, are you taking prepayments on those contracts right now?

Xiaofeng Peng

We take prepayments for all our silicon and wafer contracts signed, normally long-term contracts, at least two years, three years and for wafer, as long as 10 years. For the module contract, we take a prepayment from nobody for the next few quarters, so about '11 – but now the – for longer contracts for module, most of them we can only take the prepayment for next two quarters.

Brandon Moller – ThinkEquity

Okay, that sounds good. And then, do you have any plans, I guess, for retiring some of the – some of your outstanding debt?

Jack Lai

Yes, we do. And we still have several different proposals that we are still looking at. And certainly in Q4 and Q1, we will resolve all the CBs [ph] by April time.

Brandon Moller – ThinkEquity

Okay. Thank you very much. And then I just have one last question, which is just in terms of revenue and margin terms for just full fiscal 2011, is there a sense of just how comfortable you might be providing, I guess, some more long-term guidance on that?

Jack Lai

Yes. There are a couple of things that will work for the company very well. Number one is the continued cost reduction from our polysilicon operations. As we just indicated, our cost of silicon in-house production at $43 will drop to $30 when we exit in 2011. There will be a $13 reduction, which is 30% from a cost point of view.

And also the cell production, as you know, we are experiencing very low module gross margins at the present time, as we need to pay very high cost for cell. And right now, we just started for a couple of months in the cell production, we have already achieved the cost of $0.27. We believe that we could reduce this cost to about $0.20 level in the next five quarters. So, that will be competitive and of course that will be about 50% of the cost we are paying in the last couple of quarters, which we believe there is going to be very handsomely contributing to our gross margin.

As you know, next year, we are going to grow our module shipments to 800 megawatts. And based on the current price level, that's more than $1.5 billion potential revenue, with improved overall cost for our polysilicon as well as cell, which would drive our gross margins for module business much higher, which we anticipate that will make a very good contribution to our overall profitability in the course of 2011.

Brandon Moller – ThinkEquity

Great. Well, thank you very much, again, for answering the questions and congratulations.

Jack Lai

Thank you, Brandon.

Xiaofeng Peng

Thank you.

Operator

And our next question comes from the line of Edwin Mok with Needham & Company. Please go ahead.

Edwin Mok – Needham & Company

Thanks for taking my question and congrats for a great quarter. So the first question I have for you, Jack, is if I use the number you provided us it seems like module ASP was somewhat flattish in the third quarter? Is that – was that correct? And can I ask what's – where do you see module ASP will trend in the fourth quarter?

Jack Lai

Well, Ed, as you know, we are working very hard in terms of using our current capacity and we have been shipping every wafer we can make, we have shipping every kilogram of silicon we can make, we have been shipping every modules we can make, and at the present time, we are still in the process of expanding our capacity. And the guidance basically provides you with the progress we can make in terms of our expansion. So, the overall increase quarter-over-quarter is somehow at this current level, because there are some expansion that gets involved.

Edwin Mok – Needham & Company

Okay, good. That was helpful. And then on your 2011 guidance, based on your comment to an analyst's questions, it's – I think you are suggesting wafer pricing is relatively flattish in the first half. Can I ask how much of that volume is contracted right now and are you guys already having price discussions in there or is that based on – is that still (inaudible)?

Xiaofeng Peng

Yes, we – for 2011, we have a few contracts already signed for delivery for the polysilicon side. So – and for wafer side, most of our cells drove [ph] the contracts, and most of cells we will be delivering from the pending long-term contracts we signed in the last few years. So we still have a lot of big volume to ship for the long-term contracts for the wafers.

For the module side, we have signed several contracts to be delivered in first quarter and second quarter and – to Europe and China and now also U.S. and some other countries. We have some framework agreement contract for the full year 2011, but the price is not fixed yet for the second half of 2011.

So, now for the contract for the module, we have only visibility for the next few quarters through first half of 2011. And we are waiting on – one or two quarters to see the fixed price for the second half of 2011 for module. So for polysilicon and wafer, the visibility is very clear and for the module, we need to wait one or two months – one or two quarters.

