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Executives

Rory Macpherson – IR, Ogilvy Public Relations Worldwide

Zhengrong Shi – Chairman and CEO

Stuart Wenham – Chief Technology Officer

Amy Zhang – CFO

Steven Chan – Chief Strategy Officer

Analysts

Rob Stone – Cowen and Company

Sanjay Shrestha – Lazard Capital Markets

Paul Clegg – Jefferies

Gordon Johnson – Hapoalim Securities

Satya Kumar – Credit Suisse

Shalis Jetli – Nomura Securities

Michael Chou – Deutsche Bank

Pranab Sarmah – Daiwa Securities

Burt Chao – Simmons & Company

Lu Yeung – Merrill Lynch

Vishal Shah – Barclays Capital

Dan Ries – Collins

Charles Yonts – CLSA

Kim Chong Tan – UBS

Paul Leming – Soleil Securities

Jonathan Hoopes – ThinkEquity

Sam Dubinsky – Oppenheimer

Jeff Osborne – Thomas Weisel Partners

Suntech Power Holdings Co., Ltd. (STP) Q3 2008 Earnings Call Transcript November 20, 2008 8:00 AM ET

Operator

Good evening and thank you for standing by for Suntech’s third quarter 2008 earnings conference call. At this time all participants are in a listen-only mode. After managements prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Rory Macpherson, Suntech’s Director of Investor Relations; please proceed.

Rory Macpherson

Hello everyone and welcome to Suntech’s third quarter 2008 earnings conference call. My name is Rory Macpherson, Suntech’s Investor Relations Manager. From Suntech on the call today will be Dr. Zhengrong Shi, Suntech’s Chairman and CEO; Stuart Wenham, our Chief Technology Officer; and Amy Zhang, our Chief Financial Officer. Chief Strategy Officer, Steven Chan and Boxun Zhang, our Financial Director will also participate in the Q-and-A following Dr. Shi’s closing remarks.

Before we continue, during this conference call, we will make certain forward-looking statements in an effort to assist you in understanding the company and its results. The forward-looking statements will be made under the Safe Harbor provisions of the U.S. Private Securities Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, Suntech’s future results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our earnings release issued today and our SEC filings. Suntech does not undertake any obligation to update any forward-looking statements except as required under principle law.

As a reminder, this conference call is being recorded and a webcast of management’s prepared remarks will be available on the Investor Relations section of Suntech’s website after this call. Also, please make note that all figures mentioned during this conference call are in U.S. dollars unless otherwise noted.

I will now turn the call over to Suntech’s Chairman and CEO Dr. Zhengrong Shi.

Zhengrong Shi

Hello and then thank you for joining us today. We delivered strong top-line results in the third quarter with total net revenues growing 54% year-over-year to $594.4 million. Non-GAAP gross margin was 21.8%, non-GAAP net income was $60.3 million and the non-GAAP EPS was $0.35 per diluted ADS. Net income will impact primary due to a sequential increase interest expanses and foreign exchange loss of approximately $22 million. Amy will provide further color in view of our third quarter financial results shortly.

Over the past two months, the solar industry has been significantly affected by the disruption of the financial market and the volatility of the major currencies. Today, I will give an overview of how Suntech has been impacted by these macroeconomic changes and what we are doing to adapt our business and why we expect to emerge from this period in a relatively strong position.

There are two external factors that have impacted Suntech’s business in the short-term. Firstly, the Euro has depreciated around 15% from the third quarter average to the current rate of 1.28 in the fourth quarter. As approximately 80% of our fourth quarter sales are expected to be denominated in the Euro. This will lead to a significant downward pressure on our average sales price and margins.

The second change is the disrupting of the financial market. Due to the current instability in the financial institutions both in the U.S. and the Europe, many banks have minimized project credit facilities in the fourth quarter to preserve liquidity. In addition they have taken a more conservative approach to solar investment.

While many of our investor projects are moving ahead according to schedule, half of those have being affected by longer and a more stringent due diligent process implemented by financial institutions. This has resulted in the deferment of some customer orders from the fourth quarter of 2008 until 2009. We are closely monitoring the situation and our current communications with banks purchase that project finance facilities will become more available in early 2009.

In response to this near terms challenges, we have implemented a range of measures to improve our cost structures as quickly as possible and preserve our profitability. Specifically, we have proactively renegotiated the higher price, spot silicon contracts for 2008 delivery.

Our adjusted procurement and production inline with sales orders to minimize inventory build out, deferred CapEx and non-essential cash outlays accelerates the optimization of manufacturing processes and supply chain management and considerably the roll out of high efficiency Pluto technology.

We believe that this steps will enables us to view the short-term market disturbances and will position us for growth as the environment improves in 2009. Despite this near term challenges, we are confident that 2009 solar demand will be relatively strong. We also believe that the industry calibration will benefit Suntech as we expect to fly to quality solar companies that are positioned to be long-term leaders in the solar industry.

Our exceptional project history, dedication to innovation and our focus on producing premium quality solar products differentiates Suntech’s products and brand. Moreover, our customer service, broad product range and manufacturing scale provide a stable base to service our customer’s long-term needs.

We are confident that our customers recognize the value in partnering with Suntech and we expect to improve our market position in 2009. In fact although some customer have differed orders in the fourth quarter, many are committing to increase volumes for 2009. This is the indication of customers confident that financing issues will be a resolved quickly.

We have already received orders from the European customers for over 600 megawatt of PV products for 2009 and are pursuing a growing pipeline of additional orders. This indicates that core demand is strong though we are well aware of the challenges created by the turmoil in the financial market that may make it difficult for some orders to materialize.

Turning to the silicon outlook, due to the impact of the fall in Euro and a weak demand in the fourth quarter, we are finally starting to see a shift towards rationalization of polysilicon process. Over the past month, the spot market price for silicon has fallen by over 50% to well below $200 per kilogram. This is a long overdue and we are taking this opportunity to discuss more realistic silicon pricing with our supplies.

While this will help to reduce the cost of the new silicon purchases in the first quarter of 2009 onward, the mix of higher price silicon from our carrying over inventory and a higher cost purchase of raw materials in October, 2008, we mean that our average of silicon cost will remain relatively high in the fourth quarter.

Nevertheless, we expect to benefit from the lower spot pricing in early 2009 and I believe our profitability will improve steadily through 2009 as we transition from the silicon, polysilicon to longer-term contract; also our strategy to secure diversified silicon pipeline to ensure stable and a relatively low cost silicon supply in 2009.

Now, let’s look at our sales initiatives. Over the past 18 months, Suntech has invested heavily in building an international sales network through opening regional offices across Europe, Asia and the U.S. and hiring high-quality personnel. We believe that this highly continental sales network will enable us to differentiate an increase in a competitive market environment.

