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Yingli Green Energy Holding Company Ltd. (NYSE:YGE)

Q4 2012 Earnings Results Conference

March 4, 2013 08:45 AM ET

Executives

Miao Liansheng - Chairman & CEO

Zongwei (Bryan) Li - Executive Director & CFO

Darren Thompson - Managing Director, Yingli Green Energy, International AG

Robert Petrina - Managing Director, Yingli Green Energy Americas

Zhenhua Fan - Director, Legal Affairs

Yiyu Wang - Chief Strategy Officer

Miao Qing - VP, Corporate Communications

Analysts

Vishal Shah - Deutsche Bank AG

Amir Rozwadowski - Barclays

Satya Kumar - Credit Suisse

Tim Lam - Citigroup

Amy Song - Goldman Sachs

Benjamin Schuman - Pacific Crest Securities Inc.

Aaron Chew - Maxim Group

Operator

Hello, ladies and gentlemen, my name is Edwin, and I will be the operator for this conference call. I’d like to welcome everyone to Yingli Green Energy Holding Company Limited Fourth Quarter and Full-Year 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’d like to transfer the call to the host for today’s call, Zhenhua Fan, Director of Legal Affairs of Yingli Green Energy. Fan, please proceed. Thank you.

Zhenhua Fan

Thank you, operator and thank you everyone for joining us today for Yingli’s fourth quarter and full-year 2012 financial results conference call. And sorry for keeping a little bit late due to technical problem. The fourth quarter and full-year 2012 earnings release were we assume will be issued soon today and available on the Company’s website at www.yinglisolar.com. We will also provide supplemental presentation for today’s earnings call, which could also be found on our IR website.

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 Communications; 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 take you through a discussion of 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 the 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 statements are based upon management’s current expectations and current market and operating conditions and relate to events that involve known or 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 like now turn the call over to Mr. Miao Liansheng. Please begin.

Miao Liansheng

Hello, everyone. Thanks for joining us today. Due to some IT technology problem we’re unable to upload our earnings release at this moment. But it shall be available in 20 maximum minutes later. Again, sorry for that.

In 2012, the PV industry arguably experienced its most severe challenges to-date. At the same time, the challenging environment also create important differentiation opportunities for leading components. Our module shipment in fourth quarter of 2012 increased by 41% over the previous quarter. In the full-year 2012, module shipment increased by 43% from 2011 to 2.3 gigawatts.

The historical achievement was build upon our well recognized brand, superior quality products in the services, exceptional customer base and our employees’ tireless efforts. According to NPF – NPD Solarbuzz, in 2012 Yingli became the leading module supplier in the world. The achievements reinforce the confidence placed in Yingli by all of our stakeholders.

In the fourth quarter, demand in China continue to expand strongly and accounted for 44% of our total revenues, as the feed-in-tariff of 1 RMB per kilo hours continue to be valid for utility scale projects. Our customers in China are accelerating the construction of their projects. In Western China, they’re now beginning to develop project in Middle China. Recently the State Grid Corporation of China announced the detailed process and execution procedures for the grid connection of distributed generation projects in China, signed March 1, 2013, the State Grid will provide free grid connection services for distribution – for distributed generation project that are smaller than 6 megawatts.

The streamlining of the interconnection procedures outlined by State Grid were significantly lower than grid connection hurdles for distributed generation projects and accelerated the promotion of solar application in China.

The steady development of utility market and quickly growing distributed generation segments will likely catapult China to be the largest solar market in the world of 2013. Our track record of success in China and increasingly broad sales and the service networks will further solidify our market position. During 2013, we expect to increase our module shipments to China by more than 40% compared to 2012. Furthermore, we will continue to optimize our customer portfolio and improve the profitability level of our sales, in China.

In 2013, in addition to building our success in China, Europe, in U.S. markets, we will continue to increase our resources in Japan and other new markets. The introduction of feed-in-tariff for commercial projects by the Japanese government in July 2012, stimulate the development in – the development of this segment, which we expect account for more than half of Japan’s solar market in 2013. We will continue to strength our cooperation with large local enterprises in the key system installation makers to make Yingli the brand of choice for more customers in the commercial and the residential segments.

