Yingli Green Energy Holding Co. Ltd. Q3 2009 Earnings Call Transcript

Nov.13.09 | About: Yingli Green (YGE)

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

Q3 2009 Earnings Call

November 13, 2009 8:00 am ET

Executives

Liansheng Miao - Chairman & Chief Executive Officer

Bryan Li - Chief Financial Officer

Jingfeng Xiong - Vice President of Technology

Stuart Brannigan - Europe Managing Director

Robert Petrina - U.S. Managing Director

Cynthia He - Brunswick

Qing Miao - Director of Investor Relations

Analysts

Jesse Pichel - Piper Jaffray

Dan Ries - Collins Stewart

Kelly Dougherty - Macquarie

[Jay Gelb] - Barclays

Sanjay Shrestha - Lazard

Rob Stone - Cowen & Co.

Satya Kumar - Credit Suisse

Lu Yeung - Banc of America/Merrill Lynch

Operator

Hello, ladies and gentlemen, this is Diana. I’ll be the operator for this conference call. I’d like to welcome everyone to the Yingli Green Energy Holding Company Limited third quarter 2009 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. (Operator Instructions)

Now, I would like to transfer the call to Cynthia He from Brunswick. Cynthia, please proceed.

Cynthia He

Thank you, operator and thank you everyone for joining us today for Yingli’s third quarter 2009 financial results conference call. On the call today from Yingli Green Energy, are Mr. Miao, Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Chief Financial Officer; Mr. Jingfeng Xiong, Vice President of Technology; Mr. Stuart Brannigan, Europe Managing Director; Mr. Robert Petrina, U.S. Managing Director; and Ms. Miao, Qing, IR Director.

A few hours ago, Yingli issued its third quarter 2009 earnings release, which can be found on the company’s website at www.yinglisolar.com. I trust you all had the chance to review it by now. The call today will feature a short presentation from Mr. Miao, covering business and operational developments, followed by Europe and U.S. market updates from Mr. Stuart Brannigan and Mr. Robert Petrina respectively, and then Mr. Bryan Li, will take you through a discussion of the company’s financial performance. After that the presenters will open the floor to questions from the audience.

Before beginning, Yingli Green Energy’s management team would like to remind the audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as: will, expects, anticipates, 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 these 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 statement as a result of new information, future events or otherwise, except as required under applicable law.

I would now like to turn the call over to Miao, Liansheng. Mr. Miao, please begin.

Liansheng Miao - [Interpreted]

Good morning or good evening to everyone of a call. Thank you for joining us today.

I’d like to take this time to discuss our third quarter highlights before handing the call to Mr. Stuart Brannigan, Managing Director from Europe and Mr. Robert Petrina, Managing Director from the United States. We’ll each provide you with updates of the respective markets immediately following Robert, our CFO Mr. Bryan Li, we’ll walk you through all financial results for the third quarter.

I’m very pleased to announce strong results for the third quarter. We have achieved a record high shipments and revenues and at the same time have steadily increased our profitability. Third quarter revenues increased to RMB 2.2 billion from RMB 1.5 billion in the second quarter, representing quarterly growth of 48.5%. Shipments increased to more than 80% quarter-over-quarter, enabling us once again to post quarterly shipment growth about 70%.

There were two main driving forces behind our strong results. First, we saw increased momentum in our market demand, as global economic conditions improved and we benefited from a better credit environment for solar project financing in all major markets.

Second, the strategies we implemented during early stage of financial crisis results favorable cost structure in place. We adopted a competitive pricing strategy to incentive wise demand for our products. That at same time, we provide a upgraded package installation services, such as technology consultancy and after sales services to our customers, a long side, our high quality products to enhance our brand value.

Our company employees will help demonstrated exceptional performances in executing these strategies, which enabled us to acquire shares in mature markets as well as to boost sales in emerging markets. In the nutshell, we have significantly increased our market share in various markets and further solidified our leadership in those competitive industries. All these factors give us the confidence to save a full year shipments for 2009, we’re now still below 490 megawatt, up from our previous estimate of 450 megawatts.

I’m also very pleased to report that, during the third quarter our gross margin increased to 20.1%, up from 18.3% in the second quarter. This was primarily attributable to our continued ability to reduce our polysilicon cost and to optimize our cost structure. Furthermore, this margin increase, also demonstrated our ability to increase our profitability, while achieving significantly high growth in shipments.

In order to maintain in these leading provision and increasingly competitive to PV industry for the long term, we have initiated a series of strategies for mid to long term development primarily focusing on the developments of the advanced technology and further integration of value chain. We believe that, through these efforts, we have able to enhance our comparative cost advantage and increasingly optimize our product performance. This will allow me to update you on a couple of these specific efforts.

You may recall that during the second quarter, we announced the Project PANDA, a collaboration of Yingli, ECN and Amtech to develop next generation high efficiency solar cells. I’m pleased to announce that Project PANDA has achieved an important milestone. We have successfully produced a next generation cell, which has an average efficiency rate of 18% or higher on our higher production line.