During the third quarter, our key markets continued to be Germany and Spain, which generated 33% and 22% of our revenues respectively. As we move into 2009, we expect that Germany, Italy and the U.S. will be the key growth drivers. In particular we are excited about our new initiatives in the United States that we believe will enable us to rapidly expand our presence there.

Firstly, we intent to rapidly expand our dealer network; secondly we acquired EI Solutions, a leading California-based commercial solar system integration company; thirdly, we establish 50/50 joint venture with MMA Renewable Ventures to form Gemini Solar, which we will develop, own and operate large-scale PV projects, greater than 10 megawatts in the U.S. Combined this initiatives will enable Suntech to serve more completely the hubris of U.S. customers and give us a platform to triple our U.S. sales to over 120 megawatts in 2009.

In Asia, it is promising to see that the Japanese government has given a renewed commitment to developing the domestic Solar market. We expect to access this growing opportunity by utilizing the distribution network we inherited by our MSK acquisition.

Turning to our capacity expansion and the supply optimization; in the third quarter we reached 750 megawatt of our PV sale production capacity and we are on target to hit one gigawatt by year end 2008. However, given the new environment we have decided to hold further expansion until there is more visibility on the status of the credit market.

We will continue to monitor the demanding environment and adjust our expansion plan to suite. In the interim our effort will be dedicated to optimization of our production processes and its supply chain management as well as continued investment in transferring our high efficiency Pluto technology onto production lines.

Before I turn the call over to, Stuart, to update you on our technology. I would like to emphasize that why we are projecting a difficult fourth quarter. We have full confidence in the gross potential of the solar industry and the strength of Suntech business model. Our goal that has always been to drive down the cost of solar to a great parity and these macroeconomic changes should accelerate this process and then stimulate demand.

We have in here in the flexibility to adapt to the market environment and we are confident our profitability will improve as our silicon cost decline significantly in 2009. As we ramp our Pluto technology, we also believe that this challenges offer opportunity to accelerate our past to a great parity and established Suntech as a clear leader in the solar industry. Thank you for your continued support on Suntech.

I will now turn the call over to our Chief Technology Officer, Dr. Stuart Wenham to discuss our progress on our technology upfront. Thank you.

Stuart Wenham

Thank you Dr. Shi. I’m pleased to report that we are nearing the completion of our evaluation phase of the Pluto technology and we are on track to expand our production capacity from 10 megawatts to 30 megawatts by the end of 2008.

The conversion efficiency achieved in large scale production is even higher than we achieved in pilot production. We are consistently producing Pluto monocrystalline sales with the conversion efficiency of 18.5% to 19% and multicrystalline sales with the conversion efficiency of close to 17%. These are significant developments for Suntech primarily because the greater conversion efficiency is achieved without increasing the average cost of production per wafer.

Enhancing conversion efficiency is one of the key elements of our cost reduction program. In addition because Pluto can be applied to different grades of silicon, it gives Suntech considerable flexibility in a range of ways including with products and applications.

In terms of ramp up, the reduced pressure to expand our production capacity next year will increase our opportunity to retrofit existing lines with the Pluto technology. We are targeting to increase our Pluto manufacturing capacity to 100 megawatts during the first quarter of 2009. We intent to start selling Pluto modules as soon as we have received the relevant industry certification which we expect will be in the second quarter of 2009.

Turning to Thin-Film, our strategy is to use Thin-Film to complement our panel based products as part of the diversified solar offering, which also includes the IPV. Demand for these products will run along parallel tracks and we intend to be there with best-in-class products.

Our new Thin-Film production facility is on track to finalize installation of a 50 megawatt Thin-Film production line by the end of this year. We will then initiate trial production and plan to send Thin-Film panels for certification in early 2009. We expect to start shipping Thin-Film products to customers in the second half of 2009 and target 15 megawatts to 20 megawatts of output for the full-year.

I will now turn the call over to our CFO, Amy Zhang for our third quarter financial review.

Amy Zhang

Thank you, Stuart and hello to everyone on the call today. I’ll provide some color on certain results for the third quarter of 2008. I will also discuss some tax performance focusing principally on non-GAAP numbers that we believe give a clearer picture of the operating dynamics of the company.

Specifically, non-GAAP measures exclude $3.9 million of share-based compensation expenses, $0.5 million of net income impact related to the amortization and expenses of the MSK and KSL Kuttler acquisitions. You can also find a reconciliation of these measures in the financial tables at the end our earnings press release document issued today.

Net revenue for the third quarter was $594.4 million, 53.7% higher than the year ago period. Our core PV module business accounted for 88% of total revenue in the third quarter of 2008, compared to 93% in the second quarter of 2008. Other revenues include direct sales of PV sales, system revenues and revenues from KSL Kuttlers printed circuit board business.

Non-GAAP gross margin was 21.8% in the third quarter compared to 24.7% in the second quarter of 2008. The quarter-over-quarter decrease in gross margin, primarily reflects a decrease in ASPs, due to the depreciation of the euro versus the U.S. dollar and to a lesser expand the increased raw material purchase cost.

Total share-based compensation expenses were $3.9 million. Of this amount, $1.4 million was recognized as cost of revenues; $0.3 million as selling expenses; $0.7 million as R&D and $1.5 million as G&A expenses. On a non-GAAP basis, operating expenses increased from $33.9 million in the second quarter of 2008 to $37.1 million in the third quarter of 2008, which is equivalent to 6.2% of total net revenue.

The sequential increase in operating expenses was primarily due to increased of spending on the research and development of the Pluto technology. We expect operating expenses to maintain a similar level in the fourth quarter of 2008.

In order to better manage costs, we have implemented strict controls on all expenses. Non-GAAP income from operations for the third quarter of 2008 was $92.6 million, an increase of 41.3% year-over-year; non-GAAP operating margins were 15.6% in the third quarter compared to 17.6% in the second quarter.

Net interest expenses were $7.9 million in the third quarter of 2008 compared with net interest expenses of $5.2 million in the second quarter of 2008. The sequential increase in the net interest expenses was primarily due to the increased short-term borrowing balance to facilitate daily operation.

Foreign currency exchange loss was $16.6 million in the third quarter of 2008 compared to a foreign exchange gain of $2.5 million in the second quarter of 2008. The foreign currency exchange loss in the third quarter was primarily due to the revaluation of some assets, which were impacted by the depreciation of the Euro against the U.S. dollar and the revaluation of some liabilities which were impacted by the appreciation of the RMB against the U.S. dollar.

During the past two months we have experienced extreme currency volatility that has materially impacted out business. In particular the rapid depreciation of the euro versus U.S. dollar has impacted our earnings. To better manage this volatility we are enhancing our currency risk management in two ways. Firstly we plan to increase our hedge of Euro denominated revenues from approximately 30% to 50%. Secondly we are implementing initiatives to increase our natural hedging through procuring more materials settled in U.S. euros [ph].

