LDK Solar Co. Ltd. Q2 2009 Earnings Call Transcript

| About: LDK Solar (LDK)
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LDK Solar Co. Ltd. (NYSE:LDK) Q2 2009 Earnings Call August 12, 2009 5:00 PM ET

Executives

Xiaofeng Peng - Chairman & Chief Executive Officer

Jack Lai - Chief Financial Officer

Nick Sarno - Senior Vice President of Manufacturing

Pita Christensen - Investor Relations

Analysts

Edwin Mok - Needham & Co.

Simran - Cowen & Co.

Colin Rusch - ThinkEquity

Jesse Pichel - Piper Jaffray

Sunil Gupta - Morgan Stanley

Sanjay Shrestha - Lazard Capital Markets

Sam Dubinsky - Oppenheimer

Operator

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the LDK Solar’s second quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Pita Christensen. Please go ahead.

Pita Christensen

Good afternoon and thank you for joining us on today’s conference call to discuss LDK Solar’s second quarter 2009 financial results. This call is being broadcast live over the web and can be access on the Investor Relations section of LDK Solar’s website, www.ldksolar.com for 90 days. On today’s call are Xiaofeng Peng, Chairman and Chief Executive Officer; Jack Lai, Chief Financial Officer; and Nick Sarno, Senior VP of Manufacturing.

After the market closed in the U.S. today, LDK Solar issued a press release discussing results for the second quarter 2009. We also filed a press release on form 6-K with US Securities and Exchange Commission. The press release is accessible online at the company’s website at well as the SEC’s website or you can call The Blueshirt Group at 415-217-7722 and we will fax or e-mail you a copy.

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

Although LDK Solar believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risk and uncertainties that could cause actual results to differ materially from those projected. We refer you to the documents that LDK Solar files from time-to-time with the SEC, specifically the company’s most recent form F-20 and any Form 6-Ks. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Now I’d like to turn the call over to Mr. Jack Lai, Executive Vice President and CFO, to go over LDK Solar’s second quarter 2009 financial results. Jack.

Jack Lai

Thank you, Pita. Good afternoon and thank you for joining us to discuss LDK Solar’s second quarter 2009 financial results. Net sales for the second quarter were $228.3 million, down 19.4% sequentially from $283.3 million in the first quarter. Total wafer shipments, including our processing service business increased to 230.7 megawatts in the second quarter, from 206.0 megawatt in the first quarter.

Wafer sales for the second quarter which exclude the processing services business increased to 182.2 megawatts, from 170.2 megawatts in the first quarter. The average selling price per watt was $1.15, a decrease of $0.39 or approximately 25.3% from $1.54 in the prior quarter. Intense preview on all ASPs continued into the second quarter, resulting in continued decline of wafer prices.

Sales returns met in the second quarter of 2009 was approximately $2.4 million, a decrease from approximately $2.5 million in the first quarter of 2009 and the sales return rate was increased to 2.4% as compared to 1.9% in the prior quarter. OEM shipments were approximately 49.5 megawatts in the second quarter, as compared to 75.8 megawatts in the first quarter of 2009.

By geography, revenue was 28.1% generated from China, 17.2% from Europe, 53.3% from Asia Pacific, excluding China and 1.4% from North America in the second quarter. Our top 10 accounts in the second quarter accounted for 76.0% of total revenues. Top three accounts totaled approximately 40.5%, with our customer numbers four through 10, each average approximately 5.1% of our total revenues.

During the preparation of our second quarter 2009 financial results, we determined that an inventory write-down and loss on the firm purchase commitment or polysilicon materials of approximately $175.8 million and $16.7 million respectively against the cost of inventories was required as a result of the continued rapid market price decline for solar wafers. As a result, gross margin and results from operations were negatively impacted in the second quarter of fiscal year 2009. Gross margin during for the second quarter 2009 was negative 90.0%, down from 1.7% in the first quarter of 2009.

Operating margin for the second quarter of fiscal year 2009 was negative 102.9% compared to negative 5.7% in the first quarter of 2009. During the second quarter we had a foreign currency exchange gain of $752,000, compared to a foreign currency exchange loss of $508,000 in the first quarter. Also our government subsidies declined to $360,000 in the second quarter, from $3.2 million in the first quarter.

Net loss for the second quarter of 2009 was $216.9 million, as compared to a net loss of $22.5 million in the first quarter. Loss per diluted ADS for the second quarter was $2.03, compared to loss per diluted ADS of $0.21 in the first quarter of 2009. Total diluted ADS shares, excluding the anti-dilutive effect of convertible senior notes for second quarter 2009 was 108.1 million shares, that’s compared to 108 million shares for the first quarter of 2009.

Operating expenses were $29.5 million in the second quarter of 2009, up from $21.1 million in the first quarter of 2009. The increase in operating expenses is related to a write-down of prepayments to suppliers of approximately $9.2 million. Second quarter operating loss was $216.9 million, compared to an operating loss of $22.5 million in the first quarter.

Our share based compensation expenses were approximately $4.1 million in the second quarter. This share based compensation expenses are primarily linked to pre-IPO option grants, as well as to the build-out of our organization in anticipation of future growth. We ended our second quarter with $265.7 million of cash and cash equivalents, $123.0 million of short term pledged bank deposits, $1.2 million of short term interest bearing bank borrowings, and $247.4 million of long term interest bearing bank borrowings.

Our interest bearing bank borrowings increased in the second quarter as we continue to invest in the construction of our polysilicon manufacturing facilities. In June, we announced that we had secured a RMB500 million short term loan from the export-import Bank of China and RMB500 million three year loan from Huarong International Trust Company Limited.

