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

Q4 2011 Results Earnings Call

April 30, 2012 8:00 AM 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 and Company

Noah Kaye – ThinkEquity

Sanjay Shrestha – Lazard

Karen Tai – Piper Jaffray

Hari Chandra – Auriga USA

Nitin Kumar – Nomura

Gloria Ho – HSBC

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the LDK Solar Company Fourth Quarter 2011 Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, Monday, the 30th of April 2012. I would now like to turn the conference over to Ellen Davis from The Blueshirt Group. Please go ahead.

Ellen Davis

Good morning. And thank you for joining us on today’s conference call to discuss LDK Solar’s fourth quarter 2011 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.

Earlier today, LDK Solar issued a press release discussing the results for the fourth quarter of 2011. We also filed the press release on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company’s website, as well as the SEC’s website.

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

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

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

And now, I’d like to turn the call over to Mr. Xiaofeng Peng, Chairman and Chief Executive Officer to go over LDK Solar’s corporate and business updates. Chairman, thanks. Please go ahead.

Xiaofeng Peng

Good morning to you all. And thank you for join us on LDK’s fourth quarter 2011 earnings conference call. The fourth quarter was a very challenging period for the entire solar industry, weak market demand and industry over supply continued to negatively affect our business.

Global capacity and high inventory levels significantly lowered the market price for solar products during the quarter. Despite our ongoing cost reduction efforts, lower pricing across the global supply chain led to the continued ASP erosion and together with that impact of inventory write-downs reduced our revenue and margins for the fourth quarter.

As we evaluate these market opportunities, we are encouraged by increasing demand in China and the U.S., while European markets remained difficult. We have been exploring emerging market -- emerging new market in Eastern Europe, Central American, Australia, Japan, India and other Asia -- Asian area.

In March 2011 we acquired 72% of U.S. leased Solar Power Incorporated in Roseville, California. SPI engaged in EPC and building solar project in U.S., as well as developing project in Europe, Central American and rest of the World. In 2011, SPI grew its revenue by 195% to slightly over $100 million. In 2012, we anticipate it will grow another 100% to reach more than $200 million in revenue. This is a very good profit margin.

In April 2012, we acquired 71% of Frankfurt lease of Sunways AG of Germany. By acquiring controlling space in this leading solar technology company, we further strengthened our vertical integration strategy under the agreement. A line of inverters with industry leading brand that we’ll expand our products offering, in our cell and module technology that will improve our product quality, and using based premium brands which we have provided great potential for LDK Solar’s global marketing and sales.

The company is challenging by it is current cash and liquidity position. As a most recent report we have approximately $3.3 billion of interest bearing borrowing, 33.8% are mid to long-term, while remaining 6.2% are short-term. Our financing team has been working with our bank, as well as provincial and [multi-million central government] to provide continued support to LDK Solar.

We are maintaining a constructive relation with our banks and they have committed to work with LDK to assume long-term support by renewing current loans. We are working together on re-placing short-term debt that has been used for long-term applications.

We are evaluating option such as issuing mid-term or long-term commercial paper to refinance our short-term bonds. Apart from these, lower government of [genetic province] and CNC continued to support by offering all portfolio assistance.

We continue to believe that most of critical issues for all solar industry participants are such that cost reduction and managing strong balance sheet. The LDK management team is fully engaged in strengthening our operation and tightening our cash flow management by taking strategic equity investor to optimize our share structure and increase our capital position to lower debt equity ratio, minimize capital expenditure to own spend our manufacturing process, improvement projects.

As we [directed] consumption of our inventory on-hand in order to get generous cash flow and close modular collection of accounts receivable, strengthening the company’s management system and communication process around all greater opinion inspections and can show and reduce our operation expenses on an ongoing basis.

LDK has been focused on cost reduction program to address the market price erosion, including optimizing the polysilicon manufacturing process by modifying the fuel from diesel to natural gas and using that of hydrochlorination, isolation, poly deposition and fuel gas recovery to improve silicon purity, as well as lower manufacturing costs.

Continue to improve wafer quality and to implement high efficient wafer technologies, developing better cell design and process to improve commercial efficiencies and lowering manufacturing cost of solar modules.

And for our vertically integration from internal polysilicon production down to modules manufacturing. Also we have achieved $1 per watt solar motor cost early in 2011. We continue our effort to reach $0.85 per watt at end of 2011, and we will make efforts to further reduce to $0.70 per watt in near-term.

In summary, while we expect challenged condition in a global solar market to continue throughout 2012. We are optimistic that as our cost of PV decrease, we will see an increase in PV application globally. We believe that our industry constellation bring opportunity to company with technology and across leadership and scale.

