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

Q4 2010 Earnings Call

March 17, 2011 5:00 PM ET

Executives

Ellen Davis – The Blueshirt Group, IR

Xiaofeng Peng – Chairman and CEO

Jack Lai – Chief Financial Officer

Sam Tong – Chief Operating Officer

Dr. Yuepeng Wan – Chief Technology Officer

Analysts

Edwin Mok – Needham & Company

Sanjay Shrestha – Lazard Capital Markets

Sean Wieland – Piper Jaffray

Lu Yueng – UBS

Vishal Shah – Barclays Capital

Sunil Gupta – Morgan Stanley

Sams Dubinsky – Wells Fargo

Matt Farwell – Imperial Capital

Wayne Chang – BMC

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to LDK Solar Company Fourth 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)

This conference is being recorded today, Thursday, March 17, 2011. At this time, I’d like to turn the conference over to Ellen Davis with the The Blueshirt Group. Please go ahead.

Ellen Davis

Good afternoon. And thank you for joining us on today’s conference call to discuss LDK Solar’s fourth 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 at www.ldksolar.com for 90 days.

On today’s call are Xiaofeng Peng, Chairman and Chief Executive Officer; Jack Lai, Chief Financial Officer; 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 fourth quarter 2010. We also filed the press release on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company’s website, as well as the SEC’s website, or you can call The Blueshirt Group at 415-217-4961 and we will fax or email 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 forward-looking statements regarding future events or future financial performance of the company made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

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

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

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

Jack Lai

Thank you, Ellen. Good afternoon. And thank you for joining us to discuss the results of LDK Solar for the fourth quarter of 2010. Net sales for the fourth quarter was $920.9 million, up 36.3% from $675.6 million in the third quarter.

Wafer sales increased to $563.2 million from $426.0 million. Module sales increased to $284.4 million from $164.7 million. Polysilicon sales decreased to $12.5 million from $29.0 million. OEM sales for wafer decreased to $17.9 million from $41.7 million and OEM sales for module decreased to $1.8 million from $3.3 million.

By geography, net sales in the fourth quarter was 31.0% generated from China, 26.4% from Asia-Pacific excluding China, 35.0% from Europe and 7.6% from North America.

Our top 10 accounts in the fourth quarter accounted for 41.6% of total revenues, with the top three accounts combined accounting for 21.1%.

Wafer shipments, including our processing business increased 10.2% sequentially to 627.8 megawatts from 569.5 megawatts in the third quarter. Wafer shipments, which exclude the OEM business, increased to 596.4 megawatts from 487.0 megawatts in the third quarter. The average selling price for wafers was $0.94 per watt in the fourth quarter of 2010.

Sales return provision in the fourth quarter of 2010 was $2.4 million. OEM shipments decreased 61.8% sequentially to 31.5 megawatts from 82.5 megawatts in the third quarter of 2010. With strong demand from our new customer for solar wafers we have reduced the manufacturing capacity for our OEM business during the quarter.

Module shipments, including our processing business were 157.2 megawatts in the fourth quarter of 2010, up from 94.1 megawatts in the third quarter of 2010.

Gross margin in the fourth quarter was 27.3%, compared to 22.2% in the third quarter. Our gross margin for our wafer business was 36.2% in the fourth quarter, which increased from 27.9% in the third quarter of 2010.

Gross margin for our polysilicon business also increased in the fourth quarter to 42.5% from 30.3% in the third quarter of 2010. Gross margin for our module business increased to 9.5% in the fourth quarter from 4.6% in the third quarter.

Overall, the sequential improvements in our gross margin in the fourth quarter was due to improved ASP trends supported by strong demand, we anticipate that the continue business environment together reached the expected reduction in our overall business cost should allow us to expand our gross margin product.

Our wafer conversion cost was $0.31 per watt and the average cost of polysilicon was consumed was $50.5 per kilogram in the fourth quarter of 2010.

Operating expenses were $49.0 million in the fourth quarter of 2010, up from $30.5 million in the third quarter of 2010. Our share-based compensation expenses were approximately $2.3 million in the fourth quarter of 2010.

Operating margin in the fourth quarter was 22.0%, up 4.3 percentage points from the third quarter. Net income for the fourth quarter was $145.2 million and earnings per diluted ADS was $1.09, approximately 137.5 million shares were used in computing the fully diluted EPS.

Depreciation and amortization was $49.0 million for the fourth quarter. Capital expenditures were $148.1 million in the fourth quarter, which includes $129.8 million for wafers, cells and modules and $70.9 million for polysilicon.

