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Executives

Arthur Chen - Director, Legal Affairs

Miao Liansheng - Chairman & CEO

Darren Thompson - Managing Director, Yingli Green Energy, Europe

Robert Petrina - Managing Director, Yingli Green Energy Americas

Bryan Li - Executive Director & CFO

Miao Qing - Director, IR

Analysts

Vishal Shah - Deutsche Bank

Brandon Heiken - Credit Suisse

Amir Rozwadowski - Barclays

Philip Shen - Roth Capital

Mark Bachman - Avian Securities

Mahesh Sanganeria - RBC Capital Markets

Kelly Dougherty - Macquarie Research

Aaron Chew - Maxim Group

Pranab Sarmah - Daiwa Capital Markets

Amy Song - Goldman Sachs

Yang Chen - China International Capital Corporation

Yingli Green Energy Holding Company (YGE) Q3 2012 Earnings Call November 29, 2012 8:00 AM ET

Operator

Hello, ladies and gentlemen, this is Letty. I will be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited Third Quarter 2012 Financial Results Conference Call. All lines have been placed on mute to prevent background noise. After today’s presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you’d like to ask a question.

Now I would like to transfer the call to the host for today, Arthur Chen, Director of Legal Affairs of Yingli Green Energy. Arthur please proceed.

Arthur Chen

Thank you, operator and thank you everyone for joining us today for Yingli’s third quarter 2012 financial results conference call. The third quarter 2012 earnings release was issued earlier today and available on the company’s website at www.yinglisolar.com. We have already provided a supplemental presentation for today’s earnings call, which can also be found on our IR website. I hope you all had the chance to review it by now.

On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Executive Director and Chief Financial Officer; Mr. Wang Yiyu, Chief Strategy Officer; Ms. Miao Qing, Vice President of Corporate Communication; Mr. Darren Thompson, Managing Director of Yingli Green Energy, International AG; Mr. Robert Petrina, Managing Director of Yingli Green Energy Americas.

The call today will feature a presentation from Mr. Miao, covering business and operational developments. Mr. Thompson and Mr. Petrina will talk about the developments of the European and American markets respectively. And then Mr. Li will talk about the company’s financial performance. After that, we will open the floor to questions from the audience.

Before beginning, Yingli Green Energy’s management team would like to remind the audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, believes, estimates, and similar phrases.

Such estimates are based upon management’s current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy’s control which may cause Yingli Green Energy’s actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding this and other risks, uncertainties, or factors is included in Yingli Green Energy’s filings with the U.S. Securities and Exchange Commission. Yingli Green Energy does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required under applicable law.

I'd now like to return the call over to Mr. Miao Liansheng. Please begin.

Miao Liansheng

[Interpreted]

Hello everyone welcome to our third quarter earnings conference call today. This quarter demand from China started to pick up quickly as the construction of Golden Sun program and the utilities projects accelerated. Consequently our module shipment volumes to China increased by 74% over the previous quarter. Revenues from China as a percentage of total net revenues increased from 14% in Q2 to 28%. However, the demand slowed down in Germany due to fixed insurance costs at the end of Q2 of total module shipment in this quarter to decrease by 16.9% sequentially.

We are somehow inspired to notice public information reviews that Yingli has been the world’s largest module supplier since Q1 of this year in terms of quarterly shipment volumes. Based on current orders, we expect Q4 shipments to continue to increase from Q3 and we are confident to accomplish a full year module shipment guidance of 1.1 to 1.2 gigawatt.

Recently the Chinese government introduced a series of incentive programs as an attempt to promote solar applications in China. Accordingly, according to the 12 five year plan, cumulative installation of solar PV in China is expected to exceed 21 gigawatt by 2015. At the same time the government intends to rigorously promote application of distributed power generation and rooftop systems. Additionally, the (inaudible) announced relevant guidelines for grid connections to support the developments of distributed power generation solar projects. We believe this policies and incentive programs will further stimulate domestic demands and benefit the Chinese PV industry. In additional to all in application for the Golden Sun program, we have actively halt our customers with application procedures. We believe this practice will reinforce our customer relations and help expand our market shares in China.

As an industry leader, we have levered of in-depth understanding of the PV industry to contribute to development strategies for China PV market. Earlier this year, we have hosted several industry forums at our Baoding headquarters. The most recent one was the national strategic emerging industries forum on October 25. Representatives from the government, banks, state grade and industry associations exchanged views on how to boost the domestic demand for solar PV products in China.

As more and more countries and regions begin to embrace solar applications, we have made exciting progresses in the emerging markets with supply modules for the largest solar plants in Latin America and in Singapore to date. Furthermore, we have successfully expanded our footprint into new markets such as Sri Lanka and Uruguay.