We are confident that our continued focus on improving our cost structure, reducing our debt and building market share will position us to capitalize our long-term growth opportunities stemming from more affordable solar power.

During the course of 2012, we expect to grow and increase our revenue with greater portion coming from tungsten modules and PV projects. We also believe that that approximately 70% of our revenue in 2012 will be realized in the second half of the year due to the rapid growth of PV project in China, U.S., as well as other parts of the world.

I will now turn the call over to Jack Lai, our Chief Operating -- Chief Financial Officer to provide you with financial report. Jack?

Jack Lai

Thank you, Chairman. Good morning. And thank you for joining us to discuss LDK Solar’s fourth quarter 2011 results. Net sales for the fourth quarter were $420.2 million, down 11% from $471.9 million in the third quarter.

Wafer sales decreased to $77.5 million from $145.6 million. Cell and module sales increased to $240.3 million from $212.2 million. Polysilicon sales decreased to $24.3 million from $35.7 million. OEM sales for wafer increased to $126,000 from $47,000. OEM sales for modules decreased to $1.2 million from $9.1 million.

During the fourth quarter, LDK Solar had an inventory write-down and provision for firm purchase commitment of $232.6 million due to regularly declining market price for polysilicon, wafers and modules during the quarter. As a result, gross margin and operating results for the fourth quarter were negatively impacted.

By geography, net sales in the fourth quarter were 33.6% generated from China, 34.6% from Asia-Pacific, excluding China, 19.1% from Europe and 12.1% from North America. Our top 10 accounts in the fourth quarter accounted for 47.5% of total revenues with the top three accounts combined accounting for 23.3%.

Wafer shipments, including our processing business decreased to 197.1-megawatt from 292.5-megawatt in the third quarter of 2011. Wafer shipments, which exclude the OEM business, decreased to 196.8-megawatts from 292.4-megawatt in the third quarter of 2011.

The average selling price for wafers was $0.39 per watt in the fourth quarter of 2011. Sales returns reserve in the fourth quarter of 2011 was $0.8 million. OEM shipments decreased to 0.09-megawatt from 0.04-megawatt in the third quarter of 2011.

Sales in the module shipments including our processing business were 255.5-megawatt in the fourth quarter of 2011, up from 197.3-megawatt in the third quarter of 2011. The average selling price for modules was $1.06 per watt in the fourth quarter of 2011. Cells and modules shipment increased during the fourth quarter reflecting some seasonal uptick in the demand.

Gross margin in the fourth quarter was negative 65.5%, compared to negative 3.6% in the third quarter. Our gross margin for our wafer business in the fourth quarter was negative 165.4% coming from negative 26.5% in the third quarter of 2011.

Gross margin for our polysilicon business increased in the fourth quarter to negative 12.8% from positive 14.3% in the third quarter of 2011. Gross margin for our sale in the module business decreased to negative 66.2% in the fourth quarter from negative 3.7% in the third quarter of 2011.

Overall, the significant sequential decline in our gross margin in the fourth quarter was due to the severe price erosion, which was significantly steeper than anticipated, and inventory write-down and provision for firm purchase commitment taken during the fourth quarter.

Our wafer conversion cost was $0.26 per watt, as we have not fully utilized our capacity during the quarter and the average cost of polysilicon we consumed was $42.3 per kilogram in the fourth quarter of 2011.

Operating expenses were $256.2 million in the fourth quarter of 2011, up from $60.1 million in the third quarter of 2011. The increase in operating expenses was mainly attributable to the provision for doubtful receivables and prepayments of $179.2 million and increase in selling expenses of $6.3 million during the quarter.

Our share-based compensation expenses were approximately $2.2 million in the fourth quarter of 2011. Operating margin in the fourth quarter was negative 126.5%, down from negative 16.3% in the third quarter.

Net loss attributable to our shareholders for the fourth quarter was $588.7 million and loss per diluted ADS was $4.63, approximately 127.2 million shares was used in computing the fully diluted EPS. Depreciation and amortization was $71.1 million for the fourth quarter.

Capital expenditure was $200.7 million in the fourth quarter, which include $19.1 million for wafer, $74.1 million for sales and margins, and $31 million for polysilicon.

Our wafer manufacturing capacity reached 4.3-gigawatt in December and we achieved total installed polysilicon production capacity of 12,000 metric tons, which is in full production.

Going forward, we anticipate CapEx of approximately $150 million to $250 million for full year of 2012. Our headcount was 24,449 at the end of 2011, compared to 27,744 at the end of the third quarter of 2011, a reduction of 3,295.