We see encouraging signs that support our belief that there is a clear potential for the deployment of solar PV in regions such as South America, Southeast Asia and the Middle East. Demand for energy in this regions continue to grow at a faster pace. As the official sponsor of the 2014 FIFA World Cup, in Brazil, we have emerged on the comprehensive approach that we will leverage our well-known brand, broaden sales in the services networks and leading customer support to refine the development of this markets.

Because of the demand growth in China, U.S., Japan, and other new markets, we’re confident that the global solar market will continue to grow in 2013. We are well positioned to continue to increase our module shipments in 2013 to further [can solidify] leading position. We expect our module shipment for the full-year 2013 to be 3.2 to 3.3 gigawatts.

Additional to increasing the weight of new markets in our sales geography, we will also focus on improving our profitability in this year. We’ve seen a stabilized even slightly rising trend for the prices of solar products. As we continue to improve our cost structure, we expect our profitability to gradually improve. Furthermore, we will continue to optimize our debt structure to enhance the Company’s ability to withstand future market [volatilities].

With that, I’d like to ask Darren and Robert to talk about European and U.S. markets.

Darren Thompson

Thank you, Mr. Miao and Miao Qing. Thank you. Market demand in Europe remains stable through Q4 as a result of continued demand from Germany and particularly contributions from other European markets. It was a significant dilution and demand from Germany with nearly half of our revenue generated from other European markets versus historical 25% to 30% levels.

Growing markets like the UK combined with emerging markets like Israel and Eastern Europe continue to drive diversification demand across the European region. Signs of rationale behavior with respect to pricing begin to return the ASPs firming in Q4 although still at depressed levels given the tough competitive environment. Overall revenue share of Europe declined from 60%, down to just about 45%. The demand from other emerging regions like China, South America and Japan started ramping up.

In 2013 we expect German demand to fall from the high levels seen in 2011 and 2012, closer to the upper level of the government defined development corridor. Demand in Q1 is steady, although the recent inclement weather in Germany may have an impact on installations. Recent political statements in Germany on the EEG, creates uncertainty, although this is to be expected in an election year as political parties establish their relative positions.

The lowering of demand in Germany versus historical levels will be balanced by other emerging markets has already experienced during Q4. European demand that is supported by government incentives will remain flat or decline versus 2012 as government’s reduced support levels will introduce incentives that make solar economics challenging. This will be balanced by the emergence of new solar PV value propositions built on cell consumption and/or net metering models.

With the levelized cost of the electricity for solar PV now below the retail price of electricity in many markets, particularly in countries like Germany, Italy and Spain, the economics begin to make sense without government support. Solar solutions built on these new models will emerge during 2013 and form the backbone of sustainable PV industry and infrastructure within Europe.

We continue to vigorously defend ourselves in the anti-dumping and anti-subsidy investigations initiated by the European Commission in September-November 2012 respectively. We are approaching this stage in the anti-dumping investigation when the European Commission may consider imposing provisional tariffs. The recent value chain hearing held in Brussels at the European Commission was one of the best attended of such hearings in recent EU trade case history, indicating a strong level of support from the wider European solar community both upstream and downstream to prevent the application of punitive tariffs.

Separately a report published by the Independent Think Tank, Prognos, predicts that punitive tariffs would have a damaging impact on jobs and value added in the European Union in 2013 to 2015. These elements may play a key role and the member states advise the European Commission in May on the desirability of provisional duties. Although 2013 remain a challenging year for the industry and the market, we remain optimistic about the future of solar PV in Europe and reaffirm our unwavering commitment to the European markets and of course all customers.

Now I will hand over the call to Robert. Thank you.