Net to other expenses decreased from $6.3 million in the second quarter of 2008 to $3.2 million in the third quarter of 2008. The decrease was mainly due to the reduced mark-to-market valuation losses associated with foreign currency derivative instruments.

Non-GAAP net income was $60.3 million or $0.35 per non-GAAP diluted ADS, compared to non-GAAP net income of $71.3 million, or $0.41 per non-GAAP diluted ADS in the second quarter of 2008. Please note when calculating EPS you will need to add back the interest expense related to our comfortable notes that was incur during the quarter. There was approximately $4.6 million of interest expense related to the convertible notes in the second quarter and third quarter of 2008.

Capital expenditures were $102.4 million in the third quarter and depreciation and amortization expenses were $10.2 million. We expect capital expenditures of approximately $60 million in the fourth quarter as we expand to 1 megawatt annualized PV sale production capacity, which would bring full year 2008 capital expenditures to approximately $300 million.

Moving now to our balance sheet, as of September 30, 2008, we had cash and cash equivalents at $394.6 million, compared to $605.2 million at June 30, 2008. The decrease of cash and cash equivalents was mainly due to prepayments to suppliers, CapEx for plant capacity expansions and an increase of value-added tax recoverable. In addition, we had $124.0 million in restricted cash and $145.6 million in short-term investment, most of which can be converted into cash if required.

In addition, we had approximately $1.7 billion of approved credit lines to be used for fixed asset purchasing, working capital or trade financing as of September 30, 2008. Of these credit facilities approximately $1.1 billion had been drawn down as of September 30, 2008.

During the fourth, we have secured a further $600 million of credit facilities. We have maintained excellent relationship with domestic banks, which have relatively strong liquidity and high cash reserves. Their commitments to some tax have expanded as we have grown in a world leading solar energy company and we expect this to continue.

We believe that our capital will be sufficient to meet all of our financial obligations during this current period of instability and to maintain adequate working capital to support our operations.

Inventory totaled $247.9 million as of September 30, 2008 compared to $182.6 million as of June 30, 2008. Inventory turnover was 49 days compared to 48 days in the prior quarter. The increase in inventory was partially due to the late receipt of silicon wafers from some of our suppliers due to the storms in the U.S. at the end of the third quarter.

Value-added tax recoverable totaled $201.8 million as of September 30, compared to $143 million as of June 30, 2008. The increase was mainly due to the long clearance process required by the local regulations. Approximately $126 million value-added tax recoverable has been approved for refund by the P.R.C. government of which we expect approximately $15 million to be refunded in the fourth quarter of 2008.

Accounts receivable increased from $218.9 million as of June 30, 2008 to $232.8 million as of September 30, 2008. Day’s sales outstanding were 36 days in the third quarter of 2008, compared to 41 days in the second quarter of 2008.

Now, I’ll turning to guidance. It is important to note that our near-term result have being significantly impacted by both the depreciation of the Euro, which has impacted ASP and tighter credit markets, which has totaled near-term demand. Please also note that, due to the current market instability there is greater viability in our projections and they may change materially.

Based on our current operating conditions and assuming an exchange rate of $1.28 to the Euro for the fourth quarter, we expect revenues for the fourth quarter of 2008 to be in the range of $345 million to $360 million. The sequential decline in the revenue primarily reflects the depreciation of the Euro versus the US dollar. The deferments of some customer orders due to delays in project financing and seasonality impact due to the winter in Northern Europe.

Assuming an exchange rate of US $1.28 to the Euro for the fourth quarter, GAAP consolidated gross margin for the fourth quarter of 2008 is expected to be marginally positive or breakeven. The sequential decline in gross margin primarily reflects the decline in product sales prices due to the rapid depreciation of the Euro versus the US dollar; the negative impact of high cost inventories from the third quarter of 2008, and the high cost of raw materials purchased in October 2008.

I’ll give you some further color on the impact of the weaker Euro on our projections. During the third quarter, the average value of the US dollar was 1.5 against to the Euro. Assuming an exchange rate of US $1.28 to the Euro in the fourth quarter of 2008, the Euro will have depreciated approximately 15% against to the US dollar sequentially. Considering that approximately 80% of our fourth quarter revenues are expected to be denominated in Euro, we expect approximately 12% impact on the ASP from the Euro depreciation alone.

Due to the abnormal depreciation of the Euro versus the US dollar and the tighter credit markets, we have reduced full-year 2008 revenue guidance from a range of $2.05 billion to $2.15 billion to a range of $1.85 billion to $1.87 billion. We have also revised our full-year 2008 PV production shipment target from 550 megawatts to approximately 490 megawatts. We’ve remains on target to reach one gigawatt of installed PV cell capacity by year end 2008.

Turning to 2009, we currently expect full-year 2009 shipments of more than 800 megawatts, due to the instability of the financial markets with Suntech hold PV cell production capacity at one gigawatt in 2009, until credit market visibility has improved. This will enable us to reduce capital expenditures to approximately $80 million in 2009 from approximately $300 million in 2008. The majority of the 2009 capital expenditures will be utilized to retrofit existing production capacity to the high efficiency Pluto technology.

That concludes our prepared remarks for today. At this time, we will now open the call up for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Rob Stone with Cowen and Company; please proceed

Rob Stone – Cowen and Company

I wonder if could give us just a little bit more color on the ASP sequential trend, that you’re expecting; which you had in Q3 and which you are expecting in Q4. I know you don’t give precise ASPs, but if you just give us the appropriate quarter-on-quarter trend please.

Zhengrong Shi

Rob, from Q2 if you go to Q3, basically ASP for Q2, Q3 in euro currency is fairly flat. Okay, US dollar currency is about 3% in volume is purely due to euro depreciation. I think from Q3 to Q4 based on Euro currency, the ASP is falling about 5%.

Rob Stone – Cowen and Company

So that translate 5% plus of the 12% hit from the…

Amy Zhang

12% yes. 12% effect impact on ASP.

Rob Stone – Cowen and Company

Respecting ASPs down that about 17% in the US dollars in Q4?

Zhengrong Shi

Yes.

Rob Stone – Cowen and Company

Thank you.

Operator

And our next question comes from Sanjay Shrestha with Lazard Capital Markets; please proceed.

Sanjay Shrestha – Lazard Capital Markets

Thank you. Good to see you guys up announcing the gradual capacity expansion here. A quick question along those lines; for Q4 we’ve got the ASP trend, but for 2009 in that 600 megawatt commitment that you guys have, how much of that is a Euro denominated contract and what sort of an ASP trend you are seeing in that? And I’ve got a follow-up question after that.

Amy Zhang

Right, out of that 600 megawatts we have secured, majority of that are actually from the European markets. We actually haven’t included any orders from the U.S. market yet. So, I would say out of that 600, more than 90% will be from Euro denominated contract.

Sanjay Shrestha – Lazard Capital Markets

So, then is it fair to say then, 18% is 5% reduction foreign currency for next year, layer on top of that, at least another 10% related to the feed-in-tariff dynamics and that’s sort of the pricing reduction we are seeing, correct?