We will continue to evaluate additional funding options, including the sub-registration we filed during the second quarter of this year, as well as other short term and long term sources. In the near term, we are taking the following actions to improve our liquidity. One, we are working on a loan application from a PRC institution and we estimate that we may receive approval for RMB2.5 billion or more, including mostly a long term loan to finance our polysilicon plant and operations.

Two, we are working with our China based Banks to replace short term loans with longer term loans and renewal of current loans, so that we can reduce our net current liabilities. Three, we are monitoring the current capital market development and plan on issuing up to $200 million of new shares when market conditions improve.

We expect to use the majority of the proceeds to repay short term loans to improve our debt equity ratio or we are streamlining our operations, improving yield and the cost structure to return to profitability as soon as possible; and five, we are taking internal measures to limit capital and business expenses to conserve cash flow.

Capital expenditures were $258.1 million in the second quarter, of which $1.0 million was for our wafer manufacturing facilities, which we expanded to 1.6 gigawatt capacity in the second quarter and $257.1 million was for our polysilicon plant, which includes a build of the second trend in the 15,000 metric ton plant.

Depreciation and amortization was $16.9 million for the quarter. We will control our CapEx through the minimum level, but we’ll continue to evaluate that this environment, to assure our expansion is inline with changes in the business development. Inventories decreased to $384.1 million as of June 30, from $548.8 million of March 31, largely due to the write-down we have recorded for the quarter.

Our capacity was increased to 1.6 gigawatts in the second quarter. Our polysilicon inventory is comprised of raw material silicon inventory and inventory in transit. We continue to expect our average silicon cost will continue to be reduced over the next few quarters. Prepayments to suppliers which stood at $110.8 million as of June 30, were down $62.9 million from $173.7 million as of March 31.

Our advanced payments from customers were $681.9 million, down from $709.3 million in the first quarter of 2009, which represents a net decrease of $227.4 million. As the global economic crisis continues, we continue to expect prepayments to suppliers and advanced payments from customers to decline sequentially going forward, especially after we increase our own polysilicon production.

The company headcount was 13,064 at the end of second quarter, compared to 13,287 at the end of the first quarter of 2009, a net decrease of 223. We will monitor our headcount inline with the capacity requirement for 2009. LDK Solar will continue its efforts to build a strong team, increase its R&D capability and enhance its infrastructure to support our growth globally.

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

Xiaofeng Peng

Thank you, Jack. Thank you and again welcome to LDK Solar’s second quarter 2009 earnings conference call. We appreciate your interest and support of LDK Solar. The operating environment remained very challenging during the second quarter. Our operating results for the second quarter reflect the impact of these challenges. As we continue to navigate this downturn, we are working to better align our strategy and operations with current industrial dynamics.

We are focused on improving our cost structure, increasing wafer sales by ramping up polysilicon production. We are encouraged by a number of recent positive developments in the solar industry, and we believe the industry should see some recovery in the second half of 2009.

We are working diligently to position the company strategically to capture future opportunities. We have taken significant steps to diversify our business and increase inter-industrial collaboration to export new markets and geographies. I would like to now discuss some of these highlights in further details.

Demand for our wafer began to trend more productivity in the second quarter. We shipped 230.7 megawatt of wafers during the second quarter, which was an increase of 20.3% year-over-year. Our annualized wafer capacity reached 1.6 gigawatts at the end of the quarter.

We believe that this conservative expansion will allow us to capture demand upside. We continue to closely manage our capital expenditure outlays in the tough operating environment. We have taken a number of steps to expand our business to take advantage of the new opportunities in the solar industry.

During the quarter, we entered a number of agreements to collaborate on the construction PV system and further downstream market developments, particularly in the fast growing market of Europe and China. We announced agreements to provide wafers for joint firm PV plants project in Italy, with leading system integrator ESPE, [Huarong] Italian and SAEM.

We are very pleased to strengthen our position in the PV power plants market in Europe and China. We have assembled a dedicated team to explore this opportunity and are in the process of negotiating agreements to enter in several similar projects in the near future.

We acquired a continuing interest of Solar Green Technology, as persistent integrated in the Italian market. LDK Solar acquired 70% of SGT’s share in effort to strengthen our presence in the Italian PV sector. SGT will provide project opportunities and technique supports in terms of realization and a control of PV turnkey plants to LDK Solar.

We believe assists to SGT work or resource will be either effective, an immediate tool for LDK Solar efforts in managing development activity in the Italian PV market. At the present time, we have over 100 megawatt PV project pipeline in the European region. In addition, we are assessing our solar module distribution center in Europe to expand our beliefs and increase our revenues.

During the second quarter, we saw significant momentum build around China’s Golden Sun solar subsidy program, which we believe reflect long term confidence in the gross prospects for the local solar industry. This subsidy program will be provided at the next subsidy payment for the solar resolution project, in means of financial support up to 500 megawatts of PV projects nationwide, subsiding at least 50% of total construction costs.

We believe that we are well positioned during this quite early stage of development of PV industry in China and we are pleased to be in the early stage of negotiating enrolment in a number of local projects. We signed a congressional agreement with the Jiangxi [Provision] Government for the development of PV power project, closing up to 2 gigawatts in the Jian province, due to various independent investments and a partnership program, in assisting the Jiangxi province in building complete PV industries, extension PV products, including roof top projects, solar plant and other integrated PV projects.