Robert Petrina

Thank you, Darren. Following the solid third quarter in the Americas, the fourth quarter was defined by significantly increased booking activity for 2013 and a slight slow down in Q4 demand due to excess channel inventories spilling over from the 1603 Treasury Grant Project that did not materialize in line with expectations. The conclusion of the AD/CVD investigation and reversal of critical circumstances lifted a significant cloud of uncertainty and allowed for reversal of previous provisions. The uncertainty around the presidential election also concluded with the election of President Obama, which creates a promising environment for industry for years to come.

As it has been the case through the year, distribution channels continue to remain highly competitive as available margins left little room for the traditional buy, bundle and sell models. However, greater integration with distribution partners and leveraging our promotional activities to drive regeneration for our customers, allowed us to continue to drive consistent volume in the segment. We’ve continue to be one of the leading suppliers in the residential segment, in California as well as other states and are confident of our ability to continue to grow with the segment.

We’ve expanded our operational footprint to drive savings and fulfillment costs, while at the same time decreased response time for our customers. As in previous quarters, we successfully acquired new customers that value our channel discipline and strategy to not compete with our customers downstream directly.

After having been selected last quarter to supply one of the largest PV projects in the world, we continue to win utility business from exceptional clients and build our utility pipeline for 2013 and beyond. Consequently we expect to increase our sales to the segment by more than 300% in 2013, in comparison to 2012.

In South America we’ve expanded our infrastructure to better position the Company to participate in the growth clearly visible in Mexico, Chile, Brazil and the Caribbean. With more than 40 customers and more than 13 countries in South America and the Caribbean, we’re building a great platform from which to address sustainable growth in these new markets. In Canada we’ve engaged with the leading global OEM to supply significant volumes and take a major step in becoming a leading player in the Ontario market in 2013.

While 2012 was a complicated year with a number of distractions we will never forget, we believe we become a more nimble, stronger company and 2013 will be an exceptional year for Yingli Americas and our downstream market. Pricing level stabilize as we exited Q4, the U.S. market is growing quickly from a larger base and new markets are moving quickly up the learning curve, all positive signs.

As we all observed the new economics are catalyzing growth throughout the region and Yingli is well positioned to continue to earn success.

I will now pass it to Bryan for his update.

Zongwei (Bryan) Li

Thanks, Robert. And welcome everyone to our fourth quarter and the full-year 2012 earnings conference call today. Now our fourth quarter and the full-year 2012 earnings release and the earnings supplemental presentation just appeared on our website. We apologize for keeping you waiting due to an unexpected technical issues, really sorry for that.

Despite a continued challenging market conditions, our module shipment volumes in Q4, 2012 increased significantly by 40.6% from the previous quarter and reached a historical high. The sequential increase of module shipment was primarily driven by the robust demand in China. As a result of the shipment growth, our total net revenues in Q4, 2012 increased to US$466 million from US$355.9 million in Q3.

In Q4, our cost of PV modules was negatively impacted by inventory provision of US$19.4 million. Excluding the impact of the inventory provision, our polysilicon cost per watt were declined to US$0.15 from US$0.17 in Q3 ’12. In Q4, we made a remarkable improvement on polysilicon costs, which declined to US$0.48 from US$0.53 in Q3 ’12, leaving our previous guidance of below US$0.50 when we exit 2012.

Excluding the impact of the inventory provision, gross margin for PV modules in this quarter will be negative 3.5%. Operating expenses in Q4, 2012 were negatively impacted by a non-cash impairment of long-lived assets of US$32.2 million related to equipment of polysilicon, a non-cash provision for bad debts of US$16.3 million and a loss of US$9.9 million related to disposal of certain equipment.

Excluding the impact of the items mentioned above, operating expenses in Q4, 2012 will be US$83.2 million compared to US$67.4 million in the previous quarter. The sequential increase of operating expenses was primarily attributable to the increased module shipments. Excluding the impact of the items mentioned above, operating expenses as a percentage of total net revenue will be 17.9% in Q4, a decrease from 18.9% in the previous quarter. Operating loss in Q4 was US$181.4 million, representing an operating margin of negative 38.9%.

