Solarfun Power Holdings Co., Ltd. Q4 2008 Earnings Call Transcript

Solarfun Power Holdings Co., Ltd. (SOLF)

Q4 2008 Earnings Call

March 25, 2009 8:00 am ET

Executives

Paul Combs – Vice President of Strategic Planning

Terry McCarthy –Interim Chief Financial Officer

Henricus J.P. Hoskens – Chief Executive Officer

Analysts

Paul Clegg – Jefferies & Co.

Vishal Shah – Barclays Capital

Sam Dubinsky – Oppenheimer & Company

Jenny Wu – Lazard Capital Markets

Josh Baribeau – Canaccord Adams

Burt Chao – Simmons & Company

Paul Clegg – Jefferies & Co.

Arch Pei – JL McGregor & Company

Andrew Root – Alkeon Capital

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Fiscal Year 2008 Solarfun Power Holdings Company, Ltd. Earnings Conference Call. My name is [Kanisha] and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). There will be a replay webcast available on the company's website, which is www.solarfun-power.com. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Paul Combs, Vice President of Strategic Planning. Please proceed sir.

Paul Combs

Thank you and good morning everyone. Welcome to our call and thanks for your continued interest in Solarfun. Joining me today are my colleagues, Harold Hoskens, our CEO and Terry McCarthy, our just appointed Interim Chief Financial Officer.

Before we continue with the formal commentary, I need to take a moment and remind you of the company’s Safe Harbor policy. This call will contain forward-looking statements, which are subject to risk and uncertainties. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risk and uncertainties in the company’s filings with the SEC. In addition, any projections about the company’s future performance represent management’s estimates as of today March 25, 2009. Solarfun assumes no obligation to update these projections in the future as business and market conditions change.

As you have read in our earnings release, Terry has just been appointed as our Interim CFO, with the departure of Amy Liu, effective March 31. We would like to take this opportunity to thank Amy for her many contributions to Solarfun and wish her well in her new endeavors. Terry is no stranger to Solarfun as he has served on our Board as an Independent Director since November of 2006 and chaired our Audit Committee. So, he is familiar with Solarfun's operations and financials and will provide an invaluable service to the organization until a permanent CFO is hired.

Terry spent over 20 years with Deloitte in San Jose, California including as Managing Partner. He has worked extensively with companies entering the Chinese market, while at Deloitte. He is well versed in Asia and its challenges and opportunities. You will hear more from Terry in a few minutes. You all are fully aware of the challenging environment in which we currently operate, so we don’t plan to believe at that point, what we would like to do is offer an explanation of our fourth quarter results, provide you with some clarity on the current business environment, update you on our liquidity, focus on the key operating metrics on which our success depends and provide you with some sense for our expectations for the first quarter and for the full year 2009.

On the last point, I think that most of you who know us understand we try and offer as much transparency to our business as possible, and provide you with some clarity on our future expectations. You will note that our projections are less specific than previous quarters. This is simply a result of the uncertain operating environment in hand. Terry will now run you through our highlights. Terry?

Terry McCarthy

Thanks Paul and good morning everyone. I hope you had a chance to read through our earnings release by now and have a general feel for the numbers. Today I will focus on some of the key metrics in areas where we believe you have an interest. I will focus more on our most recent quarterly results as they reflect our rapidly changing operating environment.

Shipments for the fourth quarter of 2008 were 47.6 megawatt, up approximately 14% from the prior quarter. We believe this performance was actually quite respectable given the current environment and compared to what we are seeing from others in the market. As you may remember, we were somewhat quite constrained earlier last year and this was not an issue for us in the fourth quarter. Average selling price for the quarter was $3.37 U.S., which was down from the fourth quarter previously. This price decline reflects high downstream inventories, module supply/demand imbalances and of course the weak economic environment.

Our revenue mix shifted somewhat from last quarter, but continued to be generated largely in Europe. Germany and France combined to make up 57% and 19% respectively. Shipments to Spain went down from 24% last quarter to 2% in Q4 of 2008. This drop makes our quarter-to-quarter shipment growth that’s much more gratifying and we believe it demonstrates our ability to successfully diversify our geographic footprint. We recorded negative gross profit of $55.4 million. This loss was due mainly to a $47.8 million of non-cash inventory provision, which was almost equally split between mark-to-market and lower grade products, which are not currently salable.

We think the provisions from the last two quarters addressed most of our inventory revaluation, however this will be determined by future price changes. The benefit of lower prices for polysilicon related raw materials will take another two quarters to reflect it in our financial statements as we work down our higher inventory cost and renegotiate existing supply agreements. We expect a more positive gross margin picture beginning in the first quarter of 2009 and further progress as the year unfolds.

In view of the current operating environment, we have aggressively focused on controlling expenses in fact we have reduced these expenses 15% compared to last quarter. We were again able to hedge currency risk with the outcome being a $3.2 million net currency gain. Including these provisions, we recorded a net loss of $61.4 million or a negative $1.14 per basic ADS share. The negative impact of the fourth quarter inventory provision was approximately $0.74 per fully diluted ADS.

