LDK Solar Q3 Earnings Call Transcript

123jump.com Staff
05 Dec, 2008
New York City

LDK Solar, a manufacturer of multicrystalline solar wafers reported revenue rise of 23% to $541.8 million. Net income declined to $88.4 million or $0.77 per diluted ADS from $149.5 million or $1.29 per diluted ADS.

LDK Solar Co. Ltd. ((LDK))
Q3 2008 Earnings Call Transcript
November 19, 2008 8:00 a.m. ET

Executives

Pita Christensen
Jack Lai – Executive Vice President, Chief Financial Officer & Secretary
Xiaofeng Peng – Chairman and Chief Executive Officer
Nicola Sarno – Senior Vice President of Manufacturing

Analysts

Pierre Maccagno – Needham & Company, LLC
Kim-Chong Tan – UBS
Sam Dubinsky – Oppenheimer & Co.
Jesse Pichel – Piper Jaffray
Sanjay Shrestha – Lazard Capital Markets
Titus Menzies – Libertas Capital
Charles Yonts – CLSA
Jake Greenblatt – Barclays Capital
Paul Leming – Soleil Securities

Presentation

Operator

Welcome to the LDK Solar third quarter 2008 earnings conference call on the 19th of November. Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the presentation, please press the “*” followed by the “0” on your telephone for operator assistance. I will now hand the conference over to Pita Christensen. Please go ahead.

Pita Christensen

Good morning and thank you for joining us on today''s conference call to discuss LDK Solar''s third quarter 2008 financial results. This call is being broadcast live over the Web and can be accessed on the Investor Relations section of LDK Solar''s website, 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.

Before the market opened in the US today LDK Solar issued a press release discussing the results for the third quarter 2008. We also filed the press release on Form 6-K with the US Securities and Exchange Commission. The press release is accessible online at the company''s website as well as the SEC''s website or you can call The Blueshirt Group at 415-217-4961 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 regarding future events or the future financial performance of the company made pursuant to the Safe Harbor provisions at 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 filed from time-to-time with SEC, specifically the company''s most recent Form F-1 and any Form 6-Ks. These documents identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

And now I''d like to turn the call over to Mr. Jack Lai, Executive Vice President and CFO to go over LDK Solar''s third quarter 2008 financial results. Jack.

Jack Lai

Good morning and thank you for joining us to discuss LDK Solar''s third quarter financial results. LDK Solar achieved record revenues and profit in the third quarter of fiscal year 2008. Net sales were $541.8 million, up 22.7% sequentially from $441.7 million in the second quarter of 2008. Our revenue was at high-end of our previously released third quarter guidance.

Total wafer shipments including our processing service business increased 31.8% to 252.7 MW in the third quarter from 191.7 MW in the second quarter. Our wafer sales, which exclude the processing service business, increased 30.0% to 208.3 MW from 160.2 MW in the second quarter of 2008. The average selling price per watt was $2.48, an increase of $0.04 or approximately 1.6% from the prior quarter. The higher ASP was primarily a result of a price increase implemented in the second quarter.

Sales returns made in the third quarter was $2.0 million, decreased from approximately $2.1 million in the second quarter of 2008 as the sales return rate improved to 1.0% from approximately 1.4% in the prior quarter.

OEM shipments were approximately 44.3 MW in the third quarter of 2008. By geography, revenue was 28.6% generated from China, 41.8% from Europe, 25.7% from Asia Pacific excluding China and 3.9% from North America in the third quarter of 2008.

Our top 10 accounts in the third quarter of 2008 accounted for 73.7% of total revenues. Top three accounts totaled approximately 44.9%, while customers number four through ten each averaged approximately 4.1% of our total revenues.

Our gross margin during the third quarter 2008 was 22.7%, down from 25.4% in the second quarter of 2008. The expected decline in gross margin resulted primarily from increasing our silicon sourcing costs, which was partly offset by the selling price increase and the productivity improvements.

Our operating profit margin during the third quarter of 2008 was 19.9%, down from 22.7% in the second quarter of 2008, which was mainly attributable to low gross margin. During the third quarter of 2008, we had a foreign currency exchange loss of $1.6 million compared to a foreign currency exchange again of $5.8 million in the second quarter of 2008. This decrease was the result of the fluctuations of Renminbi relative to the other currencies we transacted in during the quarter. Also, our common subsidiaries increased to $5.4 million in the third quarter of 2008 from $4.3 million in the second quarter of 2008.

Net income for the third quarter of 2008 was $88.4 million, down from $149.5 million in the second quarter of 2008. Earnings per diluted ADS for the third quarter were $0.77, down from $1.29 in the second quarter of 2008. The decrease in net income and earnings per diluted ADS was mainly due to the fact that in the second quarter of 2008 we included a one-time revaluation gain of $60 million or one-time earning per diluted ADS of $0.50 relating to the change of our prepaid forward contract from cash sale to physically share-settled, which were required to be revalued at fair value on 2/17/2008.

Total diluted ADS shares for third quarter 2008 was 116.1 million shares as compared to 119.1 million shares for the second quarter of 2008. Operating expenses were $15.1 million in the third quarter of 2008, up from $12 million in the second quarter of 2008. Third quarter operating income was $107.8 million up from $100.3 million in the second quarter.

Our share based compensation expenses were approximately $4.3 million in the third 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.