Excluding the inventory provision, the impairment of long-lived assets, the provision for bad debts and loss of disposal of certain equipment mentioned above, operating loss in the Q4, 2012 would be US$103.6 million, representing an operating margin of negative 22.2%.

In Q4, we continue to optimize our debt structure. As a result, our interest expenses were reduced to US$33.6 million in Q4 from US$36.1 million in Q3. Weighted average interest rate also declined to 6.22% from 6.33% in the previous quarter. Given our net euro denominated asset position in Q4, and the appreciation of the euro against the RMB, foreign currency exchange gain was US$4.3 million. After an income tax expenses of US$0.8 million, our bottom line results include a net loss of US$200.5 million and the loss per ordinary share and per ADS of US$1.29 on GAAP basis. Our adjusted non-GAAP basis, net loss was US$145.8 million and the loss per ordinary share and per the ADS was US$0.93.

Let’s move on to our balance sheet. As of December 31, 2012 our cash and restricted cash were US$489.8 million compared to US$592 million as of the end of Q3 ’12. Operating cash flow was positive and continuously improved in Q4. As of the end of Q4, our accounts receivable increased to US$629 million from US$512.4 million due to the increase of sales and partially offset by improvement on cash collection from customers during the quarter.

Day sales outstanding improved to 121 days from 130 days in the previous quarter. Accounts payable increased slightly to US$594.1 million from US$584 million. This payable outstanding reduced to 105 days in Q4, from 120 days in Q3. Inventory balance reduced to US$405.1 million from US$461.7 million in the previous quarter. Inventory turnover days decreased to 72 days in Q4 from 95 days in Q3.

We continue to maintain an effective communication with major banks in China. As of today, we have approximately US$527.5 million in unutilized short-term lines of credit and US$384.3 million committed as long-term facility that can be drawn down in the near future.

Let’s move on to full-year 2012 results. As Mr. Miao commented earlier, we’re proud to become the largest PV module supplier in the world in 2012. Our module shipment increased by 43.2% from 2011 to 2. 3 gigawatts in 2012. Despite a significant increase of module shipments, our total net revenue were negatively impacted by the industry wide decline in ASP for PV modules. Total net revenues for full-year 2012 were US$1.8 billion compared to US$2.3 billion in 2011.

Gross loss was US$59.2 million in 2012 compared to gross profit of US$389.2 million in 2011. Overall gross margin was negative 3.2%, reflecting the impact of non-cash charge of inventory provision of US$106.8 million in this year. Gross margin of PV module excluding the impact of the inventory provision will be 3%. Net loss was US$491.9 million in 2012 and the loss per ordinary share and per ADS was US$3.14. On adjusted non-GAAP basis, net loss was US$336.6 million and adjusted non-GAAP loss per ordinary share and per ADS was US$2.15.

Now I’d like to discuss our guidance for Q1 and the full-year 2013. Based on current market conditions and a forecasted customer demand, we expect our module shipment in Q1, 2013 to decline by low to mid single percentage to decline by low to mid teen percentage from Q4, 2012. Shipment volumes for full-year 2013 are expected to be in the estimated range of 3.2 gigawatts to 3.3 gigawatts, representing an increase of 39.4% to 43.7% from 2012. We also expect to achieve further cost reduction and we continue to negotiate with material suppliers and stay committed to technology innovation and operating efficiency improvements.

In first quarter 2013, we further expect to reduce our non-polysilicon cost by another few cents per watt from the level of Q4, 2012. Our blended polysilicon costs in Q1, 2013 is expected to be low 20s in terms of U.S. dollar per kilogram. In 2013 we expect to gradually improve our profitability as we plan to sell more to market at a higher price and continue to achieve cost savings. Based on our current forecast of module price and cost, we expect our gross margin in first quarter to be low to mid single-digit percentage.

Now I’d like to open the call to the questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Now your first question comes from the line of Vishal Shah from Deutsche Bank. Please ask your question.

