LDK Solar Executive Insights: Wafer Business, Cost Structure

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On Tuesday, LDK Solar Company, Ltd. ADR (NYSE:LDK) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

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Wafer Business

Edwin Mok – Needham: (Indiscernible) guidance as probably you are planning at a very high level – a pretty big increase in those wafer shipment. Just wondering what was driving that increase and also based on what your first quarter looks like, wafer price is still below your cost, right, does it sense to continue shipment at loss?

Jack Lai – EVP and CFO: Well, basically, based on our forecast, I think we believe that the second half of sales and (indiscernible) will be at least a (fivefold) of first half, at least the wafer business we have 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 the new M2 wafer sales will bring up at least the revenue and production for LDKs order.

Edwin Mok – Needham: Next question, what kind of premium do you think in charge for the M2 wafer versus (indiscernible) wafers?

Xiaofeng Peng – Chairman and CEO: Yes, for M2 wafer, normally now we charge around $0.10 to $0.50 more than normal wafers piece.

Edwin Mok – Needham: Good piece. Okay, great. That was very helpful. 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 sound like there’s opportunity in various part of the world. I was just wondering 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. In terms of these three markets, which one, which markets do you have the highest confident and which one do you see the most risk?

Jack Lai – EVP and CFO: From PV project business in North America, we have a backlog, the (total) value would be somewhere about $1 billion which would be difficult to realize that within about three years. Hence that in North America we expect to generate somewhere of $200 million or $350 million per year, and this I think we are somewhere probably $200 million to $250 million thus for North America. In China, as you know, we just signed a three 200 megawatts projects, along which the backlog we booked. So China still a high, very high growing opportunities for LDK, as you know we are one of the top EPG company in China, we are also 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 basis right now is relatively small. However, we are 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 (put over that) we’re going to recognize somewhere about 300 megawatt that we can sell during the course of 2012.

Edwin Mok – Needham: I see. But it sounds like based on what you just said, 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 – EVP and CFO: Well, again, back in North America we have like $1 billion backlog, which require about three-year to accomplish. I think in China our project probably is going to last for at least five years. We’re going to do it project-by-project, location-and-location and the realizable revenue that this year we anticipate to total somewhere about 300 megawatt total worldwide for all projects.

Edwin Mok – Needham: Then a question on the polysilicon production, so in the second quarter you guys did a little update, but your guidance implied comp pick up 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 kind of target, 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?

Jack Lai – EVP and CFO: I think that for the polysilicon business that we have to be a little careful at this moment. The Company now is focusing on improvement of the cost structure by spending most efforts in building a hydrochlorination process, hence the production output will be much lower than what we had planned. Our cost of production at this moment (still be in the) $40 which compared to the market price was somewhat economical. So we are adjusting our plan, that’s basically to reduce the production and to focus on the price improvement, so that we can achieve much better cost structure by the end of the year, that time we will be ramping up, too. So I think that from a convenient to customers that definitely our team will need to talk to our customers and to reschedule some of the delivery schedule, so that we can serve them better with more competitive products and the better products in the future.

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

Jack Lai – EVP and CFO: Of course, we continue looking to possibilities, the issue our long-term debt to replace the short-term debt. At the present time that our (interest in fact) average about 7% per year and we anticipate that if we can do a longer term loans that possibly that we can reduce probably to 6% level, which of course very good for the Company. So we’ll continue to do that.

Cost Structure

Karen – Piper Jaffray: 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 cost as well as total module cost?

Jack Lai – EVP and CFO: Karen, you know that because the capacity that we have nearly 1.7 gigawatt which has increased, so that we could do say as much as 300 to 400 megawatt on quarterly basis. However, because the market conditions, because the seasonality, because the Chinese New Year shutdown we only produced somewhere about 50 megawatts. Hence that amortized cost was very, very high for the first quarter. From the second quarter, we start to improve our utilization of capacity, I think, in the second half certainly we’re going to ramp higher in the manufacturing which, of course, bringing much low cost of course that we are looking at somewhere that get to the mid-to-low teens of penny, so maybe somewhere to $0.13 to $0.15 range that will be competitive to the market price.

Karen – Piper Jaffray: Previously you guided to total module manufacturing cost of around $0.70 year-over-year improvement. Is that still on target?

Jack Lai – EVP and CFO: Yes, with our efforts including silicon to module, we are confident that we can accomplish up to $0.70 probably at the end of the year.

Karen – Piper Jaffray: Then can you give us some color on your expectation for now module ASPs by the end of the year?

Xiaofeng Peng – Chairman and CEO: Yeah, currently last quarter we see our ASPs around $0.80, and I think that because now we sell in most of big percentage in U.K. market is such our mode – euro and euro essentially is going down. So, in dollars maybe few (indiscernible) the last few quarters because of the euro-U.S. dollar exchange difference. So, I think, there is not too much room for module reduction in the year I think maybe between $0.70 to $0.80.

Karen – Piper Jaffray: 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 – Chairman and CEO: Yeah, I think, they’re starting from third quarter. I think most of the revenue (indiscernible) in fourth quarter, and only in the third quarter the revenue of projects will be coming. It will greatly increase our revenue.

Karen – Piper Jaffray: Okay, so your total project revenue breakdown between third quarter and fourth quarter will be like 70%, 80% will be recognized in the fourth quarter something like that?

Xiaofeng Peng – Chairman and CEO: Most of our projects in China will be recognized in the fourth quarter, and we have a big percentage of projects in the U.S. and in Europe that can be recognized in the third quarter.

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