Yingli Green Energy Holding Co. Ltd. Q4 2009 Earnings Call Transcript

|
 |  About: Yingli Green Energy Holding Company Limited (YGE)
by: SA Transcripts

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

Q4 2009 Earnings Call

March 8, 2010 8:30 am ET

Executives

Lilian Wong – IR, Brunswick Group LLC

Liansheng Miao – Chairman & CEO

Bryan Li – CFO

Qing Miao – Director, IR

Stuart Brannigan – Managing Director, Europe

Robert Petrina – Managing Director, Americas

Yiyu Wang – Chief Strategy Officer

Analysts

Jesse Pichel – Piper Jaffray

Vishal Shah – Barclays Capital

Kelly Dougherty – Macquarie

Dan Ries – Collins Stewart

Amar Zaman – UBS

Satya Kumar – Credit Suisse

Lu Yeung – Merrill Lynch

Operator

Hello, ladies and gentlemen, this is Katie. I’ll be the operator for this conference call. I’d like to welcome everyone to Yingli Green Energy Holding Company Limited fourth quarter and fiscal year 2009 financial results conference call. All lines have been placed on mute to prevent background noise. (Operator instructions)

After today’s presentation, there will be a question-and-answer session. Now, I would like to transfer the call to Lilian Wong from Brunswick. Lilian, please proceed.

Lilian Wong

Thank you, operator, and thank you everyone for joining us today for Yingli’s fourth quarter and fiscal year 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, Director and Chief Financial Officer; Mr. Stuart Brannigan, Managing Director of Yingli Green Energy Europe; Mr. Robert Petrina, Managing Director of Yingli Green Energy Americas; and Ms. Miao Qing, our IR Director.

Earlier today, Yingli issued its fourth quarter and fiscal year 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 Mr. Bryan Li, who 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 audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, 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) Hello everyone. Thank you for joining us today. I would like to take this opportunity to wish you a wonderful Year of the Tiger.

First, I will like to discuss some quarterly and yearly business highlights and achievements before handing the call over to Bryan Li, our CFO, who will take you through our first quarter and fiscal year 2009 financial results.

I am very pleased to announce that we close 2009 with a strong fourth quarter as a result of continued efforts to balance profitability and market share expansion. Our PV module shipments for the fourth quarter increased more than 15.7% over the previous quarter, while fourth quarter gross margin continued to improve, reaching 29.6%. Although 2009 was a challenging year for Yingli and the solar industry as a whole, we were able to emerge stronger by increasing full year PV module shipments by 86.6% year-over-year to 525.3 MW, and beating the high end of our shipping guidance.

Two main factors contributed to our solid shipment growth. First, by satisfying vigorous demand for our highly bankable and cost-effective products, we have enhanced cooperation with our top existing customers. We have very influential sales and distribution channels across all major PV markets. Second, we were able to attract an influx of orders from new customers with our strong brand, well established reputation and integrated service model.

Looking into 2010, in view of the shared anticipation of global industry growth and the robust flow of purchase orders and inquiries that we have already received, we are confident in our ability to achieve our full year PV module shipment guidance of 950 MW to 1 GW. This confidence is further supported by our planned capacity expansion, which I will speak about in a moment. In spite of the expected cuts in feed-in tariff subsidies in Germany in the middle of the year, which may bring pressure on the module price, we still expect sustainable growth in Germany in 2010 by capitalizing on our solid position and extensive customer base in that market.

In addition, we are expanding our footprint rapidly in the US, Spain, Italy, China and other emerging markets to further drive our growth. Take the United States as an example, following establishments of a US subsidiary with two offices in New York and San Francisco. We finished the fourth quarter with the largest share, 27% of applications in the California solar initiative program. We view this as an indicator of our market penetration across all markets. We have leveraged our outstanding sales and marketing capability and technical expertise, and continued to strengthen our well-established reputation, as we diversify our sales and customer service channels to enter more countries and regions.

We will also adopt flexible strategies, which we believe will allow us to meet different customer needs, while strengthening our risk control capabilities to ensure fast and healthy market expansion.

To support our shipment target and goal of further expanding our market share, we are actively implementing a strategic capacity expansion plan to build an additional 300 MW of high efficiency mono-silicon-based, vertically integrated production lines at our Baoding headquarters. Combined with the existing 600 MW production capacity in Baoding, and the 100 MW capacity under construction in Hainan Province, this new expansion project is expected to bring our total production capacity to 1 GW by the end of 2010. To support this expansion project, I'm pleased to announce that we have secured a five-year project loan facility of RMB 1.5 billion, which is equivalent to approximately $220 million from the Bank of Communications.