Edwin Mok – Needham & Company

Okay, great. That was great color. And then just one more question I have. On the cell capacity, you guys talked about it's – it appears that there will be a driver for the module gross margin. I was wondering, can you give us some roughly timeline of when you expect to start producing on the new site there and any kind of (inaudible) you can provide, like maybe this year capacity and year-end capacity for cell? That would be helpful.

Xiaofeng Peng

For cell production capacity right now, we have 120. But end of the year, we could go to 180 megawatts and with the addition of Hefei location, we expect to add 1 gigawatt and commencing production sometime Q2 of 2011. By the end of 2011, we should have 1.26 gigawatt of cell capacity.

Edwin Mok – Needham & Company

That's coming really fast. That was helpful. And then lastly, I just have one more question. On the polysilicon side, there was some discussion about a smaller plant in your prepared remarks. I was wondering – I think before you guys have talked about potentially expanding that plant to get better economical scale on that plant. Is that your plan to do that? I think previously you guys talked about potentially you can go up to 3,000 metric tons or even bigger than that. Is that still in the plan or are you going to focus on this other capacity expansion and therefore that is on the back burner right now?

Jack Lai

Yes. For the Xiacun plant, currently we have 1,000 capacity and producing at capacity. We have planned to add two more thousand – 2,000 more capacity. So at the end of 2011, we should see 3,000 metric tons in the Xiacun plant, which of course could lower the current lost to – maybe by about 20%. So that will be a very good investment for LDK.

Edwin Mok – Needham & Company

Great. Sorry, if I could just squeeze one more question in, did you guys recognize any silicon revenue in the last quarter and any system revenue you expect in the fourth quarter and 2011?

Jack Lai

Ed, could you please repeat the question again? It can't – break off a little bit.

Edwin Mok – Needham & Company

Yes, sorry about that. I was referring to – you guys have a system business in Italy, right? I was wondering if you recognized any revenue on that business in the last quarter. And any plans for the revenue in the coming year?

Jack Lai

Yes. So, number one, we already have a couple of projects already completed and we are on schedule to sell this project in Q4 this year or maybe the beginning of next year. And also, we still have a very good pipeline. We are continuing to develop projects, it takes maybe another six months or so to complete more project and we will sell the project maybe three to six months after completion. So everything is in the pipeline. So gradually, we also going to grow our PV project business.

Edwin Mok – Needham & Company

Great. That's all I have. Thank you.

Jack Lai

Thank you, Edwin.

Operator

And our next question comes from the line of Jesse Pichel with Jefferies & Company. Please go ahead.

Min Xu – Jefferies & Company

Hi, good morning Chairman Peng, Jack, and Sam. This is Min Xu for Jesse Pichel. Congratulations on a strong quarter.

Jack Lai

Thank you.

Xiaofeng Peng

Thank you.

Min Xu – Jefferies & Company

Yes, can you give us some color on the poly ASP that is built in to your 2011 guidance?

Jack Lai

Well, at the present time, we are selling probably in Q3 for $50 per kilogram and – which was increased from Q2. And right now, the spot market price is maintained fairly high around $80 per kilogram. And in the longer term, we expect the poly price will be level at about $50 to $55 throughout the course of 2011.

Min Xu – Jefferies & Company

Okay. A quick follow-up. For your Q4 poly production, how much is going to your own wafer business and how much is going to the spot market?

Jack Lai

At the present time, we use about 50% of our production into our own wafer line and 50% that we sell to contracts we signed and maybe a small amount to go to spot market.

Min Xu – Jefferies & Company

Great. Thank you very much.

Jack Lai

Thank you, Min.

Operator

And our next question comes from the line of Ahmar Zaman with Piper Jaffray. Please go ahead.

Ahmar Zaman – Piper Jaffray

Hello. Good evening and thank you for taking my question. Congratulations on a great quarter. My first question is on polysilicon. So we have heard that some of your reactors' optimal production is significantly – is higher than the rated production of these reactors. Can you talk about what your optimal capacity is – or could be versus what your rated polysilicon capacity is?

Jack Lai

Well, our design capacity for the Mahong plant was 15,000 metric tons. Although at the present time, our present R&D team initiated a project which allows the system to produce 5,000 extra tons using the current design, which is still in research process. If we can get this process improved by debottlenecking, which we believe that 15,000 metric tons someday, maybe a year, maybe 18 months from now, that could increase to 20 metric tons, which will be very, very good for our investment. But again, this is still in research process.