During the first quarter of 2012, we experienced a high rate of attrition due to the highly skilled workers now returning to the payroll, [actually coming back on] for Chinese New Year. Our most recent headcount report in April was 19,495, which is 5,254 less than end of 2011. In summary, our company’s headcount is now about 9,078 less from a high of 28,273 in July 2011.

As you know in highly competitive solar market we implemented strategies to optimize our organization structure, increased our productivity, enhanced production management and aligned our production plan and labor requirements, which resulted in increase the productivity and operational efficiency.

We are essentially right sizing our production output in order to build a sustainable capacity with redundant scale to match our customers demand. While [increasing] our headcounts, some employees may also take the leave without pay or reduce working hours. These processes minimize the impact on employees. Thus, we are providing [leave] cost reduction. Our principle has always been and still is to take care of our employees, while building a sustainable organization to meet the changing demand of our customers.

Now, let’s turn to the balance sheet. We ended the fourth quarter with $244.1 million in cash and cash equivalents, and $565.1 million in short-term pledged bank deposits. Inventories decreased to $654.9 million from $918.4 million in the third quarter of 2011.

Our turnover days of our accounts receivable increased to 132 days, while our payables increased to 88 days. We expect several PV projects in final stage of completion and will be sold in the next couple of quarters. Our polysilicon inventory at the end of the fourth quarter was approximately 2,492 metric tons at an average cost of approximately $30.3 per kilogram.

Total interest bearing borrowings were approximately $3.3 billion at the end of the quarter, including $2.2 billion of short-term bank borrowings and $1.1 billion for long-term interest bearing borrowings.

In the fourth quarter of 2011, we allowed tranche to issue an aggregate principle amount of RMB3 billion notes due in 2014 to institutional investors in the PRC. The first phase, RMB500 million were issued in December 2011. We are working with the bank for issuance of the remaining balance. We will use the proceeds from the notes to refinance our short-term borrowings.

Now let me turn the call to Sam Tong, our President and Chief Operating Officer to provide you with an operation update. Sam?.

Sam Tong

Thank you. Thank you, Jack. I will provide updates on our wafer module sale and polysilicon operations. Our wafer processing costs in the fourth quarter was $0.26 per watt, as we had not fully utilized our capacity during the quarter.

We continued to work toward our goal of reducing the wafer converting costs to as low as $0.16 per watt over the next few quarters. Instead of [going strictly] lower costs, we are focusing on delivering higher quality wafers to our customers.

During the highly competitive market times, our focus on quality will retain our long-term portfolio customer base. As mentioned early on the call, we reached 4.3-gigawatt of annualized wafer capacity at the end of fourth quarter.

I would like to highlight the new (inaudible) of R&D case M2 wafers, and with that based on LDK term for high efficiency markets for crystalline wafers. We had received feedback from our major customers as a new M2 wafer, which marks solar cell converting efficiency, especially more than 95% of such solar cells half of the efficiency had at 16.8%. Such increase of the efficiency is achieved within significant input of production costs, but it provides our customers with much higher advantage.

Given the fact that the innovation of M2 technology is bringing great impact to the fuel industries. We have also developed solar cells technology to capture further advantage of M2 wafers. We have opportunity average cell efficiency of about 16.3% with our M2 wafers.

Normally, the fourth quarter of 2011, we started mass production for the new generation M2 wafers. We are increasing the manufacturing capacity of Max M2 wafers through many upgrades for our existing production improvement, targeting full capacity production in the second quarter of 2012.

We have huge technology service teams to help our solar cell customers to improve their solar cell line productivity and the solar cell efficiency. We are also delivering our solar cell process (inaudible) through our customers for the use of M2 wafers with many linear change of their production organization.

We brought an interchange of their production organization and equipment, which fueled our module operations in anticipation of higher shipment of volume in the second half of 2011, while remaining in focus on enhancing our cost structure. We also paid close attention to the quality of our modules.

We have reached our manufacturing capacity of 1.7 gigawatts in our solar cells facility at the end of the fourth quarter of 2011 and 149.6-megawatt of cells were produced as processing costs of $0.19 per watt during the fourth quarter of 2011.

In addition to providing [ready] supply of cells for our modules, we expect that the integration of R&D efforts for polysilicon wafers, cells and modules will continue to drive down the total costs of modules.

However, our production line have been implemented our fine-line technology and the average cell efficiency has reached 16.9% to 17% efficiency with our [thermal] module wafers and over 17.3% efficiency with our M2 multicrystalline wafers.