We have also signed various framework contracts for construction of PV power projects in nearly 4 gigawatt with Jiangxi, Xinyu City, and [Inaudible] of Jiangxi Province in the second quarter. The terms including financing, present a specific location and each of this contract will require sign approvals from the relevant China governments of developed departments, prior to the commencement of construction.

We have built a team that is dedicated to applying for the Solar project in Jiangxi, Jiangsu and other provinces. We anticipate being able to share more detail on our specific opportunities on such terms when the contracts are finalized. As Jack mentioned, we remain dedicated in exploring a variety of options to strengthen our balance sheet and to improve our assets to finance resource and return when we grow our businesses required capital and the credit markets are retracted.

We are encouraged by the increasing level of activity we are seeing in numerous markets across the solar industry. Many of these opportunities we take time to cultivate. However, we believe that our current initiatives are building a strong pipeline of business, that will contribute significantly to our long term growth.

I will now turn the call over to Nick Sarno, our Senior Vice President of Manufacturing. Nick.

Nick Sarno

Thank you Chairman and thank you to everyone for participating in today’s earnings call. I would now like to provide updates on the progress of LDK Solar’s current operations, including polysilicon plant construction and production updates, polysilicon supply and R&D initiatives. Let me start with the updates on the operations.

A challenging operating environment has persisted through the first half of this year. Early this year, we detailed to limit our expansion plans to better reflect near term demand levels and are continuing to execute on this revised plan. We remain focused on implementing a number of initiatives that will enable us to continue improving cost structure, increasing wafer cells and ramping polysilicon production.

We remain committed to implementing a yield improving initiatives, to further reduce or eliminate production losses such as broken wafers, kerf loss and other manufacturing losses. During the quarter, we commenced production on our in-house 30,000 metric ton annual capacity slurry recycling system, which will greatly contribute to improving our manufacturing cost structure once it is fully operational. We have already begun using recycled slurry from this facility.

We have developed a manufacturing capability to produce 180 and 170 micron thick wafers that are shipping based on individual customer needs and requirements for thinner wafers. Now, let me turn to the updates of our wafer capacity expansion progress.

During the second quarter, we announced that we were resuming our wafer production capacity expansion plans, as a result of an improvement in the wafer demand. Our current expansion plans continue to be conservative and we will closely monitor our CapEx outlays in the coming quarter, while continuing to do our best to enhance our long term competitive position by optimizing our cost structure.

Let me move to polysilicon plant production and construction updates. For our 1,000 metric ton facility, poly production levels in these facilities remain low in the second quarter, as we continue to optimize the production line during the quarter. We expect to reach full production capacity of the initial 1,000 metric tons in Q4 of 2009, and continue to focus on optimizing our production cost structure as we ramp production levels.

For the 15,000 metric ton poly plant, we achieved mechanical completion of the first 5,000 metric tons in the second quarter, and are on track to commence polysilicon production by the end of the third quarter of 2009.

We continue to take a more conservative approach in the construction schedule for the second and third 5,000 metric ton trains, more closely monitor capital expenditure outlays in this challenging business environment. However, we expect the second and third trains to reach mechanical completion by the end of the third quarter 2009, and the end of the first quarter of 2010 respectively.

We continue to monitor market demand and evaluate the appropriate timing to move forward with the complete installation of the remaining trains. We are pleased with our continuing progress on the construction of the first train. Decommissioning and commissioning of all U and I system is now complete in preparation for initial production of polysilicon.

Two reactors from train one were hot tested in July and provided valuable information on train one optimization path forward. We will continue to revisit our 2009 targets quarterly to ensure that they are reflective of the ongoing solar market dynamics. We look forward to providing you with an update on the incremental progress we make.

Let me update you on the polysilicon supply. Given the current market dynamics, we believe that we will benefit from the stabilization of operation variables and the cost reduction in 2009. We remain focused on ramping the in-house polysilicon production, but we do not expect it to have any meaningful impact on our manufacturing costs until 2010, due to the current availability and pricing on the market.

We continue to receive additional polysilicon shipments from contracts signed in 2006, at costs still lower than current spot market pricing, and to take advantage of the low cost of polysilicon we continue to purchase recyclable silicon on the spot market.

I would like now to provide you with a research and development update. Our R&D efforts continue to be a priority for LDK Solar. These initiatives are important component to our long term growth strategy. I would now like to take the opportunity to provide you with an update on the recent research and development achievements and to reiterate our key objectives for R&D in the near term.

Large ingots; during the second quarter we successfully produced 660 kilogram and 800 kilogram ingots, the largest ingots produced by the company to-date. 660 kilogram ingot represents a 46.7% increase in capacity from the standard 450 kilogram ingot. The 800 kilogram ingot represents an additional 21.2% increase in capacity from the 660 kilo.

Once in full production, the larger ingots with lower capital expenditure, will contribute to the reduction of production costs. The increased chart size directly contributes to lower power consumption, higher yields, improved efficiency of downstream processor equipment, and reduced unit consumable costs.

We continue to expand our lines of P and N type mono wafers. Customers are currently evaluating our recently manufactured N type mono wafers. In the near term, we will continue to invest our resources on polysilicon research, new ingot, development, and quality improvements, and continue collaboration with domestic equipment manufacturers in developing lower cost equipment.

Thank you for your support of LDK Solar. I look forward to providing further updates on our operations and R&D efforts. I will now turn the call back to Jack. Jack.