Our wafer manufacturing capacity reached 3.0 gigawatts in December and we achieved total use of polysilicon production capacity of 11,000 metric tons, which is in full production.

In light of the strong demand and backlogs we have experienced, we will continue our integrated business model and will continue to ramp up our cell, module, polysilicon manufacturing capacity. We will also tightly manage capital expenditure requirement for continued wafer capacity expansion, which will continue to primarily be done through equipment upgrades and debottlenecking.

Going forward, we anticipate CapEx of approximately $100 to $150 million in the first quarter of 2011 and $450 to $550 million in fiscal year 2011 to expand our wafers, polysilicon, cell and module capacities.

Company headcount was 22,400 at the end of the fourth quarter, an increase of 2,973 from the third quarter.

Now let’s turn to the balance sheet. We ended the fourth quarter with $202.1 million of cash and cash equivalents and $503.7 million in short-term pledged bank deposits. As of the end of last week, we have $506.6 million of cash and cash equivalents.

Although, we continue to operate with negative net working capital, our operating cash flow to get -- significantly improved to $231 million and 10 over days of our accounts receivable was slightly increased to 29 days, which we have accounts payables increased to about 53 days.

Inventories increased to $474.6 million due to our prolonged manufacturing process for downstream module business. In addition, we have several PV projects in the final stage of completion, which will be sold in the next couple of quarters.

Our polysilicon inventory at the end of the fourth quarter was approximately 2,460 metric tons at an average cost of approximately $56.4 per kilogram. We expect the quality and cost to trend lower as we realize the benefit of in-house production.

Total interest bearing borrowings were approximately $2.5 billion, including $1.86 billion of short-term bank borrowings and current portion of convertible senior notes and $636.3 million of long-term interest bearing borrowings and non-current portion of convertible senior notes.

With increased cash flow from operations, a higher cash balance and three financing activities we recently completed, we continue to make progress on reducing our short-term borrowings, following the closing of the private equity investment in our polysilicon business, which is expected to occur in the next few weeks. We will continue to explore potential spin-off plan for our polysilicon business.

Now, let me turn the call to Mr. Peng, our CEO. Mr. Peng?

Xiaofeng Peng

Thank you, Jack. Hello and thank you for joining us today. In the fourth quarter we were very pleased to once again to achieve record quarterly revenue, strong growth in wafer and module shipments, high ASP and improved gross margins. Our results are testament to how we operate as a leading very great -- integrate producer of PV product.

Our performance demonstrates the benefit of our expanded scale, geographic reach and increasing contribution we are seeing from our polysilicon, module and cell business. Obviously, our team continued to execute strongly. We extend our market leadership, as well as the largest solar wafer producer reaching 3.0 gigawatt of annual wafer manufacturing capacity at the end of December. We have continued to achieve this expansion in wafer capacity primarily through equipment upgrade to minimize our CapEx in this area.

Due to industry technology improvement, our wafer conversion efficiency has been improved from 15.6% to 6.85% of [corporate world-wide] for a piece of wafer starting from beginning 2011. We expect to expand our wafer manufacturing capacity to 4 gigawatts by end of 2011.

All shipments of our business in the PV value change, module, cells and polysilicon continued to (inaudible) long-term. As we view the ever changing industry dynamic, we are continuously discuss of our integration modules.

We were pleased to announce in January that LDK Solar acquire -- agreed to acquire 70% interest in S.p.A. for approximately $33 million. We have known the S.p.A. Group for several years and have been very impressive with the quality of the work and the caliber of the [entire] their service.

Through this transaction, S.p.A. can accelerate the development of its PV project pipeline, which primarily consists of utility-scale power plants and commercial/industry PV system. S.p.A. is growing development portfolio and pipeline in turn should provide LDK Solar with enhanced downstream benefit to its vertical integration model through module supply for large scale PV projects. In addition to hedging expand, LDK Solar present in North America, we have assume total manufacturing control of S.p.A former module manufacturing facility in Shenzhen, China.

I would like to update you how we see the key market -- PV market evolving and how they relate to our growth strategy. As well as tragic event in Japan, we don’t see a significant current impact to our business. We do not expect to be effect by [potential hydro] global polyethylene supplier that may arise in the near-term. We expand our deepest sympathy for the countries tremendous losses.

In Europe, following strong growth in 2010, we believe the key markets will be Germany, Italy, Belgium, France and other emerging areas. And I’m sure we are aware Italy is in process of changing its (inaudible), which we’ll be expects strong near-term uncertainty before the new policy defend.