In addition, the Bank of Communications also granted an RMB 215 million credit facility to Yingli China to be used as general working capital. The 300 mono-silicon-based expansion project in Baoding, we will adopt new technologies developed from our project PANDA, through strengthen our capabilities and the continued reduction of purchasing costs in the product differentiation through higher sell conversion efficiency rates and other technological advantages.

On the first PANDA pilot line, we have already successfully produced next-generation cells with an average efficiency rate of 18% or higher. Looking ahead, we expect to reach the average efficiency rate to at least 18.5% on the commercial production lines by the end of this year. With this expansion in place, we will be better positioned than ever to solidify our leadership in the global PV market.

Now please let me give you an update on polysilicon. Our in-house polysilicon manufacturing plants, as you know we have successfully commenced the trial production, and reached certain key technology and operating milestones in December 2009. Now we're in the final stage of testing the manufacturing process, and we expect to start commercial production in the first half of this year with full production capacity of 3000 metric tons expected by the end of this year.

In addition, polysilicon has been recognized by the Chinese government as a high and new technology enterprise. So it is entitled to a preferential enterprise income tax rate of 15%, under the PRC Enterprise Income Tax Law.

As a leading solar company, we believe we are not only responsible for our customers but also for our community, of environment, and the advancement of science and technology. Attesting to our core values of responsibility, trust and innovation we obtained three firsts during fiscal year of 2009. This include of becoming the first Chinese company to obtain the SA 8000 social accountability certification, the first Chinese company to join PV CYCLE and the first Chinese company to receive the TUV Rheinland 'Power Controlled' certification.

Furthermore, as announced earlier this year, we are proud to be supporting the construction of the State Key Laboratory of PV Technology at our manufacturing base in Baoding. The laboratory will also serve as a platform to promote technology innovation and the making of PV industry standards.

Recently, two senior government regulations including Jiang Zemin, former President of China, Zeng Peiyan, former Vice Premier of China, and Zhang Guobao, Director of the National Energy Administration of China, and Li Keqiang [ph], the Vice Director of the National Energy Administration of China visited our headquarters in Baoding. The high level visit reflects Yingli’s influence in the PV industry, and also positive signs of the attention and support of the Chinese government for renewable energy companies.

We are happy to see agendas for this year's plenary sessions of the National People’s Congress, and the People's Political Consultative Conference in Beijing, including topics such as enhancing environmental protection, and developing a low carbon economy, which is also a good indication of the continued growth of the domestic PV market and China-based solar companies.

Throughout 2009, we’ve focused on promoting our Yingli Solar brand. To deepen our relationships with existing customers and reach out to more potential customers, we joined the privileged ranks of official sponsors of the 2010 FIFA World Cup in South Africa. This step is part of our global marketing strategy to increase our brand awareness worldwide by associating our brand that one of the world’s most popular sporting events. We look forward to better communicating our brands, and demonstrating our commitment to making solar energy, a clean, enduring, and cost-effective energy solution for all mankind. And we plan to make this a reality by continuing to work closely with our customers.

In summary, we are looking forward to 2010 as one of the world's leading vertically integrated PV product manufacturers with a strong management team, extensive list of loyal customers and partners, and effective strategies we believe we are well positioned to meet the opportunities and challenges ahead.

I've now hand the call over to Bryan Li, who will take you through the financial results for the quarter and the full year.

Bryan Li

Thank you, Mr. Miao, and hello and welcome to everyone who is joining us for today's call. Today I will provide an overview on Yingli’s financial results for the fourth quarter and full year of 2009, and provide guidance for the fiscal year of 2010. We had a very strong fourth quarter performance with shipment and gross margin both reaching historical highs.

PV module shipment volume increased by 15.7% and 29.6% gross margin in the fourth quarter demonstrates our increasingly well-recognized Yingli Solar brand, successful sales strategy, and a leading cost structure. For the full year 2009, shipments were 525.3 MW exceeding the high end of our previous guidance of 500 MW.

Gross margin for the full year of 2009 was 23.6% exceeding the high-end of our previous guidance of 20%. I will now walk you through our financial performance for the fourth quarter 2009. In line with our Q4 PV shipment growth, which was the result of an increasingly well-recognized Yingli Solar brand, solid and diversified customer base, enhanced sales channels and stronger customer service offerings. The total net revenue were RMB 2.53 billion, equivalent to US dollars 370.8 million in the fourth quarter 2009, representing an increase of 13.7% from RMB 2.23 billion in the third quarter of 2009.

Gross profit in the fourth quarter of 2009 was RMB 750.4 million, equivalent to US dollar 109.9 million, representing an increase of 50% from RMB 500.3 million in the third quarter of 2009. Gross margin was 29.6% in the fourth quarter of 2009, a substantial step up improvements over 22.5% in the third quarter of 2009, 19.8% in the second quarter of 2009, 16.7% in the first quarter of 2009, and 14.8% in the fourth quarter of ‘08 sequentially.

