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Hanwha Solarone Co Ltd (NASDAQ:HSOL)

Q2 2012 Earnings Call

September 11, 2012 8:00 am ET

Executives

Paul Combs – Vice President-Investor Relations

Ki-Joon Hong – Chairman and Chief Executive Officer

Jung Pyo Seo – Chief Financial Officer

Charles Kim – President

D.K. Kim – Chief Strategy Officer

Analysts

Kelly Dougherty – Macquarie Research

Caleb Dorfman – Simmons & Company

James Medvedeff – Cowen & Co. LLC

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2012 Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today Tuesday, 11 of September 2012.

I would now like to hand the conference over to your speaker today, Mr. Paul Combs. Thank you. Please go ahead.

Paul Combs

Good morning everyone, welcome to our call. Joining me today our Chairman, Hong; our President, Charles Kim; CFO, Jay Seo; and D.K. Kim, our Chief Strategy Officer.

Chairman Hong will open with some broad summary comments of key accomplishments as well as touch on the current industry operating environment. Jay will follow with some financial highlights from the second quarter. Charles will then discuss a few critical longer term initiatives for the company, followed by D.K. who will conclude with some observations on the recent acquisition of Q-cells by Hanwha Group. We’ll then be happy to answer any questions you may have.

I’d like to remind you of our Safe Harbor policy, which is included in the earnings release as well as posted in its entirety on slide two of the slide package. I need to remind you that our comments today will contain forward-looking statements that are subject to risks and uncertainties. Please review our filings with the SEC for a complete rundown of these risks.

Now, it is my pleasure to turn the call over to Chairman, Hong.

Ki-Joon Hong

Thank you, Paul, and good morning, everyone. In spite of challenging industrial environment, I believe our company has made some significant products during the last quarter. The most notable accomplishment were acceleration in shipment growth, a meaningful reduction in processing cost, a return to gross profitability, continued discipline in operating expense, and working capital management, and enhanced synergy with the Parent company.

We believe the company is increasingly well positioned not only to survive this prolonged industrial downturn, but will endeavor to establish a position of leadership going forward. This is not the key process nor will it come without challenges including continued pressure on volume price near term, industrial capacity, slowing growth in traditional or European market and duties in the United States and maybe in Europe. It is apparent that the industrial consolidation is well underway as marginal competitors either not scale low cost production run, and financial resources have and will continue through future.

The synergies with our largest shareholder are becoming increasingly more relevant, and provide us with certain strategic advantage. The recent acquisition of Q-cell is a significant milestone in the company’s long-term ability to gain competency advantage and provide a number of benefit to us, which D.K. will outline shortly.

Now, Jay Seo, our CFO will touch on some financial highlights for the second quarter.

Jung Pyo Seo

Thank you, Chairman, and good morning everyone. My comments are summarized on slide 3 through 7. Some highlights for the second quarter include; PV module shipments including module processing services rose 43.6% to 230.7 megawatts, while our ASPs declined to $0.77 from $0.84 in the preceding quarter. Our EA, which is Europe and Africa region was the largest by far at 76% of total shipments and reflected the pull-in demand in Germany ahead of incentive reductions.

Germany accounted for 57% of total shipments while other markets such as England, Italy and Spain were 4% to 5% each. The Asia Pacific region was the next largest market segments at 17% of total shipments with China, Korea and Japan the largest distributors. Shipments to North America accounted for 7% of total, as we continue to transition to the new AD and CVD structure.

The full geographic mix of shipments is illustrated on slide 5. Higher volumes somewhat offset by lower prices combined to increase revenues over 33% from the previous quarter to $168.7 million. The company achieved over $22 million swing in gross profit from the prior quarter. Gross profit of $10.6 million and gross margin of 6.3% was much improved from $11.9 million gross loss and negative gross margin of 9.4% for the first quarter.

We continue to maintain tight control over operating expenses and narrowed our operating loss from $35 million in Q1 to $13 million this quarter. As a percent of revenues, operating expense is at 14% were improved from 18% the prior period, largely due to higher shipments and revenues. This ratio should improve to a more normalized range of 10% to 12% overtime.

Interest expense rose slightly reflecting higher debt levels, and we recorded a $5.4 million loss from the combined effect of a foreign exchange loss with a gain from the fair value of derivatives. On a GAAP basis, we recorded a net loss of $42 million or $0.50 per basic ADS. On a non-GAAP basis, we recorded a net loss of $39 million or $0.46 per basic ADS. The figure was significantly impacted by the change in fair value of our convertible bonds this quarter, as it has some periods in the past which is largely influenced by the movement of our stock price.