Vishal Shah - Deutsche Bank AG

Yeah. Hi, thanks for taking my question. Just wanted to get some more color on your guidance for the full-year, you said your shipments will be up 40% year-over-year, Europe is suppose to be flat this year and China is growing by 40%. So, I’m just wondering where the remainder of the growth is coming from? Thank you.

Qing Miao

Thank you, Vishal.

Zongwei (Bryan) Li

The first quarter ’13 in fact the China markets will take roughly 20% of the annual revenue. The German and the European market will pursue – maintain roughly 40% of our total revenue. The most increase market will be Japan and rest of the world. Japan roughly 14% to 15% of our total revenue. The rest of the world will be US$0.12 and the U.S. – besides that U.S. will be roughly 15%.

Vishal Shah - Deutsche Bank AG

Okay. That’s very helpful. And just want to clarify, your comment on OpEx and just the world gross margin trends for the year. How should we think about OpEx in 2013 as volumes go up and also at what point should we start seeing profitability? Are we talking about double-digit kind of margins in the second half? Can you sort of give some more color on that? Thank you.

Zongwei (Bryan) Li

Yeah, sure. Thanks, Vishal. For the selling expenses it will be fluctuated with the increase of shipment volumes, given the warranty reserve and the insurance and the free charges will go accordingly. And for the G&A and our R&D expenses, we currently expect to continue to cut the cost and as the cost saving efforts moves on. And currently based on the best knowledge and the budgets we are having, and we are expecting that selling expenses will be somewhere in the range of 7% to 8% of the total revenue, and our G&A will be roughly $24 million per quarters, and R&D on a quarterly basis will be $6 million. So that will be the picture – the rough picture for the OpEx for this year.

Vishal Shah - Deutsche Bank AG

Thank you.

Operator

Thank you. Your next question comes from the line of Amir Rozwadowski from Barclays. Please ask your question.

Amir Rozwadowski - Barclays

Thank you very much and good evening folks. If I may, following up on sort of the trajectory where you expect the businesses this year, it does seem like roughly there is some expectations for further share gains. I was wondering where you saw opportunities for you folks to gain additional share in the market place, and also if you can provide some color on the overall competitive environment, obviously the sector itself has been played with overcapacity for some time now, but volumes do seem to be growing. So, any update on sort of where you see the competitive landscape would be helpful. Thank you.

Robert Petrina

I think first is, we believe 2013 market will be – global market will be continuing to grow. And on the other side, the overall capacity has been share count significantly through 2011, 2012. So in 2013 we expect that the global capacity versus global demand should be roughly 30% more than the demand it can absorb. This is why we believe the supply over demand issue should be much more balanced in 2013. So, in the key market, especially for China, U.S, Japan, the rest of the world that we all see not only the overall market volume will be continue to increase, but also with our competitiveness we should able to slightly increase our market share in U.S. and China, also significantly increase our market share in Japan, the rest of the world. So, and put all this together, this actually is the pace how we expected our revenue will be continuing to increase in 2013.

Zongwei (Bryan) Li

And to further supplement your EU statements another two things I will like to emphasize. The one is, you explained and we’re very excited about fast growing on the new markets including China, including U.S. in 2013, and also we're very happy to see the emergence of the new markets and across the China outside of the traditional solar countries including Japan and South Asian countries and African countries. And then secondly and -- in late December 2012 and we have seen the rebound of the price from late December ’12 level and moving to the first quarter of this year. So, that has clearly indicators and afford us to prove the pricing stabilization of the markets. So that is to some extent a larger relief of the supply and demand situation. And although the market is experiencing the oversupply situation, but a quick pick-up and the emergence of the new markets has absorbed or offset the oversupply situation, so that make us -- become even more comfortable -- even more confidence on our market share taking in 2013.

Amir Rozwadowski - Barclays

Great. Thank you very much for the incremental color.

Operator

Thank you. Your next question comes from the line of Satya Kumar from Credit Suisse. Please ask your question.