The increase in gross margin in the fourth quarter was due to flattish average selling price, and our continuous improvement in blended cost of polysilicon, polysilicon usage per watt, and non-polysilicon costs. I would like to mention here the gross margin of previous quarters were adjusted to incorporate the reclassification of warranty and shipping costs from cost of revenues to selling expenses in order to better (inaudible) nature of those expenses and to increase the comparability of information amongst the other solar companies.

In the fourth quarter, our non-polysilicon costs including depreciation further decreased to $0.76 per watt from $0.81 per watt in the third quarter and $0.86 per watt in the second quarter and $0.90 per watt in the first quarter of 2009. This decrease demonstrates our strong R&D capabilities, and execution capabilities to continuously improve the yield rate, field conversion efficiency rate and operational efficiency.

The blended cost of polysilicon continuously decreased by the mid-teens in the fourth quarter. I would like to emphasize again that Yingli has now provided long-term (inaudible) provisions to write-down inventory costs or polysilicon prepayments the challenging fourth quarter of 2008.

Through gradually consuming comparatively higher price of polysilicon inventory, and successfully renegotiating prices with our long-term polysilicon suppliers, we have consistently consumed comparatively higher price of polysilicon inventory, while maintaining a competitive gross margin. Looking forward, with the launch of 300 MW high efficiency mono-crystalline silicon-based manufacturing capacity in Baoding, which was deployed technology developed through project PANDA.

We believe the increased cell efficiency rate, and the larger operating scale will allow our polysilicon usage pull off, and our non-polysilicon cost to continue to improve. Further, the ramp up of our in-house polysilicon plant, Fine Silicon, starting December 2009 will leave more room for cost reduction in the future.

Operating expenses in the fourth quarter of 2009 were RMB 639.3 million, equivalent to US dollar 93.7 million, including non-cash impairment of intangible assets of RMB 131.2 million, equivalent to US dollar 19.2 million, and a non-cash bad debt expense of RMB 184.3 million, equivalent to US dollar 27 million.

The impairment of intangible assets relating to long-term supply agreements arose from the purchase price allocation in connection with a series of acquisitions of equity interests in Tianwei Yingli in 2006, 2007. As a result of the continuous decrease in the price of polysilicon, the company has recognized a non-cash impairment loss of RMB 131.2 million to reflect the difference between the carrying amount and the fair value of the intangible assets. The non-cash bad debt expense that resulted from the settlement was two particular customers in this quarter. Both the impairment of intangible assets and the bad debt expense were non-cash charges, and had no impact on the company's cash flow.

These two non-cash charges collectively impacted our Q4 EPS by RMB 2.13, equivalent to $0.31. After excluding those two non-cash charges, operating expenses in the fourth quarter of 2009 were RMB 323.8 million, equivalent to 47.4 million US dollar, compared to RMB 257.5 million in the third quarter of 2009. Operating expenses as a percentage of total net revenues was 12.8% in the fourth quarter of 2009, compared to 11.6% in the previous quarter.

After excluding non-cash interest expenses, which was related to certain financial instruments, replicated from the convertible notes and ADM loans. Interest expense was RMB 58.7 million, equivalent to US dollar 8.6 million in the fourth quarter of 2009, compared to RMB 68.2 million in the third quarter of 2009.

The weighted average interest rate for the borrowings in the fourth quarter of 2009 was 6.27%, a decrease from 6.66% in the third quarter of 2009. The decrease in weighted average interest rate was a result of the company's efforts to reduce funding costs.

Foreign currency exchange loss was RMB 48.5 million, equivalent to US dollar 7.1 million in the fourth quarter of 2009, compared to a foreign currency exchange gain of RMB 71.8 million in the third quarter of 2009. The foreign currency exchange loss in the fourth quarter of 2009 was primarily due to the depreciation of the Euro against the RMB.

Under the volatile foreign currency markets we are now only managing the net position of monetary assets and the monetary liability against the different foreign currencies, by also enacting our hedging policies, including hedging up to 30% of our revenues. We will continue to take active steps to mitigate the foreign currency risk.

Income tax benefit was RMB 1.1 million, equivalent to US dollar 200,000 in the fourth quarter of 2009, compared to an income tax expense of RMB 31.0 million in the third quarter of 2009. The income tax benefit in the fourth quarter of 2009 was primarily due to the write-off of deferred tax liability as a result of intangible assets impairment, netted off against the income tax expense in Tianwei Yingli and Yingli China.

As a result of the factors discussed above, on an adjusted non-GAAP basis, net income was RMB 137.5 million, equivalent to US dollar 20.2 million. Adjusted non-GAAP diluted earnings per ordinary share and per ADS were RMB 0.89, equivalent to $0.13 in the fourth quarter of 2009. Please note this net income figure still includes the specific debt expenses of RMB 184.3 million, equivalent to US dollar 27 million, which actively impacted our fourth quarter EPS by RMB 1.24, equivalent to $0.18.