We remain confident that Italy will continue support healthy long-term PV market. Basically rooftop installation expected to compare a significant portion of our European market. We are well-positioned for rooftop installation through number of distribution agreement that we already have in place.

In summary, we are very pleased with the performance of our company. Our first quarter results demonstrate our ability to leverage our technology advantage, strong customer relations and cost effective manufacturing capability.

We have made significant stress in positioning the company to take advantage of the growth throughout value change in the PV industry. As we ended 2011, we are excited about our prospects for continued growth and a success.

I will now turn a call over to Sam Tong, our President and Chief Operating Officer to provide our manufacturing operation update. Sam?

Sam Tong

Thank you, Chairman Peng. I will provide an update on wafer, module, cell and polysilicon operations. Reflecting the strong demand levels, wafer ASP continued to increase in the fourth quarter. We have seen continued stability in the wafer pricing so far in the first quarter of 2011.

Our wafer processing cost in the fourth quarter was $0.31 per watt. We continue to work towards our goals of reducing the wafer conversion costs to as low as $0.25 per watt over the next year.

As mentioned earlier on the call, we reached 3 gigawatts of annualized wafer capacity at the end of the fourth quarter. We were able to accelerate our wafer expansion plan with minimal investment and we expect that our continued expansion to 4 gigawatts by year end will be made with the equipment upgrade, with minimal capital expenditure.

We have continued to scale our module operation rapidly, increasing our shipments by nearly 70% sequentially during the quarter. We are continue to focus on enhancing our cost structure as we ramp up our manufacturing operation as expected, we began to see processing cost decline in the first quarter, resulting a significant improvement to our gross margin for modules.

We have already seen of our cell manufacturing lines is processing as planned. In addition to providing a steady supply of cells to our module, we expect that our integration of R&D efforts for polysilicon, wafer, cells and modules, we are continue to drag down the total cost of modules in the next few quarters.

We reached a manufacturing capacity of 180 megawatts at the end of fourth quarter and we produced 27 megawatts of solar cells at the processing cost of $0.21 per watt.

Total polysilicon production tracked at expected levels during the fourth quarter and approximately 1,925 metric tons of polysilicon was produced.

In our Shenzhen plant we produced approximately 299 metric tons of polysilicon. In our Ma Hong plant we produced approximately 1,626 metric tons of polysilicon during the fourth quarter. The third 5,000 metric ton is expect to commence -- commissioning in the second quarter of 2011. We expect the cost of polysilicon production will continue to be reduced in the coming quarters.

Combining the two plant production, we expect to produce between 2,300 metric tons and 2,400 metric tons of polysilicon in the first quarter of 2011. While the cost of 2011, we are making efforts to debottlenecking, we expect to increase addition of 3,000 metric tons capacity through debottlenecking with the minimal capital expenditure. Therefore, we expect our polysilicon capacity to reach 25,000 metric tons by end of 2011.

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

Dr. Yuepeng Wan

Thank you, Sam. I would like to provide an update on our research and development programs. We continued our efforts in debottlenecking and process improvement. We started implementation of a new, advanced conversion technology to produce tricholorosilane from silicon tetrachloride. The application of this technology will enhance greatly our current capacity of polysilicon production and the reduced overall production costs.

We have been successful in commercialization of several of our proprietary technologies. The conversion of 95 sets of old DSS 240 furnaces into DSS 450 furnaces led to the increase of ingot capacity of about 140 megawatts. The implementation of the newly developed [ASP] process resulted in an increase of about 500 megawatts in the ingot production capacity without capital expenditure.

The innovative [PV] process has improved the ingot quality on its electrical property at a reduced consumption of argon gas at the same time. We have successfully completed several R&D projects on improvement of ingot wafer processes. This includes an innovative charging and acoustical technology that can produce poly ingot of more than 500 kilograms with standout DSS 450 furnaces and crucibles and a much improved costs and process for high quality N-type monocrystals that can increase the yield of the crystals significantly.

We performed an expanded R&D projects for integrating and optimizing the whole production processes and technologies from polysilicon to the final PV panels. We have reached below $1 per watt production cost successfully in this project.

We are confident of our technology path towards the lowest cost of production that we are aiming at the production cost below $0.90 per watt in our R&D integration efforts in this year.

During the fourth quarter, we have been granted four new patents and the three more patent applications were submitted. To date, a total of 64 patent application has been submitted and 15 of them have been granted patent rights.

I will now turn the call back over to -- back to Jack.