Looking ahead, we’re confident in a commercial application of Project PANDA. It’s another key effort our cost structure is that the all amends of in-house polysilicon plan Fine Silicon. I am pleased to report that mechanical setup for the site is now complete and trial production is set to begin in December 2009. We look forward to updating you on our new product in coming weeks.

With Fine Silicon in place, we believe we’ll be the most and vertically integrated PV manufacturer in China. Certainly, while few other companies in the world have polysilicon to module vertical integration, we see several unique strength, for example, first of all our nameplate capacity at every step over supply chain appropriately matches the next and we believe, this makes us one of the most well vertically integrated companies.

Secondly, all of our existing manufacture facilities are located in one site, which enables us to reduce to the greatest extent and collusive front, uncertainties and it caused assaulted with transportation and carination for multiple production signs. All these are reasons that further drive all composite cost of structure and it capture profits at every stage of production. We look forward to increase the profitability going forward while at a same time providing products to our customers at composite projects.

At this time, I’d also like to share a couple of piece of exciting news, all 10 megawatt PV rooftop on-grid project in Dunhuang, Hebei Province, has been officially approved as part of the China’s Golden Sun projects and as such it’s eligible for subsidy. This is Hebei Province’s largest Baoding attached PV project to-date.

China continues to encourage innovation or research into new technologies in applications. On this front, we are currently building a 0.5 megawatt BIPV project for an exhibition poly prevailing for wage. We have dealt to various priorities PV applications including PV walls external fixtures with PV based products and more. We believe that this project will serve as a great demonstration in industry and help to further for more PV applications in China.

With the recovery of the global economy, an increasing awareness of climate change issues, we’re encouraged by the fact that more and more countries around the world are taking concrete steps to embrace solar energy and other clean technologies. As a result, we have more confidence than ever, in the future of Yingli and a PV industry as a whole. Finally, on behalf of entire management team, I would like to express my sincere appreciation salving factors and business partners for their support and trust. I’d also like to thank our employees for their hard work.

I will now hand over the call to Mr. Stuart Brannigan, who will discuss European market highlights.

Stuart Brannigan

Thank you very much. Good morning and good afternoon everybody. I’m going to take a look back at the third quarter and look into the fourth quarter. The third quarter of ‘09, I think, that’s be a very strong quarter, as you’ve already heard to the numbers mentioned by Mr. Miao. Demand began to pickup early in August and essentially at first by commencing the various political processes in Germany, prior to the elections, but the feed-in tariff maybe more aggressively reduced in 2010, but not which is in the present legislation.

This galvanize the PV community into action and it will attempt to ensure the maximum number of PV systems are installed at the more favorable feed-in tariff of ‘09, compared to the room at mid year in 2010. This increase in demand in Germany is demonstrated by the official installation figures from the German government. Showing a rather for cumulative total of only 500 megawatts installed in ‘09 up to June, but an record raised over 300 megawatts amount from July through September.

Maintaining this rate through year end, we give a total ‘09 market of 2.3 gigawatts, solely for Germany, but we expect this to improve closer to 3 gigawatts by year end. Hence in Q3, we’ve had firm order request of volumes whereby the monthly manufacturing capacity. However, as we’ve already stated in past calls, we’re not relying on Germany alone.

Our strategy of expanding our European wide market position is moving along nicely, and in Q3, we’ve made excellent progress in the number of markets. Our commitment to local officers with the right networks and great understanding of local culture is beginning to bear fruits. It’s important to a great success in Greece, where we were on target for meaningful market share this year, having supplied modules to many projects including the largest PV power, so far as we constructed in Greece of the 4.3 megawatts.

In Q3, we opened our new French office in New York and we’re already seeing strong evidence that the local market has welcome this new initiative. We’re fielding a large of number of inquiries in sales opportunities and we can see Yingli taking a strong position in front over the next few quarters. The same can be said for our Italian operation, and we supplied a landmark 2 megawatt commercial roof system to really kickoff our activities there.

Spain has finally started to wakeup, as 2009 has been quite pool. Installations are expecting to reach around 100 megawatts for the whole of 2009, but as I said, Spain is now starting to pickup and we’re seeing demand growing. For me personally as a bridge in Q3, we’d be selling an earnest into the U.K. market and expect to see one of the market leaders going forward.

In direct sales to Yingli customers, we’ve supplied a number of megawatt projects to the Czech Republic and this trend is continuing getting stronger. We should also remember that a very large proportion of our modules invest invoiced in German addresses, our German customers operate across the whole of Europe and beyond and I’ve had a great deal access across the whole of Europe in this quarter.

Looking at Q4, in truth it’s become a quite problem for us. It’s a nice problem, but still a problem. Demand this far outlaying our ability to supply right now and we really struggling to ensure all of our customer get a fair share of everything they need. Customers are even looking at air freight as a way of getting more modules in time to project completion for the 31 of December.