Turning our attention to the balance sheet. We were able to manage payment terms with customers and keep our daily sales outstanding steady at 27 days. We finished the quarter with slightly over $60 million in cash and over $200 million in working capital. We continue to rely on our bank credit facilities for near-term funding needs. Net total bank borrowings rose to $190 million. We recorded $31 million in capital expenditures, $49 million in long-term supply pre-payments and $30 million for the final payment of the remaining interest on our ingot company LYG during the fourth quarter.

I would like to take a moment to review our currency risk management. As a guideline, approximately 80% of our sales are denominated in euros and the reminder in U.S. dollars. Currently, approximately 50% of our euro-to-U.S. dollar exposure is hedged through September of 2009. The following are details of our expected funding needs and sources of liquidity. We finished the fourth quarter as I mentioned with $60 million in cash. For the full year 2009, we expect capital expenditures, supply pre-payments and the final payment for last year's acquisition of LYG will total approximately $100 million maximum.

Nearly 67 million of this total is for pre-existing supply-contract pre-payments, all of which are actively under renegotiation. We anticipate this number will likely be reduced and we will be to extend the timing for some of these payments going forward. We expect operating cash to be neutral to slightly positive for the year. However, in this view, we feel that during the year we may have up to additional $50,050 million U.S. Fortunately, the lending environment in China continues to be favorable. We currently have undrawn credit lines of approximately 100 million U.S.

In summary, we remain confident that our 2009 funding needs are secured and we have the financial resources to compete in the current environment. This hopefully gives you an overview of our recent performance. Our current environment is clearly much different than what we experienced from most of 2008. Therefore, we decide do a lot more time for your specific questions rather than outlining in details of our full year results, which are contained in the earnings release. We do think it's important to note that our shipments of a 172-megawatt more than doubled compared to last year. This clearly indicates that we've been able to develop market share and sustain a high profile with our customers. Now, I will pass the call to Harold for some comments on current business trends and our expectations for 2009. Harold?

Henricus J.P. Hoskens

Thanks Terry. First of all with reference to a package in the earnings release, I would like to comment on the hiring of Peter Xie, who just joined Solarfun as President, China. Peter will be located in Qidong, as the Head of our Manufacturing, Research and Purchasing activities and will also assume direct responsibility for our ingot manufacturing facility in the city of Linyang-Yangguang. As you have seen from the release, Peter joins us with a stellar educational background, proven leadership at senior management levels. And he has a good cross-border experience between east and west.

He has a unique plant technical as well as practical management experience and we look forward to him tackling some of our most critical issues. His initial focus will be on the realigning our supply contracts with the current business environment. Improving the quality and consistency of our manufacturing operations and our products and to do so with the intent of producing our cost in an increasingly competitive environment. He will also drive a vertical integration effort as we ramp to scale in ingot and wafer making. Peter also here I welcome.

Let us now turn our attention to the current operating environment and how we foresee the remainder of 2009 evolving for the industry and for Solarfun. Let us start with that on the demand side. We think the first quarter will be the low point of demand for the year for the upstream players in the industry like Solarfun. Let me share three key points towards this. First, industry observers have commented in quite some detail on an overhang of modules in Spain. Some of these modules are expected to be resold in the early part of 2009 in other parts of Europe.

Secondly, we noticed that certain downstream players carried significant inventories of modules by the end of 2008. These inventories will be digested in the course of early 2009. The third point, at the end of 2008 the financing environment in some key markets was very tight. It seems that now a bit more into Q1, people have a better feel for the financing that is available to them, new projects are being self started at the same time we note that this has reduced project costs in the very early part of this year.

After Q1 going into Q2 we are gaining significant traction from mid-sized projects in Germany and Eastern Europe that is typically for projects up to 5 megawatt and from larger projects in the Mediterranean region. Also we are gaining traction in South Korea, now this takes into consideration certain assumptions for the development of the local currency exchange rate towards the U.S. dollar. The markets in U.S. are developing and we believe we should see significant volumes especially towards the end of '09, but we feel that as a foreign player we need to make a stronger impact there.

We see that it is currently more difficult in the global market to forecast the order flow. This is because a significant amount of project preparation including the sourcing of modules is done in parallel with obtaining financing for that project, because of this, the final confirmation to us is in many cases only available a relatively short period before shipment. In the current environment, [Audio Disturbance] to the players involved. Until we see these shipments materialize, it is difficult for us to project sales volumes for the year. Of course the first quarter is nearly complete so we have a good handle on the outlook for that. We expect first quarter shipment volumes to be around 35 megawatt with an ASP in the euro 205 to euro 210 range.

Going beyond the Q1 we have budgeted internally for further improvements in shipment volumes during Q2 and expect in the second half of this year to record further accelerated demand. Accounting in the second half for close two-thirds of full year demand. As a baseline, we have 200 megawatt of existing contracts with customers. These are solid customers who have good market presence and financial stability and will be some of the first to benefit from a pickup in demand as described earlier.

We continue to be in dialog with these customers on how to execute this contract over the year in a mutually beneficial way. And we have seen new demand from places like Middle East, North Africa, and South Korea. Clearly U.S is a market in which we want to penetrate and we are building infrastructure and customer relationships. In terms of ASPs, current ASPs are 30% below what we recorded just two quarters ago. We believe that the trend in module ASP during the next quarters will be strongly influenced by the trend in spot poly prices. We are buying poly today at prices that are 60% below what they were six months ago.