Total polysilicon production was on track as expected levels during the fourth quarter and approximately 2,317.8 metric tons of polysilicon was produced. We expect to produce between 1,800 metric tons and 1,900 metric tons of polysilicon in the first quarter of 2012.

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?

Dr. Yuepeng Wan

I would like to provide an update on our research and development programs. Our programs are focused on lowering production costs and the increasing sale conversion efficiencies.

Through our continuous R&D efforts, we have developed a proprietary technology for multicrystalline silicon wafers, which speaks to our new wafer product M2 wafers.

The high-performance wafers M2 improved absolute conversion efficiency by 0.3% to 0.5%, with most of the customers have reached an average conversion efficiency of about 17.1% to 17.4%. We have reached 17.5% average efficiency EBITDA of all special solar cell lines.

In our solar cell production lines, the implementation of our fine-line technology has led to an increase of cell conversion efficiency of over 0.4%. Our highest efficiency R&D Polycrystalline has achieved an average efficiency of over 19% with a potential to reach 19.5% in the near future.

For polysilicon, we continued our technology upgrade and development of improved production efficiency and the product qualities. We completed a major restructuring of the purification part to significantly improve a throughput of the purification, while maintaining the high purity level of the product.

We have optimized the [cost] of hydrogenation reactors to improve their conversion rate. We have viewed a pilot line for hydrochlorination of silicon tetrachloride, and successfully integrated these new technologies into our sharp-end production.

All these activities have contributed to the continued reduction of production costs. With our high-efficiency product cells, we expanded our modules of 6 by 10 cell products portfolio through the power range of 265 watts to 270 watts.

Our effort on a new module concept PPA project reached a new milestone of full size PPA module was viewed and it was demonstrated that our output was increased from 240 watts to 257 watts, up 7%.

During the fourth quarter, four patents were granted and the 24 patents were applied for, bringing the total to about 15 granted and the 61 patents applied for in 2011. I will now turn the call back over to Jack.

Jack Lai

Thank you, Dr. Wan. Moving onto our current business conditions, for the first quarter of 2012 LDK Solar estimates its revenues to be in the range of $190 million to $230 million. We anticipate that wafer shipments to be between 140 megawatt and 150 megawatt.

Sales and module shipments to be between 170 megawatt and 180 megawatt, in-house polysilicon production between 1,800 and 1,900 metric tons and in-house cell production between 40 megawatt and 50 megawatts.

For fiscal year 2012, LDK Solar estimates its revenue in a range of $2 billion to $2.7 billion pursuing production between 12,000 and 15,000 metric tons of which shipment was third-party customers are expected to be between 6,000 and 8,000 metric tons.

Wafer production between 2.7 gigawatt and 3.3 gigawatt, of which shipments to third-party customers are expected to be between 1.5 gigawatt and 2.0 gigawatt. In-house sales reduction between 1.2 gigawatts and 1.6 gigawatts and the margin reduction between 1.2 gigawatts and 1.6 gigawatts, with cell and module shipments to third-party customers between 1.0 gigawatts and 1.3 gigawatts. Inverter shipment is between 200 megawatts to 250 megawatts.

LDK Solar expects PV Systems project construction, which is in the range of 400 megawatts to 600 megawatts and to recognize between 270 megawatts and 350 megawatts through projects that are EPC services with third-party customers.

And now, we would like to turn the call back to the operator to open the line for questions. Operator?

Question-and-Answer Session

Operator

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

Edwin Mok – Needham and Company

Hi. Thanks for taking my questions. First, just quickly -- sorry I missed it -- what’s the module revenue in the fourth quarter? And then tied to that on the first quarter guidance, how much of that guidance is based on shipping just third-party cell versus third-party module?

Xiaofeng Peng

So the module sales during the fourth quarter -- the fourth quarter revenue was $227.9 million and the shipment was total 270 megawatts.

Edwin Mok – Needham and Company

I see. And then I guess on your guidance, how much of that you’re assuming this -- your solar cell versus selling solar module?

Xiaofeng Peng

Mostly, our solar cell module format has lot of portion than its cell format.

Edwin Mok – Needham and Company

I see. Great. And then I noticed that you guys are expecting the poly production to come down in the first quarter, right? And in the same time, I think Chairman Peng talked about some of the step that you guys are taking to reduce the poly cost, right?

I was wondering, what do you think the poly cost can get to especially low-level production and the reason your guidance sounds like you expect production results picked up. So, may be give us some idea of what your poly cost can be in the first quarter and then may be by the end of the year what do you think your poly cost could be?