Traditionally, Q4 is a two month quarter were December being quite, as customers tend to ease back demand to ensure lowing beneficiary year end and it’s ready to take advantage of the anticipated price reductions offered by manufacturers in order to move product in this slower first quarter, as always driven by the German and you’ll feed-in tariff productions. This is not so obvious this year, as the concern of the heavy feed-in tariff cuts in midyear is filling quarter one demand in Germany.

Customers are ordering shipments in December for January delivery and this trend is continuing through the opening months of 2010. I think those are concerns about our changes in subsidies in both Czech Republic and Italy, a feeling extra demand from these countries too. Truthfully, the changes in the feed-in tariff in Italy and Czech Republic are very slow and we don’t believe that we’ll really done from the overall demand of these markets.

Also the upcoming cope in hog in summer, we’ll keep focus on renewable throughout this period. Thus, we see a strong quarter far from a European perspective. It’s across the variable factor the weather in Germany and this may still play a factor in Q4, more likely Q1 ‘10. We have the benefits that we’ve been able to see in the future in a crystal ball, we remained confident at the strong demand going forward.

As we looking to 2010, as we said, the urgency to complete projects before the anticipated feed-in tariff cuts in Germany in midyear, it’s going to start drive a strong first half year performance in Germany. Just as an aside, you see some newly firm correlation has become more consolatory in the last few weeks and the latest comments from government essential talking to the industry to understand the way forward.

If there are any further cuts in the feed-in tariff in Germany, they seem to be focusing on the large kilogram mounted systems and that leave the other commercial rooftop and residential rooftop segments free until the review later in the year ready for additional changes in 2011. So we say a consistent strong market through 2010 in a those segments.

However, even though there’s a room has been enough to stimulate strong demand and I think it is prudent to the investment community supporting the PV site in Germany. The rates are turn off by the PV projects at the moment represented great investment opportunity as Europe struggles to shake up the recession in very low interest rates.

We see very high demand in the Germany in the first half of 2010, but even if this slows after Q2, demand being Europe is a whole leads just to be very confident and positively very strong 2010. Growth for Shenanigans Europe is shown by this Spanish PV Associations view, as Spain will reach somewhere near 600 megawatts in 2010 from 800 in ‘09. Our partnerships in the large utilities and major EPC contracts give us a strong position for 2010 in Spain.

A number of major projects developing in France and Czech Republic and with Greece possibly reaching a 100 megawatts without large market share and U.K. government finally releasing their own feed-in tariff and goodness it leads us to believe we’ll see a very strong 2010 and possibly even more important for Yingli a great divergence for sales geographies across Europe.

Having settled that, I’ll now handover to Rob Petrina, who’ll talk you through the U.S. market highlights and outlook.

Robert Petrina

Thank you, Stuart. After conversing a very difficult first half of the year, the U.S. market showed real signs of recovering a later part of the third quarter as financial markets rebounded and credit conditions improved. Our customers gain confident and pricing had stabilized and began contracting for a significant volumes. First, I’d like to walk you through some of our key achievements then follow with specifics on our commercial achievements and future expectations in the U.S. market.

As many of know, in the early part of the third quarter, we strengthened our physical infrastructure by opening up office in New York and establishing our field operation center in San Francisco. During this period, we also enlarged our team with a number of additions on both the technical and commercial front. We dramatically expanded our product and service offerings in the U.S. market and currently carry a full line of highly efficient quality solar modules.

Our product offering expands an output range from 180 watts to 275 watts with leading will multicrystalline efficiencies. As an expansion of our strategy localize and establishing the Yingli Americas as an organization capable of supporting and collaborating with clients and all the critical needs. We also began to process to establish a U.S. module manufacturing center of excellence.

In the later part of the third quarter, we began to see some of the early results of our increased U.S. presence. Yingli Americas, we see binding purchase orders for more than 11 megawatts from commitments on an additional 18 megawatts. The ever willing majority of these purchase orders are issued by customers that are leaders in their respective sectors and we’re initially being the strategic priority for our team.

We were extremely active in the California RFL process and to our development partners our product was bid on more than one gigawatt of potential projects. We’ve established ourselves, the permanent fixture on the shortlist of the major developers, integrators, IPPs and utilities and this reflects their confidence in our long term strength and competitive position.

According to independent third party analyst, in September we had nearly 11% of the applications on the California solar initiative program and continued getting momentum in the fourth quarter and into 2010. Our efforts on the East Coast have translated into significant wins that have resulted in Yingli panel supply to the reversed mix of residential, commercial utility and academic clients. To-date, we both diversified client base and our clients in more than 10 states. In the upcoming quarters, we intend to leverage our early success to expand our strategic focus and include a broad range of sales targets.

Our strategy to not forward integrate, but partner with some of the most respected and best positioned customers across the three major market segments has proved to yield strong results and get us as one of the leading companies in the U.S. market. In conclusion, we are significantly raised the Yingli’s performed U.S. market and we’ll continue support our clients to convert our opportunities to further gain market share in 2010 and beyond.