Xiaofeng Peng

20,000 metric tons.

Ahmar Zaman – Piper Jaffray

20,000? Great. Thank you very much, Chairman Peng. And then in terms of your polysilicon, I think just to follow up on the prior question, in terms of 2011, how should we think about your polysilicon – what percentage of your polysilicon production will be consumed internally versus sold externally, spot or contract?

Xiaofeng Peng

We have signed some contracts in – with some customers. We expect – we can sell more and more – approximately 50% of our poly selling to semiconductor and solar industry.

Ahmar Zaman – Piper Jaffray

So 50% you will consume internally and 50% you will sell externally?

Xiaofeng Peng

Approximately, yes.

Xiaofeng Peng

Correct.

Ahmar Zaman – Piper Jaffray

Okay. And then finally, just in terms of the strong demand that you are seeing in the first half of 2011, can you give us some color on which markets you are seeing that demand in? Which markets are driving that – the strength in 2011 and especially in the first half?

Xiaofeng Peng

Yes. Because now we – our wafer production is selling most of Asia and Europe and we have very big demand in China, in Taiwan, in Korea, Japan, India and also we see a big demand in Europe and other countries. But for module now, we have – we see very big demand from Italy, France and all European countries and also, we have some strong demand from U.S. and Canada. We also have a – see very big demand now in local China and also, we see strong demand from Japan, from Korea, and also Chile [ph] and then also other Asian countries like India and Thailand.

Ahmar Zaman – Piper Jaffray

Okay. And then if I may squeeze one final one, your cost – your wafer cost per watt went up by about $0.03 or $0.02 in the quarter. Can you give us some more color on what those specific enhancements or what those one-time adjustments were that you made to your line?

Xiaofeng Peng

Yes, this is adjustment because it's one time for all the spare parts and maintenance for our electricity and also our equipment, this to expand our capacity. In last quarter, we spent very few money expanding our wafer capacity for 300 megawatts. And this capacity expansion, 300 megawatts, is less than – less $50 million. And this spare parts and maintenance is one time. So it about a $0.02 increase, but except these, our processing cost is only $0.30 in last quarter. So, this is just one time for maintenance.

Ahmar Zaman – Piper Jaffray

Correct.

Xiaofeng Peng

And this is just to expanding our capacity from 2.6 gigawatts to – from 2.3 to 2.6 gigawatt.

Ahmar Zaman – Piper Jaffray

Great. Thank you very much and congratulations, again.

Jack Lai

Thank you, Ahmar.

Operator

And our next question comes from the line of Sanjay Shrestha. Please go ahead.

Sanjay Shrestha – Lazard Capital Markets

Great, thank you. Good evening, guys. Again, congratulations on a fantastic quarter and a great outlook. A couple of questions here. First one, what do you expect to get your non-silicon processing cost to by the end of 2011, down from $0.30 right now?

Xiaofeng Peng

We are targeting from current $0.30 to reduce about $0.01 per quarter; for wafer processing cost to $0.25. Our – also, current – our solar cell is $0.27 processing costs; I think next quarter should be – in this quarter, quarter four, should be $0.24. And we also target reducing $0.01 per quarter to $0.20 per quarter and our module processing costs in quarter three is $0.35. We expect to reduce $0.30 per watt in the next few quarters, about also $0.01 per quarter. So our polysilicon cost today is around $22, $24 – $42, $43 per kilo. I think we are ramping up, reducing to about $30 per kilo end of next year.

Sanjay Shrestha – Lazard Capital Markets

Got it.

Xiaofeng Peng

Something like that, yes.

Sanjay Shrestha – Lazard Capital Markets

Perfect. Kind of a follow-up on that, Chairman Peng. There's been a lot of question about pricing, implied ASP assumption. I just want to make sure that I'm understanding this right. You did talk about having very good visibility for the full year 2011, both on the polysilicon and the wafer side, right?

Xiaofeng Peng

Yes.

Sanjay Shrestha – Lazard Capital Markets

Okay, so can you share with us as to where do you see exiting 2011 for the wafer ASP for you guys?