Xiaofeng Peng

Yeah. In the first quarter earlier, we did some technology improvement to use in some new technology in the earlier year, it’s been high erosion [for my own] plant. So, after the hydrochlorination process moving in the next few months, finishing probably in the second half of year, then the cost will reduce -- further reduce another $7 to $9 per kilo.

So, from currency may be high level of 20 to low-level of 20s at the end of the year, if we have fully successful hydrochlorination and also other technology improvement process in the next few months.

Edwin Mok – Needham and Company

I see. And then I guess the forward question to that is what about your wafer production cost? I think Jack mentioned that production cost went up last quarter because of the increased -- lower utilization. So, if your wafer production remains pretty low and is it going to remain at that level or do you know how things will progress towards -- as we look towards the second half of this year?

Jack Lai

Both in wafer, in the first quarter we have long China’s New Year and also most importantly now, we are trying to transfer from the normally convention multicolor of wafer to new product -- and two markets wafer and if wafer have much higher efficiency compared to our pending convention multicolors to increase on wafers. So in this few months, we are trying to upgrade all our pending facility and equipments to high efficiency and two wafers.

So we will now see a lower capacity because we are trying to update all our pending equipments. I think in quarter two, we will have full capacity and we will have full capacity when all M2 wafer introduction and all our facility changed to M2 wafer production. That’s why you see in lower utilization now because we were trying to upgrade all our implemented M2 wafers.

Edwin Mok – Needham and Company

I see. That was helpful. And then on the revenue, you mentioned that 70% of your sales is expect to come in the second half of this year. Is that based on your belief of all the end-market? Was it based on some of your project that you guys -- on solar projects, that you guys are working on right now that you expect to recognize revenue back half? And if it’s greater than market, which market do you think you see the biggest growth and where you guys position in those market?

Jack Lai

Maintenance revenue and I think probably because most of our project revenue will be regressed in the second half of year and because then in the first half of year most projects during construction and so in that period, project revenue normally is a big percentage for the company, especially in China and now we have also platform in U.S. and Europe.

And also in first half of the year, we were -- all finished our wafer. Also we use this time to transfer our wafer production from a normal wafer to -- into high efficiency wafer and the most of all, our shipment wafer also definitely will be full capacity fueling the production in the second half of the year because of the new technology and low cost, high-efficiency wafer and this will be in turn a very competitive market, especially now feedback from all customers of our M2 wafers.

Edwin Mok – Needham and Company

Okay. And what about your view of the market? Do you think that there will be some uptick in market and if so what do you think which market do you think will see the strongest growth?

Xiaofeng Peng

For China market, I think will be most up in the revenue will be coming from the second half of year because especially for the utility market, the first quarter is very, very slow in China because of the -- the weather is not okay for building project in China, especially most of our project from Western China.

That stars our activity in second quarter in China and I think most of our fuel projects will be conducted and sourced in the second half of year. So that’s why in China this year, we will become a very important market for LDK. We expect at least 5 gigawatts to 7 gigawatts this year in China.

LDK has a relatively potential market share in local market. And we’re working very closely with most of our leading players in China, both from the EPC service, project development and also module supply.

Edwin Mok – Needham and Company

Great. That’s all I have. Thank you.

Operator

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

Noah Kaye – ThinkEquity

Good evening, gentlemen. This is Noah Kaye in for Colin. I wonder if you could provide some detail on how you plan to roll over the short-term debt. Could you -- you mentioned that at the beginning of the call, but if you could give us some additional details and show any sort of milestones that you’re able to reach?

Xiaofeng Peng

Yeah. We have management doing over from last two years. And we have very close relations with most of the banks and we’re working very closely to rolling our all the short-term loans and we have all this credit facility renewed. So, it should not be an issue for us to roll over the short-term debt.

Noah Kaye – ThinkEquity

Okay. Can I ask, how is your supply chain managing expanded terms? What are you having to pay for in advance or finding it difficult to get it materials in any kind of timely way?

Jack Lai

Are you talking about financing costs?

Noah Kaye – ThinkEquity

Yeah. Is it about in terms of managing supply chain? Are you finding that we have to wait for any materials, have your pre-payments increased for any part of the supply chain in any significant plan?

Xiaofeng Peng

Right now, we are very, very busy in the fund stream. I think the module sales is this, our production line is actually PV and we probably need to extend the production from the supply point of view.

Noah Kaye – ThinkEquity

But no material shortages that you are seeing?

Xiaofeng Peng

We have not seen any material shortage mainly because now the supply seems to be over some -- we are working very, very closely with most of our suppliers. We have a very strong relations -- a long-term relation with most of our suppliers.