Jack Lai

Thank you, Dr. Wan. Based upon current business conditions for the first quarter of 2011, LDK Solar estimates its revenues to be in the range of $800 million to $850 million with gross margin to be in the range of 27% to 29%. We anticipate wafer shipments between 610 and 660 megawatts, module shipments between 120 and 140 megawatts, silicon production between 2,300 and 2,400 metric tons and cell production between 45 and 50 megawatts.

For fiscal year 2011, we expect our revenue to be in the range of $3.5 billion to $3.7 billion with gross margins between 24% and 29%. We expect wafer shipments between 2.7 gigawatts and 2.9 gigawatts and module shipments between 800 and 900 megawatts. In addition, we expect silicon production between 10,000 to 11,000 metric tons and cell production between 500 to 600 megawatts.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from the line of Edwin Mok with Needham & Company. Please go ahead.

Edwin Mok – Needham & Company

Hey, thanks for taking my question. So first question is on just cell capacity ramp. You guys previously talked about, eventually having higher cell capacity in second quarter. Can you update us, how is that going to progress throughout the year?

Xiaofeng Peng

Yeah. The cell capacity is ramping up very well and we have 180 megawatt capacity in Shenzen sites and this site now have capacity of 240 megawatt in Shenzen and most important, our big capacity in Hefei factory is more than 1 gigawatts of factory and we are starting production very soon. I think, in quarter two, we have a big production, in-house production in Hefei factory. So I think our Q2 in-house solar cell production will be significant increase than current levels.

Edwin Mok – Needham & Company

And what’s the target for the year?

Xiaofeng Peng

The target, we will produce 500 to 600 megawatts solar cell in-house and target end of the year -- capacity will be reaching from 580 megawatts a day to reaching 1,260 megawatts end of the year.

Edwin Mok – Needham & Company

Great. That’s helpful. And then, Jack, a question on the CapEx. It sounds like you guys expect a lot of improvement in capacity just from debottleneck, but your CapEx guidance compared to all expansion in poly, cell and wafer seems relatively low.

Can you tell us how much -- may be a good way to think about it is how do you kind of break out $400, let say $450 million of CapEx that you are targeting for this year between various parts and on the wafer side, is that any risk that you have some old equipment that might be -- you might have to just spend CapEx to retool to keep that capacity?

Jack Lai

I think that debottlenecking for our polysilicon actually will increase by 7,000 metric tons extra in addition to the 18,000 we predicted. (Inaudible) we expect to reach a 25,000 metric tons by the end of this year. While we expect to spend probably close to $150 million this year and I think on the cell side, as Chairman indicated that we are increasing one site to increase about 1 gigawatt in Hefei, which we believe that comes close to about $300 million total investment, also including some of the peripheral support for the Hefei operations. We expect that the total investment actually to be $450 to $550 for the total year. So we have probably $100 million for some other module capacity expansion and some other improvement of our current production lines.

Edwin Mok – Needham & Company

I see. So you expect 1 gigawatt of additional capacity mostly come from debottlenecking and throughtputs (inaudible)

Jack Lai

Yeah.

Edwin Mok – Needham & Company

I see. Very helpful. Just question on kind of ASP trend, what you guys are seeing on the first quarter and so far this quarter in terms of wafer ASP and how do you kind of think about the general issue at its release? Do you anticipate a big drop in ASP as you get into second quarter and the second half?

Jack Lai

Yeah. We’ve seen the polysilicon price is very staple and even increasing chains, because many suppliers in -- from Japan, they have stopped their production for few months. We see that wafer market is very stable and -- for pieces because no one was selling the wafer by piece.

In piece-base, the price is very stable compared to fourth quarter, may be $0.10 to $0.20 difference but is very stable. For the module side, we see that ASP is down from 185, 186 to what level down to around $170 level. So the module price has decreased around the first quarter

Edwin Mok – Needham & Company

I see. Just to clarify, wafer, you said you expect about $0.90 plus in the first half of they year?

Jack Lai

Yeah. We see the first quarter is around -- still around $0.90 level and just based on 3.8 watts per piece. So if -- this year, we are starting to change our wafer to 4.1 watts per piece. So if you are selling at same price per piece -- the watt space per wafer is around 8% to 9% lower.

Edwin Mok – Needham & Company

I see. So you expect higher watts per wafer piece which helps offset some -- which enabled you to sell it at a better pricing point that’s all, that’s what you need. Okay. It’s very helpful and then just one last question. On the operating expense, you know, it increased by a bit sequentially in the third to fourth quarter, Jack, how do you kind of think, about OpEx going to first quarter and for the rest of the year as well.