Jack Lai

Thank you, Nick. Based upon current business conditions, we expect our third quarter 2009 wafer shipments to be if the range of 260 megawatts to 300 megawatts and larger shipments to be in the range of 10 megawatts to 20 megawatts. We expect revenues for the third quarter 2009 to be in the range of $240 million to $270 million. Due to the current market limit visibility, we are not providing other guidance at the present time.

Now we would like to open the lines for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edwin Mok - Needham & Co.

Edwin Mok - Needham & Co.

First question is regarding just kind of environment in the third quarter. What do you guys see for your ASP and the spot ASP. Also I noticed your towing business has increased as a percentage of total, do you expect that trend to continue in the second half?

Jack Lai

Let’s start with the ASP situation. At the present time, the ASP mostly we see is between $0.90 to $0.95. We see the price is much more stabilized as compared to three to six months ago, which of course was $1.50 level, but right now I think we are pricing $0.90 to $0.95.

As far as the trending for Q3, Q4, probably mostly we’re going to see $0.90, maybe some competitors they’re also seeing some in the mid $0.80 level, but for LDK I think we’re mostly at the $0.90.

Edwin Mok - Needham & Co.

Then the towing mix, Jack?

Jack Lai

Well, our business model continues to be between 15% to 20%. Right now I think we are closer to 20% as a composition.

Edwin Mok - Needham & Co.

A question maybe for Xiaofeng regarding the downstream opportunities there, can you help us a little bit in terms of your pipeline. Obviously you guys are working with a lot of local guys in China, but maybe help us in terms of pipeline just for this year and next year, how much do you expect to ship for that in Italy and in China.

Also is that a delayed revenue recognition for those and finally, for the module that you said you’ll be shipping 10 to 20 megawatts in the third quarter, is that going to be shipping to a project you guys are incubating and where would that project be?

Xiaofeng Peng

First for the module shipments, it’s shipped to a third party, the disputation being now focused on earning stock in Europe at the moment. This is the module shipment to the third party.

On project, in China I think now this year we are starting slowly. I think, now we just got some project approval for rooftop and then step-by-step also I think, also now we’re in the process of approving the project, especially regarding some project.

I think definitely we will start some project in China, both rooftop and the project in Jiangxi and Jiangsu province and also other province, starting from mostly the fourth quarter I think. Definitely next year we’ll be much, much more improved and there will be significant improving increase in China.

For Europe, now we have collaborated these several projects in Italy with the ESPE and common Italian and also SAEM. This is a project we will be mostly in Italy and most of this project will be finished in the fourth quarter and some will be finished in the first quarter and second quarter next year.

For the project collaboration with Q-Cells, it’s 41.5 megawatts. I think we will expect to start connection in September. So this is the total picture. Of course, we are negotiation many project pipelines, both in Europe and China and this will be more similar agreement in the next few quarters.

Edwin Mok - Needham & Co.

Jack, just on recognizing revenue, do you expect to recognize revenue in those time that Chairman Peng was talking about. Do you have to wait until those projects are sold or what’s the count?

Jack Lai

Yes, I think we still need more time to build out the Lowes projects and also find exit strategy, before we will recognize those revenues. So the earliest time will be sometime Q4, but now we are still working on those projects.

Edwin Mok - Needham & Co.

I see. So it depends on project status; there might be some delay there then?

Jack Lai

It’s probably the completion time we need and also to talk to potential purchaser of Lowes projects.

Edwin Mok - Needham & Co.

Then Nick, maybe just some question on operations. I think before you talk about conversion costs going down to maybe $0.25 per watt. Since you have added wafering capacity here, do you think that might delay that time line? I think that was your target for exiting this year or something.

Nick Sarno

Edwin ask again, I’m sorry. I didn’t quite understand the question.

Edwin Mok - Needham & Co.

On conversion costs, I think you have a target of cutting that down to maybe around $0.25 per watt, either exiting this year or next year. Given that you have added some wafering capacity, it’s now at 1.6 gigawatts; would that delay that process?

Nick Sarno

I’m going to ask Jack to take that question, Edwin.

Jack Lai

Edwin, simply that cost issue, let me try to help you here. As you know, at capacity, about 1.5 gigawatts of our cost per watt of processing should be at about $0.30. At the present time we believe our utilization is probably close to 90% and our cost for the current quarter, Q2 2009 is probably slightly over $0.30, probably running at the $0.33 level, which is much improved from the first quarter, which is probably closer to $0.40 and that’s due to the imputation of the capacity.

We believe that if we go beyond 1.6 and 2 gigawatts level, it’s likely that our cost of processing can be reduced to about the $0.25 level. So you are right, $0.25 certainly is our objective, but right now we are running at slightly over $0.30.

Edwin Mok - Needham & Co.

Then just on the polysilicon plant, I think Nick you talked about the first 1000 metric tons volume production. Can you tell us how much you produced in that plant and at what costs and any kind of update for the year, target for production for both plants that you guys are running?

Nick Sarno

Yes Edwin. It’s very difficult at this stage of the game to really understand the production cost. We’ve always said that at this level of production, we’re going to be around $80 to $100 a kilo, but that’s very difficult to really understand.

The important thing to remember is that we have adjusted our construction and start-up strategies basically to be inline with the current market and financial environments. Therefore, we have purposely slow down the construction and start-up activities, in view of the company finances and in view of the market, the pricing on the silicon.

Of course the objectives are continuing to be for both plants to produce at the lowest possible cost, which is we said that both plants are capable and are designed to produce in the lower $30 range. If this was a favorable market environment, I think we would have been expanding very fast and optimizing as we were expanding, but because of this market environment, I think our objective should be to optimize before we expand. So, that’s the phase we’re kind of in right now, is an optimization phase, in particular for the small poly plant, but also we will do this in the big poly plant as we move forward.