Market commentaries on the trend towards second half '09 for these poly prices show quite a broad range. From there it is difficult to project an ASP going into that period. In terms of shipment volumes, we think it's reasonable to ultimately expect full year shipments well in excess of a 200 megawatt compacted amount and our internal budgets call for that. We have adequate capacity also with the current seasonal imbalance to handle shipment volumes in excess of 280 megawatt, but until the picture becomes a little bit more clear, we have chosen to describe our current visibility and to offer some color on expected trends, but not to give a specific shipment forecast, which is highly unpredictable nine-months into the future.

As you may have read, our manufacturing services and technology corporation agreement with Q-Cells has been finalized and production will begin very soon. We expect shipments to approach 100 megawatt for the remainder of calendar year '09. It's a good piece of business with a world-class customer I think it speaks to our ability to make good credit and to do so at a cost competing effectively for a contract of this scope. It enables us to add 100 megawatt of incremental modular capacity to do so with attractive returns and invested capital and to add profit at effective margins.

Our remaining goal is to continue to reduce our cost structure there are two key areas to this. First, our ability to obtain poly and wafers inline with market conditions and two to maximize the benefits of our vertical integration. Let me share the status and outlook of both. We are making progress, but we have not yet reached out ultimate objectives. For the first, our ability to obtain poly and wafers inline with market conditions, whereas we see that regular ASPs have come down significantly during the past six months, we see as described earlier that our polysilicon related purchase costs are coming down even faster.

At the present [sales] reduction based on new figures earlier indicated. The reduction in modular ASP was less than half of reduction in poly prices to us. After the processing of existing inventories and open purchase orders with vendors, this offers us in the near future a real opportunity for gross margin improvement. We see further potential to benefit from this trend, going into the second half of the year if an when polysilicon costs would continue to drop. With the decreasing prices for poly, we see the importance of similar cost reductions for other materials increasing and we see good traction in that area.

The broader availability of poly make it also increasingly possible to enhance the quality of both purchase wafers and silicon, which creates further outside potential in the power output of our modules. We are actively engaging with our supplier partners, with whom we have long-term supply contract in place. We discussed how our contracts can for both parties contribute to a sustainable business relationship. In this all aspects are being discussed, pending pre-payments, short-term delivery volumes amortization of past pre-payments as well as of course product prices.

By the end of 2008, about 40% of our sourcing volume was under contracts or orders for which prices were not determined according to prevailing market conditions some say fixed price about the contracts or orders. We know encouraging support and understanding from our supplier partners to work on these contracts, discussions are progressing, but have not yet being completed. To my second point the benefits of vertical integration. Vertical integration at both the ingot and wire saw operations as discussed at earlier calls is progressing and on schedule. We will soon reach 250 megawatt of annual output capacity in both production steps. For 2009, we plan to increase as earlier indicated output from these facilities to 60% of our need on a run rate basis.

Operationally, these facilities are coming online quickly. The competitiveness of these facilities depends on the achievement of three main cost elements. First, the grams of polysilicon per watt from the wafers produced. Secondly, the cost of the other materials used, and the third the cost of operating these facilities. We believe that for all of these elements we have good traction, as a figure and looking towards the fourth quarter of this year, we project that module costs with wafers from our internal production will reach the top level of roughly $1.90 U.S. per watt based on assumed cost of polysilicon more or less equivalent to today’s spot rate of $1.30 U.S. per kg.

The full benefit of these cost reductions will begin pickup become apparent in our financial statements beginning with the coming first quarter, that we are in right now, where we expect the gross margins to reach mid-single digit. For the full year 2009, we anticipate margins growing further and approach low double-digits. These are assumptions and the environment is fluid, but is the framework, where I believe can start from. In conclusion, I would like to depart with a note of optimism, I would like that you don’t misinterpret, our lack of specific guidance as a reflection of our confidence in the longer-term liability of solar energy or for Solarfun’s competitive position within the industry.

We see 2009 and particularly the first half 2009 as a transition period. One, where strong companies become stronger and good companies position themselves for better days ahead. We think we are a good company and one that is getting stronger all the time. Demand will return as described, module inventories will be reset on both the product and raw material side and costs will continue to be optimized. We will let our future results speak for themselves. Thank you for your continued attention and support of Solarfun. And as always we will be pleased to address any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Paul Clegg from Jefferies. Please proceed.

Paul Clegg – Jefferies & Co.

Thanks good evening. Thanks for taking my question. On the inventory write-down that was mostly finished goods, you said is that correct, you didn’t write-off any high cost poly during the quarter? And then if you could also give us what the tax impact was that went into that $0.74 per ADS. And then I do have a follow question?

Terry McCarthy

It was a mixture, there were some poly, but it was principally module that were written down, yes.

Paul Clegg – Jefferies & Co.

Principally modules, okay.

Terry McCarthy

And the tax rate, effective tax rate was probably even at 12.5%.

Paul Clegg – Jefferies & Co.