With that, I’ll hand the call to Mr. Bryan Li, our CFO, who will take you through the financial highlights for Q3. Bryan.

Bryan Li

Thank you, Robert. Good morning and good evening to everyone on our call. Thank you, thanks for being with us today. Before I go into the line items, let me give you a quick overview of our third quarter performance, which I’m pleased to say, it was very strong. Both shipment volume and our gross margin are inline with our expectation, comparing quarter-over-quarter, the shipment increased more than 80%.

Gross margin continued to improve 18.3% to 20.1% and our income from operations to increase by 127.4% to RMB 242.8 million. Our adjusted and non-GAAP basis, net income increased to RMB 184.2 million from RMB 119.8 million and our EPS increased to RMB 1.2 million from RMB 0.91.

I will now take you through our financial performance for third quarter 2009. As a result, we improved the credit environments in major PV markets, as well as our widely accredited product capability. Greater market shares established market and expanded process in merger markets.

We maintain the gross momentum that began in the second quarter. PV module shipment up more than 80% quarter-over-quarter, product net revenue were RMB 2.2 billion, equivalent US $326 million in the third quarter of 2009. An increase of 48.5% from RMB 1.5 billion in the second quarter, despite of the high teen decrease in average selling price. The gross margin was 20.1% in the third quarter of 2009 and started improvement comparing to 18.3% in the second quarter of 2009. 15.3% in the first quarter 2009 and 13.2% in fourth quarter of 2008.

Our ability to control cost through two main strategies, let me now go into the details of each of this. First, we’ll continue to reduce blended cost of polysilicon by gradually consuming comparatively higher priced polysilicon inventory and successfully renegotiated our prices with our long term polysilicon suppliers.

As you may recall from our previous earnings call, Yingli has now provided a significant provisions to write-down the inventory costs or polysilicon prepayments. Even during the challenging fourth quarter of 2008 and the first quarter of 2009, instead, we have cost delayed to assume to the comparatively higher priced of polysilicon inventory, while maintaining a competitive gross margin.

Furthermore, negations with our long term polysilicon suppliers have allowed us to bring contract that our poly prices down a level comparable with spot market prices, the blended of cost, our polysilicon in Q3 decreased to over 38% from the second quarter level. We expect it to continue to decrease by mid-teen in the fourth quarter as the majority of the higher price of polysilicon inventory will be consumed by the end of 2009. Further, the ramp up of our in-house polysilicon plant, Fine Silicon starting December 2009 will leave more room for cost saving in the future periods.

Second, our polysilicon usage per watt and non-polysilicon outing cost continue to decline in the third quarter through improvement in year rate, field conversion efficiency rates and operational efficiency. In the third quarter, our polysilicon outing cost consisting of depreciation, utilities, labor, freights, insurance, and our warranty reserve etc. decreased by US $0.85 per watt from US $0.98 per watt in the second quarter.

Also as Mr. Miao has mentioned, Project PANDA continues to progress smoothly and we believe the meaningful improvement of our sale conversion efficiency rate were allowed our polysilicon usage per watt and then non-polysilicon outing cost to continue to decrease in our coming year.

Operating expenses in the third quarter of 2009 were RMB 204.8 million, equivalent to US $30 million, compared to RMB 167 million in the second quarter of 2009. The increasing operating expenses for our second quarter, was primarily attributed to increase our selling, general and administrative expenses. Consistent with the large increase in shipment volume and increased R&D expenses, in connection with the progress of a serious of initiatives including Project PANDA.

Operating expenses as a percentage of total net revenue was 9.2% in the third quarter of 2009, compared to 11.1% in the second quarter of 2009. The decrease at operating expenses as a percentage of total net revenue was mainly due to the increase in total net revenue.

As a result of the increase in gross margin and a decrease the operating expenses as a percentage to total net revenue. Income from operations in the third quarter of 2009 was RMB 242.8 million, equivalent to US $35.6 million an increase of 127.4% for RMB 106.8 million in the second quarter of 2009. Operating margin was 10.9% this quarter, compared to 7.1% in the second quarter of 2009.

After excluding the cash interest expenses, interest expense was RMB 68.2 million, equivalent to US $10 million in the third quarter of 2009, compared to RMB 79.1 million in the second quarter of 2009. The weighted-average at interest rate for the borrowing in the third quarter of 2009 was 6.66%, a decrease for 6.88% in the second quarter of 2009. Both measured, basis excluding in cash interest expenses. The decrease in weighted-average interest rate was a result of the company’s effort to reduce funding costs.

Foreign exchange gain was RMB 71.8 million, equivalent to US $10.5 million in the third quarter of 2009, compared to a foreign currency exchange gain of RMB 108.7 million in the second quarter of 2009. The foreign currency exchange gain in the third quarter of 2009 was primarily due to the appreciation of euro against the RMB.