Satya Kumar - Credit Suisse

Hi. Thanks for taking my question. Bryan, can you just remind me what you said about the expectation for OpEx and for the growth through the year, specially considering that you’re expecting some fairly sharp growth, rest of the world outside sort of the main regions you’re expecting demand to grow to almost 400 megawatts. I’m thinking that these demands from new regions will be fairly, widely distributed globally. How does that affect your OpEx evolution as we go through the year?

Zongwei (Bryan) Li

Yeah, sure thanks. As I explained earlier, for the selling expenses we currently expect 7% to 8% of the total – of the net revenue in 2013, and for G&A we will continue to control the cost. So, currently I’m expecting roughly $24 million per quarters for the G&A expenses and for R&D that will be roughly $6 million per quarters and across the year.

Satya Kumar - Credit Suisse

Okay. So, if I look at all of these metrics, what sort of level of pricing that you need to see in the market for you to turn profitable or do you expect that you will start engaging more in downstream activities to improve the profitability?

Robert Petrina

Actually we see now the average price actually has been flat and stabilized around the $60 per watt peak and that maybe few cents slightly above average. So actually this has been maintained and started since the end of December until now.

Zongwei (Bryan) Li

I think the key is, the continuous decline in module price has largely bring down the solar power generation costs. And with the further implementation of the net metering and rooftop for the rooftop system in many regions including in the European countries and the part of the U.S. and the East Asia countries, and that has made the solar power very competitive to mention all means of solar power generations. So, that has organically -- and bring up the demand in those countries.

Satya Kumar - Credit Suisse

All right. Thanks, Bryan.

Zongwei (Bryan) Li

Thank you.

Operator

Thank you. Your next question comes from the line of Tim Lam from Citigroup. Please ask your question.

Tim Lam - Citigroup

Hi, thank you for taking my questions. I have two questions. First one is; how big you think the China and Japan market can wish this year and what company’s market share target is for these two markets? And also do you have any thoughts on the profitability of each countries compared to the previous focus in the European markets?

Miao Liansheng

For year 2013 the install – for now until 2014, the installation will be rough like 30 gigawatts in Chinese market, so this year we are estimating it will be 2 gigawatts minimum (indiscernible). And there are three type of segments that will be highlighted during the next three or four years. The first one to (indiscernible) system, as you all know that Department of Energy decided to continue it the previous year’s feed-in-tariff, one RMB per kilo hours. The second one is announced the buildings improvement there already two or three rounds announced the previous point and sooner or later after the Congress, there maybe distributed generation systems might be announced as well, and I assume that it might be the best practice for each countries on the safety, efficiency point of view. And I need to admit that in 2012 in terms of the pricing in China it’s not that favorable to us and admit not satisfied in the debt mainly because stock market systems down at this market and our customers are mainly state owned power companies and we have less leverage to argue with them. But I’m assuming that, what you say the average pricing is trending to be stabilized and account receivable is shortened and that in first quarter we have shipped roughly 40% in Chinese market, but our accounts receivable actually reduced significantly from previous quarters. So in the future our profitability points will be mainly coming from (indiscernible) distributed generation for about full leverage of our brand name and network.

Robert Petrina

So for the expected China market given the Japan market has -- the very comparatively high feed-in-tariff system than Europe, and in the U.S. the incentive program actually does not decrease every year which for these two market can allow us to sell at higher price than we sell to the European market. The second reason is, for U.S. and Japan market given the higher demand from the customer regarding to the technical liability and also bankability of the warranty, which also allow us to depreciate our pricing level with the second tiers of price. So this is why we believe the probability of the pricing, we can sell to this market will be contributed more profit to the Company than in 2012.

Tim Lam - Citigroup

(Indiscernible).

Operator

Thank you. Your next question comes from the line of Amy Song from Goldman Sachs. Please ask your question.

Amy Song - Goldman Sachs

Hi, good evening everyone. Thanks for taking my questions. I have a few questions on your cost structure. First of all, I remember that you said at the last conference call that in 2013 you pretty much use the all imported poly as raw material. So what is your strategy going forward, if we see a potential poly tariff coming along the way? How do you cope with that? That’s my first question. Please go ahead.