Okay. That makes sense. And a question about your credit lines, my understanding is that they are primarily or perhaps all asset based. Can you tell us how you calculate the borrowing base on average under those lines what sort of ratios of working capital accounts will lend down, is it 70% accounts receivable, 50% inventory or is it something higher than that?

Terry McCarthy

Well on the LCs, I mean there at a 100% or maybe a little less than that and that's or their open lines of credit.

Paul Clegg – Jefferies & Co.

Okay, are they asset-based, therefore when you're actually drawing down under them rather than issuing LCs?

Terry McCarthy

No, they are open credit.

Paul Clegg – Jefferies & Co.

Okay. So, we don't need to then when you say it's a $100 million that's a $100 million not based up of any sort of borrowing base?

Terry McCarthy

Well there is combinations, I mean we do have some that are secured, by some of our land leases, and that's probably 10% or 15% of the total and then the balance of these are letters of credit or open lines of credit.

Paul Clegg – Jefferies & Co.

Okay. And if I may just one quick follow-up and then I will jump off and jump back in the queue, but for the Q-Cells agreement that 100 megawatts is an annual number it sounded like so, should we expect that to actually be 75 megawatt in 2009. Since you don't start until the second quarter?

Terry McCarthy

That could be a conclusion we will try, because it needed to be started in the course of Q1 as towards the end of Q1 as earlier I mentioned we will try to make up some those gram.

Paul Clegg – Jefferies & Co.

Okay, thanks. I'll jump back in the queue.

Operator

And your next question comes from the line of Vishal Shah from Barclays Capital. Please proceed.

Vishal Shah – Barclays Capital

Okay. Thanks for taking my question. On your Q1 shipments outlook you said, can you give us a sense of how the shipments were in the three months, did you see any activity in the first two months or most of the quarter was back-end loaded?

Terry McCarthy

We talked about the number of 35 megawatt as our current shipment outlook. I think in general we would see a pickup of traction as we move into the year. Partly there is a normal seasonal pattern where in certain European countries especially Germany at the moment is a key market, it is closed and there is little traction. Also with the building down of inventories as well as people getting more accustomed to the financing framework, which is available to the industry we see an increasing amount of traction, going into the quarter from…

Vishal Shah – Barclays Capital

So, would it be 30% in the first two months and then 70% in the second in March is that a fair assessment or do you think its more balanced than that?

Terry McCarthy

I don’t have the figure on top off my head I will more talk from the amount of, also quotations we have ongoing et cetera and I bring that altogether to say the amount of traction is significantly increasing also some of the products delivered just after March 31, et cetera. So, we talk more about attraction we see in the market.

Vishal Shah – Barclays Capital

Okay and how do you think Q2 is looking like is it going to be up sequentially and significantly or would it be only a marginal pickup.

Terry McCarthy

We see that – that – we see an increase, we call the Q1 the lowest point of the year, so we see an increase into Q2, we said it here that the total amount for the second half would be over proportional compared to the whole year. So, from that you can assume a gradual increase over the year, with maybe as we have seen in earlier periods also get a dip towards the year-end.

Vishal Shah – Barclays Capital

A dip towards the year-end. Okay.

Terry McCarthy

Yeah. That is normally close to the year-end.

Vishal Shah – Barclays Capital

Okay, right. Of course, yeah.

Terry McCarthy

That’s right it's decreasing somewhat.

Vishal Shah – Barclays Capital

Okay. And can you talk about your payment terms. How are your payment terms to your customers in Q1 versus Q4?

Terry McCarthy

We have a strong focus on the result like I said we have managed to keep our DSO for Q4 well under control, I think for Q1 the figure is not yet completed. We need to see how our collection in that, so to say is going, but currently we do not see big changes in this particular period.

Vishal Shah – Barclays Capital

Very good. And then just in terms of your prepayment activity, you said you are going to spend about $50 million or so on prepayments. I’m just trying to reconcile, you said 100 megawatts of volume coming from Q-Cells is that right?

Terry McCarthy

That is correct.

Vishal Shah – Barclays Capital

And then you said about 40% of your supply is contracted, does that include Q-Cells or excluded, it presumably it excludes Q-Cells?

Terry McCarthy

That's a very good question. Let me be a bit more specific here good point. When we talk our normal business volumes, we talk typically that we make the sales in the module ourselves. So, the business volumes and trends is also to conflict coverage, the coverage on the fixed price terms we discussed earlier, we talk the volumes where we make both sales in module. As you may have read from the Q-Cells announcement that it's a module only contracted in that sense that as reported outside of these volumes and in that sense an additional volume to our more normal, our more traditional product volumes.

Vishal Shah – Barclays Capital

Okay, okay. So, but even in that case if you look at the pre-payment amount of $60 million or so for let's say, 80 megawatts of product that seems high, why would you have to pay so much?

Terry McCarthy

We have said that the 40% is related to contracts, where market prices are not the reference that's the first point. Secondly, these contracts are, the fixed contracts are in many cases contracts, which reach over great amount of years. So, you cannot apply any ratio related to one-year on the amount of product let's say under these contracts and then that tends to the amount related to pre-payments.

Vishal Shah – Barclays Capital

Okay. Thank you.