Edwin Mok - Needham & Co.

Finally just one more question on the inventory you guys have written down. Jack is it possible for you to give us some color in terms of how much your inventory of finished good is versus raw materials and also at what poly price are you guys pricing, and have you written down inventory too?

Jack Lai

Most of our inventories still are raw material and from time-to-time we keep between our 2,000 to 2,500 tons of raw material, given that we’re going to produce somewhere about 300, a little bit over 300 megawatts in the third quarter. So, which at the 7 grams per watt basis we need to consume about 2,100 tons, and that is kind of the inventory that we would keep.

Inventory cost level; right now I think the costing is nearly $80, and though the market that we can purchase is probably somewhere in the $65 range. So it has been coming down over the last two, three quarters and we anticipate that the silicon price for the next two, three quarters will continue to drop.

Operator

Your next question comes from Simran - Cowen and Co.

Simran - Cowen & Co.

Firstly, I just wanted to sort of have your idea on poly pricing. Going forward you mentioned it’s at about $60 already, how do you expect that to trend over the next few quarters?

Also as a follow up to the previous question, I know that at this point it’s really hard to tell how much you will produce in terms of your poly production this year, but I just wanted to sort of understand, does your previous target of about 2,000 to 3,000 metric tons still stand?

Jack Lai

For the polysilicon price, we see is much stable from a few months ago and compared to the second quarter and the first quarter, now that we see the polysilicon price stabilize around the $65 to $70 range, even recently the polysilicon price even increased to be a few months ago. So we see the polysilicon price much, much more stable in the market, than the last two quarters.

Simran - Cowen & Co.

I see and sort of for your poly production plant, are you still at your earlier target of about 2,000 to 3,000 metric tons of production or has that changed with sort of your readjustment of plan?

Nick Sarno

We have to always adjust our plans based on the market and market environment right now. LDK, we need to be very sensitive about the current market price and if we rush to produce silicon that is higher than market price, it doesn’t do anybody any good at this point in time.

So as I said earlier, our objective is that to really optimize the plant so that once we get going, we get going at the lowest possible cost. The facilities as we indicated before, train one is completely has been mechanically complete, the 1,000 ton facility has been mechanically complete for some time and they’re optimizing right now.

So we’ll watch the market condition and see at what point it makes sense for us to rush forward with the higher production levels and of course when we do that, we want to make sure that we can come in at the lower end of the current market value of polysilicon.

Simran - Cowen & Co.

Also one more quick question. I noticed that your government subsidies were down this quarter. Is there any particular reason for that?

Xiaofeng Peng

Because of the government subsidy, our country is using actual cash received and actually we received some money a little bit behind the calendar, so actually we’ll be booked in this quarter.

Operator

Your next question comes from Colin Rusch - ThinkEquity.

Colin Rusch - ThinkEquity

Can you give us an update on train two and train three, where are you today with the handoff. Are you still expecting the handoff on train two sometime soon and can you let us know how many reactors have been installed on train three.

Nick Sarno

Train two, we’re still on target to be mechanically complete by the end of September. That has not changed very much and so I believe right now we have a full line of reactors already installed or some are installed and some maybe are still waiting to clear customs, but all-in-all the reactors are in China. So we’re on target for that.

Train three, in view again of the current situation, I think that it would be in our best interest to sort of delay that until the end of the first quarter 2010 and move forward with the optimization of train one and two in the rest of this year.

Colin Rusch - ThinkEquity

Then on TCS procurement, can you just walk us through how you’re expecting to bring the TCS online and how much you’re expecting to purchase from outside sources over the next, call it four quarters.

Nick Sarno

Yes, our objective again dividing the small plant and the big plant so-to-speak, our objective for the big plant is to produce our own TCS. We’ve got all the systems in place to do that.

For the early stages and purely because we are in, if you will in a startup mode, we plan to bring in TCS actually from our smaller plant to start testing our equipment, but my expectations are that by the end of the year, we’ll be also producing our own TCS in the big poly plant.

The small poly plant currently brings in TCS from a local supplier that we have contracted with, but the plants are eventually to do our own TCS at that plant as well. So of course the purification of that TCS is done in-house. So its technical grade TCS that we bring in and then we purify it in-house.

Colin Rusch - ThinkEquity

Then I have a follow-up question on restructuring the balance sheet. It sounds like you’re making some progress on shifting things around. Can you talk a little bit about timing and any sort of additional requirements that maybe needed to procure the loan, particularly the RMB$2.5 billion loan?

Xiaofeng Peng

I think the first course of challenge is going through to short term loans and of course to renew any upcoming renewals for the short term with the China based institutions, and of course we are also working with the same crew of banks to negotiate that if we could apply for longer term loans, which will be replacing the current short term loans and the particular bigger project was the $2.5 billion which is undergoing. We anticipate that probably sometime in Q4 we should have results and that will be a big help to finance our poly plants.

With the shelf registration for this up to $200 million new shares issuance, that as soon as the market condition allows, we will probably go ahead and do that equity offering. So we believe these are actions we put together and with the very conservative expansion plan we have, we should be able to restructure our balance sheet and put a much better shape in the next couple of quarters.

Colin Rusch - ThinkEquity

Then just I’ll sneak one last question. So with the refinancing of the short term loans, can you give us some sense of where you think interest rates are going to fall at and directionally where they’re moving?