Income tax expenses was RMB 31 million, equivalent to US $4.5 million in the third quarter of 2009, compared to the income tax expenses of RMB 16 million in the second quarter of 2009. The increase in the income tax expenses for the second quarter of 2009 was primarily attributable to the increase to net operating income generated by Tianwei Yingli

As a result, of the factors discussed above, our income basis, net income was RMB 120.8 million, equivalent to US $17.7 million in the third quarter of 2009. Diluted earnings per ordinary share and per ADS was RMB 0.79, equivalent to US $0.12 in the third quarter of 2009, compared to diluted loss per ordinary share and per ADS of RMB 3.03 in the second quarter of 2009.

On an adjusted non-GAAP basis, net income was RMB 184.2 million, equivalent to US $27.0 million in the third quarter of 2009, compared to adjusted non-GAAP net income of RMB 119.8 million in the second quarter of 2009. Adjusted non-GAAP diluted earnings per ordinary share and per ADS was RMB 1.2 equivalent US $0.18 in the third quarter of 2009, compared to adjusted non-GAAP diluted earnings per ordinary share and per ADS of RMB 0.91 in the second quarter of 2009.

Now let’s move on to the balance sheet guidance. Accounts receivable increased by 31.4% to RMB 2.7 billion, equivalent to US $394.4 million as of September 30, 2009 for RMB 2 billion as of June 30, 2009. Days sales outstanding decreased to 109 days in the third quarter of 2009, compared to 123 days in the second quarter of 2009. Primarily as a result, market recovery and they improved the collection of our accounts receivable due to our continued credit risk control efforts and a higher production capacity.

Inventory of September 30, 2009, was RMB 1.75 billion, equivalent to US $256.4 million, down from RMB 1.9 billion as of June 30, 2009, due to the decrease in comparatively higher price of polysilicon inventory. As a result of the improved collection of accounts receivables and in fact the inventory management, we have continued to generate a positive operating cash flow in the third quarter.

Long term bank borrowings decreased to RMB 1.1 billion, equivalent to US $162.2 million as of September 30, 2009 from RMB 2 billion as of June 30, 2009. Our short term borrowings increased to RMB 3.1 billion, equivalent to US $460.4 million, as of September 30, 2009 from RMB 1.8 billion as of June 30, 2009.

The changing of balance of long term bank borrowings and a short term bank borrowings in the third quarter was primarily due to the reclassification of long term and our short term bank borrowings. As of today, we have approximately RMB 7.6 billion, authorized a line of credit, of which RMB 4.9 billion have been utilized.

With that, I will turn to our guidance. Given the strong third quarter results, at a greater visibility to market demand for the fourth quarter, we update our annual PV module shipment targets to the estimated range of 490 megawatts to 500 megawatts for the previously expected a range of 450 megawatts to 500 megawatts for the fiscal year 2009, an increase of 74% to 77.6% compared to fiscal year 2008. In addition, we updated our gross margin target for fiscal year 2009, to be in the estimated range of 19% to 20% for the previous expected range of 18% to 20%.

Now, I will like to give some inductive targets and expectations for the shipments and gross margin in the fourth quarter of 2009. As I commented earlier, benefited from the improved global economy, the environment for solar project financing and a strong demand from Germany, Spain and the Southern European markets, we expect that continuously robust of fourth quarter with shipment flattish to the third quarter level.

Turning to the cost sides, our competitive polysilicon outing costs combined and it was continuously declined to blended a cost of polysilicon suffered to improve our gross margin in the fourth quarter, which we’ve currently expect to being in the estimated range of 21% to 23%.

I’ll now open the call to questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jesse Pichel - Piper Jaffray.

Jesse Pichel - Piper Jaffray

Bryan, can you reconcile your guidance. You called for poly costs to decline mid teens in Q4, but you also said that poly costs are going to be closer to spot prices. So if I look at your Q3, it looks like your poly costs were about a 100 kilos slightly higher. Will that drop to about $70 in Q4, which would thus be 30% decline?

Then following that logic, it looks you’re guiding your Q4 gross margins to go up to about 22%, but if I assume in that type of poly cost reduction that would be about eight points of higher margins sequentially not two, so if you could just walk me through that and then I have a follow-up question?

Bryan Li

The polysilicon cost, were further get in our fourth quarter given the continuing consumption of the high cost polysilicon. As we guided, in the fourth quarter we will expect a mid-teen reduction in the polysilicon costs around us third quarter level. I think the direction is moving towards the spot market price, but given there are still a pushing of the high cost polysilicon in the inventory, which we believe most of them will be consumed by the end of this year. So I’ll be looking at a meaningful gross margin improvement in the first quarter.

Jesse Pichel - Piper Jaffray

So it’s about $85 poly even in Q4?

Bryan Li

My expectation is down by another mid-teen percentage for our third quarter level.