Terry McCarthy

We think these amounts were very much in line with the conditions prevailing in the industry let's say going into Q4. And as I have said we are now actively engaging with these supplier partners to see whether we can create a sustainable route on these contracts going forward.

Vishal Shah – Barclays Capital

And did you make any pre-payments in Q1?

Terry McCarthy

We made a very small amount of pre-payment in Q1.

Vishal Shah – Barclays Capital

Okay. Thank you very much.

Operator

And your next question comes from the line of Sam Dubinsky from Oppenheimer. Please proceed.

Sam Dubinsky – Oppenheimer & Company

Hi guys. Couple of quick questions, you stated that nameplate capacity is about 280 megawatt. And I believe last quarter it was 360 did you take capacity off-line or you're just separating out the capacity for Q-Cells and I have a couple of follow-ups?

Henricus J.P. Hoskens

Sam, our nameplate capacity continues to be 360 megawatts we've produced normally at an output level of about 80% of that. So, what we are trying to do is give you an indication on the low end of our contracts in hand of 200 megawatts, as well as our potential on the top end for production in hand.

Sam Dubinsky – Oppenheimer & Company

Okay, I see.

Terry McCarthy

You will also note that in the year given the demand pattern, I earlier indicated demand is not evenly spread over the year particularly not in this year I’d almost say. In that sense to run the nameplate capacity you would need to run the capacity all year flat out and the given the demand picture I just indicated for our prices in Q1 the seasonal unbalance is causing a certain difficulty to reach nameplate capacity.

Sam Dubinsky – Oppenheimer & Company

The 286 we can currently produce on the same capacity?

Henricus J.P. Hoskens

Yes.

Sam Dubinsky – Oppenheimer & Company

Okay. Could you maybe just disclose what blended poly cost you're expecting in Q1 I know you said you are buying it today with the current price say at about 130, but based on what you have inventory after the markdown, what should we think about Q1 blended poly cost?

Terry McCarthy

It's a difficult one, it consist of two factors, it consisted of the inventories in-house at the end of Q4 and it consists of the new purchases so to say in Q1. I think we have overall indicated the gross margin, we expect to achieve from that, I’m not sure we have more detail available at this point in time.

Sam Dubinsky – Oppenheimer & Company

Okay. What are your targeted non-poly cost in 2009?

Terry McCarthy

Target non-poly cost?

Sam Dubinsky – Oppenheimer & Company

Yeah.

Terry McCarthy

We have indicated that for our internal wafer production, modules coming based on wafers from our internal wafer production that towards Q4 we want to achieve a cost of $1.90 U.S. per watt based on a polysilicon price of 1.30 say, a comparison of $1.30 U.S. per kilo.

Sam Dubinsky – Oppenheimer & Company

Okay. And just a clarification you said your contract backlog was about 200 megawatts this definitely excludes Q-Cells, with Q-Cells it's about 300 megawatt?

Henricus J.P. Hoskens

Correct.

Terry McCarthy

Yeah. We call it 200 megawatt, yeah 200 plus 100 you could also…

Henricus J.P. Hoskens

Yeah.

Sam Dubinsky – Oppenheimer & Company

Okay. And what's the margin profile for Q-Cell business, because I still agree totaling has been a high margin business, but I think you have disclosed in the past that its going to be a lower margin business, please give us some more color there?

Henricus J.P. Hoskens

Sam I think it’s a reasonably good margin business, we have said, disclosed before in the mid-to-high teens maybe in the old environment that looked a little softer than what some people were generating or we would hope to generate, I think in this market environment something approaching 20% is a nice piece of business.

Sam Dubinsky – Oppenheimer & Company

Okay. Great. Thanks guys.

Operator

And your next question comes from the line of Sanjay Shrestha from Lazard Capital Markets. Please proceed.

Jenny Wu – Lazard Capital Markets

Hello this is Jenny calling for Sanjay. I have a question regarding the 200-megawatt backlog. Can you give us a sense of, the geographic breakdown, how much are selling to the Germany and to other countries?

Terry McCarthy

The majority of let's first talk, we talk about where the customers are with which we sign the contracts, we have noted before that some of these products flow through these customers in other regions. We think that in terms of the customers with which we sign the contract, the majority of these contracts are in Germany and to a lesser extent in the South of Europe, notably Portugal to a lesser extent Spain and Italy.

Jenny Wu – Lazard Capital Markets

Okay. And how about the inventory situation at your customers end? Can you give us a sense on that?

Terry McCarthy

It is a sketchy it's a developing picture actually you may appreciate I think overall in the industry, we were a bit surprised in the early part of year let's say until Chinese New Year that there was more downstream inventory, as we, let's say getting out of the year had expected. I think our customers are working through that inventory and the fact that they are working through that inventory is one of the reason depicted for the demand to further pickup going into Q2. We continue to monitor this situation on the industry in a customer level as much in detail as possible. And we would like to continue to update as we go further.

Jenny Wu – Lazard Capital Markets

Thank you.

Operator

And your next question comes from the line of Jed Dorsheimer from Canaccord Adams. Please proceed.

Josh Baribeau – Canaccord Adams

Hi. This is actually Josh Baribeau for Jed. Just a couple of quick questions, I think you mentioned 80% of your exposure is hedged. Can you just give us an idea of what that rate is, what rate we should expect?