Jack Lai

Normally our interest rate is averaging around 6.5% to 6.8% for the bank loans, our CB which of course is 4.25%.

Colin Rusch - ThinkEquity

Okay, and directionally with the restructuring, you think it will be inline with that 6.5% to 6.8%?

Jack Lai

In China, interest rate is fairly regulated, so we don’t anticipate too much change.

Operator

Your next question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

To start off, why after this write-down was gross margin negative? What’s the average polysilicon cost after the write-down and does that indicate that more write-downs will come and perhaps write-downs of some of your wafering equipment?

Jack Lai

First of all, the silicon costs after the write-down, at this moment we are sitting at around $80 and this $80 silicon cost level, at current market wafer pricing level at $0.90 to $0.95, that is adequate for the current business support. So at this moment, certainly that $80 cost of silicon is inline with the current wafer price.

Jesse Pichel - Piper Jaffray

Why weren’t you gross margin neutral at least, by writing that down?

Jack Lai

Well at this moment, I think at $0.90 to $0.95, we still have probably somewhere mid single digit of gross margin and of course we will continue to the observation, plus at the present time the ongoing silicon price will be somewhere at the range of $65, which of course in the quarter, we believe that $80 cost will be coming down as well. So if the ASP is maintained at $0.90 level, we would be able to produce positive gross margin.

Jesse Pichel - Piper Jaffray

Your CapEx on the poly plant has been something like $1.4 billion to-date or so, but depreciation’s only $16 million. When does that depreciation start to work their way into the income statement and how might that affect your margins going forward?

Jack Lai

As you know, the polysilicon plant is still in mechanical completion and the ramping up stage. As soon as they’re going to commercial production, and that’s a time that we will turn on the depreciation. The depreciation is of course, for a lens variety it’s actually 40 years, for construction of civil engineering by 20 years and for the equipment mostly 10 years and certainly they will impact our cost structure.

We will obtain probably the 1,000 ton probably sometime in Q4. At this moment why Q4 is, as Nick mentioned, I think Q4 we anticipate that 1,000 ton be into production. Right now, as Nick mentioned that we are focusing more on optimizing the cost structure, rather than try to produce silicon at high cost. So many, many modifications and addition of some new subsystems to enhance the cost structure is being added.

Jesse Pichel - Piper Jaffray

What will the actual depreciation be over the next couple quarters, from $16 million a quarter? What should that be at a quarterly rate?

Jack Lai

As a capacity, that depreciation is going to be around $12 to $15 per kilogram at capacity. So during the ramping up period, of course we’ll be higher, but the design cost of the depreciation should be somewhere between $12 and $15 per kilogram.

Jesse Pichel - Piper Jaffray

I’ll just have to do the math of on that. A quick background, you said you have 2,000 metric tons of inventory, is that right?

Jack Lai

I think that we have between 2000 to 2500, I would say that right now, let me just quickly…

Jesse Pichel - Piper Jaffray

So if I multiply that times 80, you’re not getting to the full level of your inventory, and I’m wondering what else is in inventory?

Jack Lai

Inventory, of course raw material, and also work-in-process, and also finished goods, then plus the consumables, which including the slurry and the [Inaudible]. So we only discuss the raw materials, because that’s the most interest for our investors.

Jesse Pichel - Piper Jaffray

Last question for Nick; Nick, how much actual power do you need at full capacity for the 16,000? I know you’ve built out seven or more substations in the past few years, but has the Jiangxi Power Company committed to building a new power plant yet and what do you think the risks are there, that you might not have enough power?

Nick Sarno

I think the risks are fairly low, Jesse. The total power requirements for the plant are around 400 megawatts and we’re okay for that. So it’s a lot of power, but that’s what’s being built for us specifically. So I’m not quite sure of the plants of the Jiangxi government. I know that they’re continuously building new power plants in the area. That’s something that’s very important for them, because of their focus on our type of industry.

Jesse Pichel - Piper Jaffray

Jack, I lied, one more question. I was doing the math when we were talking. It looks like your processing costs then this quarter were something like $0.55, $0.60, is that right, or am I doing that incorrectly?

Jack Lai

No, I think I just mentioned at close to $0.33.

Jesse Pichel - Piper Jaffray

It was $0.33.

Jack Lai

Yes, because right now the capacity is nearly capacity, so we are about 90%. If we are at capacity, we should be $0.30, $0.29 to $0.31, that’s my range, but right now I think we are at $0.33 for Q2.

Operator

Your next question comes from Sunil Gupta - Morgan Stanley.

Sunil Gupta - Morgan Stanley

Jack, could you talk about your tolling business. You said currently it’s about 20% of your shipment. What do you expect this to be in the second half of this year, and what’s the gross margin like on the tolling business?

Jack Lai

For the tolling business, in the second quarter we have a free capacity, of course we tried our best to get as much as more tolling business available. I think in the third quarter we see now the wafer selling business is increasing. So normally we just use our spare capacity to do the tooling business. So when our wafer sales increase, then we try to limit the tooling business, but normally we keep our 15% to 20% as our solar tooling business capacity, so depends. So normally 15% to 20% still is in this range.

Sunil Gupta - Morgan Stanley

How about the profitability or margins in the tolling business currently?

Xiaofeng Peng

Yes, because the tooling business, we have a different categories. Some tooling business customers from the polysilicon we give back wafer. Some kind of customers just give back ingots, they don’t give back wafer. So the profit is different and sometimes the customers give us virgin poly. Sometimes customers give us recyclable poly, so all kinds of gross margins are different.