Jesse Pichel - Piper Jaffray

Would that be approximately $85 or, could you…?

Bryan Li

Yes, they will be within our ballpark.

Jesse Pichel - Piper Jaffray

You are producing significantly above your 600 megawatt nameplate right now, probably closer to 700. Can you increase your production levels in Q4 and Q1? I mean, you are guiding to sequential growth in Q4, would that come from inventory sales or will it come from PANDA and when do you expect to have, if I’m pronouncing that correctly facility up in running?

Bryan Li

In the fourth quarter, we would currently expect a flattish shipments for the third quarter level, because of the capacity constrain. As we are gaining extra operational efficiency over the existing capacity and also we are continuously improve the sale conversion efficiency rates quarter-over-quarter. So we’ll be expecting in first quarter next year and then we should be able to produce more from the fourth quarter level, even without adding any extra capacity.

Jesse Pichel - Piper Jaffray

Your OpEx in the quarter was substantially higher than it was in Q2. Should we assume that it’s going to stay at these levels? Then I’ll have my last question for Stuart. Stuart, you dropped your module prices significantly in July that does appears to be faster and lower than any of your competitors in China. Were your customers that are now benefiting from industry lowest price was worryingly with any types of share gains in Q1 and Q2? Would any of that be contracted?

Bryan Li

Jesse, I think you reached the two questions. One is about the APACs, one is about OpEx and the other is about the pricing in the third quarter. So I’ll answer the first question first and then I will leave Stuart to answer the second questions.

I think for the OpEx, it’s a little higher in the third quarter, that was primarily driven by the efforts we were put in place to expand our oversea sale channels through the establishment of new sales subsidiaries in the U.S. and in France, in Italy, and also the build up of this approaching channels in both the Europe and the U.S. So it’s actually reflecting a gap between the upper end cost that we put in place and a benefit we will be gaining in the following quarters.

So I think in this quarter the SG&A is high, but our target is to gradually reduce the SG&A to 6% of the total revenue in the second half of next year. Also turning to the R&D expenses side, as we are pushing forward the Project PANDA’s seems the second quarter, so I will be expecting a similar level of R&D expenses in the next two quarters. As we commercialize Project PANDA in late next year and then I will be expecting to R&D expenses dropped to 1% of the total net revenue that will be the general guidelines I’ll be looking at. Now, I’ll pass to Stuart to answer the second questions.

Stuart Brannigan

I think you’re right about the price jumping in June, July time and the reason for that was full intention to being a price leader. I think, as Bryan talk about in the guidance, the growth in the shipments from ‘08 to ‘09 at 75%. It shows we’ve taken significant market share from the global and may grow 10% or 15% this year.

I think what some of the results we’re seeing from some of the other companies in the last few days. You can see some of those shares have been taken from. The solid Q4 and Q1 sales levels we got now show that the loyalty of the customers from being given that opportunity in June, July time. I think a number of the customers have spent a lot time on building that brand reputation with Yingli to their next level of customer.

So I think it’s not just a question of Q4 and Q1. I think it’s a question of 2010. I think, we’ll see the benefit of that price reduction in June 2009 going all the way through 2010. There’s a number of customer, we talking about not just 2010, but much more long term contracts. So I think the price leadership has just gained quite a level of trust for those customers going forward and I think you’ll see the benefit of that as we go forward over the next couple of months in terms of longer term deals with people.

Bryan Li

For the first quarter of next year, we were currently expecting that ASP was flattish up for the fourth quarter level. Given the meaning considerable reduction on the poly blended over our polysilicon in the first quarter, I will be expecting the gross margin will be meaningfully improved for the fourth quarter level.

Cynthia He

Jesse, Ms. Miao also has kind of conclusion to your questions to give you kind of price for the next year.

Operator

Your next question comes from Dan Ries - Collins Stewart.

Dan Ries - Collins Stewart

A couple of questions maybe on the balance sheet, a lot of my expense questions were just asked. The accounts receivable has been in the last four quarters, as low as 75 days is highest 179, it was about 110 this quarter. Where do you think that trends?

Bryan Li

For the fourth quarter, I will be expecting the DSO drop to somewhere close to 90 days to 100 days level.

Dan Ries - Collins Stewart

Do you think that’s the new sustainable level?

Bryan Li

No, that’s not a sustainable level, because we will continuously reduce the DSO in the first quarter next year and the second quarter of next year.

Dan Ries - Collins Stewart

So what is the target I guess at this point, for mid 2010?

Bryan Li

I think the first target I’ll be looking at is somewhere close to 70 days and then we’ll further put efforts to reduce to somewhere close to 60 days.

Operator

Your next question comes from Kelly Dougherty - Macquarie.

Kelly Dougherty - Macquarie

I just wanted to follow-up pricing question. How do we think about your pricing strategies for next year? Are you intending to remain as aggressive or do you have a cost structure in mind and then a specific margin and you’ll price accordingly? If so, what kind of gross margin do you have in mind for 2010?