Terry McCarthy

I’m sorry 80%…

Henricus J.P. Hoskens

Is hedged at what rate. What assumption on this?

Josh Baribeau – Canaccord Adams

Yeah. At what FX rate you are assuming for this year?

Terry McCarthy

1.42.

Josh Baribeau – Canaccord Adams

Okay. And in looking at the inventory charge, you did mention that it's mostly finished goods as opposed to raw poly and I think looking at some of your peers, a lot of their inventory charges over the last quarter or so was mostly in the high cost poly. Is it safe to assume that you just have, you've had less poly on hand or the poly you've had has been at a lower cost or is there a potential for some further write-downs, mostly on the poly side?

Henricus J.P. Hoskens

Josh, we need to offer a correction on that I think we misspoke, actually in terms of the, the provisions that we took it was about equally split between finished product, a B grade unsalable product in this environment, and the other half was really a mark-to-market phenomenon. There was a small part of just sort of poly, so I think that offer that as a correction. I think as Terry had stated, we think we've addressed most of these inventory valuation issues. Of course the pricing environment continues to change it doesn’t mean we are totally immune from this going forward, but we think between what we accomplished in the third and fourth quarter we have addressed most of that.

Josh Baribeau – Canaccord Adams

Okay. And just finally I think this is the first time that we've heard about sort of a lower quality maybe off-spec product not being able to sell having been written down. Should we assume that most of that was going into Spain where sort of artificial demand forces were taking place last year?

Terry McCarthy

I think that last assumption is not completely correct I think we were confirmed at in the period of the supply/demand imbalance with let's say not so much silicon available with the phenomenon that the quality spread in wafers and poly was broader than maybe one would have wished that leads to more out flyers so to say in the performance of products and not all products meet the rigorous criteria of our customers inferences also TUV. So, we had these products in that period next to a smaller let's say normal spread in production. And we could flow them in markets, which were particularly price sensitive. And these markets provide a more significant part in South Asia and East Asia not in Europe. We were able to sell these products there as a cost competitive one. We currently see that due to the overall changing cost pattern in the industry that we will have opportunity for that.

Josh Baribeau – Canaccord Adams

Okay. Great. Thank you.

Terry McCarthy

Can I clarify one thing also you mentioned we were 80% hedged, if I understood you we're actually 60% hedged through September.

Henricus J.P. Hoskens

Just for clarification and Terry is right the 80% number that we've referenced before was the approximate percent of sales in euro?

Terry McCarthy

Right.

Operator

And your next question comes from the line of Burt Chao from Simmons & Company. Please proceed.

Burt Chao – Simmons & Company

Hi. Thanks for taking the questions. Just a couple of quick ones, on China credit terms, we've talked to some of your competitors and, I mean they've mentioned that China's credits is the readily available, the terms seem to be getting a little bit less attractive? Could you comment on that initially and then just secondly on what terms you're actually assuming with these – the credit lines that you need to bridge the gap between your cash and what you expect to spend this year?

Terry McCarthy

We seem to have good relation with the China Bank and we've had continuing availability of credit from them, and frankly the interest rates are dropping a little bit in our current environment.

Burt Chao – Simmons & Company

Okay great. And you'd mentioned…

Henricus J.P. Hoskens

Burt, to finish your second part of your question, we have said and would continue to say that we anticipate a need for up to $50 million.

Burt Chao – Simmons & Company

Okay.

Henricus J.P. Hoskens

Of additional funding we have. We have existing credit, untap credit lines of nearly a $100 million in China and sort of testament to the lending environment here, we actually have other banks approaching us in China with letters of intent to do additional funding so we feel quite comfortable, and actually fortunate to be where we are.

Burt Chao – Simmons & Company

Okay, great. And on the inventory just following up the first, which I think Paul asked about inventories, after the write-down, can you give a break down of what your finished goods and your poly is right now in the I think $107 million, you have on your balance sheet?

Henricus J.P. Hoskens

You are looking for the split between the two or…

Burt Chao – Simmons & Company

Yeah. Of what you currently have how much of that is actually poly and how much are finished goods or work-in-progress?

Henricus J.P. Hoskens

I don’t have the figure from the top of my head, but I would say that in total our wafer and cell inventories are number one, and that our poly and finished product inventories are relatively the smaller part of the tune.

Burt Chao – Simmons & Company

Okay. So, 10%, 30% I know you will have the number we can follow up off-line, but if you just have kind of a directional indication? I mean we could [move] on it another big deal?

Henricus J.P. Hoskens

I would say that less than a 30 in finished product is that right.

Burt Chao - Simmons & Company

Yeah. That’s great. Thanks so much.

Henricus J.P. Hoskens

Yeah.

Terry McCarthy

What you would hear, I hope.

Burt Chao – Simmons & Company

Okay great. And then you mentioned the poly re-negotiation I think you said you had $67 million in prepayments, but I understand that that’s over, that’s not just for poly that you are taking here in 2009, but for contracts that are longer-term. You said that you are trying to re-negotiate those down, I mean can you give me any indication of how well you will be, what your success has been so far on renegotiating and what you think you can reduce that number to over the course of the year?