Sam Tong

Hi, Ed. It’s Sam. Our model still suggest that that we try to improve our OpEx to 4% level although our cost module is still 4% to 6% now for the next couple of years. I think, most likely we are running -- still around 5% which is middle of our cost model. But of course, the company has tried to improve the control and they try to see if we can work on the 4% range. At this moment, I think 5% is still a very good estimate.

Edwin Mok – Needham & Company

Great. That’s all I have. Thank you.

Jack Lai

Thank you, Edwin.

Operator

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

Sanjay Shrestha – Lazard Capital Markets

Great. Thank you. First of all, congratulations on a great quarter guys. Couple of quick questions, first on your 800 to 900 megawatts module shipment for 2011. Can you give us a sense as to sort of a geographic distribution of that and what sort of a volume and a pricing commitment do you guys have for that during 2011?

Xiaofeng Peng

Yeah. For the module side now, we have a big portion, I think more than 55% we will still ship to Europe.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Xiaofeng Peng

Of course, this year we see a big demand from allocation also to North American especially, in U.S.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Xiaofeng Peng

We also allocated now a big volume in China because we have a very strong pipeline in China market. Also we’ve seen now, we also starting to ship to Asia especially to the market like in Australia, in Asia like India, also Japan and Korea. So we see a more diversified market than last year and I think the key market is still Europe. I think we are here around, 55%, more than 55% still, I think, this year.

Sanjay Shrestha – Lazard Capital Markets

Got it. Can I ask a follow-up question on that? So in light of this, somewhat of a uncertain or not clear situation about the policy dynamics in the European markets? Have you seen any price like you know changes in your Q2 delivery or have you seen any impact from that or any thing more you could add on that?

And second part of that question, if I may, Chairman Peng, are you expecting anything different in this five-year plan to come out as this relates to the solar outlook in China.

Xiaofeng Peng

Yeah. We see the module price in the second quarter is stable, especially in a shipment in April and May.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Xiaofeng Peng

We think that demand is very strong from Europe now. I think may be -- the price may decline in quarter three and quarter four for the module.

Sanjay Shrestha – Lazard Capital Markets

Okay.

Xiaofeng Peng

And for China, I think the demand is increasing more and more and we see them generally become a very important market especially for LDK Solar this year and next year.

Sanjay Shrestha – Lazard Capital Markets

Okay. And do you expect anything different versus that 5 gigawatt near-term target that has been there for China for the solar installation in this new plant that is expected to come out sometime this month. Anything incremental, have you heard about that?

Xiaofeng Peng

Yeah. We see a lot of movement in China, both from utility level and also (inaudible) project and also (inaudible) level. So we see them at different level and different -- both utility level and (inaudible) project and rooftop is moving very well in China. I think China will be a gigawatt market, may be, for next year, I think, more than 2 gigawatt market and even more for next year.

Sanjay Shrestha – Lazard Capital Markets

Got it. Two quick follow-ups for me, if I may. First one is, in terms of your module business, right. Two part question on that. One, what kind of pricing are you getting in China versus here up in the second half of 2011 and who are you using for [encapsulated] supplier?

Jack Lai

Yeah. For second half here in China, we can still get a module price around $1.50 to $1.55 range and in other areas, we still not decided price in second half year for Europe and for U.S. But in China, not normally, we’ll get a price, around $1.50 to $1.55 for the module price for second half of the year and the customers are willing to pay for some volume.

Sanjay Shrestha – Lazard Capital Markets

And for the encapsulated supplier?

Xiaofeng Peng

Both for China market.

Sanjay Shrestha – Lazard Capital Markets

Okay. Okay. Got it. Got it. That’s great. Congratulations again on a great quarter.

Xiaofeng Peng

Thank you.

Jack Lai

Thank you, Sanjay.

Operator

Thank you. Our next question comes from the line of Ahmar Zaman with Piper Jaffray. Please go ahead.

Sean Wieland – Piper Jaffray

Hi. This is [Sean Wieland] for Ahmar. Just wondering, if you could go over what your poly ASP was in 4Q and 1Q and how that sort of you see that trending in terms of your external cells of poly?

Xiaofeng Peng

So the ASP, actually is doing quite well and I think we reported in third quarter somewhere about $62. In the fourth quarter, we are running north of $70 and sometimes actually close to $80. Right now, we’re still seeing very short demand and their price beyond -- goes over $70 and sometime go to $80 and at times, we see offers close to $90.

Sean Wieland – Piper Jaffray

Great. Thanks. And also, if you could talk a little bit about, what might be, sort of a timeline in terms of your poly production cost. I know, you had some slide last quarter that went over this. But with the time line that we can think where your poly production cost could be moving below the $30 level and if you could walk through, what we will have to do to achieve that?