We have made further progress in reducing about processing cost during Q2 and our goal of achieving non-poly processing cost of $0.50 per watt remains in sight. As shown on slide 6, our blended cost of goods sold fell 22% QoQ from $0.92 per watt to $0.72 per watt. Our internal cost also dropped about 9% to $0.71.

The primary factors driving cost reduction were lower polysilicon prices, higher utilization and continued progress on a number of cost reduction initiatives. We still suffer a penalty for idle capacity, without that the lay of our cost would match those of industry leaders.

Our average polysilicon cost for the recent quarter was $25 per kilogram, falling from an average of $27 per kilogram in Q1 2012. We expect the price of polysilicon to decline further in the second half of 2012 with spot prices of polysilicon now in the low $20 per kilogram.

Now, let’s take a quick look at the balance sheet as shown on slide 7. As of June 30, 2012, our cash and cash equivalent balance remained healthy at $282 million and we maintained net working capital of $201.5 million.

Total short-term bank borrowings declined over $125 million to $306 million, reflecting the company’s efforts to shift that to longer term borrowings. Our outstanding long-term debt, which includes the non-current portion of long-term bank borrowings and our convertible bonds increased to $453 million, largely due to the $108 million three year credit facility secured during the quarter.

We also repurchased an additional $22 million of convertible bonds since close of the second quarter. We have purchased approximately $50 million in convertible bonds during the first quarter. Credit is clearly tightening China broadly speaking, but we continue to have access to necessary funding with credit lines of approximately $500 million.

Accounts receivable increased about $30 million to $126.4 million reflecting higher shipment volumes. Day sales outstanding decreased again from 83 days in Q1 2012 to 77 days in Q2 2012, reflecting continuing tight credit control. Inventories of $108 million were relatively unchanged from the prior quarter. Days inventory outstanding decreased from 69 days in the prior quarter to 60 days in the second quarter.

Capital expenditures in the second quarter were only $6.2 million. Our capacity remained unchanged at 800 megawatt for ingot and wafer, 1.38 gigawatt for cell and 1.5 gigawatt for module. We have no specific plans to add capacity near-term and will continue to evaluate our needs as the operating environment evolves. We anticipate spending around $150 million in capital in 2012.

Charles will now make some brief comments on current initiatives underway to better position the company for growth and give a glimpse of near-term market conditions.

Charles Kim

Thank you, Jay, and good morning, everyone. My comments are summarized on slides 8 to 10. As Chairman Hong noted earlier, the company continues to make progress in a number of areas during a very difficult operation environment. In prior quarters, we have reviewed some detail our cost reduction plan. Our outlook for key growth markets like China, Japan, and the U.S. and given some highlights of technology road map and downstream development, all of these remain relevant issues today and we are making strides in each area.

One of the real benefits of our relationship with our largest shareholder is Hanwha ability to develop a company for the long term. Don’t get me wrong, we feel probably everyday to maximize performance in the near term, and I think you can see a number of signs of tangible substance they’re including the shift from OEM to parameters, significant non-poly cost reduction, excellent expense and working capital management, and some reasonable success in penetrating the market.

We are convinced that an enormous market opportunity exists for well positioned players, and we are actively managing our company with that in mind. The year 2012 is clearly a transition year for the industry. Traditional growth markets in Europe are slowing. Growth volume there is being replaced by growth in China, Japan and the U.S. And the new areas of growth like the Middle East, Africa and South America are [increasing].

In fact, 2012 will likely PVM 10% volume growth to over 30 gigawatts, and we believe that over the next five years the market can expand it to over 70 gigawatts following on a compounded basis at least 15% per year. The benefit of pull-in price in solar systems are increasingly competitive as a source for power generation and it can exist without incentives. Industry overcapacity has existed since mid 2011 and won’t be back from true balance until sometimes in 2014.

That being said, consolidation is underway with one year handful of players likely to survive. It is estimated that in Jiangsu Province alone, 150 of the 200 smaller players have ceased operation, a number of companies in Europe and the U.S. have failed and in China, most of the larger players are faced with ownership issues that are not easily rectified.

We are in a fortunate position that with our own parent company commitment. We can develop and evolve the company during tough times. We are actively working on a number of issues with the long-term mind including developing direct sales charts to establish a control over the customer.

Evolve to system sales by bundling products, ERC turnkey business and the downturn business to balance the volatility over the module business presented to capture better margin.