Henricus J.P. Hoskens

It is very difficult to give an outlook on that. We are talking here quite about diversified set not an unlimited set, but it s a set of contract, which relate to poly, which relate to wafers, which relate to suppliers in the West, which relate to suppliers in the East. The behavior the expectations towards these contracts from each of these supplier partners is probably different. There are parties, which who are using, who are starting with these contracts a new business, so to say there are other more experienced partners in the chain who have based on previous business cycles certain expectations. From that it is very difficult to see a patent what we can see is that all partners are actively and constructively engaging in these discussions. We can also see however that we have not yet come in the period of these past, I’d say roughly three months where we are focusing on the subject in a broader sense that we have come to a conclusion yet. So, these discussions will still take a bit of time and we hope they will lead to a favorable solution for both parties involved favorable in the sense that it creates a sustainable situation related to the market going forward.

Burt Chao – Simmons & Company

Okay, great. And in addition to renegotiating the pre-payments I assume you are also in the process of trying to re-negotiate longer-term contract pricing for the specific poly? Is that and an okay assumption?

Henricus J.P. Hoskens

It is absolutely.

Burt Chao - Simmons & Company

And how successful has that been in general thus far?

Henricus J.P. Hoskens

Yeah. Burt, I am going to repeat your question here. For here, the question is how successful have we been in re-negotiating the actual price of both poly and wafers going forward for our long-term contracts?

Terry McCarthy

I think the price is one of the elements in that and again we see quite an accommodation with these supplier partners on these subjects and from that we see for new purchases also reducing purchase prices in Q1 and going into Q2.

Burt Chao – Simmons & Company

Okay, great. And kind of the last question is simply in the case that you are not able to re-negotiate poly or even the pre-payment schedule. I mean what's the Plan B some of your peers in China seem to taking the hardball stands of maybe just abandoning contracts and abandoning their pre-payments altogether, I mean what is your contingency in the case that you can't get poly down to a [profitable] level given the current market price for poly?

Terry McCarthy

I think it is our expectation that we can find an agreement here with the partner involved on the way it falls with the contract, if one of the two parties, there are two parties to this, would conclude that that is not possible, I think these parties have to prepare for what action they seem fit.

Burt Chao – Simmons & Company

Okay. Well thanks so much for taking the question.

Operator

And your next question comes from line of Paul Clegg from Jefferies. Please proceed.

Paul Clegg – Jefferies & Co.

Hi. Thanks for taking the followup. Can you help us to quantify the margin or cost impact of bringing more wafer volumes in-house and talk about what percentage comes from in-house sources currently, and then how would you expect that to trend during the year and then I have a couple of follow ups?

Terry McCarthy

The cost difference is a function of what type of wafer prices we will see in the market, I think that is a difficult one. I commented earlier that the full cost based on internal wafers is at $1.90, a lot assuming a poly price of 1.30 we think that's a competitive rate. We expect from that to see benefits from our internal wafer manufacturing. We are gradually scaling up that facility, we are coming from a volume of less than a quarter, we are going to over or to 60% on a run rate basis by the end of '09.

Paul Clegg – Jefferies & Co.

Okay.

Terry McCarthy

60% of our total needs.

Paul Clegg – Jefferies & Co.

Okay. So, the difference between, could you say then if you were to do the wafers externally what would that $1.90 be?

Henricus J.P. Hoskens

Yeah. Then you need you make an assumption of how the wafer prices, how both the polysilicon prices and the wafer maker add a value would develop over time. We think the $1.90 is favorable to that, but it depends on how also the silicon prices move. I see some of the analyst comments after reading some of our colleague wafer maker's announcement where these two are added, I take here on the $1.90 I take a constant view on the polysilicon prices.

Paul Clegg – Jefferies & Co.

Okay. Can you then maybe tell us what your grams per watt figure is, this quarter and then what actually goes into that 1.90 estimate?

Henricus J.P. Hoskens

We are ramping up our facilities as we speak and like I said we have achieved a lot, but we are not yet there. We need to enhance by also enhancing the scale, the competitiveness in three areas grams per watt, the cost of other materials, which are also significant in particular or can be significant in particular in the wafer area. And thirdly the cost of the operation of these facilities on all three areas, we are working. We need to make improvements to get to that $1.90, but we feel we are in a good track also with the benefit of the increasing of volumes to achieve that.

Paul Clegg – Jefferies & Co.

Okay. Could you say if you are higher or lower than 7 grams per watt today?

Henricus J.P. Hoskens

The internal we are a bit below that.

Paul Clegg – Jefferies & Co.

Bit below on the internal.

Henricus J.P. Hoskens

Yeah.

Paul Clegg – Jefferies & Co.

And then just I don’t know if Amy is on the call, but if she has a comment maybe about the reason for the departure I think that would be helpful to hear?

Henricus J.P. Hoskens

She is not on the call.

Terry McCarthy

She is not on the call.

Henricus J.P. Hoskens

Yeah. Amy is not on the call Paul, I think Amy has chosen to pursue, other interest I don’t I understand the nature of your question and when a CFO leaves, it's not perceived particularly positively, we fully understand that I think in this case, you shouldn't read more into it than is necessary. Amy has done a great job here she has left behind good systems, good people, we are fortunate to have Terry in place to fill in on an interim basis and we are actively going to recruit a good replacement.