Xiaofeng Peng

More certainly that, I think a year ago, we’re running in the high $50 and actually running now, we are very close to $50. And with the effort, we are putting in, our changing of process and also improve of the efficiency in the protection process, also with the third train going to come into production probably within the next quarter, our depreciation, amortization cost will be much lower.

With some of the cost change actually, we are going to save a lot of utility cost that are getting involved and also with the scale of guarding increase that we expect that by the end of the year, we are still looking at some way at $30 to $32 per kilogram, fully [loaded] to cost.

Xiaofeng Peng

I think also for next year, we are pretty confident of our must be below $30 starting for next year.

Sean Wieland – Piper Jaffray

Very good. And then also you could talk a little bit about, you made a comment earlier about impact from Japan on polysilicon and how that might be impacting your business or opportunities for the business? Can you elaborate on that a little more about what you’re seeing and what you guys expect this result of the polysilicon situation in Japan?

Xiaofeng Peng

We are getting 20 to 40 tons silicon from Japan every month in the past. I think in this volume, we will be replaced from other source in short term. But I think because -- as this amount is compared to our total resource, our total polysilicon, requirement is very, very minimum and also we have some wafer customers in Japan, I think. But the impact, it will be much shorter.

So of course, it may be very short term impact for some delivery but also it got select demand for polysilicon, both polysilicon and wafer is very strong. I think it’s very easy for us to relocate it. So the impact for us is very, very minimum.

Sam Tong

Sean, just to add to the number perspective that our revenue in the fourth quarter of 2010 are 2% of our total revenue that come from Japan.

Sean Wieland – Piper Jaffray

Great. Thank you very much. That’s it from me.

Jack Lai

Thank you, Sean.

Operator

Thank you. Our next question comes from the line of Lu Yueng with UBS. Please go ahead.

Lu Yueng – UBS

Hi. Thanks for taking my question. I wonder as you’re timing to spin out your poly business at the end of year, how should we think about what kind of cost you will be -- will you be paying for the market price for your poly produced from your certain business or how should you think about that?

Jack Lai

Yeah. Because according to the U.S. GAAP that even though we have intercompany transactions we need to attach whole market price. So from an LDK policy shipped to LDK Solar. The policy of LDK shipment that will be charged on fair market value.

Lu Yueng – UBS

I see. One more question is -- if you -- we restructure your balance sheet this year with that how should we think about the interest expense for this year?

Jack Lai

Well for the time being that our average cost of capital somewhere about 5.5%. So, if you look at our run rate, it’s probably somewhere I think about $2 billion -- a little bit over $2 billion. So I feel it would be somewhere between $100 million to $130 million for interest expense for 2011.

Lu Yueng – UBS

I see. One more follow-up for your polysilicon business you said about the bottlenecking by the end of the year increasing your final capacity, how should we think about the total depreciation as you go for the year for your poly?

Jack Lai

According to the -- I think our depreciation is probably somewhere about $13 and change per kilogram. Once we increase that 7000 additional capacity we are looking at somewhere obviously $3, $6 to $8 per kg once the bottlenecking completed.

Lu Yueng – UBS

Okay. Okay. Thank you very much. Congratulations.

Jack Lai

Thank you.

Operator

Our next question comes from the line of Vishal Shah with Barclays Capital. Please go ahead.

Vishal Shah – Barclays Capital

Hi. Thanks for taking my question. Jack, two questions. First of all, your balance sheet your cash -- your pledged bank deposits went up in Q4 and your current assets cash number came down, can you talk a little bit about that and then secondly can you also talk about what percentage of your polysilicion production you sell into the open market and recognize revenue? Thank you.

Jack Lai

Thanks, Vishal. First of all your question on pledged bank deposits, as you know we are making very good progress in importing the equipment to set up a our 1Gigawatt cell line in Heifi City in Anhui Province and which we have to open LCs to purchase those equipments and we need to almost 100% to the pledge back deposits to secure each shipment near term. So that’s the reason that the increase the balance sheet on the pledge bank deposit line. So…

Xiaofeng Peng

And also in the end of the year we have a taken a payback to -- more than $220 million to interest full term to 15% interest for more than $220 million to pay back the 15% of our [home plant] (inaudible) poly plant in (inaudible)?

Jack Lai

So, on the polysilicon business our business model we expect to sell about 50% internally to the wafer operations and the other 50% to the open market as though recent months that because the market is very, very tight and we use more than 50% in our in-house operations.