Productivity improvements and reducing cost through automation, technology development and purchasing cost reduction, leveraging system sales in concert with Hanwha Group debt financing and commitment to creating a culture that values and deliver quality. Before transitioning to D.K., I will make a few observations about the near term operating environment.

For Q3, for the industry may see some short-term pause in demand as euro slows. China is unquestionably a big market. The U.S. [is over], but Chinese manufacturers are still in transition in solving the new duty requirements. And in Japan, pace of development is slower than earlier anticipated with a new incentive just coming into play and approval issues. Many manufacturers have built inventory during the second quarter in anticipation of a strong second half of the year.

Now, reduced the volume expectations by many for the Q3, this will place continued downward pressure on pricing. We anticipate module prices may fall well below $0.70 per watt during the second half. The combination of lower prices and the flat [sheet] demand should continue to make profitability challenging for most players near term.

We think conditions in the Q4 will improve either China, Japan and the U.S. are seeing better demand. Pricing should stabilize somewhat and inventories will have been worked down.

Now D.K. will make some brief comments on Hanwha Group acquisition of Q-cells.

D.K. Kim

Thanks, Charles and good morning. My comments are summarized on slide 11. When Hanwha Group made its investment in Solarone in September of 2010, it was the beginning of the long-term strategic objective to become a top three global player in the solar industry. With the acquisition of Q-cells, one could arguably say that the Company is quickly closing the gap in achievement of that goal.

As measured by cell capacity, our combined entities will have well over 2 gigawatts of production capacity and diversified manufacturing footprint in Europe, Mainland China, and Southeast Asia.

The ability to store cells from multiple markets will become a distinct competitive advantage in the phase of duties for Chinese manufacturer cells in the U.S. and quite possibly in Europe. And this was accomplished through the financial resources of the parent company, placing no direct strain on Hanwha Solarone’s balance sheet.

Integration of any acquisition this large is always a challenge, but the two parties know each other quite well and have successfully collaborated through an OEM agreement since 2009. We believe Q-cells provides us with a number of benefits, which include a well established brand globally, manufactured in Germany and Malaysia including both mono and multi capabilities and a very professional workforce. Strong technology and R&D, high efficiency and high quality products, increased scale and leverage in supply chain sourcing, the opportunity to expand our existing module supply agreement, and a growing downstream business.

Now Jay will conclude with an outlook for the third quarter as well as the full year.

Jung Pyo Seo

Thank you, D.K. As shown on slide 12, for the third quarter expected is the following. Shipments volumes similar to those recorded in the second quarter. We expect to maintain positive gross margins. For the full-year 2012, we have reduced our shipment focus from 1 gigawatt to a range of 900 megawatt to 1 gigawatt. Capital expenditures for the full-year will be approximately $150 million. We maintain our earlier projections that non-poly processing cost should fall to $0.50 per watt or below by year-end.

We are now happy to answer any questions you may have. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kelly Dougherty from Macquarie Bank. Please ask your question.

Kelly Dougherty – Macquarie Research

Hi, everybody. Thanks for taking my question. Just a quick follow-up on details you all comment. Can you maybe give us some sense of how that actually gone to work? I mean is your management team going to be in charge of their operations as well or they kind of run separately as part of Hanwha the parent. And then just how the economics work if you would source cells from them. Is that just kind of a tolling arrangement? Maybe just some thoughts on what their production costs are relative to yours as well? Thanks.

Charles Kim

Regarding the consolidation of the organization, definitely, we will try to the synergy in between both companies. As mentioned by D.K., we expect a bunch of the synergies in operation side. So the in-sourcing, we will set up the global sourcing function to minimize the repurchasing cost. And for regarding the R&D, we will also deconsolidate the projects to minimize our global expenditure, and also ourselves, Q-cells has almost 1 gigawatt of sale capacity, 200 from the Germany and 800 from Malaysia. To avoid the anti-dumping issues, we will either purchase or we will do the tolling business. In details are not decided, we are because of the – we are right now under the process of post-merging integration.

D.K. Kim

And in terms of the cell cost, I think in terms of the cash cost, the Malaysian Q-cells plant is roughly at the same level as our cell plant in China in terms of the cash processing cost.

Kelly Dougherty – Macquarie Research

And then that would be what you would base your – I assume there were two separate attitudes right, so I assume there have to be some kind of tolling arrangement or buying cells around, but you based that on the cash cost. Is that fair to say?