Liansheng Miao - [Interpreted]

Very large market share this year and also can have a very solid customer base in very diversified market. So it has setup into next years pricing strategy, I will continue. Next year, we will be more balanced between new customers and existing customers between major markets and new markets. Again the most important will be more balanced before profitability and the price competitions.

Operator

Your next question comes from [Jay Gelb] - Barclays.

Jay Gelb - Barclays

Couple of quick questions, could you just clarify, what you would say on ASPs for Q4 and Q1? I think you made a comment a minute ago, anything quite catch it?

Bryan Li

Before I answer your questions, let me finish the second question and cartridge just raised. In regards to the gross margin target for the year to come, I think for next year when we have more visibility in the next quarter and I will more clarity to talk about the gross margin target, but at this moment, I will be looking at 25% plus gross margin for the next year and I have great confidence in achieving these targets.

Then back to your questions. For the ASP in the second quarter, I think we have talked about the mid-teen percent in the reduction for the second quarter level. For the fourth quarter, I’ll be looking at slightly down from the Q3 level, but for the first quarter of next year, I would be expecting flattish up from the fourth quarter level.

Operator

Your next question comes from Sanjay Shrestha - Lazard.

Sanjay Shrestha - Lazard

Two quick questions, first, how should we think about the depreciations for your in-house silicon plant tent to start to sort of into your cost of goods sold line? Do you take that into consideration, when you talk…?

Bryan Li

The depreciation charge for the internal poly plant will be depreciated at US $9 million every quarter approximately. I think I missed your second question. What is your second question?

Sanjay Shrestha - Lazard

When do you start to recognize that, which is the first quarter that depreciation would actually start to impact the cost of goods sold?

Bryan Li

So according to U.S. GAAP, we will recognize the depreciation charge immediately upon the trail production. We’re currently target to start trail in December ‘09. So there will be some depreciation charge reflected in the fourth quarter.

Sanjay Shrestha - Lazard

Is that one of the explanation as to why your gross margin is not much higher than what it could have been in Q4? Does that 25% guidance, which you saw in and takes into consideration that is depreciation charges, would that margin would have been in higher?

Bryan Li

The depreciation charge certainly will be a cost to our existing cost level, but I think actually what I’ll be looking at is really in an next two quarters, first quarter next year and second quarter next year. We don’t need to look at it is really the production costs of internal poly, because the production cost will be incorporate out of depreciation charge and utility costs in the component.

So as large the initial product costs does not exceed or close to the spot market, poly price and we should be better off for the internal poly factories and given the volume and it will be continuously to ramp up towards the end of next year.

Operator

Your next question comes from Rob Stone - Cowen & Co.

Rob Stone - Cowen & Co.

My question is about your United States module manufacturing strategy. Could you comment on when you expect to begin production? How you will expect that will influence the cost of the modules you sell in U.S.? Whether you think that will also influence the ASP that you’ll be able to achieve in the U.S.?

Robert Petrina

Rob, in terms of our timeline for production, we’re currently in negotiations with a few different locations with respect to the final settings of the plant and we have a very conservative obviously ramp and given the fact those only things can happen in such a process and our goal is to begin production really at a healthy core by the end of 2010.

In terms of cost, we’ve probably don’t want to go too much into that and given the fact that as a relative share of our global production, our U.S. plant is not going to be, let’s say significant. I mean, given the number that we’ve discussed. I don’t think is going to impact our overall pricing.

I think it’s a very important step and for the U.S. market and very much is going to help in accelerating the innovation cycle with respect to how quickly we can hands our product offering for customers and work with our partners on the downstream side and giving them a better product and really that’s the motivation behind it.

Rob Stone - Cowen & Co.

Let me just rephrase a little bit, it seems clear that modules can be manufactured for lower cost in China than they can in U.S. On the other hand, you would have the advantage of a much shorter supply chain as you mentioned, you could customize things with the U.S. market. It occurs to me that a product that’s made in the U.S. might at least for that segment of your sales. I know it won’t necessarily move your global average price, but U.S. made products might be able come into higher price within this market, is that a fair assumption?

Robert Petrina

I think certainly you have different clients with different requirements, certainly will be a fair assumption I think.

Operator

Your next question comes from Satya Kumar - Credit Suisse.

Satya Kumar - Credit Suisse

Just wanted to follow-up on the few things, what did you say your Q4 shipments whereby the major geographies?

Bryan Li

For the Q4, we’ll shipped close to 60% products to Germany and the other closer 20% to the other South European countries and the rest of them will be distributed to the U.S. and South Asia and China.

Satya Kumar - Credit Suisse

Given that there’s going to be 10% decline in the feed-in tariff in Germany in Q1. Why would you be able to maintain an ASP of flat to up in Q1? I thought that was a pretty bunchy comment?