Vishal Shah – Barclays Capital

Okay. So, in Q4 would it fair to you assume that we use 73% of your polysilicon production for your in-house operations?

Jack Lai

Correct. That is very, very high in Q4.

Xiaofeng Peng

So wasn’t your -- you mentioned that you recognize cost for internal polysilicon production based on market price, so would it be fair to assume that your polysilicon costs was as high as spot market price? Can you explain that again, one more time?

Jack Lai

Well, our production cost, of course are coming down gradually but at times that because of ramping a process that could be going up or down totally depends upon the cost curve, but the present time our production runs that we should expect somewhere about $39 to $41 range. I think a $40 cost to date is a very good estimate although we expect that to go down to about $32 by the end of this year.

Vishal Shah – Barclays Capital

Okay. And in your guidance for full year 2011 revenue what percentage of your polysilicon production number that you have given 10,000 to 11,000 metric tons, what percentage of that number are you assuming that you would sell to achieve in the open market?

Jack Lai

So the production -- let’s say for $10,000 to $12,000 in our (inaudible) we should expect that between 5,000 to 6,000 tons will be sold to our customers and as you know that we have signed three or four major customers, they will take probably those 5,000 to 6,000 tons from our production.

Vishal Shah – Barclays Capital

Have you entered into contracts with those customers or are you going to sell polysilicon in the spot market?

Jack Lai

Yeah. We’ve signed contract such as BYD, such as Lu’an Group and those are major customers in the next couple of years.

Vishal Shah – Barclays Capital

Okay. Great. That’s very helpful. Thank you.

Jack Lai

Thank you, Vishal.

Operator

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

Sunil Gupta – Morgan Stanley

Thank you. Jack I just wanted to follow up on some of the earlier questions about ASPs and cost, so on ASPs you mentioned and I think Jim has already mentioned module ASPs have declined little bit in Q1 and also for the wafer ASPs, do you have visibility for Q2 and Q3 based on the conversation that you are having with your customers and I wonder what that looks like?

Jack Lai

Yeah. We see the polysilicion business the demand is very strong, the price have increased recently and wafer ASP is very stable and reduced few cents (inaudible) very very stable range, single range in for a wafer.

For the module we’ve seen the price decline in first quarter. I think the second quarter April and May June demand is very strong. And a probably average ASPs in Q2 in June there may be some decline and in second half of the year the module we see -- we still see maybe further decline a little bit in Q3 and Q4 and this is -- and of course in the second half of the year, most of the customers are in the negotiating process, but in Q2 that demand is very strong especially in April and May.

Sunil Gupta – Morgan Stanley

And Chairman Peng you mentioned that wafer ASP right now is quite stable, are your customers giving you visibility for Q2 and Q3 for wafer ASPs also right now?

Xiaofeng Peng

Wafer ASP was strong and the demand in Q2 and in Q3, I think in wafer -- I think in both Q2, Q3 the wafer demand is, I see is very, very strong.

Sunil Gupta – Morgan Stanley

Okay. And all the news and the changes that we have seen in the policy side in Italy and France, have you seen in last few weeks any changes, whatsoever, to your module demand or module ASPs particularly in Italy?

Xiaofeng Peng

Italy is a greatly uncertainty for the demand and some customers they hold their orders as their policy is more clear. Therefore, rooftop market in Italy and the general market still was strong demand and also it still sounds good demand from France and also other major markets like Belgium, like Slovakia and Bulgaria, those have strong demand and also you will have demand from Australia is coming very strong. So we see a lot of diversified market especially from -- major marketing in European areas also.

Operator

Thank you. Our next question comes from the line of Sam Dubinsky with Wells Fargo.

Please go ahead.

Sams Dubinsky – Wells Fargo

Hi. Just to be clear you currently have cash and cash equivalence to about $500 million which I think major net debt is near $2 billion? And you also have about $1.6 billion in negative working capital in Q4, why not focus on reducing your debt levels and primarily working capital rather than expand and then I have a follow-up question?

Jack Lai

I assume that due to the course of 2011 we expect to do the revenues somewhere from $3.7 billion to $3.8 billion. Based on the guidance for gross margin, we probably are going to run in high 20s which can bring probably close to $1 billion gross profit.

We expect our CapEx to be livid about $0.5 which means that we would generate operating cash flow, our net cash flow somewhere across to $0.5 billion and of course this $0.5 billion will contribute to our reducing our short of debt and that’s basically why we are doing a lot of engineering efforts, R&D efforts, debottlenecking with very minimum CapEx to increase the wafer capacity and also to expand our polysilicon from 18,000 to 25,000 metric tons. And we believe that $500 million range of CapEx with $500 million positive net cash flow that will be contributing to our reducing short term debt.