Robert Petrina

First regarding to the poly procurement structure for 2013, you’re right the main portion is still from the overseas supply in 2013. However we have been actively talking with them for the supply in China which also gives us a more extended procurement result in 2013 to ensure we have a reasonable balance between imported poly and domestic poly.

Amy Song - Goldman Sachs

Okay. So how should we think about, i.e. do you mean for domestic shipment you’re going to use domestic poly for exporting shipment you’re still using import poly, is that the correct way to think about it?

Robert Petrina

I think it's – I assume you are talking a potential concerning from the potential China tariff against the imported poly.

Amy Song - Goldman Sachs

Yeah.

Robert Petrina

So, basically to look at this case is still not – in the final even in the preliminary result which is still under the investigation. Secondly as we are a Company which imported poly and exported good to overseas, so basically we should able to be free from any extra tariff as we do not use them for the China demand positioning. We only needed to buy China poly for the China market and then for the rest of the world we don’t need to buy China poly to avoid any potential tariff risk.

Amy Song - Goldman Sachs

Okay. So, go back to the gross margin outlook. So, given your improving margin outlook and also current -- hiked poly price, so should we consider the margin outlook is merely because you write-off, your high inventory being write-off completely so your margin expanded because stabilized ASP or you do pass on the poly -- what's the percentage if your pass on poly cost structure to pricing. Do you get any margin expansion from there?

Robert Petrina

First of all on the ASP side and as we commented earlier and we start to see the pricing rebound in late December 2012 and then this trend is moving to the first quarter of ’13. So, I think and for the pricing side and currently we’ll be expecting roughly the similar level and in Q1 and from Q4. And on the cost front and for the non-poly part we continue to gain cost savings on the non-poly production cost by another few cents, and so that will contribute to the margin. And also for the blended polysilicon cost and in the first quarter our inventory cost is pretty much close to the market price. So that will and comparing to the relatively higher blended cost of poly silicon in Q4, I think that will also give us margin boost in Q1, ’13.

Amy Song - Goldman Sachs

Okay, that’s great. Just one last question; what is your target for non-silicon cost in 1Q or maybe throughout the year towards the end for this year?

Zongwei (Bryan) Li

Yeah, sure. And in the first quarters and we expect another few cents and from Q4 level and probably $0.02. And when we – moving towards the end of 2013 and I will expect $0.45 per watt.

Amy Song - Goldman Sachs

So you said for the first quarter you will trim down two more cents, so basically you maintain $0.45 throughout the year; is that right?

Zongwei (Bryan) Li

No, the first question and first quarter will be higher than $0.45, but when we exit 2013 it will be sub $0.45.

Amy Song - Goldman Sachs

But you reported $0.47 at the fourth quarter last year, so first quarter is what maintain same, flattish from 4Q last year?

Zongwei (Bryan) Li

The fourth quarter was $0.48 – it was $0.48. So in the first quarter and probably $0.46 and I will roughly estimate. And when we exit this year we’ll be below $0.45.

Amy Song - Goldman Sachs

Okay, sounds great. Thank you.

Zongwei (Bryan) Li

Thank you.

Operator

Thank you. Your next question comes from the line of Ben Schuman from Pacific Crest. Please ask your question.

Benjamin Schuman - Pacific Crest Securities Inc.

Hi, thanks. Sorry I didn’t mention this before, but can you tell us what level of capital expenditures will be required to meet the 2013 shipment guidance?

Zongwei (Bryan) Li

Yeah, sure. And currently we don’t have substantial capital expansion plan in 2013. And as a result and we currently expect $130 million to $150 million for 2013. So that will include the maintenance cost and also some final installments of the previous installation projects.

Benjamin Schuman - Pacific Crest Securities Inc.

Okay, great. And then you mentioned not having to be price comparative with Tier-2 players, but to gain the type of market share that you’re guidance implies and do you still anticipate pricing below most of the Tier-1 competition on a global basis?