In September LDK Solar closed a follow-on offering of 4.8 million ADS resulting in net proceeds of $192.4 million from the offering. As disclosed in the prospectus, LDK Solar expects to use approximately 60% of the net proceeds to fund the construction of our polysilicon manufacturing plants, approximately 30% to fund the capacity expansion of our wafer production facilities and the remaining 10% to fund other general corporate activities.

We ended our third quarter with $347.8 million of cash and cash equivalents of $164.5 million, $451.9 million of short-term interest bearing borrowings and $159.5 million of long-term interest bearing borrowings. Our short-term and long-term interest bearing borrowings increased as we continue to invest the year spending our wafer capacity and in the construction of our polysilicon manufacturing facilities.

Capital expenditures were $532.2 million in the third quarter of which $193.4 million was for our wafer manufacturing facilities and $338.8 million was for our polysilicon plants. Depreciation and amortization was $10.6 million for the quarter. Inventories increased to $702.3 million as of September 30th from $656.2 million as of June 30th, as we needed to secure silicon free stock in preparation for our continued wafer production growth.

As our capacity increased to 1.2 GW in the third quarter, our work in process and finished goods increased by $41 million as compared to second quarter of 2008. Our polysilicon inventory is comprised of raw material silicon inventory, inventory in transit and non-current inventory. Inventory costs by as non-current decreased to $7.7 million in the third quarter from $10.5 million in the second quarter of 2008. The materials included in the non-current portion or inventory represent use of all silicon that is not expected to be consumed within the next 12 months. This category of silicon can only be used and planted in smaller quantities for its ingot production. Our silicon cost increased approximately 13% sequentially during the third quarter as the polysilicon supply remained tight. We are seeing low polysilicon prices in the fourth quarter and expect our average polysilicon cost will improve over the next few quarters.

Prepayments to suppliers, which stood at $316.9 million as of September 30th were up from $274.3 million as of June 30th as we continue our efforts to secure silicon free stock sources. We saw long-term sales agreements we signed with our customers. Our advanced payments from customers increased to $777.2 million, up from $607.7 million in the second quarter of 2008, which represents a net increase of $169.5 million.

In that of the current operating environment, we expect prepayments to suppliers and from customers to decline going forward. Company headcount was 12,384 at the end of third quarter compared to 9,496 at end of second quarter of 2008, a net increase of 2,888. We continue to increase our headcount as we build a strong team, increase our R&D capability and enhance infrastructure to support our growth.

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 third quarter 2008 earnings conference call. We appreciate your interest and support of LDK Solar.

Before I discuss business highlights from the third quarter, I would like to comment on the current operating environments. We have undertaken an intensive assessment of how the current economic conditions could impact our market and our business going forward. While we do not believe our business will be immune to the global economic downturn, we remain confident in our industry leading position and our ability to continue to execute our growth plan. There are numbers of factors that differentiates LDK Solar from other participants in the solar industry. We continue to run our wafer manufacturing facilities at full capacity to meet our strong customer demands and to fulfill our backlog of orders.

We have secured long-term contract totaling 1.8 GW for 2008 which provide us with strong revenue capabilities. We have a well-diversified solid customer base. We believe our customer base on a core is sound and including industry leaders. We have a healthy cash position of more than $406 million at the end of September and a well used credit facility totaling in excess of approximately $430 million.

In our solar wafer sector, LDK is the leader in the cost technology and the capacity. We will continue to diligently assess the current economic events unfolding and make necessary change to our business to adapt to that evolving environment.

Now I would like to discuss our business highlights from the third quarter. LDK Solar delivered another quarter of very strong results. Revenue is at a high-end of our previous released third quarter guidance. During the third quarter, as Jack noted, we increased our wafer shipment 31.8% sequentially to $252.7 MW exceeding our revised expectations.

By end of September 30, 2008, our annualized wafer production capacity has reached 1.2 GW and in response to a continuous strong customer demand our success is rapidly ramping our capacity. We are again raising our target annualized production capacity for 2008 to 1.4 GW and 2.3 GW by end of 2009 and 3.2 GW by end of 2010. We are very proud of our successful execution expanding our capacity and believe we have achieved one of fastest capacity ramps within the solar industry.

We also continue to diversify and expand our customer base during the quarter by securing six additional long-term contracts with the top player in the PV space. These additional contracts also further expanded our presence in Europe, Asia and North America. Based on our backlog report, we have booked more than 14 GW in wafer orders plus 6 GW of wafer processing service orders. Our sales visibility continues to be very clear for 2009 and beyond.

Lastly, we completed construction and installation of equipment for our 1,000 MT polysilicon plants. The construction of our 15,000 MT for the silicon plants remains on schedule. The plant commissioning process for the 1,000 MT polysilicon plant has progressed and all stations are now fully operational. Based on the current status of our commissioning and testing phase, we expect polysilicon output in early December 2008 and estimate 2008 production to be between 15 MT and 25 MT.

We anticipate a smaller than previous expected polysilicon output in 2008 as we have committed more time to industry safety and environmental protection measures. We have made considerable progress on our construction schedule for both plants and remain confident in the timeline for the construction of our 15,000 MT polysilicon plants where we currently expect the first 5,000 MT chain to be operational at the end of first quarter or the beginning of the second quarter 2009. We remain confident that we will produce between 5,000 and 7,000 of polysilicon in 2009. Nick will also elaborate more on the polysilicon plants developments.

I will now turn the call over to Nick Sarno, our Senior Vice President of Manufacturing, to discuss the operation of our business and to provide with the updates on the progress of the polysilicon plant construction and R&D efforts. Nick.

Nicola Sarno

Now, I would like to update you on LDK Solar operations, including capacity expansion progress, polysilicon plant construction progress, polysilicon supply and R&D. For operations, we achieved many milestones in our operations as we ramp our capacity and increase our wafer shipments. We continue to expand our customer base for our 180-micron thick wafers and continue to receive positive feedback on these wafers.

We are also testing 180-micron wafers with three additional customers. One hundred and eighty micron wafers have increased our yields and the number of wafers per kilogram. Thinner wafers and thinner wire have also reduced a wire-saw output by approximately 30% resulted from slower cutting speeds. Consequently, we believe the thinner wafers and thinner wires have added to the industry bottleneck in wire-saw capacity.

We are continuing with our yield improvement initiatives and are making constant improvements to our production processes in order to further reduce breakage at increased yields. This is an effort that is further fettered by our in-house slurry recycling system.

Our capacity expansion plans have continued to progress well ahead of schedule for the year. As mentioned by Mr. Peng earlier, our annualized wafer production capacity has reached 1.2 GW at the end of September and we are very proud that we continue to execute one of the steepest ramps in our industry.

I''d like to update you on poly plant construction. For our 1,000 MT facility all of the equipment has been installed. We have been testing and commissioning the equipment for safe operation. During commissioning, we have encountered some issues on delivery of equipment for the sub power station.

In preparation for startup we are currently developing safety and environment startup operation procedures. Based upon the current status of commissioning, we anticipate a minimum quantity of polysilicon will be produced during the fourth quarter. We expect polysilicon production levels to ramp during the first quarter to be more meaningful levels. We now expect to produce between 15 and 25 MT of polysilicon in 2008 and between 5,000 and 7,000 MT of polysilicon in 2009.

Now for our 15,000 ton facility, the first phase of plant construction and equipment installation for up to 5000-ton capacity is nearing completion. We are currently in the advanced stages of construction and civil work is nearly complete. Equipment and piping installation is ongoing. Two reactors are being installed. Two more reactors and one converter are being cleared through customs. Installation of the distillation columns has been completed. The CTS fluid bed reactors are on-site and are being installed.

And while we have experienced some delays in commencing polysilicon production in the 1000 MT facility, overall construction activities have progressed quite well and we are proud of the aggressive schedule we have maintained and we remain committed to reaching our goal of a combined production capacity of 16,000 tons by the end of 2009 and we look forward to providing you with the incremental progress we make.

And for more details, feel free to reference our website where we keep an updated overview on the progress of our polysilicon facilities, which includes photographs as well as the bios of our experienced project team.

And now I would like to comment briefly on our polysilicon supply. As you know, polysilicon prices have declined. While we anticipate continued pricing pressure for poly in the near term, we also anticipate a moderation will return to the market.

And two additional long-term polysilicon supply contracts with incumbent polysilicon suppliers will also start in 2009, a pricing much below the current market pricing. And I also want to take this opportunity to update you on research and development activities.

We continue to make strong progress in R&D initiatives during the quarter. We officially opened our technology center on October 30, 2008. In the R&D wafer line we have all the equipment needed for wafer research and development.

Our analysis center is a classified clean room environment, featuring state-of-the-art instrumentation allowing LDK to conduct analytical characterization of polysilicon, wafers and incoming materials for both our polysilicon and wafer plants.

At the analysis center we’ll host the most advanced hardware for the PV industry and serve as an open lab providing analysis services to the sector. These services will include trace element analysis, PPB to PPT, chemical analysis, electrical property, and material property analysis.

And our research and development team is currently working on the following projects, monocrystal process development, crucible recharge system for further improvement of our production capacity of our directional solidification purposes, process optimization for the JYT directional solidification furnace and advanced wafering cleaning process. And with that I would like to turn the call back to Jack to provide guidance.

Jack Lai

Thank you Nick. Based upon current business conditions, we expect our fourth quarter 2008 revenue to be between $555 million and $565 million, which represents sequential growth of 2% to 4%.

Shipments are expected to be in the range of 260 MW to 270 MW. We expect gross margin to be in the range of 18% to 21%, which reflecting lower than expected silicon production in the fourth quarter and a continued weakness in the Euro.

We anticipate that gross margins will improve over coming quarters as we begin to see a contribution for our internal poly production. By the end of fiscal year 2008 we expect to reach an annualized wafer production capacity of 1.4 GW and produce to 15 to 25 MT of polysilicon.

For the full year of fiscal year 2009, LDK Solar currently estimates revenue to be in the range of $2.9 billion to $3.1 billion. Wafer shipment in the range of 1.80 GW to 1.85 GW.

Annualized wafer capacity to be 2.3 GW by the end of 2009, gross margin between 26% and 31% and produce between 5000 and 7000 MT of polysilicon in 2009 and now we will open the lines for questions.

Question-and-Answer Session

Operator

Thank you. If any participant would like to ask a question, please press the “*” followed by the “1” on your telephone. If you wish to cancel this request, please press the “*” followed by the “2”. There will be a short pause while participants register for a question. Your first question comes from Pierre Maccagno. Please go ahead sir.

Pierre Maccagno – Needham & Company, LLC

Congratulations on the quarter Mr. Peng, Jack and Nick. So when do you expect to be fully ramped for the 1,000 ton plants and when do you expect the gross margins to bottom out?

Nicola Sarno

Pierre let me answer your first question on the 1,000 ton. We’re currently, as I said, all equipment is installed and we’re testing the equipment. We’ve had a few issues with supply of equipment for our power substation. We’re currently developing operating procedures for that. You know when you get to a poly plant it’s always difficult to determine exactly when you’re going to start as you go along. But the best estimate, at this point in time, is that we can produce between, as we said, between 15 and 25 tons this year. I realize it’s not a lot but at least we’re pushing to get that started.

Jack Lai

Your question on gross margin, that at the current present environment with some exposure to Euro we expect that we get further squeeze on a gross margin probably in Q4 as we indicated in the guidance and in Q1 we probably are going to see some more squeeze. However, once we start to have in-house polysilicon production we believe that our gross margin will improve. So, as soon as that (inaudible) is material then our gross margin will improve accordingly.

Pierre Maccagno – Needham & Company, LLC

So I mean will it be safe to say that first quarter will be like the bottom of the gross margins?

Jack Lai

At this moment that will be the case.

Pierre Maccagno – Needham & Company, LLC

Okay. And then returning to Nick, I mean just to reiterate the question, so would you expect the first quarter or second quarter to be fully ramped in the 1,000-ton plant or that’s difficult to predict?

Nicola Sarno

I expect Pierre that the first quarter will be going through the ramp, that’s for sure and you know with poly plants it takes some time to fine-tune the plants, but definitely we’re in a position for the first quarter to start our ramp.

Pierre Maccagno – Needham & Company, LLC

Okay. And then the second question is regarding the ASP of wafers. Could you talk about what was the average ASP and also was there a regional difference? I would expect probably more pressure from China rather than from Europe, if you will expand on that?

Xiaofeng Peng

For us, most of our countries, take OPEC countries, oil prices already fixed. So the first quarter is, our ASP will be around $2.20 per watt and in next year the price around 10% reduced from this one, so approximately $2.00 per watt for next year.

Pierre Maccagno – Needham & Company, LLC

Two average for the whole 2009, okay.

Xiaofeng Peng

Of course different customer, different size of contract, different, different terms but the average about $2.00 per watt.

Pierre Maccagno – Needham & Company, LLC

And finally any comments on the spot pricing of silicon, how it has changed or where you do expect it to go to?

Xiaofeng Peng

The silicon price, for a long-term contract price is still same. For the spot market price is dropped a lot in the last few weeks, so I see it will keeping dropping in the next few quarters.

Pierre Maccagno – Needham & Company, LLC

And that is because it’s more available or what is the mechanism?

Xiaofeng Peng

The polysilicon supplying will still be tight, but I think the main reason is the more players, they just close the business and sell out all inventory and this is just, especially in many local producers, the small players in China, they have no order and they just want to sell out any inventory they have. Of course, the financial market also impacts a lot.

Pierre Maccagno – Needham & Company, LLC

Okay. Thank you very much.

Xiaofeng Peng

Thank you.

Operator

Your next question comes from Kim-Chong Tan, please state your company followed by your question.

Kim-Chong Tan – UBS

Hi, good evening. This is Kim Chong from UBS. Congratulations on a good quarter. I will like to check on your 2009 volumes guidance 1.8 GW to 1.85 GW. How much of that do you believe would be, well what’s your confidence level in that delivery on the 1.8 GW to 1.85 GW?

Jack Lai

Most of this contract is a take-or-pay contract. Customers already pay them, or most of contracts is already paid the deposit and of course there are some tooling contract also including in this total country numbers, so most of them will be deliverable and this -- the revenue is very clear.

Of course that some small customers, very - especially some small customers in local China they have some impact basically, but our set revenue, this revenue is very, very small. So they do not impact our revenue, so our revenue is very clear for next yea and our demands is still very strong and now we still have not enough capacity to meet (inaudible) and delivery to our customers because in this moment, more producers that customers are willing to give the order to small players because sometimes they cannot deliver the quantity as they promise. And also the wafer quality also is an issue for this industry. So this why now the more stronger player they have more, they will get more orders and more order, change can easy for us to give our customer to on a waiting list.

Kim-Chong Tan – UBS

In terms of the delivery volume for quarter one, is this going to be, I mean for 1.8 GW for next year is it going to be like increasing over the quarter or do you expect the quarter one to be slightly lower than quarter four in terms of shipment?

Jack Lai

Our quarter one the shipment definitely will be higher than quarter four even in a condition we have a Chinese New Year in the terms, but our capacity will be bigger than Q4, so we expect quarter one shipment will be higher than quarter four.

Kim-Chong Tan – UBS

Okay. Thank you.

Operator

Your next question comes from Sam Dubinsky. Please state your company followed by your question.

Sam Dubinsky – Oppenheimer & Co.

Sam Dubinsky from Oppenheimer. Just a couple of quick questions, if poly pricing starts coming down in the stock market, do you foresee an inventory charge and what could the magnitude of that charge be? And I have a couple of follow up questions.

Xiaofeng Peng

Yes, from time-to-time that in our accounting process we have to review the inventory costs, and if there’s anything that we need to do, any provision, we will do so and of course we have been doing that on a quarterly basis.

Sam Dubinsky – Oppenheimer & Co.

So I guess how much metric tons of poly do you have in inventory?

Xiaofeng Peng

Around approximately 1,800.

Sam Dubinsky – Oppenheimer & Co.

1,800. Okay and so your poly costs today are somewhere in the, if I just do the math, somewhere in the high two’s, like somewhere around 280 and change is that correct?

Xiaofeng Peng

Approximately yes.

Sam Dubinsky – Oppenheimer & Co.

Okay. And so what are you seeing on the spot market for poly?

Xiaofeng Peng

There’s a different range, so it’s on average it’s -- it depends, what kind of material we get.

Sam Dubinsky – Oppenheimer & Co.

And on a side note, can you maybe just tell me what tolling was this quarter and how much you expect for- in Q4 and next year?

Jack Lai

We did about 44 MW for the quarter and right now we believe that our tolling is roughly 20% of our total shipment and next year will be around 20%, maybe 22% range.

Sam Dubinsky – Oppenheimer & Co.

Okay. And then in terms of the commentary of customers no one giving pre-payments for future orders, is that indicative of sort of macro weakness? Is there any chance that there’s some backlog slippage into next year, and do you guys have a contingency plan just in case some customers push out orders?

Xiaofeng Peng

We still will get a pre-payment from customers in Q4, and in Q2, and we even just received pre-payment today and yesterday, so we continue to receive pre-payment for the contracts signed, especially from leading industrial leaders in their sectors and we will continue to get prepayment for this quarter, next quarter. Of course, it will be more difficult, and longer, more -- much longer term contracts than before.

Sam Dubinsky – Oppenheimer & Co.

Okay. Thank you.

Jack Lai

Thank you Sam.

Xiaofeng Peng

Thank you.

Operator

Thank you. Your next question comes from Jesse Pichel. Please state your company followed by your question.

Jesse Pichel – Piper Jaffray

Yes, good evening. Jesse Pichel from Piper Jaffray. I’d like to ask you what was your average polysilicon cost, exactly? I didn’t hear the answer to that on the last caller’s question.

Xiaofeng Peng

We don’t disclose our average silicon cost normally. The silicon cost is more than $250, but if you’re coming down in Q4 every quarter it’s different because we buy different kinds of silicon but I believe our Q4 silicon price will drop from last two quarters.

Jesse Pichel – Piper Jaffray

So when you say that your average silicon cost was over 250 does that mean the entire 1800 MT in the inventory is valued at 250 just so I’m clear?

Xiaofeng Peng

Yes, yes.

Jesse Pichel – Piper Jaffray

Okay. ASPs they were $2.48 you’re guiding to $2.20, is that correct?

Xiaofeng Peng

Yes, in Q4 ASPs are approximately in this range because different customers and different size order, different terms, they have a different price of course.

Nicola Sarno

During next year building another 10% price reduction, so next year will go from $2.20 to the $2.00 level. We expect in 2009 the ASP will be somewhere at $2.00 range.

Jesse Pichel – Piper Jaffray

Right. The other companies from Asia that have reported are looking for much more than a 10% ASP decline because the foreign exchange alone gave up 20% and then in Euro terms probably another 5% to 10%, so there maybe 25% drop in ASPs and I’m just wondering how you’re able to keep your ASP so high?

Jack Lai

It depends, if you have to compare which level you’re decline. If your ASP dropping from 2.7 watts, $2.08 per watt and of course you need 25% deduction, but even compare our reduction to the current price is $2.02 watts of course is only 10%.

Jesse Pichel – Piper Jaffray

I’m sorry I don’t understand that. I mean it seems like the price of a module in dollar terms is now about $3.25, so you know someone buying a wafer at $2.20 would make basically no gross profit selling it at that $3.25, so I’m just wondering how that’s possible that you could charge $2.20 in Q4?

Jack Lai

Most of our contracts, take-or-pay contract is a firm price. So it’s different with most of our peers and this is first and always you see most of our peers are selling their wafer in this year at $2.07, $2.08 per watt., but we only selling $2.02, $2.04, so if you compare $2.02 per watt, 10% reduction is for next year, this is a reasonable price.

Jesse Pichel – Piper Jaffray

So your take or pay contracts don’t have market price adjusting mechanisms in there?

Jack Lai

This would be this why you see we have nearly $800 million advanced payment from customers.

Jesse Pichel – Piper Jaffray

I’m sorry I’m not following you. Do your contracts, your take or pay contracts, have market price adjusting mechanisms in there?

Jack Lai

Most of our, of course we contract case by case, but most of contracts is fixed price.

Jesse Pichel – Piper Jaffray

Let me change the subject. CapEx, you spent $530 million in the quarter. What’s your expectation for CapEx in Q4 and for all of ’09?

Nicola Sarno

Right now our spending rate is around $300 million to $400 million per quarter and that’s for the total year we expect to spend $1.1 million to $1.2 million, however this moment that because of some of material costs really coming down that we do have some room to negotiate with some of our vendors to have some cost savings, so we anticipate that in the next several quarters we might have a little bit of reduction in terms of CapEx cost.

Jesse Pichel – Piper Jaffray

Okay. And my last question is you offered gross margin guidance for 2009, which I think was different from the last I remember it. What are your assumptions under that gross margin guidance in terms of - you’re going to produce 5,000 to 7,000 tons at what cost and what are your other assumptions there?

Nicola Sarno

First of all that the Euro situation, that we expect the Euro probably 20%. So we are not exempt from a Euro situation. So the ASP side, like you said the ASP side has got some pressure. So from a pricing environment that we are facing a situation that will impact the gross margin. And of course that we anticipated our ramp, if our silicon production ramping will be faster, I think certainly we have some room for better gross margin, but at this moment we believe that 26 to 31 is a very good estimate for next year''s gross margin guidance.

Jack Lai

And also, our wafer shipment is much more than previous guidance, original expectations so we are now expecting 1.8 GW so we need probably, we still have to purchase 50% of silicon from market, this is higher than originally expected.

Jesse Pichel – Piper Jaffray

Right. Okay, great. Thank you very much.

Operator

Your next question comes from Sanjay Shrestha. Please state your company followed by your question.

Sanjay Shrestha – Lazard Capital Markets

Lazard Capital Markets. Good evening guys. A couple of follow-up questions on what Jesse was talking about. So far, in 2009, I''m also kind of trying to understand it a little bit better as to your revenue shipment and the gross margin guidance. Can you talk about, in terms of that $2.9 to $3.1 billion in revenue you are talking about, how much of that is going to go at the wafer sale, how much of that is going to be tolling business, and in that how much of that is to the international customer versus the domestic customer?

Jack Lai

At the moment, most of our sales is international customers so if you see that most of our local customers only 20% to 30% range and then you''ll keep seeing the similar range, for next year.

Sanjay Shrestha – Lazard Capital Markets

In terms of majority of them being international customers, is your sales denominated in US dollars or in Euro?

Nicola Serno

Mostly US dollars, US dollars roughly 50% to 55%, a little bit under 30% Renminbi and a little bit around 20% in Euro.

Sanjay Shrestha – Lazard Capital Markets

Okay. So when you guys are talking about your wafer ASP going down to $2.00 next year, right, and Jack, you mentioned that the gross margin range is also because of a potential impact from Euro. If Euro is going down the way it is and other folks are saying that even with reducing crisis they''re not seeing quite immediate uptick in demand, what is the kind of mix you guys completely sort of immune from that, in terms of seeing any potential impact in terms of a slowdown of your demand scenario here, at least in the near-term?

Jack Lai

In the long run, we believe that we are the lowest cost producer and we have probably by far, the most solid customer base, which we have take or pay contracts. We believe that this customer base will sustain our revenue quite well in the coming years.

Sanjay Shrestha – Lazard Capital Markets

Let me ask you one follow-up question on that then. So in terms of the take or pay contracts, if some of your, let''s say, the weaker customer out of that mix were to come back to you guys and give you a 14-day notice and say I can''t honor the contract any more. Do you have enough incremental demand to fill up the volume that we''re talking about here?

Jack Lai

Yes, and normally we have to select our customer to sign long-term contracts and the small customer normally they have no intend to sign a big contract. Normally, small customers sign only small size -- of long-term contract because they have no money to pay such a long prepayment, so if any of the small customers have some problem to their contract, normally can easily find our pending customers or new customers. So because it''s a very, very small percentage is very, very small impact.

Sanjay Shrestha – Lazard Capital Markets

Got it. Now, in terms of your, so in-house poly is going to be anywhere between 5,000 to 7,000 MT right? And you mentioned that, I missed that a little bit when you guys were commenting it about how much you might have to buy it in the spot market and so due in 2009. Can you sort of walk us through, obviously, the sales is committed for it at this point in time so do you have all the poly that you need to be able to sort of have a good visibility in that 26% to 31%, forgetting about the Euro for a second? Can you walk us through where all of that poly is coming from and maybe a scenario as to in-house production pricing is this range, spot might be this range and some of the other long-term contract pricing might be this range?

Xiaofeng Peng

At the moment, we expect maybe 50% of silicon will come from our in-house production and we have several long-term contracts that they will be the price range, long-term contract are normally are around a $6.00 range. And also we have a very, very big percentage from our customers and this is will continue to be a major supplier for us today and we also have the UMG.

So next year, our UMG, the material will be much more than this year and we keep our capacity, which is recycling our silicon, then we have a capacity of more than 3,000, 4,000 tons of recycled silicon. This all still we''ll be continuing to recycle silicon from in-house and if you see that the silicon market is more easy than last year because many smaller companies have already shut down the business. So they''re much more available silicon in the market, especially also semi-conductor business is also not very good like before so also they''re more silicon available in the market than before.

Sanjay Shrestha – Lazard Capital Markets

One last question then, so you guys talked about 15 to 25 MT of poly here this year which is slightly below prior expectation and you certainly seem confident about being able to produce anywhere between 5,000 to 7,000 MT next year. One, kind of wanted to understand the level of confidence that you guys have to be able to hit that goal. And second thing is that maybe conceptually, at what price does the spot poly have to get to before you say, maybe we need to rethink our strategy and say we don''t get to 16,000 MT since we can buy it cheaper in the market, but other than build it in-house, it''s kind of build versus buy decision. At what price do you sort of rethink and say maybe, we need to slow down our poly expansion plant.

Jack Lai

First of all, I think our design benefiting costs for our poly plant is $35 to $32 and it was a long-term objective to reach $22. So definitely we will go ahead to continue to finish our project sometime during 2009. In terms of manufacturing of 5,000 to 7,000 tons, we''re going to ask Nick to help to answer.

Nicola Sarno

Yes, again, on the 1,000-ton facility we''ve built the facility in record time, as you probably know and the information that we put out on our website. We want to be - in view of some of the problems that some Chinese polysilicon suppliers have added the past months, we want to be super careful in how we start this plant up and make sure that we don''t have any major issues.

The 15,000-ton plant at this point in time we expect to begin ramp up sometime at the end of the first quarter or second quarter. We''re on schedule with this plant and also we can say the same about this facility construction as being, in my mind, truly something to be proud of, and so we''re in the phase right now of installing all the equipment and so I don''t really see any problem in meeting our expectations for next year.

Sanjay Shrestha – Lazard Capital Markets

Okay, terrific. Good quarter guys. Thank you.

Operator

Your next question comes from Titus Menzies. Please state your company followed by your question.

Titus Menzies – Libertas Capital

Good evening gentlemen and congratulations on a good quarter. I am from Libertas Capital. I guess a couple of questions, basically. Firstly, you mentioned that one of the reasons why the spot price of poly has fallen so much is in back of some of the small players run flush inventory into the market because they''re struggling to make orders. Could you give us some color on the quality of the poly, which is being flushed to the market? How they differentiate from what the traditional incumbents are offering in terms of quality into the yield, is there much difference or are they virtually the same?

Nicola Sarno

Yes, for our industry, the solar industry we''re not seeing a difference that''s big enough to make a problem for the solar industry or for us that is using multi-furnaces, if you will. Of course, the incumbent players have had years and years of experience and there''s no way that when you look at the overall quality produced by the incumbents, there''s no way that you can make a comparison with what the new guys, including LDK will produce, but I am super confident that we''ll get there as we gain experience over time. So what we receive now is usable material, it''s good material and we don''t see any problems with it.

Titus Menzies – Libertas Capital

Okay. I guess just to expand that comment a bit further, in terms of what your customers are looking for, in terms of the quality of the silicon, if the incumbents of silicon is probably at a higher quality yield or what''s the level of commitment do you think that your customer will say, rather than using your own in-house production for next year of 7,000 or being 5,000, 10,000 for you to use poly from the external incumbent players. Because they have - -

Nicola Sarno

Again, to answer your question, I don''t think that will happen simply because, don''t forget, producing multicrystalline one of the advantages in having multicrystalline production is that it offers the ability to use an extremely wide range of silicon and some of the silicon available on the market today is definitely of lower quality levels than can be produced with new Siemens polysilicon plants. So I don''t expect that any of our customers will be requiring specific silicon because what we produce right now is anyway of pretty good standard and it offers the efficiency and the quality that customers are looking for.

Titus Menzies – Libertas Capital

Okay, it’s perfect. I guess the second question is regarding CapEx. Now you''ve already highlighted for this year, you''re looking to spend between $1.1 and $1.2 billion. As you go into next year, you did suggest that you may slowdown your expansion plans and as a result, you might have to lower costs going out towards the exclusive suppliers. Is that on the backward shelf, your slow ramp or are you in a position to apply more pressure on you''ll pay them, and if so, I was wondering what your CapEx for next year would be like.

Jack Lai

Well next year, again, that we probably are going to spend another $600, $700 million for the poly plant and about somewhere around $400 million and up to $500 million for wafer capacity expansion. So roughly $1.1, which of course we have several opportunities to realize some savings but right now our anticipated expenditure in 2009 is about $1.1 billion.

Titus Menzies – Libertas Capital

So CapEx for next year is going to be roughly the same as it was this year.

Jack Lai

Yes.

Titus Menzies – Libertas Capital

Okay. I guess the next one is just regarding the (inaudible) dynamics. Now as you mentioned earlier, you''re not seeing any sort of meaningful push outs for cancellations as of yet from your customers either for domestic, mainly in China or international. Are you seeing any tooling customers who are coming up to you and saying if you have any additional capacity could you deliver to us in terms of terms business during the quarter?

Jack Lai

At the present time, our factory is still running 24/7 so it''s still very, very busy to fulfill all the orders.

Titus Menzies – Libertas Capital

But in terms of are you getting any sort of dialog with some of the - both potentially new or incumbent customers who may say to you, we have committed ""X"" amount of MW from you but however we need more, should anybody cancel, can you deliver to us within the quarter because we need more than what we originally had.

Nicola Sarno

We''re always open to those kinds of opportunities from our own customers. At this point in time, as Jack was saying, it does not become necessary to because we''re running at full capacity 24/7, but I think obviously if that opportunity presented itself, we would look at that in conjunction with the current capacity and the near-term capacity expansion. So I think the answer is, we would look at that but we haven''t had that opportunity yet.

Titus Menzies – Libertas Capital

All right gentlemen, thank you for your time and for answering the questions.

Operator

Thank you. Your next question comes from Charles Yonts. Please state your company followed by your question.

Charles Yonts – CLSA

Hi guys. This is from CLSA. Congratulations on a strong quarter again. Most of my questions have been answered. Just a couple I''d like to go through on debt. Could you give us an idea of your debt schedule and whether or not you have any meaningful debt rolling over in 4Q or 1Q?

Jack Lai

Our debts are primarily are short-term with probably about 20% would be more than one year, and so most of the debts, they are revolving lines every 12 months with China-based banks.

Charles Yonts – CLSA

Okay. So with those lines revolving every 12 months, is there any sort of month coming up that we would see a lot of these coming up, these 12 months coming up where they''ll have to be –

Xiaofeng Peng

No, this is a revolving line so you normally, your just revolving normally it''s around one year. Some year we were -- you will see these numbers, it depend the company, you can reduce it and you can -- we now still have more than $430 million unused credit line, even if you want, you can also expand your credit line for this facility.

Charles Yonts – CLSA

Okay, good. Thanks. In terms of interest rates, have you seen any movements in the sort of rates that you''re able to get from domestic debt?

Jack Lai

Right now our interest bearing is about, maybe somewhere 6% to 8% range and some of it is that – the longer terms, they are probably below 6% about the minority of our loans but majority is 6% to 8%.

Charles Yonts – CLSA

Okay. Thank you. That’s it.

Jack Lai

Thank you Charles.

Operator

Your next question comes from Vishal Shah. Please state your company followed by your question.

Jake Greenblatt – Barclays Capital

Hi. This is Jake Greenblatt for Vishal Shah at Barclays Capital. I only had one question regarding have any clients come to you and delayed the terms of delivery or said that they couldn''t already, they had to cancel any deliveries that had been scheduled.

Xiaofeng Peng

We have a diversified customer base and most of customers is overseas customers. Almost all our overseas customers have no discretion, they never contact us. We do have some very small customers from local, there were some, they delay the shipments a little bit but this revenue is very, very small and not impact our total sales and revenue at all. There are only a very, very, very few.

Jake Greenblatt – Barclays Capital

Okay, great. Thanks.

Operator

For your final question you have Mr. Paul Leming. Please state your company followed by your question.

Paul Leming – Soleil Securities

Soleil Securities and thank you for taking the question. First, I just want to verify. You quoted a $2.48 ASP for the quarter, did that include tolling revenues or is that purely the ASP on sales of material excluding tolling.

Jack Lai

Excluding tolling.

Paul Leming – Soleil Securities

Okay. Thank you. And then second question I wanted to ask on capital spending. You spent over $500 million in the third quarter. Jack, you said $300 to $400 going forward would kind of be the run rate, but I''m wondering as you''re moving toward the completion of the first of the three polysilicon facilities, could capital spending stay up in the $400 to $500 million range in Q4? And then are we looking at the decline as we go through 2009? Could you just give us any kind of granularity on how high the run rate is going to be on CapEx in Q4?

Jack Lai

First of all, we have some prepaid money always prepaid to our vendors and I think during the Q1 and Q2 will be high season due to the majority of incremental moving and start insulation, and so from Q3 with the current CapEx plan that should go down from Q3 of next year.

Paul Leming – Soleil Securities

Any commentary you can make at all about how the rate stays during the current quarter, during the fourth quarter this year?

Jack Lai

Right now, we''re looking at probably 300 range and I think that runs through Q2 and after Q2 that number should be reduced to be focused on only wafer side because the poly plant, probably the majority is going to be installed during the summer of 2009.
Paul Leming – Soleil Securities

And could you tell us what your cash balances are right now, today?

Jack Lai

We are close to about $400 million total, including the bridge (ph) cash accounts.

Paul Leming – Soleil Securities

And then my last question, can you give us any insight at all, into what you do expect your production costs out of your polysilicon plants to be as you ramp up the larger facilities? And what I''m really interested in is what you think your cash conversion costs are going to be, not the depreciation load on the plant but what do you think you''ll be starting at in terms of cash, production costs and how long would it take to get down into maybe the $30.00 per kilo range. That''s what a lot of the large incumbents work at today.

Nicola Sarno

Yes, that''s always a very difficult number to estimate when we start production. My estimation is it very much depends on how many reactors we''ve got running at one time and how fast we get them running. But let''s assume for a minute on 5,000 MT and we''ve got all the reactors in place, good start I believe is around maybe $80 a kilo or so. The ramp down period, I would expect that would be to get down to the values that we''ve designed the plant to run at which is $30, less than $30. We''re looking at a good two years, 18 months or two years or so.

Paul Leming – Soleil Securities

And Nick, just to clarify as you talked about maybe starting as high as $80 and getting down to $30, is that a fully loaded cost in your mind, is that depreciation or is that just the cash cost?

Nicola Sarno

No, that''ll be fully loaded.

Paul Leming – Soleil Securities

Okay. Thanks very much.

Nicola Sarno

Thank you.

Operator

Thank you. I''m afraid we have no time for any further questions. I''d like to hand the conference back to Mr. Jack Lai.

Jack Lai

Okay, thank you to everyone for joining us today to discuss the third quarter 2008 results. We are very pleased to share our recent development and provide updates on our expansion progress. We look forward to providing another update on our next earnings call and hope to see many of you when we present at the Upcoming Investor Conference and on the road shows. (Inaudible). Please do not hesitate to contact us for a visit to LDK solar. Thank you.

Operator

That concludes the LDK Solar third quarter 2008 earnings conference call. Thank you for participating. You may now disconnect.