Noah Kaye – ThinkEquity

Okay. Well, thank you so much.

Xiaofeng Peng

Thank you.

Operator

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

Sanjay Shrestha – Lazard

Thank you. A couple of questions guys. Chairman Peng, question for you. What’s been sort of the philosophy or the view of the government given what’s going on in the domestic solar industry right now with majority of the players losing money, lot of the debt on the balance sheet? What’s being your dialog with both the provincial and the central government? What’s their feedback right now? What are they saying? What should the strategy be here to sort of rebuilt the healthy solar industry both domestically and maybe even position them to sort of gain share in the international market?

Xiaofeng Peng

I think, especially, if you are seeing our -- the government just released a detailed 5-year plan just two months ago.

Sanjay Shrestha – Lazard

Okay.

Xiaofeng Peng

And definitely, they have created, getting support of all in the leading company, at least cost structure, leading cost technology and leading cost -- leading scale. So I think in Canada the leading scale, leading technology and leading cost structure, it will be definitely benefit. So definitely the company has a good cost structure, scale, has a technology advantage and also we plan to definitely have a good advantage to get most profit on and better government.

Sanjay Shrestha – Lazard

Okay. Now, did you anticipate some sort of the consolidation or in the industry not necessarily even two companies saying let’s merge but maybe some sort of a course consolidation by the government to bring supply demand more in balance, given what’s happened to the industry in ‘11 and what looks like a difficult 2012? Do you anticipate that?

Jack Lai

This is Jack Lai. We are not sure because a lot of smaller capacity and smaller company have not so much technology or then the capacity maybe less. If not become not and not valuable capacity, because this industry seems to have a lot of capacity. But a lot of capacity become is not efficient capacity because now you see a lot of line we cannot produce enough. So efficiency can be like market demand.

From this time now, you see a lot of cell lines -- we cannot produce the efficiency more than 16.8%. And it cannot become -- not a real capacity for the market. So and also same for wafer, same for polysilicon and current polysilicon prices are around $25 more or less. So not too many companies in the industry can produce polysilicon at such cost level.

So, this mainly capacity already become not competitive capacity even they have capacity in there like this, not any capacity market accepts. Similarly, also for module, so there is a lot of the capacity there but really that capacity can produce cost competitive, the market cap debt, and also quality of debt, and also the brands accepted by the market with (inaudible) and feel much better than before. So you see this is a lot of addressable account constellation become capacity, it can even more consuming power for technology market brands and technology enticing together this.

Sanjay Shrestha – Lazard

Okay. Two final questions for me. So on the first one, right, you’re about talking about getting to module cost of $0.85 and eventually to $0.70, but some of the other players in the industry are talking about getting to numbers much lower than that that are not even fully vertically integrated. So, given that you go all the way from poly to module, I’m just trying to understand -- arguably you actually should be able to get to that $0.70 number sooner than some of your other peers? What’s the disconnect here? What am I missing?

Jack Lai

Yeah. Because every company have different calculation basis, some companies have calculation on their cash base cost, some just on -- not silicon cost base. So, we are fully integrated for polysilicon in the wafer cell module. So currently we have reached enough -- first quarter we have reached $0.85 per watt. I think our cost is below that and we have reached $0.70 per watt. And then I think we’re very confident that we will reach lower than $0.70 sometimes in the next few quarters.

So currently you’ll see the market price for the module still $0.80 to $0.90. So if you can reach $0.70 very soon then still can be assumed as possible in the market.

Sanjay Shrestha – Lazard

Okay. Great. Then my final question is, so Chairman Peng, you talked about the (inaudible) issuing some sort of a commercial paper, right. So that’s going to be an onshore debt, not an offshore debt I take it right and how you plan to sort of -- how do you envision that debt unfolding. Is it -- can you talk about that a little bit?

Xiaofeng Peng

We are still working on that. So I think we will try to use commercial loans and also long-term loan to replace the short-term loan and we will continue work on that and most of all, our technical support asked to do this to achieve this goal. So, we’re keeping -- working on that too replace that short-term loan obviously medium or long-term loans or commercial loans.

Sanjay Shrestha – Lazard

Got it. Okay. Right. That’s all I have. Thank you.

Xiaofeng Peng

Thank you.

Operator

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

Karen Tai – Piper Jaffray

Hi. Mr. Peng and Mr. Li, and everyone. This is Karen calling on behalf of Ahmar. I have a couple of questions here. So the first one is for your wafer equipment upgrades, can you let us know how much you have already spent on your M2 wafer furnace upgrades. And how much additional you need to spend and what are you using to fund to finance these?