Stuart Wenham

Actually, I think the reality is on the next years ASP in Euro currency compared to Q3 is about 10%.

Sanjay Shrestha – Lazard Capital Markets

Around 10% compared to Q3, okay. One last question then guys, in terms of the spot poly market which is directionally coming down, so what are you guys seeing for next year with the long-term contract in the spot market, are you comfortable? Can you give us a sense as to what’s your new target gross margin for 2009 after having worked through all this high price inventory in Q4?

Zhengrong Shi

Amy could you?

Amy Zhang

Can you please repeat your question again Sanjay?

Sanjay Shrestha – Lazard Capital Markets

Sure, of course with the spot prices coming down and a lot of long-term poly contract, now with ASP being what it is, can you give us a sense as to what’s your new target gross margin for the full-year 2009 and how should we think about that gradually improving throughout the year?

Amy Zhang

If you’re talking about the whole year instead of quarter-by-quarter improvement, as what we have always said, 20% is the bottom-line of what Suntech would maintain and fight against it to achieve. I would still say 20% for the whole year ’09.

Sanjay Shrestha – Lazard Capital Markets

Okay, great. Thank you.

Operator

And our next question will come from the line of Paul Clegg with Jefferies.

Paul Clegg – Jefferies

Good evening and thanks for taking my question. I just wondered a kind on a follow on to Sanjay’s question. How long would it take you to go through your higher priced wafer and silicon inventory? How much of a positive gross margin impact did you see in the first half of the year? I guess versus second half of the year as you worked through that inventory?

Zhengrong Shi

You mean the next year or this year?

Paul Clegg – Jefferies

Next year, how long is it going to take? If you’re still talking about the fourth quarter including a lot of historically higher priced inventory under those wafer contracts and so, if you are go into next year, how is that’s going to play out sort of on a quarter-by-quarter basis?

Amy Zhang

Yes, actually fourth quarter higher wafer cost is mainly due to the shift from Q3 and also high price paid in October. In the normal pattern of our production and sales, we normally has around two weeks of production shifted in the last two weeks of December, which is normally the Christmas and New Year Holiday and rolling that over into Q1. So, I would say it will take us just one quarter at the beginning of 2009 to absorb all the carry forward, high price wafers and silicons in ’09.

Paul Clegg – Jefferies

Okay, is that have more of an impact on the first quarter than? Are you addressing through even higher wafer costs?

Amy Zhang

No.

Paul Clegg – Jefferies

Okay, thanks very much.

Operator

And our next question will come from the line of Roger Johnson with Hapoalim Securities.

Gordon Johnson – Hapoalim Securities

It’s Gordon Johnson, thanks for taking the question guys. I guess I have two questions. Number one, what polysilicon’s spot price and polysilicon contract price are you assuming for 2009 to get to your 20% gross margins and how low do you think polysilicon’s spot prices can go in ’09 considering in 2004, they are $30 per kilogram and then I have a follow-up.

Zhengrong Shi

At this moment we see the spot poly prices already below $200 per kilogram and we believe poly price will continue to fall, but I think fall to which level is not clear to tell at this moment, but for our long-term poly contract the most of it is all well below $100.

Gordon Johnson – Hapoalim Securities

And then I’m looking at your short-term debt, it’s increased to over $700 million. I guess I’d like to know how many banks do you guys have that with and have there been conversations about rolling that over beyond the next three to six months and then also Amy, I’m looking at this $500 million convert you guys have which is putt able by your investors February 15, 2010. So, it seems like you guys may have to come up with that money over the next 15 months, given your working capital commitments. Can you help me understand how you guys are going to meet that obligation? Thank you.

Amy Zhang

Right; ever since the setup of Suntech back to 2001, we have been always working very closely with the China-based bankers. All the big four including Bank of China, ICDC, Bank of Construction and Bank of Agriculture, plus all the major commercial banks from China and then combined with other international bankers like, ABN Amro, like Citi, like Standard Charter etc.

So, all these facilities we have secured and all together up to now $2.2 billion to $2.3 billion including what we’ve already got in ’08 with $1.7 and another $600 million secured and all these new facilities will be brought over into ’09 and will not be expired until the end of 2009.

I hope that answers your question and the second is relative to CD. Yes, we are fully aware that we have putt able and callable option to be expired sometime in February of 2010. We are fully aware of that and we are well prepared for repayment when we are required to.

Operator

And our next question will come from the line of Satya Kumar with Credit Suisse.

Satya Kumar – Credit Suisse

Thanks for taking my question. In terms of your solar wafers that you have on contract; are you fully committed to taking solar wafers you have in contract and if the spot prices where to go below the solar wafer contract prices? How do you plan to handle that and can you give some color on, is there a minimum volume that you need take each quarter and how you can sort of manage those volumes given in the current circumstances?

Zhengrong Shi

Okay, Sanjay first of all, we still believe so far in the slow market price, although it falls fairly rapidly, so far our long-term contract in adding silicon or in wafer is still much lower than the spot price. Secondly, we are in a process to negotiating with our suppliers about the feasibilities of a more realistic price in the long-term because this financial crisis impact everybody, from silicon makers, wafers makers and us. So, we all understand the situation, I think we have to work together to tight for long-term obligations.

Satya Kumar – Credit Suisse

Got it and a couple of quick follow-ups, what was the conversion cost to the quarter and secondly, given the CapEx now lower in focus only on Pluto, is it fair to assume that it essentially shows the type of solar plant for the time being?

Zhengrong Shi

What’s your first question; is it conversion cost?

Satya Kumar – Credit Suisse

Yes.

Amy Zhang

Conversion cost of what?

Satya Kumar – Credit Suisse

Your conversion cost to go from wafer to panel. I just want an update on that.

Amy Zhang

What you mean from wafer?

Satya Kumar – Credit Suisse

Yes. Wafer to margin?

Amy Zhang

Wafer to margin cost, non-silicon cost?

Satya Kumar – Credit Suisse

Yes.

Amy Zhang

Alright, it’s still the same 0.7.

Satya Kumar – Credit Suisse

Still the same okay.

Amy Zhang

It’s $0.70 per watt from wafer to module; it’s fully loaded.

Satya Kumar – Credit Suisse

Understood, thank you and on the Thin-Film side, what is the current plan given the lower CapEx? Are you essentially freezing this development?

Zhengrong Shi

We cannot hear you clearly.

Satya Kumar – Credit Suisse

On the Thin-Film solar side given the lower CapEx, are you freezing the development?

Stuart Wenham

Freezing the development of what?

Satya Kumar – Credit Suisse

On the Thin-Film BIPV?

Zhengrong Shi

Thin-Film, our full production line we come operational in the first quarter of next year.

Satya Kumar – Credit Suisse

Okay, thank you.