Xiaofeng Peng

For wafer, because we have already done a lot of long-term contracts, starting from 2006 and 2007, 2008, so these long-term contracts are still pending and we have taken a lot – taken many deposit and down payment from customers. So these contracts still need delivery in 2011. And we still also signed few more long-term contracts in this year, 2010, and these contracts is also delivery in 2011. And we already taken deposit and down payment from these contracts.

Sanjay Shrestha – Lazard Capital Markets

Got it.

Xiaofeng Peng

Yes. And also, we still – for us, our wafer capacity is still not enough for these contracts in the first half of 2011, so first quarter or second quarter of 2011. We have still not enough capacity to meet the demand. For polysilicon, we also started signing a few contracts with our customers. These contracts will be also delivered in 2011. We recently announced a contract with BYD Company, so this also will deliver some silicon in some contracts.

And for module, we are already starting singing contracts – pretty much contracted all year of 2011, but price is only fixed for the first quarter and the second quarter. And we already started to receive some payment for the first quarter and second quarter order for module.

Sanjay Shrestha – Lazard Capital Markets

Got it. So is it fair to say then, you do expect your wafer ASP to stay above $0.70 a watt, even in Q4 of 2011?

Xiaofeng Peng

Wafer – I think our wafer ASP for the quarter four should be slightly increased, currently $0.87, should be I think $0.02 or $0.03 more increased in Q4. And after that, I think the price for ASP will stay in similar level in Q1 and Q2.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Xiaofeng Peng

And for the second half of 2011, I think we probably the price we can see maybe one quarter later. But I think the – there will be not too much reduction, maybe some percent reduction.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Xiaofeng Peng

For the module, I think the ASP will be around few cents, few percent less than current level. Current – in quarter three, our ASP for module is $1.88. I think in Q4 should be similar level and Q1, Q2, there maybe a few percent, 2% or 3% discount than current level. And I think for quarter three and quarter four, now we have no visibility. Maybe we can discuss the price in one quarter, two quarter later.

Sanjay Shrestha – Lazard Capital Markets

Yes, nobody has the visibility for that at this point in time anyway. So, two last questions for me. One, so with such a big demand coming your way and you are ramping capacity, as you should, now the question is, how should we think about how do you – how are you going to fund that expansion? So much cash flow do you think there is going to be in 2011 to fund that expansion and are you considering funding that expansion with equity or is it going to be using that line of credit of almost $9 billion you guys have recently received? So help us understand, how should we think about the leverage on your balance sheet for next year?

Jack Lai

Sanjay, of course that – at the present time, our cash flow from operations remain at between $140 million to $150 million per quarter.

Sanjay Shrestha – Lazard Capital Markets

Yes.

Jack Lai

And next year, with the bigger turnover and with improved gross margin, we expect our cash flow will be increasing to about $200 million level on a quarterly basis. With the approval of the CDB facility, we will be able to have this money to be used for CapEx if we need it. And of course we can use the cash flow from operations to either pay down some of our debt.

Sanjay Shrestha – Lazard Capital Markets

Yes.

Xiaofeng Peng

And of course that's when the market conditions improves, we may consider to have some equity deals. As you know, we've already done a deal last year and we have been waiting to see if any market conditions improve, we could do some of the deals to improve our cash position. But certainly we are very hopeful that with the operating cash flow and with the CDB facility, we should be handling our expansion quite well.

Sanjay Shrestha – Lazard Capital Markets

Okay. So, just to be clear, the equity issuance is only opportunistic, not something you will do unless the market is very good and you see significant share appreciation and things along those lines, right?

Jack Lai

Right. And at the same time, as you know, we expect our CapEx to be somewhere of $500 million, $600 million range and from operations, we could generate about $800 million next year. So, we should have sufficient fund to fund our CapEx activities.

Sanjay Shrestha – Lazard Capital Markets

Great. Congratulations on a great quarter and the outlook, guys.

Jack Lai

Thank you, Sanjay.

Operator

And our next question comes from the line of Lu Yueng with UBS. Please go ahead.