Xiaofeng Peng

Yeah. The cost of upgrade to that new facility for M2 wafer is very limited. Total cost is less than $1.5 million. So we have already nearly 40% already upgrade. I think the balance we have in the next few weeks and we will incorporate to almost of our finance will be upgraded and then we will be forecasting.

So now, we are -- we’ll just take time to upgrade all of the furnace, all the facility and all of the wafer department. So it does take some time. We already starting from late Q4 and now Q2. I think most of effort we are doing. Then CapEx will be doing maybe just less than $1.5 million.

Karen Tai – Piper Jaffray

Okay. Thank you. And as you mentioned given that we are already -- in Q2, can you give us more details and explain the range for your Q1 guidance. And I wanted to also get some more color on your full year ‘12 guidance and what percentage of your revenues will come from the inverters and the project sales and the EPC? Thank you.

Jack Lai

Yeah. You see in our first quarter, if you see under projects are reasonable and our cells and module shipment is 170 to 180 megawatt. Wafer shipment was 140 to 150 megawatt. And then for the full year, we are planning to construct in 400 to 600 megawatts PV project. We expect it will be recognized revenue between 270 to 360 megawatts this year.

Karen Tai – Piper Jaffray

What percentage of your total revenue is your project business?

Jack Lai

Yeah. For project in the beginning you can see in the China base, now the system price around $2 and in Europe or in USA, it’s more than $3. So, currently -- so if you have 270 to 360 megawatts, it’s easy to have the revenue from project business.

Karen Tai – Piper Jaffray

Okay. Thank you. And one more, what kind of yields are you achieving with these M2 upgrades for your wafers?

Xiaofeng Peng

On the yield you mean like...

Karen Tai – Piper Jaffray

Yeah. Cell -- cell conversion efficiency and what kind of -- and also what kind of wafer yields?

Xiaofeng Peng

The yield for the wafer M2, it’s the same as our conventional end products.

Karen Tai – Piper Jaffray

Sorry. Can you repeat that?

Jack Lai

And sale efficiency from local…

Xiaofeng Peng

Yeah. For the wafer attachment for M2 it’s the same as the yield for our normal wafers. So the yield is the same and the efficiency is above.

Karen Tai – Piper Jaffray

Okay.

Xiaofeng Peng

The efficiency to improve the wafer -- this is the wafer to improve the cell efficiency is 0.4% to 0.5% average on wafer. So, our customers will be getting much higher solar cell efficiency compared to use that normal most additional wafers and the production cost is also similar.

Karen Tai – Piper Jaffray

Okay. Okay.

Xiaofeng Peng

So no one...

Karen Tai – Piper Jaffray

And then...

Xiaofeng Peng

…really based on premium for our M2 wafer than the competitor normal wafers.

Karen Tai – Piper Jaffray

Okay. And then again back to your Q1 guidance, I understand that you provided a range for your shipments, but given that we already well into Q2 just wanted to get some more information on why the range, what is causing the range for the guidance, the wide range?

Xiaofeng Peng

And you will see in our ranges both on the wafer is only 10 megawatts, cells and module shipment only 10 megawatts. So I don’t think this range is competitively reasonable range for the shipment either...

Karen Tai – Piper Jaffray

Okay. And then what are your cell production, you mentioned that in the first quarter for your in-house cell production, you are only doing 40 to 50 megawatts, which is significantly lower than your cell capacity in-house. What is your overall strategy going forward for your in-house cell production, are you exploring outsourcing potential cell outsourcing method to or can you just elaborate more on that?

Xiaofeng Peng

Yeah. So this is a few -- recently in the first quarter, we have a long Chinese New Year holiday and second, we were under management of our inventory. So normally -- normally we -- how many cells production depends how many modules we have ready to ship to the production with the customers.

So in quarter-to-quarter, while we have company tried to maintain inventory and reduce the inventory. And also in first quarter we have a long Chinese New Year holiday. So these are two reasons for the production for our solar cells.

Operator

Our next question comes from the line of…

Xiaofeng Peng

But definitely…

Operator

Our next question comes from the line of Hari Chandra with Auriga USA. Please go ahead.

Hari Chandra – Auriga USA

Thank you. Can you explain the disconnect between the first quarter guidance and also what you have for the full year, in terms of how are you going to bridge that and what are the timelines in terms of the ramp through $2 billion to $2.7 billion for the full year?

Xiaofeng Peng

In the first quarter you reached 10th holiday and routine system maintenance, so the output that was very significantly lower, and also for the management business system through the project that construction high in China and in Europe mostly kind of very low season.