Sams Dubinsky – Wells Fargo

So, at what point should we see these debt reductions starts to occur like in Q2 or in the back half of the year and then I have one last follow-up question?

Jack Lai

Well certainly this is graduated. As you know the $2 billion investment in three years in a polysilicon plant. So deleverage this $2 billion debt it certainly will take couple of years, maybe three years to go through and with the $500 million anticipated positive cash flow we believe that we can do it probably somewhere in that range, maybe three years and then you will see that our debt will be very, very low.

Sams Dubinsky – Wells Fargo

Okay. And then --

Dr. Yuepeng Wan

Sorry as -- it’s Wan. Most of our CapEx this year is for expanding our solar cell capacity in Hefei and this capacity -- CapEx is already supported by the local governments as a long-term loan and most important, we want to integrate our (inaudible) module from polysilicon to integrated cell and module. And with this integration model, we are adding the cell capacity this year to have a very cost -- very competitive cost in the module base.

So just now, Dr. Wan will do an R&D pilot production from silicon and to module. Then, they have already very successful minimized integration from polysilicon to module cost below $1 in December and this is the reason behind I think through their effort, integration to cell in-house production and we will be -- end of this year, maybe, we can achieve below $0.90 in the module total cost and this will be very, very significant competitive advantage for LDK in the long run.

Sams Dubinsky – Wells Fargo

Okay. And then on the poly plant, just -- can we get some more color on the spinout? How much cash do you expect to raise from this transaction? How much debt do you plan offloading on this entity, once it’s spun out?

Jack Lai

Well, that’s a very, very good question and at this moment we are still in the process of doing the restructuring for the polysilicon business. We established a holding company at Cayman Island and another holding on Hong Kong level, which will own the two poly plants in China.

We are still working with our banks to see what kind of debt restructuring we can do and of course, we are also in the process of discussing with our investment banks and the bankers and to see what kind of a proper [evaluation] is good for our shareholders. And we believe, once that becomes more mature, maybe in the next two to three months, we will have more mature information to share with you.

Operator

Thank you. Our next question comes from the line of Matt Farwell with Imperial Capital. Please go ahead.

Matt Farwell – Imperial Capital

Hi, guys. Great quarter. Just a question on the convertible bond. Do you have any plans to deal with that? And is that -- your dealing with that bond contingent upon a successful IPO of the poly plant?

Jack Lai

That CB we will redeem in about 30 days and the cash is already in the bank. We just reported as of the end of last week we have more than $500 million in our bank account. I think this redemption will cost us about $350 million. So we are doing this buyback about 30 days.

Operator

Thank you. And we have time for one final question. It comes from the line of Wayne Chang with BMC. Please go ahead.

Wayne Chang – BMC

Hey, guys. Thanks for taking the question. Great quarter. I just wanted to really kind of revisit the whole pricing aspect. Obviously, ASPs have been fairly resilient to strong and I wanted to kind of better understand what your thoughts are into Q2, Q3, I mean, are we going to see some level of sustainable improvement and is that what’s really leading to sort of the full year margin guide up that you guys are indicating or is there other things that you could kind of explain and provide insight to? Thanks.

Jack Lai

Well, from a polysilicon side, as you know, we still very, very tight and we think that the price is going to be still very, very stable for us. On the wafer and module side, as chairman said, in the next couple of months we’re still seeing a fairly stable commitment, though for the year we will see some reduction, probably beginning end of second quarter and probably going into the second of the year.

On our model, we suggest maybe it will be 10% to 15%. The company is committed, also, with the continuous cost reduction programs, which we anticipate to reduce our costs by at least 15% and the target to more than 20%. For instance, our polysilicon can go from $40 to $30, which is 25%.

Hence, we still expect our gross margin to expand a couple of points from the current level. So, I think that will be the exchange. So our efforts will be at reducing the costs faster than the price erosion in the open market.

Operator

Thank you. And at this time, I would like to turn the conference back over 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 are hosting a Analyst Day in New York City on April 11th and we welcome your participation. Please contact our investor relations for more information. Wish you all have a nice evening.

Operator

Thank you, sir. Ladies and gentlemen, if you would like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 3035903030 using the access code of 4421616 followed by the pound key. This does conclude the LDK Solar Company fourth quarter 2010 earnings call. Thank you for your participation. You may now disconnect.

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