Robert Petrina

No. Actually our pricing now is quite reasonable actually even in the top level amount in Tier-1 poly (indiscernible) suppliers.

Benjamin Schuman - Pacific Crest Securities Inc.

Great. Thank you very much.

Operator

Thank you. The next question comes from the line of Aaron Chew from Maxim Group. Please ask your question.

Aaron Chew - Maxim Group

Hi, good evening thanks for the question guys. Wondering if I can just follow-up on Amy’s questions on the poly tariff first and foremost. Just to clarify if you’re going to be using domestic producers for domestic demand. I was under the impression that the primary domestic producer poly in China has much lower quality than your primary two suppliers overseas. So, just wondering if you could help us understand what the implications are for the quality of modules you produce from domestic poly if that means lower efficiency and inability to do PANDA type of modules, and if there’s anything you’re doing maybe as a contingency effort to avoid new such tariff either for the domestic poly. Thanks.

Miao Liansheng

Basically there is some small poly suppliers in China which their quality may not as the (indiscernible) compared with all poly suppliers. However, in China we also have the [medium] quality supplied by the GCL and (indiscernible) which their quality has already reached the level can guarantee the final quality of product where we should (indiscernible). So we should be able to seek enough resources to secure our quality for the product in China.

Zongwei (Bryan) Li

And in many years ago and when the Chinese poly markers started entering to the poly business and there was a quality gap between the domestic producers and western producers. But over the time and we see and some big and reputable Chinese poly makers are spending tremendous efforts in not only controlling the cost, but also improving the quality of the polysilicon they produced. And, so in recent years we see the quality gap between the Chinese producers and the western producers are getting narrowed and also and although there may still shall be some quality gap between different players but the pricing has already reflected the different quality level of the products, and so I think and when we come down to the module efficiencies and that has already reflected in the end product cost. And we are also managing the portfolio, the supply and the domestic supply and demand and the external and western supply and demand are in separate base and we try to implement -- we try to smartly manage the domestic supply with the domestic demands and to reduce any potential or possible tariff issues on the polysilicon. Thanks.

Aaron Chew - Maxim Group

Okay. That’s helpful. If I could just add one quick follow-up, Bryan? You said your operating cash flow positive, I’m think you meant in the fourth quarter right, and just it looks like cash flow was actually down $100 million and debt didn’t move that much. I just wondered if you could help us walk through how that works.

Zongwei (Bryan) Li

Yeah, sure. And we -- in Q4 we spent roughly $40 million and on the CapEx side and mainly for the maintenance of the existing facilities and also some -- the pipeline infrastructure costs. And then we on a net basis and we repaid $100 million in loans through the banks, and most of the loan repaid was relating to the trading facilities [ph] in which expose 22nd (2:10) was the closing of the trading activities.

Aaron Chew - Maxim Group

Thanks.

Zongwei (Bryan) Li

Okay. Thanks for the question.

Operator

Thank you. And your last question comes from the line of Vishal Shah from Deutsche Bank. Please ask your question.

Vishal Shah - Deutsche Bank AG

Hi. I just wanted to get your updates on just overall interest expense reduction as you go through the year; I mean you had $33 million of interest expense. How should we think about that line item as the year progresses and you plan to spend $150 million on CapEx? Thank you.

Zongwei (Bryan) Li

Yeah, sure. Thanks for the questions. And we currently expect and we’re will -- in 2013 we’re will incur on even net basis and $35 million and per quarters for the interest expenses.

Vishal Shah - Deutsche Bank AG

Thank you.

Zongwei (Bryan) Li

Thank you.

Operator

Thank you. And that concludes our call today. And now, I’d like to transfer the call back to Ms. Miao Qing, for closing remarks.

Miao Qing

Thanks for everyone who joined us today. Any further questions, please contact Investor Relations. Have a great day. Thank you, bye-bye.

Operator

Thank you ladies and gentlemen. Once again thank you for your participation. You may all disconnect.

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