Paul Clegg – Jefferies & Co.

Okay. Thanks very much.

Operator

And your next question comes from the line of Arch Pei from JL McGregor. Please proceed.

Arch Pei – JL McGregor & Company

Hello. Thank you for taking the question. I wonder if Solarfun has participated in recent bidding process of 210 megawatts and sort of what carried the projects, and could you give us any comment about that bidding process, which in turn will boost the Chinese domestic demand and will benefit, Solarfun has a tender sort of a [talent] producer?

Henricus J.P. Hoskens

We see, it’s a good question. We see that the Chinese market is becoming more on the radar screen in terms of the demand. Coming on the radar screen is particularly dominated by a set of larger scale and you mentioned one of them larger scale projects, which are being brought into tender. Solarfun is an active participant in the Chinese markets, we are with the history of our company well connected to the Chinese, lets say electricity generating industry and we try to play a role in these different tenders.

Arch Pei – JL McGregor & Company

And also your restricted cash position decreased a lot in Q4 2008 where your bank borrowings did not decrease. And why did your restricted cash position decrease and will this position sustain?

Terry McCarthy

Some of the restricted cash, is that what you are referring to the restricted cash?

Henricus J.P. Hoskens

Yeah. Just to clarify your question, I’m sorry we didn’t quite understand it. Is your statement that our cash balance has actually declined?

Arch Pei – JL McGregor & Company

Not cash, but restricted cash position I mean why do you pledge less restricted cash in banks in Q4 2008, where your bank borrowing position did not decrease very much?

Terry McCarthy

I think the move in the restricted cash was that in a certain external relation, we switched from a pledge of restricted cash to a different guarantee mechanism. So, it switched position. Is that right?

Henricus J.P. Hoskens

Yeah.

Arch Pei – JL McGregor & Company

Okay. And the last question is that, with polysilicon price maybe dropped to around 80 to 90 recently and do you think the recent price drop will continue and will there be a rebounding in polysilicon prices sooner or later, and if polysilicon price break into 80 or lower than 80 per kilogram, will you consider another inventories write-down related to polysilicon and wafers?

Terry McCarthy

A couple of point in response to this and let me start with your latest point about potentially necessary inventory adjustment. This industry carries quite a significant material pipeline it takes an ex-number of weeks from silicon arriving in our plants until the modules are delivered to our customers. In that sense you tend to have always a certain exposure in case market prices would change abruptly. If market prices like in Q4 take all of a sudden a very significant different lower position, you run the risk of sitting on inventory, yeah which then gets a lower value. So, this is I think one of the intrinsic point in the industry where nobody can really and completely shield from. On your second point about poly, a couple of weeks ago there was a conference in Germany and there were some voices, who said poly is significantly trending down, there were also some voices, who said it may trend up in the future. I think we have here tried to make a statement based on a continuation of the seized market price levels, let's say in February. In order to have a frame of reference, I think in general for Solarfun it is not a bad thing when there is a gradual and not to abrupt, that's also what we said last and by the way, and not to abrupt adaption of polysilicon prices, because we believe that the adaption in these polysilicon prices is bigger than the adaption in module prices and will with the competitiveness in terms of total cost for our company will enhance our competitive position. So, yes there are voices who say, a further come down especially towards the second half of poly is possible. At Solarfun we do not oppose, let's say that trend provided if – it done in a certain reasonable adjustment.

Arch Pei – JL McGregor & Company

Great. Thank you very much.

Operator

(Operator Instructions). And your next question comes from the line of Andrew Root from Alkeon Capital. Please proceed.

Andrew Root – Alkeon Capital

Hi. Thanks for taking my question. I just want to follow up on the China market as far as the tenders are concerned. Can you give a sense for the total bid pipeline that's out there just really don’t have any contacts for help big or not big in the China market maybe over the next year or two?

Terry McCarthy

It is a couple of very sizable deals, which I have spoken about or which are coming to a phase that a tender is being considered. There are some different phases in this and I would not have at this point in time to sum between the different phase. There are also phases, which I pointed for Josh Baribeau on a pre-standard phase and I would need to split them out. And if so wanted we can come back on that one separately.

Andrew Root – Alkeon Capital

Sure. And then just related to that is there a tariff level that’s being discussed in terms of Renminbi per kilowatt hour and the returns that can be achieved at current module prices for investors are they double-digit returns are they single-digit just again any color at all would be helpful? Thanks.

Terry McCarthy

I think in general the support mechanisms from the different levels of government tend to vary between projects I think also recently there have been some emphasis from the Central Government here in China to come to a standardization of all these electricity tariffs, electricity based tariffs and I think that will have also an impact on a bigger standardization for the solar projects. In general there is a lot of support from the different levels of government for these solar project and we think that is one of the key reasons for the volume of projects starting to get a certain amount of traction.

Andrew Root – Alkeon Capital

Thank you very much.

Operator

At this time we have no questions in queue.

Henricus J.P. Hoskens

Okay. Thanks again for your interest if you have any followup questions feel free to contact us. Have a good day. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect and have a wonderful day.

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