Operator

And our next question will come from the line of Shalis Jetli with Nomura Securities.

Shalis Jetli – Nomura Securities

Hi, thanks for taking my question. If you could give slightly longer-term targets for the Pluto technology; I guess you talked about where you’re going to get by the end of first quarter ’09 and also if you can give details, any effort in terms of reducing the thickness of the wafer?

Steven Chan

Well, as Stuart just mentioned, our first solely megawatt line proved will be in ready before end of the year. Then we are in the process to retrofit some lines in the first quarter and while we want to retrofit as many lines as possible, we also are a bit of prudent when we differ our expansion suites and I think once we reach 100 megawatt by the end of first quarter and operate it well, we will like to retrofit as many as fast as we can.

Shalis Jetli – Nomura Securities

Is it possible that by end of the year you could possibly retrofit pretty much all the lines?

Steven Chan

Probably not to all of them, but I think may be one third of them.

Shalis Jetli – Nomura Securities

One third that is the target.

Steven Chan

Yes.

Shalis Jetli – Nomura Securities

The second part of my question also if you could look into it, whether there are any efforts in terms of reducing the silicon content by cutting the thickness of the wafer?

Steven Chan

Yes, we have a wafer thickness of about 180 in a micron.

Shalis Jetli – Nomura Securities

And what is the roadmap for that?

Steven Chan

At this momentum we have about 180 microns and we see down to 150 microns. This shouldn’t be too much a challenge.

Shalis Jetli – Nomura Securities

Understand, and is there any timeline to that?

Zhengrong Shi

150 microns could be sometime next year, towards the end of next year.

Shalis Jetli – Nomura Securities

Thanks a lot. Very helpful.

Operator

And our next question will come from the line of Michael Chou with Deutsche Bank; please proceed.

Michael Chou – Deutsche Bank

Hi Good evening. Thanks for taking my question; what is the currency breakdown for your COGS in Q4?

Amy Zhang

The currency breakdown for revenue?

Michael Chou – Deutsche Bank

For your cost of goods sold in Q4?

Amy Zhang

In Q4, I think total cost of goods sold 50% to 55% skewed from the local currency of RMB; I think around 55%, and then the rest actually split between US dollar and Euro and US dollars takes majority of the rest 40% to 45%.

Michael Chou – Deutsche Bank

Thank you so much.

Operator

And our next question will come from the line of Pranab Sarmah with Daiwa Securities.

Pranab Sarmah – Daiwa Securities

Yes, thank you for taking my question. My first question is on the Pluto technologies. You said that, you will be qualified for only by second quarter of ’09. Could you give which market you are going to qualify by second quarter of ’09 Pluto panels?

Stuart Wenham

The certification that we are seeking is basically an international certification. So, I guess customers or buyers around the world seek us to have that certification. So, it’s not specific to any one particular, that’s the IC certification. Dr. Shi, will just add a few comments on that as well.

Zhengrong Shi

Yes, I think the certification we apply this moment is IEC, 6 to 6.5 and also TUV and we are also in the process of meeting the modules for UL Certification.

Pranab Sarmah – Daiwa Securities

Thank you and the next follow-up question is, for the first time you have seen that your shipment is declining a sequential basis. How long do you think that this sequential decline will continue into or bottom out by the first quarter of ’09 or you think that it might bottom or go to.

Stuart Wenham

Okay maybe its better to give you a description about this market and then maybe you can have a bit understanding of the market. At this moment demand is very strong in the market. So, market and fundamental did not change. The problem here is the banks, the customers they want model, the module they want to buy more modules, but they have to have money to pay for it because it’s a banking liquidity which caused by this financial crisis. So, that causes some problem. So, we have to separate by the market demand and as a financial, so that gives out difference. So, the market demand is very, very fundamental.

Secondly, we should as the maturity of our sales just goes to European market and we have to like respect the seasonality. For example usually the winter time like Q4 and Q1 naturally were the lower because people cannot install the panels as in summer time or in warmer time, but because in the last several years, demand is ahead of supply. So all our customers has justified to pick modules, they don’t care even they have to taken the inventory. We do not see these seasonality very clearly although actually this seasonality occurred once in 2006.

So, in the future we actually expect this seasonality will become more and more obvious. Usually Q2 and Q3 every year will be much higher than Q1 and then Q4 and having said that we also expect the Q1 in the next year should be higher than the Q1 in previous year that reflects the market growth. I hope I can answer your question this way.

Pranab Sarmah – Daiwa Securities

Yes, I got the point and Amy when you’re going to deprecate that thin film line, if you start productions by first quarter ’09, do you have to model out higher depreciation cost from first quarter ’09?

Amy Zhang

You mean for the thin filament plant.

Pranab Sarmah – Daiwa Securities

Yes, if you’ll start producing then probably the depreciation cost will also fall through in first quarter ’09.

Amy Zhang

Yes, we definitely followed the GAAP requirement as long as the production is commenced and started we’ll start depreciation, so its inline.

Pranab Sarmah – Daiwa Securities

So, how should I model the first quarter depreciation if you start the inline depreciation?

Amy Zhang

Its still depends on the part of the asset backed that has been capitalized for the specific capacity that will commence operation, starting from Q1 next year. I presume that if you taking an extra deprecation let me see it’s a seven, it’s contained of a 10 year depreciation of equipments and also 20 year depreciation of land and other things. I think it’s quite tribal I would say. In the end and it’s only 20 megawatt to be initialized in Q1, to be quite tribal.

Pranab Sarmah – Daiwa Securities

Okay, thanks it from me. Thank you.

Operator

And our next question comes from Burt Chao with Simmons & Company; please proceed.

Burt Chao – Simmons & Company

Good evening, thank you for taking the questions. Just to go back really quick on polysilicon and then gross margins in 2009. You stated in your release in earlier in the call that you are renegotiating some of your contracts for shorter-term contracts. I guess the first part of the question becomes how willing you have the polysilicon suppliers to bid, how open have they been to the renegotiation prices?

How much of that price are you able to renegotiate, and then secondly going into 2009, if you are preserving about a 28% gross margin that assumes some sort of decline in ASP’s, what level of decline year-over-year? I understand the seasonality would you say the blended 2009 ASP will look like?

Zhengrong Shi

I will say, more than 80% or even all of our, long-term contract price will be able to enable us to meet our margin targets. When we talk on renegotiation, we mainly focused on some shorter-term contract which we have been assigned in 2008 delivery. For ASP as we’ve mentioned like probably based on Euro currency, based on Q3 from 2009 for the contract we signed silicon is about 10% drop plus about 12% to 15% of Euro depreciation, you are talking all together about 20% to 25% ASP drop.

Burt Chao – Simmons & Company

Okay wonderful, one quick follow-up. Have deliveries other than the storm in Gulf from MEMC are deliveries somewhat now on schedule, other that that storm or is there are still issues with the ramp up affecting deliveries to Suntech?