Lu Yueng – UBS

Hi, good morning, Chairman Peng, Jack, Sam, and Dr. Wan. I have a question on your capacity – sorry, CapEx guidance for next year. Could you break out how much of that is going to wafer, cell, modules, and poly? And you said that your CapEx per watt for ingot wafers are much lower these days. Can you share with us what is it that you do to achieve that and what is the CapEx per watt for ingot wafers?

Jack Lai

Well, next year, as you know, we will be ramping up our third train of our Mahong poly plant, which we expect to spend probably somewhere $100 million to $150 million. And we will also expand our wafer capacity from about 2.8 to 3.6 – 2.8 end of this year to about 3.6 next year. So that will be 800 megawatt additional. And we believe that is probably going to be around, also, $200 million.

We are going to spend some more money, of course, for the cell line, which could amount to maybe also close to $150 million to $200 million. And our expansion in the module capacity will be very minimum level, there will be a couple of pennies only, so will be somewhere like $30 million or so. We can achieve that.

So in total, we are looking at $500 million to $600 million for all CapEx next year.

Lu Yueng – UBS

So, does that include the investment by the Hefei government?

Jack Lai

Yes.

Lu Yueng – UBS

And based on your capacity targets, it looks like you are able to increase 800 megawatt of wafers with just $200 million.

Jack Lai

Yes, we can do that.

Lu Yueng – UBS

Can you share with us what is that you do to achieve that?

Jack Lai

As a matter of fact, we started with about $0.40 per watt a few years ago and with the experience that we have and with the in-house set up of cost, we don't need to retain the engineering services, we just buy equipment and we can install by ourselves and ramping up with internal resources. Especially for the last two quarters, actually through upgrade of equipment and also debottlenecking of the production line, our cost was much lower – I think it's below $0.10 on a per-watt basis. So, we did quite well for the last six months, not spending so much money, but we managed to increase our capacity.

Lu Yueng – UBS

I see. Also, based on your guidance for the poly production in fourth quarter, 1,700 to 1,900 metric ton, how much of that is coming from your second train in the fourth quarter?

Jack Lai

Okay. I think the Mahong plant will be the primary contributor for that. For the Xiacun, it's max that we can do probably 250. So about 1,500 to 1,600 would come from the Mahong plant. So, Mahong plant, because the contribution for the second train, will be very, very good in this quarter. So, a primary contributor from our Mahong plant.

Xiaofeng Peng

For the second line, we will produce maybe 200 to 350 metric tons in second train this quarter.

Lu Yueng – UBS

And when would you expect the second train to achieve full production?

Xiaofeng Peng

We expect in – sometime, in one month or two months' time.

Lu Yueng – UBS

So should I expect in Q1 the second train should be in full production mode?

Xiaofeng Peng

It will be sometime happening in this quarter, I think within maybe sometime in December it should be full production. So, definitely we will – in the first quarter, we will be full production. That's why we say we can produce maybe 200 to 350 tons in the second line of the – in this quarter already.

Lu Yueng – UBS

And lastly for me – yes (Multiple Speakers) – go ahead, sorry.

Xiaofeng Peng

Our cost for polysilicon Mahong plant should be reduced a lot from current level when our second line is full production.

Lu Yueng – UBS

Lastly for me is, what was the procurement cost of cell in Q3 and what would you expect in Q4 and going forward in 2011?

Xiaofeng Peng

The processing costs?

Lu Yueng – UBS

The procurement cost for cell.

Xiaofeng Peng

I think – yes, some level about $1.40 level and it depends, case by case. But more or less, you get $1.35, $1.37, $1.38, $1.40 level. But for next year, the price will be trending down – going down, especially from the first quarter. And I think second half of – from the first quarter, second quarter, the cell price will go down a lot, because a lot of cell capacity available now in China and in Taiwan. So I think the selling price will be going down a lot in the next few quarters.

Lu Yueng – UBS

Okay, thank you. Congratulations.

Xiaofeng Peng

Thank you.

Jack Lai

Thank you, Lu.

Operator

And we have time for one last question and that question comes from the line of Sunil Gupta with Morgan Stanley. Please go ahead.