In the current market climate, our primary focus is to reduce module production costs and strengthen of company’s competitiveness. Our major cost of reduction efforts include, first, continuous optimization of manufacturing techniques throughout the value chain. Second, improvement of operating efficiency out of enhanced production managements. Third, continuous negotiations with material suppliers to reduce procurement cost. Fourth, adjustment of capacity utilization rate according to market demand for better inventory management. As a result of all the aforementioned efforts, we expect to bring our non-silicon costs down to below $0.50 per watt and poly silicon costs close to industry average level by the end of this year.

In the fourth quarter, we continue to see solid demand from Europe and the US. We will continue to enhance our corporation with customers and solidify our position in these markets. With that, I would like to ask Darren and Robert to talk about the European and US markets.

Darren Thompson

Thank you Mr. Miao and Arthur, good morning everyone. In Europe after slow start to Q3, demand picked up in the second half of the quarter supporting delivery of a solid result in a challenging competitive environment. Even though volume sales were lower than Q2 as German demand cooled, Europe contributed 60% to global revenues in Q3 from a high over 75% in the previous quarter. Germany remained the engine room of our European demand given the center of gravity of our European customer base with an estimated third of European volume in store outside of Germany.

Demand into Q4 remains robust with a solid order book that places as a strong position to exit 2012 with low inventory levels in Europe. ASPs remain under pressure but begin to stabilize versus the steep fall earlier in 2012 as economics of solar assets remain attractive relative to incentive programs.

Visibility for early 2013 shows positive signals particularly supported by project connection deadlines in UK and Spain to capture favorable and renewable obligation certifications and end of feeding traffic extensions respectively.

German demand will decline from levels seen in 2012 and we set close to the Government policy PV development corridor. Several new and developing markets in or close to Europe such as the UK, Turkey, Ukraine, Israel, Romania and Poland showed promise of closing this demand gap in Europe. We work in partnership with our existing customers entering these markets and where appropriate, cultivate local relationships to capture these opportunities.

The anti-dumping and anti-subsidy complaint filed at the EU Commission in July and September respectively continues to cast a dark cloud over the whole PV value chain in Europe from upstream equipments and material supplies to project developers in stores downstream. We sincerely appreciate the generous support received from our customers, vendors and other stakeholders to defend our industry from potentially damaging periods of tariffs. Application of tariffs would only lead to increases in the cost of solar energy, so undoing the herculean efforts invested so far over the last decade to make solar PV affordable versus alternatives

A selection of our Europe customers are successfully gaining foothold in PV markets outside of Europe, particularly in North and South America and Yingli supports them in their expansion plans both in Europe and through our local subsidiaries. Our Fifth Annual Customer Conference at the Home of FIFA in Zurich, during October attended by 200 customers from all over the globe provided a platform for our customers and our teams to encourage and strengthen international relationships or benefit the development of these new emerging markets.

The establishment of our New York and headquarters in Zurich in October facilitate the integration of our company subsidiaries at the Pan European level, drive operational procurement in cash management efficiencies through scale advantages. Recognizing one of our core strengths in Europe is our local relationship service and presence in core markets we will continue to invest in talent where we can stay close to our customers and adapt our value proposition to specific market and segment requirements.

Europe will remain the region of challenges in to 2013, however we have demonstrated through 2012, our ability to navigate through a turbulent and fast changing market.

Now I’d like to handover the call to Robert. Thank you.

Robert Petrina

Thank you Darren. In the Americas, the third quarter continued to exhibit solid demand albeit under the cloud of the winding down of the ADCB investigation and on the conclusion of the presidential election. (Inaudible) where it’s fairly above the second quarter was a more balanced mix between utility commercial and residential segments.

Distribution channels continue to remain highly competitive as channel discipline is held by an ever shrinking number of manufacturers. The diversified set of customer and segments and projects that we will see through the (inaudible) treasury grand sales in the fourth quarter of 2011 and the first quarter of 2012, continue to drive steady demand as projects are executed.

As in the previous quarters, we successfully acquired new customers that value our exceptional customer service and long term view. All the while we strengthen our relationship with existing customers throughout the region.

Since our first projects in the US, we focused on becoming the supplier of choice for utility scale projects. This has been a multi-year effort punctuated by steady wins and ever growing project sizes. We've earned the privilege to work with many of the top utility companies in the national and are cementing our reputation as an ideal margin supplier to such customers and projects.

As we announced earlier today, we are brought up and selected this quarter to supply the largest project in the history of our company, the 200 megawatt DC utility scale project for the Centinela Solar Energy Facility Project which is segmented in two phases, each phase with a separate release known as currently pending notification for the second phase.

This 170 megawatt AC project designed to be one of the largest solar projects in the world, is situated on 1,600 acres approximately 90 miles east of San Diego in Imperial County, California, and is estimated to achieve commercial operation in the mid-2014.

We've continued our focus on new markets and continue to see exceptional growth throughout South America and Canada. We've now sold our high quality solutions in more than 12 countries in South America and have taken a major step in becoming a leading player in Canada.