Steven Chan

There are some delays in delivery from MEMC. So, they try to catch up now.

Burt Chao – Simmons & Company

Okay, wonderful. Thanks again have a great evening.

Operator

Your next question comes from Lu Yeung with Merrill Lynch; please proceed.

Lu Yeung – Merrill Lynch

Hi thanks for taking my question. I just wanted to know how much of that silicon prepayment you are going to pay in your fourth quarter and in 2009?

Steven Chan

Amy could you.

Amy Zhang

You are talking about prepayment in ’09 or in fourth quarter of ’08?

Lu Yeung – Merrill Lynch

Fourth quarter in ’09.

Amy Zhang

By the end of fourth quarter of ’09?

Lu Yeung – Merrill Lynch

Just fourth quarter ’08 and 2009…

Amy Zhang

Fourth quarter, I mean the contracted obligation for payment is $25 million in Q4 this year.

Lu Yeung – Merrill Lynch

And any idea on the 2009?

Amy Zhang

I think, this pressure from the financial crisis has being fully aware by all departments, who work actually in the solar community and I think in the end this pressure is not going to be only shared by Suntech alone. We need to work very closely with our upstream partner together to go through this difficult time. So we are still talking to them and trying to find a win-win solution to ensure that they can ramp up on schedule and then we can minimize our cash advance payment at the same time.

Lu Yeung – Merrill Lynch

One more follow-up is you said there were some deferments in the fourth quarter and has that comeback in first quarter or some of the customer that differed orders? Have they comeback in the first quarter, and what’s your sense on first quarter shipment versus fourth quarter?

Zhengrong Shi

Steven, could you take this question?

Steven Chan

Sure. So we’ve had about 35% of orders in Q4 that were either delayed or actually we’re reviewing fiscally conservative with finance or credit churns on those contracts and so let’s say that out this 600 megawatts of orders that we have from the European customers next year, maybe like say 10% or less of that is associated with the Q4, 2008 contracts that are rolled into next year.

Lu Yeung – Merrill Lynch

Do you have a sense of how comfortable you are with the 600 megawatt orders with respect to financing or quality of the customers?

Steven Chan

We’re quite comfortable. A lot of them are returning customers that we’ve worked with for many years and in addition, we’ve made an effort to diversify our customer base and so we have expanded the customer base as well. I would say that, this year for example we were probably over dependent in the first half of the year on large Spanish projects and that’s less of a dependency and so next year I think, we’re diversified across other countries aside from Spain and Germany and Europe.

For example, our Italy sales will be actually higher than our Spanish sales next year and then we are seeing a very nice up tick of sales from other country such as France, Greece and Bulgaria.

Lu Yeung – Merrill Lynch

Have you supplied for the 600 megawatt all those that you have and what would be the pricing trend for next year?

Steven Chan

Can you repeat that, sorry?

Lu Yeung – Merrill Lynch

How many percent of the 600 megawatt orders you have has been fixed on price?

Steven Chan

Those were essentially all fixed on price. Then in addition to the 600 megawatts we’re also actively on looking to sign contracts in other regions, that’s only really on Europe. Even for example in the U.S. where we’re targeting to have a 120 plus megawatts of contracts that we think it will be quite solid as well.

Lu Yeung – Merrill Lynch

Okay thank you.

Operator

Your next question comes from Vishal Shah with Barclays Capital; please proceed.

Vishal Shah – Barclays Capital

Yes, thanks for taking my question. Can you just help me understand what your mix will be between spot and contract poly in Q4?

Zhengrong Shi

For Q4, still as we have said it before, our long-term, we are not start kicking until January ’09. So, in Q4 still majority is throughout the purchase.

Vishal Shah – Barclays Capital

If I understand, in the past you said 50% of your shipments were or poly was from spot and the 50% was from contract. Looks like you are essentially cutting…

Zhengrong Shi

Pardon me. Actually what I mean that is the 50% is the short-term contract and then 50% is on spot.

Vishal Shah – Barclays Capital

Okay, but it looks like you are pushing out 60 megawatts and so of shipments into next year. So, your exposure to the short-term contract market should increase. Is that right?

Zhengrong Shi

Sorry.

Vishal Shah – Barclays Capital

Since your cutting production by about 60 megawatts and so, you are producing reducing maybe close to 100 megawatts. It looks like your percentage of short-term contract in Q4 should increase?

Zhengrong Shi

Yes.

Vishal Shah – Barclays Capital

So, in that environment then your guidance basically assumes ASP’s of less than $3 per watt. I just wanted to reconcile your guidance with your shipments profile, would that be a fair assumption?

Zhengrong Shi

We had to give you integration about the ASP before. It’s been a 17% to ASP decline compared to Q3.

Vishal Shah – Barclays Capital

In 2009, do you think at some point, you see module prices of $2.50 per watt?

Zhengrong Shi

So far is that we see that price is much higher than that.

Vishal Shah – Barclays Capital

So, you don’t really see $2.50 per watt?

Zhengrong Shi

Not for Suntech brand.

Vishal Shah – Barclays Capital

Not for Suntech brand, okay and what do you think about some of your suppliers like Shunda, Asia Silicon and GCL? When do you expect to receive shipments from them? It would be more second half loaded or do you start to see some of that in first half?

Steven Chan

Actually, we are happy to report, Shunda is doing very well. I think they are paying 18 payers reactors, five of then are already filed up and in production. So, we believe towards the end of the year, so there should be all in filed up start to produce the polysilicon and Asia Silicon their first react is already filed up and we also believe in first quarter they should be fully ramped up.

Vishal Shah – Barclays Capital

Okay great and just one final question, in your gross margin guidance of breakeven for fourth quarter. What would that have been if you had not purchased high cost wafers in October? Would you have experienced about high single-digit margins, can you help us understand what the margin profile would look like in first quarter also?

Amy Zhang

I think if we hadn’t got the high cost materials carry forward from Q3 and purchasing in October in Q4. Our gross margin will definitely be about 10%.

Vishal Shah – Barclays Capital

Great, thank you.

Operator

Your next question will come from the line of Dan Ries with Collins; please proceed.

Dan Ries – Collins

Could you just discuss some of your approach to pricing right now in Europe? There is always an issues like. Do you price had discount of the European vendors or the discounts of the Japanese vendors, or just price comparative with some of the other Chinese vendors? What discount do you feel is currently in the market versus a short module?

Zhengrong Shi

You mean out ASP?

Dan Ries – Collins

Yes.

Zhengrong Shi

We see our ASP actually probably, if I have which price of all international leading players in the market.

Dan Ries – Collins

In your decision to scale back sharply in the fourth quarter, how much of that was related to inventory in the channel versus just inability to get wafers at the price that will give you that threshold margin that you would want?

Amy Zhang

Could you please repeat your questions again?