Hence, that we believe that already the distribution for this year will be about 30% in the first half and the 70% second half. And that’s the reason you are seeing the much lower guidance for the first half including Q1 of course. And I think in the second half, you’ll see a very significant increase these recent months in the second half.

Hari Chandra – Auriga USA

How much visibility do you have out of the comfort level to deliver even at the lower end of the full year guidance?

Xiaofeng Peng

On the unit module that we are working on that with the pipeline somewhere around the 500 megawatt, we can complete that, let’s say redirect of 300 megawatt. Our $2 is our -- which we never had a last year, I think this year you’re going to see, a kind of, this increase in PV project business.

On this -- also seen our module business has been picking up even though our total revenue reduced, but our module revenue actually increased. I think in this year, you’re going to see big growth in our module business and also the PV project revenues.

Operator

Our next question comes from the line of Raghav Divekar with Nomura. Please go ahead.

Nitin Kumar – Nomura

Yeah. Hi, this is Nitin calling from Nomura. Just a -- could you help us to remind the CDB capital divestment and as to -- I mean, on your polysilicon plant, how is the IPO proceeding and also on what are the liabilities since you have to pay $15 million in dividend and you also missed -- likely missed the net profit hurdle of $190 million last year? And could you help us understand those two please?

Jack Lai

Okay. On the CDB investment to our polysilicon business, we concluded we do not have to pay that $55 million dividend because we have made our -- the guidance and that’s the number we don’t need to pay.

Nitin Kumar – Nomura

Is it -- I mean, that means do you actually made $190 million net profit on your LDK silicon?

Jack Lai

That was $0.02 for them. Yeah. We made a net profit and once again, with the dividend, that is a midterm dividend according to the agreement pattern in the process. Yeah.

Nitin Kumar – Nomura

I understand. And what is, I mean I understand that you actually still do need to finish -- do a qualified IPO by end of 2012. Otherwise you’ll have to return the money next year. So, could you give us like an update on what’s the timeline for the IPO of the polysilicon business and what valuations are you looking at?

Xiaofeng Peng

Yeah. We are still working on IPO and full investment in North Asia, which will be next year. If we can do according to IPO next year, it should be okay for the investments.

Nitin Kumar – Nomura

I understand. Also in terms of -- I mean if you look at your cash on hand at the end of 4Q and looking at your guidance. It seems that you will be burning fair amount of cash again in 1Q. What kind of cash levels are you looking at by end of 1Q and I mean -- do you need to raise more loan, not just for paying back the short term but in terms of actually having in enough sufficient cash on hand?

Jack Lai

Yeah. We have been working closely with our banks enrolling our statement in our cash. You’re seeing our cash level is for $200 million level for -- and also from few quarters and we are managing with that now cash position, where we’re working very closely with our bank. And this is not an issue for managing debt. Of course, we’ve been working hard to collect more receivables and try to collect and reduce our inventory and we are working hard to also reduce our cost, management -- operation cost.

Operator

Our next question comes from the line of Gloria Ho with HSBC. Please go ahead.

Gloria Ho – HSBC

Hi. Thanks for taking my question. Can you remind me of the production capacity for polysilicon module in the first quarter and that’s what you give us some guidance on 2012? Hello?

Xiaofeng Peng

Hello. So you’re quoting the capacity for single wafers there in the module?

Gloria Ho – HSBC

Right. Right for first quarter and for the -- guidance for 2012?

Xiaofeng Peng

But the -- expense in our capacity -- our capacity expansion maybe only -- mainly from the technology innovation and technology upgrade, so currently the capacity for the wafer is 4.3 gigawatts and service 1.7 gigawatts and module we’re just trying to [we have now capacity which doesn’t match and previous] cell capacity, but for silicon of course, we now to have too much upgrade and just -- and try to finished those upgrades.

Gloria Ho – HSBC

And (inaudible)...

Xiaofeng Peng

Pardon.

Gloria Ho – HSBC

And for polysiliocon?

Xiaofeng Peng

Yeah. For polysilicon, we’re trying to do the technology upgrade. We are targeting to end of the next -- sometime next year 2013, when our technology upgrade will finish maybe [2015] 75,000 metric tons, but this is only after our technology upgrade mid-term sometimes in the next year.

Operator

And this concludes the question-and-answer session. Management, please proceed.

Xiaofeng Peng

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

Operator

Ladies and gentlemen, if you would like to listen to a reply of today’s conference, please dial 303-590-3030 or 800-406-7325, with the access code 4524489. Thank you for your participation. You may now disconnect.

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