The prospects for Q4 are encouraging while 2013 was exceptional given the 400 megawatts of projects we have contributed for already. Our industry has continued to show incredible resilience in the face of instability for the growing uncertainty and ever growing trade friction.

The new economics are catalyzing growth throughout the region and Yingli is well positioned to continue to earn success. Thank you and Bryan please take it from here.

Bryan Li

Thanks Robert and welcome everyone to our third quarter earnings conference call today. In our third quarter, the solar industry continued to face pressure from the imbalance of supply demand and a (inaudible) adjustments in major markets such as Germany. Although the soft demand in Europe was partially offset by quick pickup of China market, as we expected. Our total module shipment in this quarter decreased about 16.9% from the previous quarter. In spite of the sequential decrease in module shipment, we believe we have successfully expanded our market share and enhanced our industry leadership position. As a result of the decreased shipment volume, and an industry widened decline ASP, our total net revenues decreased to $355.9 million in 3Q from $488.5 million in the second quarter. Based on current market conditions and a forecast to the customer demand, we expect our Q4 shipment volumes to increase by a low teen percentage from Q3. Furthermore we will also like to reaffirm our module shipment guidance of 2.1 gigawatts to 2.2 gigawatts for the full year of 2011 through 2012.

Our cost of PV modules was actively affected by inventory provision of $83.2 million and a depreciation expense related to underutilized capacity in this quarter partially offset by a reversal of an anti-dumping and the prevailing duties provision of $13.8 million that was accrued in first quarter.

Excluding the impact of the factors mentioned above, our poly silicon cost were $0.17 per watt. Non-poly silicon costs were $0.53 per watt and the gross margin of PV module was 0.3%.

As we continue to negotiate the material suppliers and a stake committed to technology innovation and operating efficiency improvement, we are confident to bring our non-silicon costs down to below $0.50 per watt and are blended the poly silicon costs to the low 20s in terms of US dollar per kilogram when we exit the year.

Based on our forecast of module price and a cost structure, we expect our gross margin in Q4 to be in the range of 0 to 2%. Primarily attributable to our continuous and effective cost control efforts, operating expenses were down to $67.4 million in this quarter from $73.7 million in second quarter. Operating loss with $148.2 million in Q3 representing an operating margin of net of 41.6%.

In order to accelerate account receivable collections, we increased the utilization of discounted notes receivables in Q3 which cost the interest expenses to increase from $36.1 million in Q2 to $40.7 million. Foreign currency exchange gain was $8.3 million compared to a foreign currency exchange loss of $28.9 million in Q2. Given our net euro denominated asset positions in Q3, the foreign currency exchange gain was primarily due to the depreciation of euro against the renminbi.

Income tax benefit was $15.4 million compared to $16.1 million in Q2. Off lately, our GAAP basis net loss in Q3 was $152.6 million and the last ordinary share in the (inaudible) was $0.98. On the GAAP basis, net loss was $63.4 million and the last per ordinary share in the (inaudible) was $0.40.

Now let`s move on to our balance sheet. As of September 30, 2012, our cash and restricted cash was $592 million compared to $882.5 million as of the end of the Q2. The sequential decrease was mainly a result of decreased revenues and the repayments of bank loans upon maturity. As of the end of Q3, our accounts receivable increased slightly to $512.4 million from $505.7 million. Accounts payable decreased to 584 million from $686.7 million. Due to the challenging market conditions, our profitability level continued to decrease. As a result, our working capital decreased from $148.1 million in the second quarter to negative $79.2 million.

As of the end of Q3 we had approximately $586.1 million in unutilized short term lines of credit and $304.1 million committed a long term facilities. That can be drawn down in the near future.

Now I will like to open the call to the questions, operator?

Questions-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Vishal Shah from Deutsche Bank. Please ask the question.

Vishal Shah - Deutsche Bank

Bryan just wanted to understand the outlook for cash in the fourth quarter, what kind of cash burn, how do you expect and have you any more debt repayments due in the fourth quarter? Thank you.

Bryan Li

We currently expect the upfront for the operating cash flow in the fourth quarter and there will be active, but the number won’t be significant. And in terms of the maturity of the existing loss in fourth quarter and as we have already planned the cash flow to set against the potential repayment of those bank loans, in terms of the amount repayment for the loan maturity in fourth quarter, and the number is not significant.

Vishal Shah - Deutsche Bank

Just want to understand (inaudible) for the fourth quarter shipments, what percentage of the shipments are going to come from Europe and particularly Germany and how do you see the market in China developing in 2013. How many gigawatts do you expect for the rural market? Thank you.

Bryan Li

The Q4 volume wise will be higher than Q3 which can ensure that we will achieve the 2.1 to 2.2 gigawatts annual targets. In Q4, the China sales will be roughly around the 28% of our total outputs, total sales and US will be slightly below Q3. European maybe represent roughly 45% and the rest of the world will be higher than Q3 because we have two larger projects we supply to India and South America.

The China market development (inaudible) we see a very positive trend, not only from the overall incentive program has a very positive progress recently but also we see more and more detail execution place has been implemented. For example, China Grid Company recently has announced a very positive position to solve those hurdles that may have before for those solar projects to be connected to the grid but also were lower relating in the connection in the administration fees for solar projects to be connected to the grid. And under the current situation based on our understanding, we expect that the China government will be announced more and more incentive programming, the Golden Sun volume for next year will be much larger than this year and the ground project of RMB 1 (inaudible) tariff for this year will remain same for next year. There will be no NA cut.

And also based on the overall, over 20 gigawatts target must be achieved by 2015. We actually see next year the China market maybe becomes the top two, the number two largest market in the world, even more than Germany for next year.

Robert Petrina

To further supplement Li’s comment on the percentage of the sales mix in fourth quarters, and based on the latest markets intelligence and the industries orders we are holding for the shipments and that we see in fourth quarters were roughly shipped 60% of our products to Europe and with Germany occupying 40% roughly. Then the China as Mr. Miao commented and in the previous call and in this call and we have seen a clear signals of the pickup in China markets and as we are currently planning to boost our shipments to China market to roughly 40% in Q4 from 28% in Q2 level and also and besides, there is one inspiring thing that we like to share with you is, as we see outside of those traditional solar countries, including Europe, US and the china and as we see more and more emerging countries and adjoining the solar campaigns and in fourth quarter, as the solar power generation cost reached a new low levels and open a new markets across the geography and we plan to ship more than 10% of our products to the countries outside of those existing solar countries and so those will be a promising trends and we see, we’ll continue to further expand into next year.

Vishal Shah - Deutsche Bank

I just wanted to clarify the numbers you gave for Q4 shipments mix. Did you say Europe will be 45% or 60% of total shipments?

Bryan Li

For Europe and we see 60% for Europe as a whole and with Germany occupying roughly 40%.

Vishal Shah - Deutsche Bank

And what about China for the fourth quarter?

Bryan Li

And China in fourth quarter will take approximately 40%.

Vishal Shah - Deutsche Bank

Okay, so there will be no US shipment in the fourth quarter?

Bryan Li

For Q4 we plan 40% and ship to Europe and with Germany, occupying 30%, slightly above 30% to German markets and the remaining less than 10% will be ship to the other the European countries outside of Germany and then 40% to China and mid-single to high single digit to the US markets and then the remaining 10% plus will be outside of Europe, US and China.

Operator

Your next question comes from Satya Kumar from Credit Suisse. Please ask the question.

Brandon Heiken - Credit Suisse

This is Brandon Heiken speaking on behalf of Satya Kumar. I know that earlier this year you guys were able to issue renminbi bonds in China, and one of your competitors just recently said that that was maybe no longer an option. I was wondering, if do you think that that's a company specific issue? Is that still an option for other solar companies in China to issue renminbi bonds?

Bryan Li

I think technical data the renminbi bond markets is still open for every company who qualifies the requirements for the insurance. But feasibilities of each companies of issuing a successful renminbi bond depends on lot of factors including the company specific factors and the financial strengths of each of the company and also the industry perceptions from the investor side. So there is a lot of moving factors that will be integrated into the considerations. So yes, the market is still open but it will never open for everybody.

Brandon Heiken - Credit Suisse

Okay, thanks. And for your cost reductions, where do you think that the total cost and non-silicon cost to go by the end of next year? I know you're targeting below $0.50 for non-silicon costs by the end of this year, but where do you think that can go and what are the further opportunities for cost reductions next year? Thank you.

Bryan Li

As we stay committed to technology improvements and the increase of operating efficiencies and as we commented earlier and we currently expect for the poly silicon processing costs, we are target to reduce to roughly $0.45 by the end of this year. And for next year we see there is another list of $0.05 to $0.08 for the cost reduction for the non-poly silicon processing part through the increase sale efficiency rates and as well as the improvement on the overall operating efficiencies.

Then for the poly side, we see the poly price out of the poly markers are committed to further direct on the cost through their cost reduction efforts. So we see there is another few cents maybe $0.03 to $0.04 and cost reduction for the poly silicon side.

Brandon Heiken - Credit Suisse

Could you repeat that? Did you say that non-silicon costs could come down another few cents? How many cents did you say in 2013 you thought?

Bryan Li

I think it will be mid-single digit to high single digit, in that year, in late next year. It’s highly possible.

Operator

Your next question comes from Amir Rozwadowski from Barclays. Please ask the question.

Amir Rozwadowski - Barclays

Yes, switching gears a bit towards pricing trends, your fourth quarter guidance was sort of flat to slightly up, gross margins on pretty significant volume growth seems to suggest that pricing will continue to come under pressure. I was wondering if you could give us your outlook for pricing trends in the fourth quarter in terms of trajectory, as well as do you expect to see some level of stabilization emerging in 2013? Thank you.

Robert Petrina

In the US after the decision for the ABCDB was finally made everything sort of clarify I think in the US we are seeing wealth of price stability in the last let`s say six to eight weeks, slightly decreasing but generally relatively stable going into 2013. So from the US perspective I think we see relative firming up of pricing but again, so we didn’t see mode and we have to see what things look like for us. As I mentioned in my prepared remarks, we have north of 400 megawatts of contracted deals for next year which have from pricing so that gives us I think a very strong base in which to work and (inaudible) opportunities will engage (inaudible).

Darren Thompson

So Europe the ASP declines are stabilizing from the significant drops that we saw in the first half of the year. I mean most of our negotiations now are behind the decimal point giving an indication of where we are on pricing. Germany, as we move into Q1 is still going to really set the price for Europe giving us a borderless community but obviously that will also be influenced by shipping distances and costs to further away from Germany at least in Europe may support slightly higher pricing. But those pricing levels even with the feed in tariff being adjusted in Germany month by month, they are still attractive IRRs on the current system pricing levels within Europe.

Amir Rozwadowski - Barclays

And I was actually wondering where you expect to see pricing trends with respect to China? Obviously, it seems like, from your commentary, that China will be a much more significant contributor overall to your total sales. What are the trends around China?

Bryan Li

Actually currently the pricing in China is just slightly below our export sales ASP and given the overall volume in China will be very attractive and a significantly high in this year and also based on the current feed in tariff program in China the downstream investment has already been reasonable, that’s why we believe that pricing for China averages through next year compared to the pricing in Q4 will also be very slightly chop to even very close. We don’t expect a very significant price chop in China for next year.

Amir Rozwadowski - Barclays

So if I may, just one quick follow-up on the overall, it seems like from a regional perspective, you folks are seeing encouraging signs around pricing. I mean should we expect the declines next year overall on a total basis to be slightly less than this year? Should we expect a potential for flattish pricing trends? Just on an overall basis, that would be very helpful. Thank you very much.

Miao Qing

Sorry you mean the geographic breakdown or the overall pricing trends?

Amir Rozwadowski - Barclays

Pardon me. Just overall pricing trends on a corporate level.

Bryan Li

Miao Qing

On corporate level for next year, right?

Amir Rozwadowski - Barclays

For next year, correct.

Miao Qing

Li you probably you can only talk about first quarter.

Bryan Li

I think currently in first quarter I think for European, generally we are still working on the Q1 volume to make a more volume specific (inaudible) because that’s why currently we see mainly the more time currently a more precise range of what the pricing. That’s at least for January for the shipment through yen, we see the pricing in Europe does not seems to be very significantly cut off given the bidding tariff changes through the year in German is not significant. In US, as Robert mentioned, the pricing in Q1 will be lower than what we saw in Q4 now. The China will deliver very slight, that’s why overall I think for next Q1 the pricing compared to Q4 maybe just very slightly chopped.

Operator

The next question comes from Philip Shen from Roth Capital. Please ask the question.

Philip Shen - Roth Capital

I want to ask a clarifying question. I think earlier in the remarks, you talked about non-silicon processing costs, target of less than $0.50 by year end '12. But then later on in the call, you talked about an actually target of $0.45. I just wanted to confirm that that was the case.

Bryan Li

In the German remark and the German was indicated and our expectation is to reduce the costs and down below $0.50 for the non-poly silicon part for Q4. That is the average cost. So the supplementary comment I made is when we exit this year and I am expecting the non-poly silicon costs will be somewhere close to $0.45. But that is an exit point.

Philip Shen - Roth Capital

And then in terms of Q3, can you share with us what your cash flow from operations were and what your depreciation expense was?

Bryan Li

For Q3 we actually achieved a positive operating cash flow and roughly $40 million in Q3 and for the depreciation charge, the average quarterly depreciation charge is roughly $45 to $46 million in quarters and in Q4 and for the operating cash flow we see it may be negative $50 million and then the deprecation charge remain the same.

Philip Shen - Roth Capital

How do you expect OpEx, operating expenses, to trend in Q4 and throughout 2013? Thank you.

Bryan Li

The operating expenses including three items, set expenses, G&A expenses and R&D expenses. And we expect for G&A expenses will be flatting from Q3 to Q4 and for the set expenses it will go up a little bit as we shift more in Q4 so that will be more logistic cost and insurance cost associated with the increasing shipment volumes from Q3 to Q4. And for the R&D expenses will remain roughly at similar levels from Q3. And for 2013, I think we will continue to control the level of the OpEx. So I think for the G&A expenses, we are targeting to achieve 1 to 2 million cost reductions for quarter to quarters and for the selling part and we are actively negotiating with the logistic companies to seek a contracts and to control the shipping costs. And for the R&D is still treated as an investment of the company’s part of future cost reduction efforts and if we see new initiatives after our technical evaluation will help us reduce the cost of production and we will certainly kick off the project. But on the dollar amount I think the level will be smaller than 2012 level.

Operator

Your next question comes from Mark Bachman from Avian Securities. Please ask the question.

Mark Bachman - Avian Securities

Bryan, have I heard you correctly? I thought I heard you say that non-silicon costs would possibly reach $0.45 before year end 2012. Is that correct?

Bryan Li

Correct.

Mark Bachman - Avian Securities

Can you break down that for us by wafer cell and module please?

Bryan Li

Sure. We expect for wafer let`s say for Inga to sell that will be roughly 35% and are contributed to the wafer to Inga to sell. And the cell process will take roughly 40% and the rest of them are the modules.

Mark Bachman - Avian Securities

I'm sorry, so 35% on the wafer side. Will you just go through that one more time?

Bryan Li

Yes sure. Let`s say for Inga to wafer it should be lower than 35, it should be somewhere between 22 to 24% and the cell will be 25% and the module will take the remaining.

Mark Bachman - Avian Securities

And, then Bryan, if I kind of think about your gross margin guidance right now, and if I think about the way that ASP trends are happening, I heard what Rob said. He said that price stability to slightly decreasing ASPs is what the US is looking at. Also, heard that there is some ASP stability, but Germany is really going to set the prices in Europe. And then, as you ship more into China, which arguably has lower ASPs as well, this may argue that you're going to have further inventory charges again in Q4. So my question is, your gross margin guidance looks to be a non-GAAP number. If you were to take a guess at a GAAP gross margin for Q4, where do you think that would fall out?

Bryan Li

I think the gross margin guidance for Q4 we gave is a GAAP number. Currently I didn’t see the necessity to do further inventory provision in Q4.

Mark Bachman - Avian Securities

Okay. Would you expect, if ASPs decline then in the Q4 further, that you would have to take an inventory charge?

Bryan Li

On a blended basis in Q4, I see the ASP will be done low teen percentage from Q3 level but on the cost front, I am also expecting the cost will be down in low teen to mid-teen percentage from Q3 to Q4 level. Of course in Q3 it’s excluding those non-cash charge. So on a gross margin front in Q4 I think we will be able to achieve 2% gross margin in Q4.

Operator

Your next question comes from Mahesh Sanganeria from RBC Capital Markets. Please ask the question.

Mahesh Sanganeria - RBC Capital Markets

I have a question on your debt and the interest expense. So adding up the short-term, long-term and medium-term notes, I get the total debt about 2.5 billion. And if you can give me what's the weighted average interest expense and interest rate and as you refinance the short-term bank borrowing, how does that rate change? If you can give some idea, that would be helpful.

Bryan Li

For the weighted average interest rate in Q3 its about 6.33% and which is pretty much the same, 6.34% in second quarter of this year. And for the refinancing costs and we see the available rate in the market is at a similar level as we are getting now.

Mahesh Sanganeria - RBC Capital Markets

Okay. And you talked about the ASP being stable next year, what is your initial thought on the shipments in the first half, is that going to be at similar level at second half of this year? Or if you can give us some color on that, that would be helpful.

Bryan Li

Based on our current expectation on the market dynamics and into next year in the major markets across the world, we are planning to ship more in the first half of next year from second half ’12 level.

Operator

Your next question comes from Kelly Dougherty from Macquarie. Please ask the question.

Kelly Dougherty - Macquarie Research

Just wanted to chat about underutilization a bit, and see what kind of charge or headwind it was in the third quarter. And then wondering if there's any consideration of underutilization in that 0 to 2% gross margin for the fourth quarter, given what you have for demand but also what you've got in inventory right now.

Bryan Li

The utilization rate in Q3 is somewhere between 60 to 70% and its getting close to 70% I think in the Q3. And in Q4 as we are currently modeled and based on the models we are planning to increase the utilization to more than 90% in Q4. And the next year as we commented, as we see he global demand continues to grow as the solar power generation costs has (inaudible) in many countries and regions. So we are as we are expecting to run 100% utilization next year.

Kelly Dougherty - Macquarie Research

So can you get to that $0.50 in the fourth quarter or down to $0.45 running at the 90% utilization level in the fourth quarter, or is that a number based on a higher utilization level, and then there might be some form of headwind from not running at that level?

Bryan Li

The number we gave is the expectation based on our current status. So that what we are expecting based on (inaudible).

Kelly Dougherty - Macquarie Research

Okay. And then, can you talk about how you think about potentially moving downstream into project development, we hear a lot of people talk about that because it, for now at least has higher margins. How should we think about projects perhaps contributing to revenue or as a percentage of megawatts, as we look forward into 2013?

Miao Liansheng

[Interpreted]

Well going downstream will be the trends for the future development of the market and we have been up promoting a concept called 3-3-4 strategy and the 4 talking about the 40% also out of 10 share in of our margin shipment will ensure going to the downstream development projects. And particularly in China markets we have a very good foundation because we have investing heavily and so were a long time to build off distribution channels and the nurturing our relationship with our business partners and the local government. So we are well positioned in the Chinese market to implement our future strategies.

And we also see positive signs such as the enlarged markets of new and emerging markets and also the decreasing trends of the total cost of PV systems and also in light of the forthcoming 2014 (inaudible) in Brazil in the (inaudible) and we are planning to further boost our strategies to going downstream in the second half of 2013 and full year 2014.

Kelly Dougherty - Macquarie Research

So do you have any kind of target for us to assume, like as a percent of revenue or as a percent of megawatts? I mean because obviously, it has a much higher ASP, it should have a higher gross margin.

Miao Qing

Thanks Kelly but we will keep it very relaxed both stretch on the downstream development. So no specific percentage of revenue to share at this moment. Thanks.

Operator

The next question comes from Aaron Chew from Maxim Group. Please ask the question.

Aaron Chew - Maxim Group

Wondering if you guys can comment a little bit further on the dynamics affecting the poly silicon market; just wondering why I'm hearing various reports from numerous sources, both anecdotally and in the media, of mid to high teens poly silicon per kilogram, and how that reconciles with your own procurement costs still expected to be in the low 20s by year end? What do you guys think is driving these reports of the mid-teens poly price? Is it a question of quality, inventory dumping, or something else? And where do you see poly settling in 2013?

Bryan Li

I think given the current situation we believe next year the poly price won’t be significantly chopped, may be flat at the current level and maybe even increase very limited like $1 to $2 to a range from $20 to $21 for next year the global volume maintain the same level like we see in cost currently the poly (inaudible) cost is really significant and also given the current poly production cost there is a lot of very big room for poly try to be significant in the lower poly price again.

Aaron Chew - Maxim Group

And can you comment on your views on why we're hearing so many reports about mid to high teens poly?

Bryan Li

I would like to say maybe in the range around $19 to $21.

Aaron Chew - Maxim Group

Okay. All right. Well, if I can just have a quick follow-up then on debt. Bryan, can you touch on a little bit more what's going on specifically with the balance sheet? It looks like you paid down a couple hundred million dollars in debt; cash came down a little bit more. And obviously, interest expense jumped up on what the press release cited to be an acceleration in cash collections. Just wondering if you could just help us out a little bit what's going on internally in terms of your policy towards dealing with the debt overhang, and if there's a change in policy among the banks that you are dealing with or just some internal initiatives in terms of debt paid down. Any color would be helpful. Thanks.

Bryan Li

There are a couple of thoughts I would like to talk about and the first of them is the efforts to transform more debt from the short term portion to the long term portion and if you’ll compare the percentage of short term loan and long term loan then from Q1 to Q3 you actually see a shift, roughly 4% from short term to long term that meeting the company is really making efforts to remove the short term loan overhead and to a long term obligations. So that’s number one. And then number two is to further reduce the interest expenses of the companies and it’s also we’re also carefully scanning all the bank portfolio and we maintain the largest of bank and also the added bank offering the long term loss to the companies and for some small banks with the smaller position or a revolving position or the prices with them condition attachment and then we will repay the loans and upon the maturity and won’t ask for the renewals. And so I think overall speaking we have from Q2 to Q3 and we have reduced roughly 1.3 billion loan balance and from Q2 to Q3 to proportionally reduce only the over half of the loan repayment pressures but also the interest bearing cost in Q3. And but we will also move more short term loans into the long term loans to make the companies operating at a much safer levels from previous levels. So those are the efforts we are making. And for the communication with the bank, though there is a lot of active news and rumors and the people are talking about an the banks concerns on the sectors but I think from the communication we had with the bank particularly those largest of bank and a major commercial banks in China and also onset of China and the banks are understand what happens in a market and more importantly they have predict the future growth a much bigger solar markets and while we are moving to 2013-2014 time horizon. So for those banks and the industry is in a pressure but it is also a good opportunity for those banks to pick a future winner to start a corporation and solidifying their relationship with those players. So thanks for cost leadership and also the brand leadership and the technology leadership we have been ranked as one of the top solar makers by Chinese bank and the foreign banks and getting supports from those banks on a company’s operations when we are moving to next year. So I am pretty comfortable with the cash flow situations.

Aaron Chew - Maxim Group

Just one quick housekeeping follow-up. Where do you expect CapEx to shake out in 2012 for the full year?