Dan Ries – Collins

I guess in the decisions scale back; I mean some of its demand related, some of its going to be supply related that you couldn’t get wafers at prices that you would want even in November and December. Was inventory in the channel a concern, taking into account when you decided to scale back production fourth quarter?

Zhengrong Shi

Inventory in the channel, you mean with the inventory, more than inventory?

Dan Ries – Collins

As you said the demand is strong, but people can’t get financing, so in –.

Zhengrong Shi

Yes, people can not get. Usually for example, like people will issue letter of credit on OTG lines before we ship out our goods. So, I think like that because of like this bank liquidity situation, our bank has become most conservative. So, process takes longer time in financing. So, some of our customers they cannot get the bank credit to pay us, as the term stating in the contract.

Dan Ries – Collins

I guess I’m getting out as there have been reports to some inventory certainly in Spain and to lesser extent in Germany. Is that affecting your decisions at this point? Or do you not feel that there is excess inventory in the channel in Europe?

Zhengrong Shi

We can certainly feel our customers they don’t want to take too much inventory in their warehouse either.

Dan Ries – Collins

Okay. Thanks very much.

Operator

Your next question will come from the line of Charles Yonts with CLSA; please proceed.

Charles Yonts – CLSA

Good evening and thanks for taking my question. Do you have some money earmarked for project development in Europe? Could you explain this program a bit and point out, where we can see it on the balance sheet? Thanks.

Zhengrong Shi

We do have some partners in Europe to develop project together and obvious our partner, we will face the similar situations as most of the developers. So, but I guess upon as work as hard as anywhere else. So, rather we will do this still have chances of opportunity to develop some projects in 2009.

Charles Yonts – CLSA

I believe its, I don’t have the number in front of me. So, but I believe its 200 million Euros year marked for this project development?

Zhengrong Shi

Okay, maybe I could refer this question to Steven. Steven maybe you can give some more color on that.

Steven Chan

Okay, so we work with different project development funds. For example, we signed joint venture with MMA Renewable Ventures here in the U.S. and then there is also another development plan that we work with in Europe and so, with that sort of support it enables the projects to have better financing terms and also, what Suntech could have as a diversified revenue stream.

For example in the U.S., we can split the development fees of the project and then also after the tax equity shareholders have utilized our investment tax credit in years six or seven then we can essentially call along the project with MMA and so in addition to having the revenue associated with the modules will also have future revenues associated with energy generation from the projects.

Charles Yonts – CLSA

Okay and then on the balance sheet, though we don’t see that’s really set aside, cash set aside of these projects or anything, is that correct?

Stuart Wenham

Yes, I think that right now it’s really like a forward-looking initiative. So that’s really like a very long-term commitment. So you won’t see any – I think there is may be $9 million that set in the balance sheet at this point, but in fact from that it’s very nominal.

Charles Yonts – CLSA

Okay. Great thanks.

Operator

Your next question will comes from the line of Kim Chong Tan with UBS; please proceed.

Kim Chong Tan – UBS

Hi, good evening. Than you for taking my question. On the financing problem that you highlighted, is it more for solar farm or rooftop installations?

Zhengrong Shi

I think it is pretty more for solar farm, a big scale of our project, but I guess that at this movement even some small scale projects is also being affected as well.

Kim Chong Tan – UBS

Is it for specific to certain countries? Or is it also prevalent in Germany?

Zhengrong Shi

I think in everywhere, this financial turmoil is going to affect everybody.

Kim Chong Tan – UBS

On the 600 megawatts, how much of it then is for projects, and how much of it is for distributor markets?

Zhengrong Shi

Steven?

Steven Chan

So which country are you talking about?

Zhengrong Shi

No, it’s about our financial and the project.

Steven Chan

In Germany?

Kim Chong Tan – UBS

I’m referring to the 600 megawatts of sales that you have secured for next year and how much of it is actually targeted for projects and how much for distributor markets?

Steven Chan

I would say that the vast majority is for the distribution market and maybe like 30-plus percent is for project market.

Kim Chong Tan – UBS

Would there be any chance that customer renegotiate price on this 600 megawatts?

Steven Chan

I think that the price has been negotiated quite thoroughly in the past month or so and a lot of those contracts were signed during this time of the financial crises and so, I think that it was taking into account. So we do feel that’s the numbers there fairly like sound.

Kim Chong Tan – UBS

If Germany’s demand, do you see Germany’s demand already with earnings for the rooftop market?

Steven Chan

Yes, definitely. We actually have some of the largest customers that we’ve had from some of our German customers for next year and that include some of the customers that have deferred some of the deliveries from this quarter. A low them quite optimistic about next year, particularly starting probably like mid to late first quarter as the weather gets better in Northern Europe and Germany.

Kim Chong Tan – UBS

Okay, thank you.

Operator

Your next question will come from the line of Paul Leming with Soleil Securities; please proceed.

Paul Leming – Soleil Securities

Good evening. I was just wonder, if you could help me understand what gives you the confident to believe that your shipment volumes are going to improve as we move into the first half of 2009. Even if I assume your shipment guidance for 2009, has heavily backend loaded.

You are still basically going to have the double shipments in the first quarter of 2009 relatively to the fourth quarter to beyond track for your full-year guidance and I just would like to understand, why you think the credit situation, the credit availability is going to improve quickly to see a dramatic improvement in shipment levels in the first quarter worried in the first half of ’09?

Steven Chan

So, we are in constant communications with various banks that lends in these situations as well as with customers through themselves are intern speaking to these sorts of banks. The message that we are getting back is that allow the banks, they’ve sort of reached their lending limits for this calendar year particularly in might of the financial crises and they get a lot of that reset for starting in January.

Then also some of these banks are also going to be future beneficiaries of various government bail out packages and so both the customers in the banks have set that they’re quite optimistic that for lending will resume starting sometime in mid, the first quarter of next year. I think that will help quite significantly.

Paul Leming – Soleil Securities

Just following upon that, is there any way that you gave any detail or granularity of the 600 megawatts of firm contracts you have for next year and how much of that is business for the first half of the year versus the second half of the year?

Stuart Wenham

Yes, I would say that probably it’s priced 6% second half, 40% first half and then in addition to that we have signed contracts in the U.S. and other countries outside of Europe and then we do expect that there will be fairly decent up-tick in delivery volumes particularly from the U.S. in the first half as well.

Paul Leming – Soleil Securities

Okay. Thanks very much.

Operator

Your next question will come from the like of Jonathan Hoopes with ThinkEquity; please proceed.

Jonathan Hoopes – ThinkEquity

Thank you. I was hoping you could clarify the comments you made on the United States market. I believe you said 120 megawatts. Is that a order book that you intent to build throughout 2009 or is that your shipment number for 2009, and following that can you characterize how big you see the U.S. market, in other words what you believe your market share will be on the back of that 120?