Charles Kim

What D.K. mentioned is the cost competitiveness of a Malaysian plant. Malaysian plant’s core competitive cost in July would be around, in cash base, $0.13 per watt, I think the world's best class. It is similar to our own [Shidong] plant. That is what he is emphasized.

Kelly Dougherty – Macquarie Research

Okay. So it's not basically, it’s not going to cost you more to buy cells from Q-cells and would theoretically to buy them from Taiwan or somewhere else to kind of get around the U.S. tariff.

Charles Kim

No.

Kelly Dougherty – Macquarie Research

Okay. Great, thanks. And then, I’m kind of just sticking with things affecting the Parent for a minute, maybe can you give us a sense of what your expectations are for potential Chinese tariffs on imported polysilicon and how that may impact your sourcing, the cost where you sourced from and then if Hanwha, the Parent, given that is still no moving ahead with their own poly plant?

Charles Kim

Yes. Hanwha, our Parent, is still moving on the construction over the poly, but as a separate company we repurchased at the market price.

Kelly Dougherty – Macquarie Research

So, how much do you purchased from Chinese suppliers now and are you seeing new supplier, they may heard of kind of marginal Chinese producer starting production backup again in anticipation of tariffs. So do you think they will be...

Charles Kim

I think it depends upon the, but in case if the EU government import the (inaudible) reduction of the demand side, so we don't expect even the Chinese government to impose the anti-dumping tariff to Europe or what the American play. So we don't expect much increase of the poly, because of the overall demand decrease.

D.K. Kim

And right now, we don't really source for many of the Tier 2 or Tier 3 Chinese players. So we only source from the Tier 1 players including GCO in China and Wacker from Europe. So we are not really strictly involved with the smaller poly plants coming back online.

Kelly Dougherty – Macquarie Research

Right. But it seems that we are hearing about some of these poly plants coming back online in anticipation of the tariff including on rocker. So I mean that just seems like it exacerbates the oversupply problem.

Charles Kim

I think that’s the potential in China at least.

Kelly Dougherty – Macquarie Research

Okay, great. I’ll jump back in queue. Thanks.

Operator

Your next question comes from the line of Caleb Dorfman from Simmons. Please ask your questions.

Caleb Dorfman – Simmons & Company

Thanks for taking my question. Good evening. It’s impressive to see the production cost decline, but at the same time bringing down the sales guidance for the year. How that have an impact on your underutilization and what type of underutilization penalty do you expect in the back half of the year?

Charles Kim

Hold-on one second, we’ll get to you on this and we just discuss for a second. Thank you.

Ki-Joon Hong

If you see our Q3 shipment diagram, we don’t expect a reduction of the shipments. And actually in Q4, the Q2 increase, the demand increase from the China and the Japan, actually we are expecting our volume increase. Having said that, we don’t expect any of the positional penalty from the idle and capacity loss in the Q3 and Q4 comparing with the Q2.

Caleb Dorfman – Simmons & Company

How large are the penalty would you estimate idle capacity was on your production cost during Q2?

Charles Kim

In Q2, it was almost $0.08 per watt.

Caleb Dorfman – Simmons & Company

Okay. Then, looking forward beyond your end of the year target of $0.50 per watt or below $0.50 per watt for processing costs, how much lower do you think looking long-term in the end of 2013 or how much lower do you think you can possibly do it and where do you think the cost savings possibly could come from?

Paul Combs

I don't think we're prepared to give you an ‘13 forecast. I think the forecast is $0.50 a watt or below. I think we're quite comfortable that we can achieve below $0.50 a watt.

Caleb Dorfman – Simmons & Company

But looking ahead, there are further opportunities to still reduce...

Paul Combs

I believe that's true. We are just unable to give you a specific number at this point.

Caleb Dorfman – Simmons & Company

Okay, great. Thank you.

Operator

Your next question comes from the line of James Medvedeff from Cowen & Co. Please ask your question.

James Medvedeff – Cowen & Co. LLC

Good evening, thanks for taking my questions. I just – in the past, you have broken down the non-poly costs into their component things, how much you paid for wafers and what the cell processing cost is and so forth. Could you do that again?

Jung Pyo Seo

Based on the – in our processing cost, for ingot is $0.04, wafer is $0.12, cell is $0.15, module is $0.25. So this is just processing cost, so silicon cost is $0.15, so total $0.71 in Q2 in average.

James Medvedeff – Cowen & Co. LLC

And to the extent that you bought some wafers in the quarter, what were you paying for them?

Ki-Joon Hong

You mean the wafer cost or purchasing cost.

James Medvedeff – Cowen & Co. LLC

Yes, purchasing…

Ki-Joon Hong

$0.26 per watt [approximately].

James Medvedeff – Cowen & Co. LLC

Okay. And then back to the Q-cells acquisition, so you’ve been assuming at least Malaysia stays online, you will have substantially more cell capacity than you have module capacity. With the plan be to add module capacity or to be an open market seller of cells?

Jung Pyo Seo

I think right now Q-cells is actually selling pretty significant amount of itself to module makers, especially in Europe. And I think in terms of adding module capacity, I think we want to be prudent in terms of making sure that we fully utilize the module capacity we already have before we add anymore module capacity.

James Medvedeff – Cowen & Co. LLC

Okay. Thank you. I’m sorry.

Ki-Joon Hong

We can see the immediate utilization increase for the Malaysian plant in case we replace Taiwan (inaudible) for the export to U.S.A. Right now, our company is purchasing 15 megawatts per month, a purchase from Taiwanese; we expect it will increase up to 22 to next year 30, and having said that we expect a significant increase of utilization in Malaysian plant in near term.

James Medvedeff – Cowen & Co. LLC

Okay. Thank you very much.

Operator

Our next question comes from the line of Kelly Dougherty from Macquarie Bank. Please ask your questions.

Kelly Dougherty – Macquarie Research

Hi, OpEx in the second quarter was 14% of revenue, but I assume that I have to assume it increases as a percentage in 3Q and shipments are going to be flattish but ASPs will decline, or maybe are there further cost you can take out of OpEx. I'm just kind of wondering how and when you can get to that 10% to 12% target you mentioned?

Jung Pyo Seo

Regarding OpEx as we emphasized, we managed – we are managing the OpEx very well. However, as you mentioned in percentagewise it was 15% in Q2. So as the sales increases, so the percentage will be lower. So think I can expect total amount of OpEx for the year will be around $110 or slightly over than that. And so the percentage in Q3 and Q4 will be lower than 14%, the absolute amount will be – absolute amount will be remaining at the same level of Q2 or slightly it will increase. So like in because of some variable in the OpEx like freight or something like that.

Kelly Dougherty – Macquarie Research

The revenue in 3Q it seems to be implied or will be done if ASPs are going to be down and volumes are going to be flat. Is that a correct assumption?

Jung Pyo Seo

Yes.

Kelly Dougherty – Macquarie Research

Okay, okay. And then how do you think about OpEx improvement, I mean do you think that you can continue to, I'm sorry not OpEx improvement – gross margin, do think you can continue to lower your production cost faster than the ASP declines and then we could see gross margin actually improve.

Ki-Joon Hong

So I think you know, the ASP, better than I know, so our cost will – there will be a big improvement in our costs continuously. So even though there will be a limitation some time in the future, but anyway, I think we will – we are trying our best to make positive gross margin, so then it is because of we reduced our cost. So OpEx will be managed very tightly, so we will show a big– I’m sorry not big improvement, anyway improvement in cost reduction and OpEx management continuously.

Charles Kim

And I think this also has to do with the synergies with Q-cells, with possibility of using Q-cells brand in certain markets as well as R&D and the quality that Q-cells brand brings. We are hoping that that could kind of mitigate some of the ASP declines in markets where brand and quality is more appreciated, and we are hoping that that would also help in helping us maintain higher gross margins as we continue to decrease our processing cost.

Kelly Dougherty – Macquarie Research

Okay, great. Just one more quick done on shipments. For you to attain the 900 to 1 gigawatt for the full year, if we kind of look at the low end, it would suggest that 20% or so sequential increase in the fourth quarter, the high end would be kind of well in excess of 60%. So just wondering how much visibility you have into the fourth quarter at this point and what may or may not happen to get you towards that high end? Are you kind of expecting big projects to come on in China or what that increase might be due to?

Charles Kim

Swinging in between the low end and the high ASP, right now we are under the negotiation of the big contract with excess supply to the emerging markets. In case we accomplish that the contract, we think we will achieve the total 1 gigawatt in this year. If not, we think it will end within 500 megawatt in this year.

Ki-Joon Hong

And in terms of visibility, we have pretty good visibility into some markets including particularly Japan, and I think that’s where we see the most visibility for Q4.

Kelly Dougherty – Macquarie Research

Okay, that’s helpful. And then just what market was that contract that you were negotiating?

Charles Kim

I cannot explain in detail of course we are under discussion.

Kelly Dougherty – Macquarie Research

Okay. Is it kind of one of the primary markets that we would imagine or it’s…?

Ki-Joon Hong

It’s non-European market.

Charles Kim

Yes.

Ki-Joon Hong

One of it was in the emerging market.

Charles Kim

Yes.

Kelly Dougherty – Macquarie Research

Okay, great. Thank you.

Operator

Your next question comes from the line of James Medvedeff from Cowen & Company. Please ask your questions. Mr. James Medvedeff, your line is now open. Please ask your questions.

James Medvedeff – Cowen & Co. LLC

Sorry, I had line mute. Thanks for taking the follow-up. I wanted to circle back on ASPs a second time. You said Q3 is lower than Q2, can you put any sort of size or range round that, is it low single digits, mid double digits?

Charles Kim

Is the range is – yes it is around a mid single digit range.

James Medvedeff – Cowen & Co. LLC

And I know it's early to talk about the fourth quarter, but I think you said, you see them flattening out a little bit in the fourth quarter, so would that be sort of no further reductions in Q4?

Charles Kim

Yeah, I think it depends upon the market, and also it depends upon the get companies the regional mix. We believe the European market will go down further, but as we see we serve more to Japan, and so Japan is the high-pricing market. In company levels we don't expect much particular in ASP, so it depends upon the companies, not company.

James Medvedeff – Cowen & Co. LLC

I understand. And then final one on ASPs, what sort of the differential do you get between your branded modules and the once that you do for third parties are for OEM?

Charles Kim

Right now our portion, a selling portion to OEM is very low, below the – it is around least type of Q4 around a positive 15% range below OEM and poly, the pricing range is we are not much – we only have the one model processing the customers is to sell.

James Medvedeff – Cowen & Co. LLC

I'm sorry, I mean your branded modules versus unbranded modules?

Charles Kim

Yeah, unbranded, we don't have the much difference in the pricing right now.

Ki-Joon Hong

So the gross margins there is about the same for our branded modules or module tooling, and I think, what Charles is trying to explain was that the only tooling that we do right now is for one customer which happens in Q-cells.

James Medvedeff – Cowen & Co. LLC

Yes, I understand. Okay, thank you.

Operator

Your next question comes from the line of Caleb Dorfman from Simmons. Please ask the question.

Caleb Dorfman – Simmons & Company

Thanks for taking the follow-up, I was hoping that you could give a brief update on the status of your downstream project development business that you made, any further progress on this province I know that there is some delays earlier in the year. Thanks.

Ki-Joon Hong

Right now, the Hanwha umbrella that the companies are doing the downstream is the Hanwha Solar Energy. They are on track, this year we expect around 80 megawatts projects, and as we acquire the Q-cells, Q-cells has very strong EPC organization, we expect to further growth in the EPC turnkey based and also in downstream.

Caleb Dorfman – Simmons & Company

Great, that's helpful. Also it seems like this quarter was the first quarter since Q2’11 that you actually had an interest tax expense versus the benefit. What was the driver of that, what can we expect to see on the income tax volume going forward?

Ki-Joon Hong

So Caleb, – can I ask you the question again?

Caleb Dorfman – Simmons & Company

It seems like this quarter was the first quarter since Q2 of ’11 that you’ve had an interest tax expense versus a benefit. What was the driver of this and what can we expect to – can we expect income tax expense or benefit again for the rest of the year?

Paul Combs

Just one second here.

Ki-Joon Hong

In the second quarter, so may be – so your question is related to tax. So in second quarter, there is a huge amount of tax expense, which is non-cash, non-cash tax expense. So that was just because of the provident adjustment and so its related tax adjustment. Then so – generally except for that, generally – but Q1 there was a positive tax expense and in Q2 negative tax expense. So in Q3 and Q4, so I think they would be very similar result about the tax expense. So I’m not sure I can answer – I answered in a right session or not. But anyway, regarding tax, if you – if you contact me separately so that we can talk about that on.

Caleb Dorfman – Simmons & Company

So basically you do expect to have a tax expense for the rest of the year.

Ki-Joon Hong

Yeah, I think so.

Caleb Dorfman – Simmons & Company

Great, thank you very much. That’s helpful.

Operator

(Operator Instructions) There are no further questions at this time. I will now turn the call back to today’s presenters for closing remarks.

Charles Kim

Okay. Thanks everybody for turning in. We are happy to answer any follow-up question that you may have. So have a good day. Thank you.

Operator

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

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