Bryan Li

In Q3 we spent roughly $50 million and I am expecting to spend another $50 million in Q4 and the vast majority of the CapEx are for the repairmen and the retrofit of the existing facilities and to help us improve the efficiency and reduce the cost.

Aaron Chew - Maxim Group

Is that 15, or 50? 15 or 50?

Bryan Li

50.

Operator

The next question comes from Pranab Sarmah from Daiwa Capital Markets. Please ask the question.

Pranab Sarmah - Daiwa Capital Markets

My first question is on PANDAs. How much of your 3Q shipment was under PANDA, and how much are you expecting on 4Q?

Bryan Li

In Q3 roughly 12% of our productions are PANDA modules. In Q4 we are expecting to produce pretty much a similar percentage. It could be slightly more to 15% of the total production volume.

Pranab Sarmah - Daiwa Capital Markets

And how much of capacity is capable of handling PANDA at this point?

Bryan Li

For the name play capacity PANDA, currently it takes I think 20% of the total capacity.

Pranab Sarmah - Daiwa Capital Markets

And my second question is on asset impairment charges. Do you expect any capital asset impairment at the end of 4Q?

Bryan Li

We have evaluated the asset values by the end of Q4 and we have identified the asset impairment and the required for the fixed asset. And we’ll continue the testing Q4.

Pranab Sarmah - Daiwa Capital Markets

Okay. So do you expect anything, given like still you are gross margin negative or operating margin negative for quite some time?

Bryan Li

Because I think and for the majority reason of the negative growth was margin a result of a higher inventory costs which we have written down in Q3. So I think except for that, I haven't seen necessarily for providing asset impairment.

Operator

The next question comes from Amy Song from Goldman Sachs. Please ask the question.

Amy Song - Goldman Sachs

I just have a follow-up question on the poly pricing. So what is your poly sourcing strategy next year, given the dynamic changes here as China government is trying to initiate their own tariff in for the poly? Then we see those news coming along the way, what is your expectation? How do you cope with that, with your current poly vendor? If the tariff does happen next year, how do you deal with that?

Robert Petrina

I am sorry before Bryan answers your question just want to elaborate on China government’s initiation of the poly silicon dumping case. We are of the case and we are going to vigorously participate in to defend ourselves, defend our interest although we are not directly investigating but some of our major suppliers are being investigated and we are going to collaborate with them to participate in investigation. And without disclosing any preparatory business arrangements and our general comment is that we are exploring various business arrangements that could prudentially give us an opportunity to avoid such a tariff being imposed on the poly silicon import from our overseas suppliers. But we are going to further explore those options.

Amy Song - Goldman Sachs

So let me understand. So you're going to try to avoid a tariff by let your vendor pay the tariff, or how do you avoid that?

Robert Petrina

There are various options that offload that are available in the current legal regime and some other cases in the previous investigations in different industries has been able to prove that searching of those arrangements would work into allow importers to avoid any tariff being imposed. And while we are working with our legal councils to secure such arrangements and their current legal regime but those are kind of sensitive information and so unfortunately we will not be able to discuss any details at this moment.

Amy Song - Goldman Sachs

So what is the percentage breakdown between contract poly and sub-poly with your supplier sourcing maybe on to 13 level? Can you talk about it?

Bryan Li

Actually right now other long term contract poly supply reached a kind of reasonable pricing adjust mechanism with us to look at the poly price regularly to ensure it won’t be significantly variable from the marketed price. That’s why currently our average of poly price between what we buy from the secure contracts versus what we can buy from the store market is quite close.

Amy Song - Goldman Sachs

Yes. So I was asking the percentage breakdown next year.

Bryan Li

The percentage is, because I mean right now our poly is due majority buying from those supplies with long term contracts.

Operator

The next question comes from Yang Chen from China International Capital Corporation. Please ask the question.

Yang Chen - China International Capital Corporation

Just a quick one on the receivables. What were the payment terms like in China right now? And also, given that the shipments to China will still continue accounting for significant portion, what would be Yingli's strategy to compare the receivables at comfortable levels? Thank you.

Miao Liansheng

[Interpreted]

We are now taking this very seriously. He thinks this is a very important question to be addressed but however observing from the trend that we control and the situation has been improving from Q3 to present. And going forward and he thinks that there are many ways that it could further improve and one way is to like (inaudible) which could potentially be changed in the future and certainly we are going to tap into the downstream market and which make it more leverage and thirdly the Chinese government will implement stringent regulations in which will also benefit from this. And also the Golden Sun project in which we are offer a better, much better payment terms that will also benefit us from those payment terms and also for some of the receivables will rely further upon insurance to make sure that those receivables will be covered.

Operator

And that concludes our call today. Now I will like to transfer the call back to Ms. Miao Qing for closing remarks.

Miao Qing

Thanks everyone for attending today's conference call and any follow up questions, you are welcome to contact IR since today.

Operator

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

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