Sunil Gupta – Morgan Stanley

Thank you for taking my questions. Congratulations, Chairman Peng, Jack, Sam, and Dr. Wan. I just wanted to follow up on the question earlier about the CapEx. On your polysilicon line, Jack, you mentioned you need to spend maybe between $100 million to $150 million. Can you just remind us how much have you spent on the polysilicon plant since inception? Because you've done it in various phases, so, say, for the 15,000 ton plant, what has been the total CapEx to date, so that we can just – and you mentioned there's something else required after this $100 million to $150 million?

Jack Lai

Okay, Sunil. For the Mahong plant, to date, we spent approximately $1.8 billion and we expect to spend additional $150 million next year so that we can bring up the line three of 5,000 tons. So that's – so we expect to spend, probably somewhere $2 billion when we fully complete this 15,000 facility.

Sunil Gupta – Morgan Stanley

And do you need anything at all after this or after this $100 million to $150 million, it's fully ramped up?

Jack Lai

We are working, evaluating if we could increase this 15,000 metric ton to 20,000 metric ton. And at this moment, we are still on the research process. If we can get the research done, then we may spend a very small amount of money to do some debottlenecking of the original production line so that we can increase the throughput. So, 15,000 will become a 20,000 facility. That cost is not yet estimated at this moment.

Sunil Gupta – Morgan Stanley

Okay. And I may have missed this earlier comment about – in your wafer business in Q3, how much was tolling and what you expect in Q4 and if you have a view on what it might be next year?

Jack Lai

Okay, of course. For the Q3, for the tolling in the wafer side was 82.5 megawatt compared to wafer sales 487 megawatts. So the total wafer shipment was 569.5 megawatts. For the module business, we had module sales 87.6 megawatts and we have OEM business for modules about 6.5 megawatts and total module shipment was 94.1 megawatts.

Sunil Gupta – Morgan Stanley

Okay. And what do you expect this to be, say, in Q4 and next year?

Jack Lai

Well, our business model normally suggests a 15% to 20% for wafer business. So, the 20% is good for model purposes for OEM business. On the module side, at the present time, only run at a low percentage, at about 7%. However, next year, when we grow up our module capacity, our module OEM business might increase also to probably the 20% level, if we can sign a couple of big contracts in the next few months.

Sunil Gupta – Morgan Stanley

Okay. And just two minor housekeeping questions on the balance sheet. So I noticed that you managed your accounts payables very well in Q3. How should we be thinking about accounts payables going forward? Can you continue to increase it as it happened in Q3 or in terms of number of days or will it flatten out? What should we be thinking?

Jack Lai

So, normally on accounts payable, we are doing quite well with many of our domestic suppliers, as we have already five-year trading experience with them and normally our operations department, they manage to negotiate regular basis for about 60 days. So that's where we try to accomplish and at the present time, we are probably a little bit less than that. But I feel 60 days is what we can work on that.

Sunil Gupta – Morgan Stanley

So, you said 60 days? Did you?

Jack Lai

60, yes.

Sunil Gupta – Morgan Stanley

Okay. And the last one that I have is on accrued expenses and payables and I'm just trying to understand what are the items in there, because that's gone up by about $80 million and are there any CapEx related payables there or what sort of payables are there in accrued expenses and payables versus accounts payables?

Jack Lai

The biggest contribution for all the payables increase was due to the work in – the construction in progress. As you know, we are in the process of expanding our facilities, including polysilicon and cell line that we are building right now. And given the construction progress that we have, all the payables increased by such amounts, yes.

Sunil Gupta – Morgan Stanley

Okay, very clear. Thank you very much and congratulations once again.

Jack Lai

Thank you, Sunil.

Xiaofeng Peng

Thank you.

Operator

Ladies and gentlemen, that concludes the question-and-answer session. Management, please continue with any closing comments.

Xiaofeng Peng

Thank you for participating in today's quarterly earnings call. We appreciate your continuous support to LDK Solar. We look forward to seeing you again in the coming financial conference and industry events. If you have chance to travel to China, we would like to extend our invitation to you to come to pay a visit to our plants. We wish you all have a nice evening.

Operator

Ladies and gentlemen, this concludes the LDK Solar Company third quarter 2010 earnings conference call. If you would like to listen to a replay of today’s call, please dial 1-800-406-7325 and enter the access code of 4377929. Thank you very much for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LDK Solar CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts