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

Q1 2012 Earnings Conference Call

June 26, 2012 8:00 am ET

Executives

Xiaofeng Peng – Chairman and CEO

Jack Lai - CFO and EVP

Xingxue Tong - COO and President

Dr. Yuepeng Wan - Chief Technology Officer

Ellen Davis – The Blueshirt Group, IR

Analysts

Edwin Mok - Needham & Company

Karen Tai - Piper Jaffray & Co.

Dan Ries - Collins Stewart

Pranab Sarmah - Daiwa Capital Markets

Amy Song - Goldman Sachs Group Inc

Philip Shen - Roth Capital Partners

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the LDK Solar Company First Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, June 26, 2012.

I’d now like to turn the conference over to Ms. Ellen Davis from The Blueshirt Group. Go ahead, Ma’am.

Ellen Davis

Thank you. Good morning and thank you for joining us on today’s conference call to discuss LDK Solar’s first quarter 2012 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, President and Chief Operating Officer; and Dr. Yuepeng Wan, Chief Technology Officer.

Earlier today, LDK Solar issued a press release discussing the results for the first quarter 2012. We also filed the press release on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the Company’s website, as well as the SEC’s website.

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

Although, LDK Solar believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We refer you to the documents that LDK Solar files from time-to-time with the SEC, specifically the Company’s most recent Form 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 Peng?

Xiaofeng Peng

Yeah, thank you. Good morning to you all and thank you for joining us on LDK Solar’s first quarter 2012 earnings conference call. The environment for the solar industry remained challenging in the first quarter. Our revenue was within the expected range as our result reflects the first quarter seasonality and the continued difficult solar industry conditions.

In this seasonally slow quarter, pricing pressure caused by the weak market demand and industry over supply continued negative effect our business. Despite our ongoing cost reduction efforts, lowering pricing across the global supply chain that continued ASP erosion and together with the impact of our inventory write-down and other provisions reduced our revenue and margins for the first quarter.

I’d like to provide some color on some of the key markets of the regions. While European markets remain difficult, we’ve been exploring emerging new markets in Eastern Europe, Central America, Australia, Japan, India and other Asian areas. In the current environment, customers are focused not only on price, but also on quality and availability.

To address these customer needs, at this year in the solar Europe we introduced the first operational and the warranty insurance covered by HDI Gerling. We were pleased to introduce unique solution at a system level. We continue to believe that some markets such as China, will began to see improvement in demand as the year progresses.

Last month the Chinese government approved a total of 1.7 gigawatts of solar project under its Golden Sun subsidy program for 2012, which almost tied over the last year and as a [joint process] in China has been as long – been have added advantage – has had advantaged our efforts to expand our PV project development service business. We recently signed a new multi-year EPC agreement for three projects located in the Gansu province. We expect to see continued growth opportunities throughout the China market this year.

As for the U.S., while we were respond by the Department of Commerce, preliminary decision on anti-dumping duty in May. We do not anticipate a very significant (indiscernible) to LDK Solar. We will work to ensure that we can meet the growing demand for our products in the U.S. At a global competitive price, we remain optimistic about regions long-term growth potential.

The Company remains challenged by its current cash and liquidity position. As of the most recent reports, we have approximately $3.5 billion of interest-bearing borrowings. Our financing teams have been working with our bank, as well as the provincial, municipal 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 assure long-term support by renewing current loans. We are working together on replacing 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, local government of Jiangxi Province and Xinyu City continue to support us by offering all possible assistance.

We are navigating their current volatile market environment by (indiscernible) manufacturing operations, reducing production costs and improving utilization, in order to include the industry downturn and sustain market leadership position. We are continuing to believe that the most critical issue for all solar industry participants are the sustained cost reduction and managing a strong balance sheet.

The LDK’s management team is fully engaged in strengthening our operations and tightening our cash flow management by seeking strategic equity investor to optimize our share structure and increase our capital position to lower the debt equity ratio, minimize capital expenditures to only spend on manufacturing process improvement projects, expedite the consumption of our inventory on hand in order to generate cash flow and closely manage the collection of accounts receivables, strengthening the Company’s management system and communication process around all critical transactions and continuing to reduce our operating expenses on an ongoing basis.

In summary, with a rapid decline in cost of electricity from solar electric systems, we believe that more and more countries will be – promote solar applications. We believe that the industry consolidation brings opportunities to companies with technology and the cost leadership and a scale.

We are confident that our continuous focus on improving our cost structure, reducing our debt and building market share, we are positioning us to capitalize on the long-term growth opportunities, stemming from more affordable solar power during the course of 2012, we expect to gradually increase our revenue with greater portion coming from downstream modules and PV projects. We also believe that approximately 70% of our revenue in 2012 will be realized in the second half of the year due to a 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 Financial Officer, to provide you with the financial report. Jack?

Jack Lai

Thank you, Chairman Peng. Good morning and thank you for joining us to discuss LDK Solar's first quarter of 2012 results. Net sales for the first quarter were $200.1 million, down 52.4% from $420.2 million in the fourth quarter. Wafer sales decreased to $58.8 million from $77.6 million. Cell and module sales decreased to $115.3 million from $241.5 million. Polysilicon sales decreased to $13.3 million from $24.3 million. OEM sales for wafers decreased to zero from $126,000. OEM sales for module decreased to $1.1 million from $1.2 million.

During the first quarter, LDK Solar had an inventory write-down and a provision for firm purchase commitment of $91.1 million due to relatively high production costs incurred in the first quarter of 2012 and a continuous decline in market price for polysilicon, wafers, and modules. An additional provision was required for potential countervailing and anti-dumping duties totaling $5.7 million. As a result, gross margin and operating results for the first quarter were negatively impacted.

By geography, net sales in the first quarter were 23.6% generated from China, 14.7% from Asia Pacific excluding China, 46.9% for Europe and 14.8% from North America. All top 10 accounts in the first quarter accounted for 38.7% of total revenues, with the top three accounts combined accounted for 15.5%.

Wafer shipments including our processing business, decreased to 164.4 megawatts from 197.1 megawatts in the fourth quarter of 2011. Wafer shipments which exclude the process of business, decreased to 164.4 megawatts from 196.8 megawatts in the fourth quarter of 2011. The average selling price for wafers was $0.36 per watt in the first quarter of 2012.

OEM shipment decreased to zero megawatts from 0.29 megawatts in the fourth quarter of 2011. Cell and module shipments including our processing business were 153.9 megawatts in the first quarter of 2012, down from 255.5 megawatts in the fourth quarter of 2011.

The average selling price for modules excluding processing business was $0.80 per watt in the first quarter of 2012. Cell and module shipments decreased during the first quarter reflecting a seasonal decline in demand.

Gross margin in the first quarter was negative 65.5% compared to negative 65.5% in the fourth quarter. Our gross margin for our wafer business in the first quarter was negative 147.3%, up from negative 165.4% in the fourth quarter of 2011.

Gross margin for our polysilicon business decreased in the first quarter to negative 73.9% from negative 12.8% in the fourth quarter of 2011. Gross margin for our cell and module business increased to negative 28.7% in the first quarter from negative 66.2% in the fourth quarter of 2011.

Overall, the significant sequential decline in our gross margin for wafer and polysilicon business in the first quarter was due to the severe price erosion, which was significantly steeper than anticipated and the inventory write-down and the provision for firm purchase commitments taken during the first quarter. Our wafer conversion cost was $0.23 per watt, as we have not fully utilized our capacity during the quarter and the average cost of polysilicon we consumed was $42.7 per kilogram in the first quarter of 2012.

Operating expenses were $4.8 million in the first quarter of 2012, down from $256.2 million in the fourth quarter of 2011. The decrease in operating expenses was mainly attributable to the reversal of provision for doubtful receivables and the prepayments.

During the first quarter of fiscal 2012, $43.8 million of provision for doubtful receivables and the prepayments was reversed and deducted in general and administrative expenses as a result of subsequent settlement or the finalization of offset agreements with customers having corresponding liabilities.

While in the fourth quarter of 2011, we incurred provision for doubtful receivables and the prepayments of $179.2 million. Taking out the impact of such provision, our operating expenses in the first quarter of 2012 decreased by $28.3 million compared to the fourth quarter of 2011, representing the result of management's efforts to reduce operating expenses.

Our share-based compensation expenses were approximately $2.7 million in the first quarter of 2012. Operating margin in the first quarter was negative 67.9%, up from negative 126.5% in the fourth quarter.

Net loss available to our shareholders for the first quarter was $185.2 million and loss per diluted ADS was $1.46. Approximately 127.2 million shares were used in computing the fully diluted EPS.

Depreciation and amortization was $63.7 million for the first quarter. Capital expenditure was $17.2 million in the first quarter, which includes $3.7 million for wafer, $4.8 million for cells and modules, and $8.5 million for polysilicon.

Our wafer manufacturing capacity reached 4.3 gigawatts in March. We achieved total installed polysilicon production capacity of 17,000 metric tons. Going forward, we anticipate CapEx of approximately $120 million to $160 million for the full-year 2012. Our headcount was 20,405 at the end of March 2012 compared to 24,449 at the end of the fourth quarter of 2011, a reduction of 4,044.

Facing a highly competitive solar market, we implemented strategies to optimize our organizational structure, increase our productivity, to enhance production management and align our production plan and the labor requirement, which result in increased productivity and operating efficiency. We’re essentially right sizing our production output in order to build a sustainable capacity with a responsive scale to match our customers’ demand.

Now let’s turn to the balance sheet. We ended the first quarter with $135.7 million in cash and cash equivalents and $603.3 million in short-term pledge bank deposits. Inventories decreased to $555.3 million from $654.9 million in the fourth quarter of 2011. Our turnover days of our accounts receivable increased to 220 days, while our payables increased to 185 days.

We expect several PV project in the final stage of completion will be sold in the next couple of quarters. Our polysilicon inventory at the end of the first quarter was approximately 2,526 metric tons at an average cost of approximately $24.9 per kilogram.

Total interest bearing borrowings were approximately $3.5 billion at the end of the quarter, including approximately $2.3 billion of short-term bank borrowings and $1.2 billion of long-term interest bearing borrowings.

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

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

Xingxue Tong

Thank you, Jack. I will provide updates on our wafer module cell and the polysilicon operations. Our wafer processing cost in the first quarter was $0.23 per watt because of lower utilization of our capacity between the Chinese New Year holiday and the ramp up of M2 wafer production.

We continue to work towards our goal of reducing the wafer conversion cost to as low as $0.15 per watt over the next few quarters. Instead of strictly lowering costs, we are focused on delivering more and more higher quality and higher efficiency wafers for our customers. In this highly competitive market environment, we believe our focus on quality will ensure that we retain our long-term loyal customer base.

As mentioned, we reached 4.3 gigawatt of annualized wafer capacity at the end of first quarter. Last quarter, we highlighted the new generation of LDK M2 wafers and the reported positive feedbacks from our major customer that the new M2 wafers reached much higher solar cell conversion efficiency with more than 95% of such solar cells reaching efficiency higher than 16.8%. We are increasing the manufacturing capacity of M2 wafers through minor upgrades to our existing production equipment targeting better utilization in the second half of 2012.

We have reached a manufacturing capacity of 1.7 gigawatts in our solar cell facility at the end of the first quarter because of holiday and the market downturn, normally 51.2 megawatts of cells were produced in the first quarter of 2012. Our cell processing cost increased to $0.34 per watt during the first quarter of 2012 as more fixed cost such as depreciations and labor were at the top because of low production.

In addition to providing steady supply of cells for our modules, we expect that our integration of R&D efforts for polysilicon wafers, cells, and the modules will continue to drive down the total cost of modules. All of our production lines has been implemented, our fine-line technology and the average cell efficiency has reached 16.9% to 17% with normal wafers and over 17.3% to 17.4% with our M2 wafers.

To enhance the quality control with skilled our module operation with more automated production lines in the first quarter and in anticipation of higher treatment volume in the second half of 2012, we will -- we’re remaining focused on enhancing our cost base structure of our modules.

Total polysilicon production was on track at expected levels during the first quarter and approximately 1,901 metric tons of polysilicon was produced, because of continuous decrease in ASP of polysilicon we plan to slowing down polysilicon production to execute the fact the installations of hydrochlorination systems to lower our future production cost. As a result the production volume of polysilicon in the second quarter of 2012 is expected to be between 520 metric tons and 570 metric tons.

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

Dr. Yuepeng Wan

Well, thank you Sam. I’d like to provide an update on our research and development programs. One of our R&D projects was awarded Jiangxi government prize for the progress of science and technology which is a provincial program awarding outstanding achievements for technology advancement as well as marketing impact.

The project was related to 10 innovative technologies for the efficient utilization of silicon powder for wafer production. We were also grated more than RMB6 million from the central government for the funding of our R&D project on the utilization of waste materials from PV manufacturing processes. This funding is very competitive under the National 863 Program which is a State High-Tech Development Plan.

Module product development has resulted in not only in high efficiency modules, but also new module products for special marketing needs. We developed new lightweight modules by replacing glasses with lightweight materials and reduced module weight by 50%. The light transmission has also increased about 2% due to the better transparency of the new material. During the first quarter of 2012, six patents were granted and 11 patents were applied for.

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

Jack Lai

Thank you Dr. Wan. Based upon current business conditions, for the second quarter of 2012 LDK Solar estimates its revenue to be in the range of $220 million to $270 million. We anticipate wafer shipments between 300 megawatt and 350 megawatts, cell and module shipment between 140 megawatt and 180 megawatts, in-house polysilicon production between 520 and 570 metric tons and in-house cell production between 80 megawatt and 100 megawatts.

For fiscal year 2012, LDK Solar estimates its revenue in a range of $1.5 billion to $2.0 billion, polysilicon production between 5,000 and 7,000 metric tons of which shipment to third-party customers are expected to be between 2,000 and 3,000 metric tons. Wafer production between 2 gigawatts and 2.5 gigawatts, of which shipment to third-party customers are expected to be between 1.2 gigawatts and 1.5 gigawatts.

In-house cell production between 0.7 gigawatts and 1.0 gigawatts and module production between 0.9 gigawatts and 1.2 gigawatts, with cell and module shipments to third-party customers between 0.8 gigawatts and 1.0 gigawatts, inverter shipment between 200 megawatts to 250 megawatts.

LDK Solar expects PV System Project construction to be in the range of 400 megawatts to 600 megawatts and to recognize between 270 megawatts and 360 megawatts through projects sales and EPC services for third-party customers.

And now, we would like to turn the call back to the operator to open up the lines 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. Go ahead, please.

Edwin Mok - Needham & Company

Hi – guidance as probably you’re planning on a very high level -- a pretty big increase in cell and wafer shipment. Just wondering what was driving that increase and also based on what you, for the quarter it looks like wafer price is still below your cost, right. Does it make sense to continue shipment at a loss?

Jack Lai

Well, basically – based on our forecast, I think we believe that the second half of our sales and demand won’t be at least on top order of the first half. With the wafer business we’ve engaged in the new wafer, M2 wafers, which is well received by our customers and we have very good background for at least four to five months and we believe that new M2 wafer cells will bring up at least revenue and production for LDK’s Solar.

Edwin Mok - Needham & Company

Great. The next question, what kind of premium do you think in charge for the M2 wafer versus more generic wafers?

Xiaofeng Peng

Yes, for the M2 wafer normally now we charge around $0.10 to $0.50 more than normal wafers per piece.

Edwin Mok - Needham & Company

Per piece. Okay, great. That was very helpful. And then I have a question on the PV project side. So you guys have just target to complete and also recognize revenue, right and it sounds like there is opportunity in various part of the world. I was just wondering how – based on your guidance, how much of that is expect to come from U.S. versus Europe versus China, if you can help break that down for us? And in terms of these three markets, which one – which market do you have the highest confidence and which one do you see the most risk?

Xiaofeng Peng

From the PV project business that in North America we have a backlog, the dollar value would be something above $1 billion, which would be difficult to realize that within about three years, hence that in North America we expect to generate somewhere $200 million to $350 million per year and this year I think we are somewhere probably $200 million to $250 million on North America.

In China, as you know we just signed three 200 megawatt projects along with the backlog report. So China is still a very high growing opportunities for LDK. As you know we are one of the top EPG Company in China, we’re also a big manufacturer and we believe that China market are going to do very, very well.

In Europe, we have a long history doing the business in Europe. The base right now is relatively small. However, we’re expanding our footprint to other countries in addition to we used to be just Italy and Germany, but now we’re expanding to Eastern part of Europe and also like United Kingdom. So we also are growing our project business in Europe as well. So, in doing all that we’re going to recognize somewhere about 300 megawatts that we can sell – (indiscernible) during the course of 2012.

Edwin Mok - Needham & Company

I see. But it sounds like, based on what you just said right, it sounds like the 200 megawatt in China, you’re targeting to complete most of them this year, is that what the target is?

Jack Lai

Well, again that is – back in North America we have like $1 billion backlog which we got about three year to accomplish. I think in China our project is probably going to last for at least five years. We are going to do it project-by-project, location-by-location and the realizable revenue that this year we anticipate the total is somewhere about 300 megawatt total worldwide for our projects.

Edwin Mok - Needham & Company

I see. Okay, that’s helpful. And then a question on the polysilicon production, so in the second quarter, you does a little bit of update but your guidance implied can’t pickup in the second half. I was wondering, do you have any contract commitment for poly shipments to your customer and would that have an effect there? Also the other thing is based on your current targets, it sounds like you probably have to buy quite a bit of poly from the outside market, right. Is that the plan for the rest of the year?

Xiaofeng Peng

Well, I think that for the polysilicon business that we have to be at least careful at this moment. The company now is focusing on improvement of the cost structure by spending the effort – most of the efforts in building hydrochlorination process; hence the production output will be much lower than what we have planned, plus the cost of production at this moment is still near to $40 which compares to the market price was not very economical.

So we are adjusting our plan, that’s basically to reduce the production and to focus on the product improvement so that we can achieve much better cost structure by the end of the year and at that time we will be ramping up too. So, I think that from a commitment to customers that definitely our team will need to talk to our customers and to reschedule some of the delivery schedule and so that we can serve them better with more competitive products and better products in the future.

Edwin Mok - Needham & Company

Great. One last question and I’ll go away. So on the long-term commercial data kind of one of your plan is to maybe try conversion of your debt into long-term commercial pay cut. Can you update us what’s the status there, I think you’ve talked about that before and what kind of interest rate are you guys looking at to do that?

Jack Lai

Well, of course that we continue to looking to possibilities to issue our long-term debt to replace the short-term debt. At the present time, that our interest expense average about 7% per year and we anticipate that if we can do longer term loans that possibly that we can reduce to probably to 6% level, which of course is very good for the company, so we're continuing to do that.

Edwin Mok - Needham & Company

Great. That’s all I have. Thank you.

Jack Lai

Thank you. Thank you, Edwin.

Operator

And our next question comes from the line of Ahmar Zaman with Piper Jaffray. Go ahead, please.

Karen Tai - Piper Jaffray & Co.

Hi everyone this is Karen calling on behalf of Ahmar. I have two quick questions; one regarding your cost structure, the follow-up on the previous question. I noticed that your cell processing cost increased significantly this quarter. I wanted to just get more color on your plans to further reduce that and your year-end target for cell processing costs as well as total module costs? Thank you.

Xiaofeng Peng

Well, Karen as you know that because the capacity that we have, nearly 1.7 gigawatts, which is increased so that we could do, say, as much as 300 to 400 megawatt on quarterly basis. However, because of market condition, because of seasonality, because of the Chinese New Year shutdown, we only produced somewhere about 50 megawatts. Hence that amortized costs were very, very high for the first quarter.

From the second quarter we start to improve the utilization of capacity, I think in the second half, certainly that we’re going to ramp higher in the manufacturing, which of course bringing much low costs, of course that we’re looking at somewhere that get to the mid to low-teens of cents – pennies, so maybe somewhere to 13% to 15% range that will be competitive to the marketplace.

Karen Tai - Piper Jaffray & Co.

Okay. And then, previously you guided to total module manufacturing costs of around $0.70 year-over-year improvement, is that still on target?

Xiaofeng Peng

Yes. With our efforts, including polysilicon to module, we’re confident that we can accomplish up to $0.70 probably at the end of the year.

Karen Tai - Piper Jaffray & Co.

Okay. And then, can you give us some color on your expectation for now, module ASPs by the end of the year?

Xiaofeng Peng

Currently last quarter we see our ASPs around $0.80 and I think because now we’re selling most of big percentage in the U.K. market is such our – Euro and Euro essentially is going down. So, in dollars maybe few cent [elasticity] in the last few quarters because of the Euro/U.S. dollar exchange difference. So, I think there are not too much room for the module reduction in the year, I think maybe between $0.70 to $0.80.

Karen Tai - Piper Jaffray & Co.

Okay, thank you. And now one last question on the project business that we talked about earlier, is that going to mostly kick-in in the fourth quarter or third quarter just in terms of overall revenues?

Xiaofeng Peng

Yeah, I think starting from third quarter I think most of the revenue (indiscernible) fourth quarter and only in the third quarter revenue of project will be coming (indiscernible) very big impact increase our revenue.

Karen Tai - Piper Jaffray & Co.

Okay. So your total project revenue breaks down on a – between third quarter and fourth quarter, it will be like 70% to 80% will be recognized in the fourth quarter, something like that?

Xiaofeng Peng

Most of our projects in China will be recognized in first quarter. And we’ve a fixed percentage of projects in U.S. and Europe that can be recognized in third quarter.

Karen Tai - Piper Jaffray & Co.

Okay, that’s helpful. I’ll jump back into the queue. Thank you.

Operator

And our next question comes from the line of Dan Ries with Collins Stewart. Go ahead please.

Dan Ries - Collins Stewart

Thanks for taking my question. You mentioned at the beginning of the call that you’re working with bank as well as the – I guess province or city government, can you indicate what support the local government is providing at this point, are they backing any of your short-term loans, are they helping with worker salaries or anything like that?

Xiaofeng Peng

Yeah, Dan they give different kind of support of course for the workforce and – different support for the Company just to meet, to also working with the different kinds of support to make the Company growing through the difficulties that’s happening in the industry (indiscernible).

Dan Ries - Collins Stewart

Okay. And just a quick follow-up, I think Mr. Peng, you just mentioned that you didn’t think there was perhaps much room for modules to fall further other than some impact from the Euro. At Intersolar, you probably at least negotiated some contracts for 3Q module sales, should we expect them to be roughly $0.75 plus or minus any factor for change in the Euro?

Xiaofeng Peng

Dan, I think it kind of goes to the euro changes, which we are expecting probably in similar range, yes.

Dan Ries - Collins Stewart

Thank you very much.

Operator

And our next question comes from the line of Pranab Sarmah with Daiwa Capital Markets. Go ahead please.

Pranab Sarmah - Daiwa Capital Markets

Hi. Good afternoon, everyone. This is Pranab from Daiwa. My first question is what is your depreciation and amortization expenses on Q1?

Jack Lai

About $64 million total.

Pranab Sarmah - Daiwa Capital Markets

Thank you. Then, secondly, did you say like your polysilicon production cost was $24.9 per kg?

Jack Lai

No, that was the average cost of polysilicon inventory we’ve on hand.

Pranab Sarmah - Daiwa Capital Markets

Okay. So what was your polysilicon production cost in Q1 or you expect to be on, say, by Q3 or Q4 this year?

Jack Lai

Well, in Q1, we came in about $41 per kilogram and that – again that – because our inventory is for 17,000 metric tons and our production is still below 2000, so that’s the reason that amortized cost was higher.

Pranab Sarmah - Daiwa Capital Markets

And it is likely to remain in the similar levels for whole year unlike about 1,500 to 2000 tons, so that means your production cost will remain nearly $40 per kilogram whole year, right?

Jack Lai

Well, we’re working on – couple of things will help to reduce the production cost. Number one of course is the process enhancement with the hydrochlorination that we’re working, and probably by the end of the year we can do that. That can reduce by $8 range and also that we’re hopeful that if we can ramp up the production to the capacity, which can lower the amortized – depreciation, with that they can cut the depreciation by half, which of course will also further reduce our implementing cost. And our objective is always try to reach above 20,000 level, which will be competitive to the – for senior companies [in work].

Pranab Sarmah - Daiwa Capital Markets

And my last question is on your Solar Farm Project, could you let me know like whether have you got any financier to buy your projects in U.S. or what is your exit strategy from Solar Farm Project in U.S?

Jack Lai

Yes, most of our U.S. project, we have secure potential buyers with cash to wait to buy when it’s completed. So, nobody that we could sell within about three-months of completion after they complete the due diligence process, so we already secure potential buyers.

Pranab Sarmah - Daiwa Capital Markets

When do you expect to get some of the cash whether to be on this year or it might spillover to next year, the cash from this buyer?

Jack Lai

Yes, some of the offers actually is – all cash deals, so for instance that within the next 90 days at least we’re going to have one or two project will be sold to (indiscernible) and there will be cash deal, which means that the cash should be normally brought in within 30 days at the close of the sale agreement.

Pranab Sarmah - Daiwa Capital Markets

Okay, thank you very much.

Jack Lai

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Amy Song with Goldman Sachs. Go ahead please.

Amy Song - Goldman Sachs Group Inc

Hi, good evening. My question to you is, first of all, I want to understand your capacity along the value chain, what exactly is the product capacity that you’re having at this moment as about ...

Xiaofeng Peng

Well, probably…

Amy Song - Goldman Sachs Group Inc

…probably -- yeah, go ahead.