Sunil Gupta - Morgan Stanley

So, on a blended basis, let’s say in Q2 what’s the kind of gross margin you realized on tolling business. I understand that each customer might have different economics.

Xiaofeng Peng

Because these are not a significant part of our business, so maybe we will give you the detail later, after calculation.

Jack Lai

Our business model point of view as Chairman mentioned, is that we try to price our tolling business very competitively. Normally we put in about 15% to 20%, just to be able to support our customers to grow the business and continue to be the leader in this business. So we’re just putting in a reasonable margin of 15% to 20%.

Sunil Gupta - Morgan Stanley

Then I had a question on your SG&A expenses which increased quite a bit in Q2. Can you help us understand what caused that increase and what should we be expecting going forward in Q3 and Q4?

Nick Sarno

Our operating expense is probably running at between $20 million to $22 million. However during the Q2, we had a $9 million write-down as part of prepayment method to some of our suppliers.

As you know, during this financial crisis, some of our vendors, their financial situation was not supportive to the business and many of them, they have trouble to deliver goods to us or they have financial difficulties. As a result, after our financial staff reviewed the curability and some of the money probably we have doubtful situations, even though we are pursuing the collection or the payback of these prepayments.

However, there are some accounts that we determine that maybe, to write down some of this prepayment is require, which materially increased by about $9 million, as compared to our run rate of $20 million to $22 million. So that’s a reasonable increase.

Sunil Gupta - Morgan Stanley

Would you expect this $20 million to $22 million run rate to continue in Q3 and Q4?

Nick Sarno

Yes, we are working management internally to control the expansion and we do not expect to have significant increase in our SG&A. So the $20 million to $22 million should be the range of our business operations.

Sunil Gupta - Morgan Stanley

Then I just want to follow up on your comments about the inventory earlier. You said part of your inventory is finished goods, so what percentage value of your inventory is finished goods?

Nick Sarno

I think it’s around 15%. So a little over $40 million, they are finished goods.

Sunil Gupta - Morgan Stanley

How about other consumables and raw materials, excluding polysilicon?

Xiaofeng Peng

Other supplies is around 20%, which of course is our [Inaudible] and [Wyos] and some other supportive goods. I think to be exactly it’s 19%.

Sunil Gupta - Morgan Stanley

Your work-in-progress?

Xiaofeng Peng

22%. I’m getting very good now. 22% or its $86 million work-in-process.

Sunil Gupta - Morgan Stanley

My last question is regarding your margin assumptions or expectations rather going forward. Based on the pricing guidance that you have talked about of say $0.90 to $0.95, what kind of gross margin do you think you could realize?

Jack Lai

Given the current level of silicon cost at $80, and our prior cost is $0.55 per watt, plus the $0.30, $0.33, our costs is right now between $0.85 to $0.90. So at $0.90 or $0.95, we are talking about unique single-digit gross margin at the current structure.

Operator

Your next question comes from Sanjay Shrestha - Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

Most of my questions have been answered, but just a few quick questions. I think you talked a lot about improving the process and optimizing the poly plant before really ramping up. Can you kind of give us a big picture sense as to what is actually involved in that? What is it that you guys are trying to do and that gives you a bit of a confidence as to that you’ll be able to sort of be significantly competitive versus where the spot price is right now?

Nick Sarno

As I mentioned in my report, the big poly plant already turned on two reactors earlier in the month of July. So we really turned on those two reactors to really assess the rest of the system to see how optimized the system was. Of course there’s a lot of things involved in this and the automation and controls and a bunch of other things.

I can tell you that at this point in time, if the silicon prices were what they were last year, we would be busily ramping up and I probably wouldn’t be at this conference call, but because our objective has changed slightly, we need to change the way we approach things. So what we’re really looking at is optimizing the off gas recovery systems, the converter systems, these are all things that we really want to make sure running at full capacity and in their best capacity, once we get going with a ramp.

Sanjay Shrestha - Lazard Capital Markets

One quick follow-up on that Nick, so if you were to produce poly today, what would that cost be, one? Two, for the next year’s expectation I’ll call it at 2,000 to 3,000 metric ton, what do you expect your polysilicon cost of production to be?

Nick Sarno

As we’ve indicated before, the 5,000 metric ton frame should be producing polysilicon, because it’s designed to do so around $30 a kilo or at least in that range. The question in my mind is if LDK is really good, we can get there pretty fast, but it’s still going to take us 18 months plus to get to those kind of levels.

So the question remains, really what is the startup production cost. That could be as high as 80 as I said before, $80 to $100 a kilo, but I’m just thinking those numbers out of the air. They’re not an official number; it’s just my feeling about those numbers.

Sanjay Shrestha - Lazard Capital Markets

Another one I guess, this is more for Jack. Jack I just want to make sure I got that right. So this $2.5 billion in loan, you expect to close that sometime in Q4 of this year, correct?

Jack Lai

That’s RMB 2.5 billion.

Sanjay Shrestha - Lazard Capital Markets

Q4 of this year is the timeline expected to close that loan.

Jack Lai

That’s correct.

Sanjay Shrestha - Lazard Capital Markets

Is that by any chance contingent upon you guys having to do an equity offering or are those completely separate events?

Jack Lai

That’s a separate event.

Sanjay Shrestha - Lazard Capital Markets

So given that your sort of contras is on that poly ramp and where you can get to, you guys are adding module capacity or incremental opportunity in China, how do you see 2010 unfold for you guys?

Jack Lai

2010, certainly we’re sitting at 1.6 gigawatt of wafer capacity. We believe that the module business downstream will increase probably to the range of at least 100 to 200 megawatts and also our projects business, that’s including primarily in Europe and in China, I would say probably also going to be between 100 to 200 megawatts for the project business.

Of course that with the lending up of the polysilicon, we would probably try to target at $45, maybe $50 or below $50 level, which of course could greatly enhance our cost structure to be somewhere $0.50 or below and we believe that our gross margin in 2010 will be much more beautiful than the current situation.

Operator

Your next question comes from Sam Dubinsky - Oppenheimer.

Sam Dubinsky - Oppenheimer

A couple of quick ones, it seems like you’ve been operating at a near zero or negative gross margin for the past several quarter with and without the charges. Why haven’t you stopped production to help manage your balance sheet better?

Jack Lai

Well, that is a very, very profound question. First of all, that being the number one market leader in the wafer business, we need to support our sales and margin manufacturers around the world. As you know, our customers are widely spread over to each region and they have their customers also require their support.

In our business, we believe in the long term profitability. We believe in the long term relationship. Even though we are hurting at this moment, we are working very, very hard as a team, not only as a team, as a company, but also as a team with the industry, trying to get through these very, very tough challenges. We believe in the long run, we will create value to our customers and at the same time bring long term value to our investors.

Sam Dubinsky - Oppenheimer

How much CapEx are you spending in 2H?

Jack Lai

Q2, we spent roughly $0.25 billion, primarily to bring up the train one and train two in the 15,000 metric ton poly plant. Our expansion in wafer spending is very minimum, just some final touches on the capacity to reach 1.6 gigawatts. So it was only like $1 million in Q2.

Sam Dubinsky - Oppenheimer

What about in Q3, Q4? How much do you expect?

Jack Lai

Well, Q3, Q4, we still are closely monitoring the progress. I think on the wafer side we have 1.6 gigawatts, which is in line with what we need to support our customers. I think our plan is probably to produce somewhere between 300 and 350 in Q3, and probably similar amount in Q4. So the wafer capacity we probably covered and we don’t anticipate spending too much money to expand, unless customers are requesting for more shipment.

On the polysilicon side, as Nick indicated, we’re going to focus on optimizing the cost structure and bringing up operation can produce silicon at very, very competitive cost. So I think that even though the speed is a little bit more slow than what we first anticipated, but we don’t really control the market conditions and we will continue to invest if such production will justify our cost structure and certainly we’d like to do that as soon as we can. I think that given that another three months, we’re going to give you more update.

Sam Dubinsky - Oppenheimer

How hard would it be to take capacity offline? It just seems like you’re not shipping products and making money on them, why not restructure the business and right-size it to current market conditions, lower OpEx, only sell wafers that you actually are obtaining a reasonable gross margin on?

Jack Lai

Well, right now our capacity is adequate, because even though normally we have 1.6 gigawatts, which is nominal capacity of 400 megawatts per quarter, assuming that 90% of the system is being run, 10% under kind of maintenance, 90% yield, we get about 320 megawatts. That’s exactly the level of support we need to support our customers.

So our capacity is very much adequate and again, our philosophy is to build up or build out our capacity to meet the demand of our customers. Right now at 1.6 it’s adequate for 300 megawatts to 350 megawatts on a quarterly basis.

Sam Dubinsky - Oppenheimer

Have you guys ever thought about selling this poly plant even if you sold it at a loss, just to raise some cash?

Xiaofeng Peng

Well, we believe in the long run to be able to support in house polysilicon is a long term strategy for LDK and certainly that we will navigate through all these issues and we’ll accomplish our project and produce silicon at a cost very, very competitive, and in the long run we can increase our long-term gross margin trend.

Sam Dubinsky - Oppenheimer

It seems like when I look at your numbers, it seems like you need more cash in the back half of this year and you probably need more cash next year, which means that your debt loads are pretty significant. I guess number one, how comfortable do you feel that you’ll be able to get this money and two, aren’t you concerned longer term that your debt loads are just way too high to operate ongoing, if sort of macro weakness persists?

Xiaofeng Peng

Certainly your points are well taken and the company’s taking measurements to improve the balance sheet structure and also at the same time that we want to make sure that we want to return to profitability as soon as possible. So that the operation itself can generate positive cash flow in the same time that we are restructuring our balance sheet.

Sam Dubinsky - Oppenheimer

How comfortable do you feel that you have access to this money if you need it from the local banks?

Xiaofeng Peng

At this moment, we are getting probably by far the best support possible that you can ask from financial institutions. So I think we use approximately six, seven banks in China. They are large scale financial institutions and we are getting very, very supportive efforts from all of them. So we are very confident that we can continue this relationship while we are improving our operating efficiencies.

Operator

Thank you. Ladies and gentlemen, unfortunately that’s all the time we have for questions and management, I’ll turn the conference back over to you for any closing comments you might have.

Xiaofeng Peng

Thank you all again for joining us today on our quarterly earnings conference. We are pleased to share our progress on our business development and discuss new opportunities ahead of us. We look forward to updating you on our progress next quarter. I hope to see many of you when we present at upcoming investor conference and road shows. When you are traveling at China or Silicon Valley, please do not hesitate to contact Jack or visit LDK solar. Thank you.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. If would you would like to listen to a replay of today’s conference, please dial in to 303-590-3030 or 1800-406-7325 and enter the access code of 4124368#.

We thank you again for your participation and at this time you may disconnect. Have a nice day.

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