Stuart Wenham

Sure, so, it’s a combination of an order book as well as an intention to build and we feel pretty confident that’s even conservative given the discussions that we had with customers and potential customers in the U.S. thus far. Then in terms of the U.S. market size, we know that their estimates out there that range from like 500 megawatts to 800 megawatts and so, we’re planning for some of the market size to be somewhere in between there. So if we had a 120 I will say 700 megawatts, we feel that would be a fairly good growth rate given our current sales in the U.S. for this year will be slightly less than 40 megawatts.

Jonathan Hoopes – ThinkEquity

I have a question for Amy. What’s the interest rate on the new $600 million short-term credit facility? How does that compare with the outstanding $1.1 million that you’ve already drawn on?

Amy Zhang

Majority of this facility actually has come from the local Chinese banks with the interest rate floating with the Central Bank rate. As you know, China has been one of the countries that has announced very significant so called stimulus package with decreased interest rate as well.

So, interest rate wise we don’t expect any increment on the financing or capital cost. It’s still floating with the PBOC Central Bank rate, minus 5% to 8% especially available for Suntech.

Jonathan Hoopes – ThinkEquity

Thank you and I may have missed this, have any of your customers cancelled orders out of the order book or is it just been a function of pushback and how many customers have requested other than contract pricing?

Steven Chan

What you mean by other than contract pricing?

Jonathan Hoopes – ThinkEquity

Lower than what they’ve contracted for, demanding lower than what they’ve contracted for?

Steven Chan

So, yes for Q4 of this year, out of the volume that we are projecting we had thought that we will have incremental 35% above that and I would say out of that 35% the vast majority of that was shifted into next year. Maybe I would say a fifth of that, we’re still in the process of negotiating with those customers to take on the volume next year, but we expect that will happen, but we haven’t finished the negotiations on that.

Jonathan Hoopes – ThinkEquity

And to be clear you’ve had no cancellations from your order-book?

Steven Chan

No, basically they are either been shifter or we are in process of negotiating how the shift for next year, because the shifting also because you are changing years that as it was alluded to earlier there is a difference in ASP and so that’s what essentially being negotiated.

Jonathan Hoopes – ThinkEquity

Thank you very much.

Operator

Our next question will comes from the line of Sam Dubinsky with Oppenheimer; please proceed.

Sam Dubinsky – Oppenheimer

Just a quick clarification, maybe I’m reading it wrong but could you explain how you are losing money I think below the line on the hedges and you are also getting hurt on ASP’s. If you are getting hurt on ASP front, shouldn’t you make some of that back on your hedge or maybe I’m misunderstanding, and then I have a follow-up question.

Amy Zhang

Yes, the gain or loss from the hedge actually it has been reflected in the P&L, in the separate line called other income or expenses. So, from hedge wise I must say in Q3 out of our effective hedge. We actually have been quite successful with minimizing the Euro impact by making gain on the hedge between U.S. dollar and Euro, but unfortunately we make some loss out of the hedge between US dollar and RMB, because not until the end the last week of September this year everybody was forecasting RMD appreciation against US dollar.

So, hedge wise it’s being minimized or eliminated out of a $10 million gain versus $11 million loss. So, it’s being eliminated to almost zero out of the hedge product, we have engaged.

Sam Dubinsky – Oppenheimer

Okay and then just a clarification in terms of your target model. After tax inventory charge in Q4, at what point do you sort of return back that 20% gross margin target? Does that happen in Q1 or Q2?

Amy Zhang

We’re talking about the whole year of ’09, achieving not lower than 20% gross margin. Quarter-by-quarter basis as we say there are too many changeable effects that can affect especially Q1, when we still need a bit longer time to identify most of the aspect. Quarter-by-quarter probably, we’ll be able to communicate that later with the clearer or much clearer of picture.

Sam Dubinsky – Oppenheimer

Thank you.

Operator

Our next question will come from the line of Jeff Osborne with Tomas Weisel Partners; please proceed.

Jeff Osborne – Thomas Weisel Partners

I just had two questions for you. Could you talk about on these new credit facilities that you are taking? Is there are any covenants that we should be aware of, they are not very transparent to the outsider so, if you can just talk about any of the key issues that we should be aware on that? Then also if you could just talk about, what the finished goods inventory was at the end of the quarter?

Amy Zhang

When the China based bankers, before they grant the credit facility to any company, they definitely have very strict procedures to carryon their own assessment. Going through credit facility, credit assessment and risk assessment. They normally do that in the fourth quarter of each calendar year and if we can secure that much facility that means that much facility will stay valid for Suntech after we qualify ourselves with different ratios in the balance sheet for the next 12 months through the end of 2009 and that’s the current situation.

Jeff Osborne – Thomas Weisel Partners

There is no issue about the minimum level of cash or anything like that used on be the balance sheet?

Amy Zhang

No, in the end the local banker’s assessments are mainly performed based on they called it legal entity, mainly the legal entity. The legal entity just registered in China, it wills onshore operation companies excluding whatever we have booked at corporate level at offshore level. So, we have been qualified at onshore level with those requirement, so these facilities I would say its got very high security and we can make draw down at anytime when we feel necessary.

Jeff Osborne – Thomas Weisel Partners

Okay and then also just on the finished goods inventory and then quickly if you could just address the other revenue were up substantially. Can you just talk about the mix of sales in equipment in that? How many of your own sales did you sell instead of modules?

Amy Zhang

88% which is quite potential from the direct sales of modules and the rest actually comes from sales of solar cell directly to some of our wafer partners and also from the Kuttler equipment. These numbers are normally first of all not our core competence and core business and also we normally don’t talk about this split out of these revenues and full longer runs, wafer to cell business and will be gradually facing out and when our revenue from system integration becomes significant we will have a separate line to record the system integration revenue in the future.

Jeff Osborne – Thomas Weisel Partners

What’s kind of annualized run rate for Kuttler, the equipment business.

Amy Zhang

You mean the revenue directly from the equipment size.

Jeff Osborne – Thomas Weisel Partners

Yes, exactly.

Amy Zhang

Around $15 million to $20 million

Jeff Osborne – Thomas Weisel Partners

Annually?

Amy Zhang

Per year, yes at the moment.

Jeff Osborne – Thomas Weisel Partners

The finished goods inventory, just how many megawatts of finished goods inventory do you have?

Amy Zhang

Clearly inventory balance has been always captured with several items. For example, raw material which takes at least 50% of the current inventory balance and then we have goods in transits and working progress and then we also have around a little bit higher than a 110 million coming from the finished goods, so if it more or less half and half.

Jeff Osborne – Thomas Weisel Partners

Okay. Thank you

Operator

We are now approaching the end of the conference call. I will now turn the call over to Suntech’s Chief Executive Officer, Dr. Shi for closing remarks.

Zhengrong Shi

Well, sorry we couldn’t get to all the calls in queue please contact our IR representative for any follow-up questions. Thank you all for joining us today.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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