Xiaofeng Peng

Well, probably at this moment we installed 17,000 metric tons.

Amy Song - Goldman Sachs Group Inc

Okay. So, 17,000 metric ton, you give a guidance roughly 5,000 to 7,000 metric ton production so then when you said early you’re going to outsourcing more, so in – let’s say, if next year we see a still – quite a lower poly – low priced poly environment, are you going to foresee a production, can we assume that?

Xiaofeng Peng

Well, it’s very important for LDK’s strategy, we’re always going back to implement the technology that’s going to be the leader in the industry and also the cost structure. So we’re working on hydrochlorination process improvement, that’s during the course of 2012. When we complete this process improvement we can lower our cost to make our production cost very, very competitive.

Amy Song - Goldman Sachs Group Inc

Okay. So, for the hydro production progress, what is the CapEx you need for the upgrade? Can you give a guidance?

Jack Lai

We anticipate to spend up to about the $100 million. We already finish a part of the process in Xiacun plant. At this moment we’re implementing the same process into the Mahong plant at this moment.

Amy Song - Goldman Sachs Group Inc

Okay. So give your solar firm footprint that you layout, 270 megawatt to 360 megawatt, so what is the percentage with China project out of this (indiscernible) and then who are you selling to in China, can you disclose that?

Xiaofeng Peng

We internally work in with different partners, major is the leading China utility company like Guodian we have already working in Gansu province and then the other – and also the local utility company in different province, in different province like we are doing last year in Shanghai, this year in Gansu and also in other province. So you’ve seen we’ve already announced several utility company, which are leading utility company in China last year and this continue – is undergoing this year. So we will have several big leading EPC contract this year. So this will be the general – very good sites of revenue in quarter three and especially quarter four in China.

Amy Song - Goldman Sachs Group Inc

Okay. So was it a percentage of ship size – in terms of a total project, what percentage of project goes to China, can you give a numerical figure?

Xiaofeng Peng

This year worldwide, I think U.S., Europe and China we will be around 300 megawatts.

Amy Song - Goldman Sachs Group Inc

To be complete and sold out?

Xiaofeng Peng

Yeah, complete and sold out, and all is just EPC service. Some we calculate EPC service, the projects or is not (indiscernible) just the EPC service.

Amy Song - Goldman Sachs Group Inc

Okay. One last question. Just doing business in China is quite well known in China, doing with big IPP is quite difficult in terms of a cash payment, because they do have their central position to extend their payment if they want it. Do you see that problem with you or you think you’re still firm sure that you can collect the revenue by third quarter, fourth quarter?

Xiaofeng Peng

Up to now we have a good relation with our customers. Of course, some customers also delay some payment. But anyway, they also pay on – they still pay on schedule. Of course some time waiting one month or two months, but finally we get most of our payment.

Amy Song - Goldman Sachs Group Inc

Okay. Thank you very much.

Operator

And our next question is from the line of Philip Shen with Roth Capital Partners. Go ahead please.

Philip Shen - Roth Capital Partners

Thank you for taking my question. Regarding the international systems projects outside of China, we’ve heard that the China Development Bank may have frozen financings for overseas project, starting a couple of months ago. Can you comment on whether or not this is true and whether or not this is affecting your international projects?

Jack Lai

Well, actually CDB is still working with our teams very, very closely. Recently, they even send a delegation go to Europe to visit our new sites and still are committed to go along with our project development teams. And also South Africa, I think that CDB also very interested to develop project out there and they’ve prepared a special fund for LDK to pursue opportunities in Africa.

Operator

And our next question is a follow-up question from Edwin Mok. Go ahead please.

Edwin Mok - Needham & Company

Hi. Thanks for taking the follow-up. Just quick question on the operating expense, Jack. How should we start to think about that in the second quarter, I think on the contrary now you talked controlling OpEx is one way to conserve cash, right? How do you think of that in the second half going into next year?

Jack Lai

Well our run rate – when the business going to the high level, we probably having a run rate of up to $50 million operating expenses (indiscernible) with the current business conditions with the revenue level that we will try to control somewhere between $40 million to $50 million, that’s what we will control in that range.

Edwin Mok - Needham & Company

I see. Great. That’s all I have. Thank you.

Jack Lai

Thank you, Edwin.

Operator

Thank you, sir. That does conclude our allotted time for questions. I’d now like to turn it back to management for any closing remarks. Go ahead please.

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 the next event. We wish you all a nice day.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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