Stuart Brannigan

I think that the answer to that is if you look at selling prices from December ‘08 through till now, then the module decrease is way, way about that it was necessary to continue with them. Interestingly, rates of returns on investments in Germany through the middle of this year and into the end. So it’s our opinion that the systems integrators and the distributors have a reasonable level of margin to support some of that 10% feed-in tariff reduction in Q1. I think that we can see that going forward is that, these prices remained pretty flat going across the year, because there is extra margin already in the channel.

Satya Kumar - Credit Suisse

What’s your outlook on volumes in Q1? For Bryan, what was your depreciation and amortization in Q3? What was your CapEx in Q3, plan for Q4 in 2010?

Robert Petrina

For the shipments in Q4, we’re expecting flattish. In Q1, we should have the ability to increase the shipment volumes for the Q4 level given the better yield and better operational efficiencies. In terms of the depreciation charge, I think besides the similar level of depreciation charge. In the third quarter I would be expecting another US $9 million quarterly depreciation charge for the internal polysilicon.

Satya Kumar - Credit Suisse

The CapEx?

Bryan Li

The CapEx for the last quarter, I’ll be expecting somewhere close to $70 million to $80 million towards the completion of that poly plant and the existing 200 megawatts expansion capacity.

Satya Kumar - Credit Suisse

2010, do you have an estimate?

Bryan Li

2010, currently we haven’t announced any expansion plan. So I will say at this moment, it would have material CapEx incurred in next year.

Operator

Your next question comes from Lu Yeung - Banc of America/Merrill Lynch

Lu Yeung - Banc of America/Merrill Lynch

I have the question on inventory. What kind of expectation would you have to reduce our inventory in Q4? Also given that the inventory in Q3, do you seems that you have received some very low price polysilicon? Is that going forward, we can base on that price on long term contracts? Can you address the inventory on our questions?

Bryan Li

For the inventory in Q4, as we are continuously consuming the high price of polysilicon in the existing inventory, so the dependently our polysilicon when continues to reduce by mid-teen percentage from the third quarter level. During the next year, the thing is for the long term contract that will have a new price. The new price will be lower than the long term contract price in this year. So for the long term contract pricing that will get further reduced for the existing level, which will further help to reduce the blended polysilicon in next year.

Lu Yeung - Banc of America/Merrill Lynch

Giving the low price long term contracts you have, is in your margin appears to be conservative at this point? Also on your Q4 shipment, you guided basically flat from Q3, but did you ship out all the inventory shouldn’t be your shipment actually be up from Q3 level?

Bryan Li

For Q3, we have already being running 100% utilization. So in Q4, we’re currently expect will continue 100% utilize our plant. So at this moment and subject to the restricted by the capacity constrain, so the Q4 shipments, we currently expect will be flattish. In the first quarter of next year, as we are expecting the yields and operational efficiency and the sale conversion efficiency rate, as workout further improved. So that will help to deliver more from the Q4 level.

Lu Yeung - Banc of America/Merrill Lynch

How much inventory you having in the finished goods right now?

Bryan Li

We have roughly 20% of the inventory or the finished goods.

Lu Yeung - Banc of America/Merrill Lynch

In dollar terms, you mean?

Bryan Li

Yes, in dollar terms and also, but one thing I would like to remind you is, we are a vertically integrated our players and inter media process that before the final products, which is PV module and I’ll call it as working progress, it’s a finished PV wafer or it’s a finished PV cell. So the work in progress occupies another 20% as the total inventory and the remainder of 60% is the raw materials and the other auxiliary materials.

Operator

Your final question comes from Kelly Dougherty - Macquarie.

Kelly Dougherty - Macquarie

I’m just wondering, what kind of cost expectations for fine silicon you’ve factored into your assumption to get to that 25% gross margin for next year? I was wondering, if you last any legal room in case, you aren’t able to produce at the cost you initially expect?

Robert Petrina

Yes, we’re initially be conservative to the cost assignation of the poly production. We expect in the initial six to seven months trial period and the cost through produced polysilicon will be somewhere close to $60 per kilo. In 12 months, following the completion of the trial periods and then we will reduce the production cost to $40 per kilo level and after that, we’re stabilized our poly production cost to somewhere close to $25 per kilo level.

Kelly Dougherty - Macquarie

That $60 number is what you have factored into the expectations for 25% gross margin next year?

Robert Petrina

Yes.

Kelly Dougherty - Macquarie

Then how many metric tons of poly due you think we can get from fine silicon in 2010?

Liansheng Miao - [Interpreted]

For next year, the rate of utilization would be expected to add 70% of nameplate capacity. The nameplate capacity is three time the metric tons, which may affect around 2,000 metric tons we’ll be hopefully produced.

Operator

This concludes the question-and-answer session for today’s call. Now, I would like to turn to the call back to Ms. Miao Qing for closing remarks.

Qing Miao

Thanks to everyone for join us for today’s call. So if you have any follow-up questions, please contact our IR department at www.ir@yinglisolar.com. Okay, thanks to everyone. Bye-bye.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect and have a good day.

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