Now, let us move on to the balance sheet. Accounts receivables decreased by 27.3% to RMB 1.96 million, equivalent to the US dollar 286.9 million end of December 31, 2009, for RMB 2.69 million as of September 30, 2009. Days sales outstanding decreased to 70 days in the fourth quarter of 2009, compared to 109 days in the third quarter of 2009. Primarily resulted from the improved credit conditions for solar project financing, our continued credit risk control efforts and an increasing product (inaudible).

Inventory as of December 31, 2009, was RMB 1.67 billion, equivalent to US dollar 243.9 million, down from RMB 1.75 billion as of September 30, 2009, due to the decrease in comparatively higher price of polysilicon inventory. Accounts payable increased by 36.6% to RMB 1.85 billion, equivalent to US dollar 271.4 million as of December 31, 2009, from RMB 1.36 billion as of September 30, 2009.

(inaudible) days outstanding increased to 94 days in the fourth quarter of 2009 compared to 71 days in the third quarter of 2009. As a result of the improved collection of accounts receivables, effective inventory management and a proactive payment strategy, we generated positive operating cash flow of over US dollar 200 million, and further enhanced our cash position in the fourth quarter.

As of December 31, 2009, we had RMB 3.63 billion, equivalent to US dollar 532 million in cash and restricted cash compared to RMB 2.66 billion as of September 30, 2009. As of the day of this press release, we had approximately RMB 9.96 billion in authorized lines of credit of which RMB 5.8 billion had been utilized.

Now I will go through some of the figures from our full fiscal year 2009 results. PV module shipment volume was 525.3 MW, an increase of 86.6% from 281.5 MW in 2008, and exceeded the high end of our previous guidance of 500 MW, offset by the considerable reduction in average selling price due to the rationalization of profitability across each stage along the solar value chain catalyzed by the recent global financial crisis and the depreciation of the Euro against the RMB.

Total net revenues were RMB 7.25 billion, equivalent to US dollar 1.06 billion, slight down from RMB 7.55 billion in 2008.

Gross profit was RMB 1.71 billion, equivalent to US dollar 251.2 million, slightly down from RMB 1.77 billion in 2008.

Gross margin was 23.6%, an increase from 23.4% in 2008, and exceeded the high end of our previous guidance of 20%.

Operating expenses were RMB 1.23 billion, equivalent to US dollar 180.7 million, including the two non-cash charges of RMB 315.5 million, equivalent to US dollar 46.2 million mentioned earlier.

After excluding the two non-cash charges operating expenses were RMB 917.8 million, equivalent to US dollar 134.5 million, compared to RMB 613.9 million in 2008. The increase in operating expenses was primarily attributable to the company's expanded scale of operations, increased marketing and promotional activities in both existing and emerging solar markets, and an increased research and development expenses in connection with the launch of a series of new initiatives, including Project PANDA.

After excluding non-cash interest expenses discussed earlier, interest expenses was RMB 278.3 million, equivalent to US dollar 40.8 million, compared to RMB 151.8 million in 2008. The increase in interest expenses was consistent with the increase in short-term and long-term borrowings from RMB 2.71 billion as of December 31, 2008 to RMB 4.25 billion, equivalent to US dollar 623.2 million as of December 31, 2009. The weighted average interest rate for these borrowings in 2009 was 7.07%, which slightly increased from 6.93% in 2008.

Foreign currency exchange gain was RMB 38.4 million, equivalent to US dollar 5.6 million, compared to a foreign currency exchange loss of RMB 66.3 million for the full year of 2008.

Income tax expense was RMB 32.9 million, equivalent to US dollar 4.8 million for the full year 2009, compared to an income tax benefit of RMB 5.6 million for the full year 2008. The income tax expense for 2009 was primarily attributable to the net operating income generated by Tianwei Yingli and Yingli China, netted off by the write-off of deferred tax liability as a result of intangible assets impairment.

In 2009, Tianwei Yingli and Yingli China were subject to enterprise income tax rates of 12.5%, and 15% respectively whereas in 2008 Tianwei Yingli, the major operating subsidiary was subject to an enterprise income tax rate of zero.

As a result of the factors discussed above, our adjusted non-GAAP basis net income was RMB 364.5 million, equivalent to US dollar 53.4 million for the full year 2009. Adjusted non-GAAP fully diluted earnings per ordinary share per ADS was RMB 2.53, equivalent to $0.37 for the full year 2009.

Before I move on to the guidance of 2010, I want to spend some time on the reconciliation of non-GAAP measures to GAAP measures. Firstly, in connection with the US dollar 50 million convertible notes issued to Trustbridge, and the US dollar 50 million three year loan facilities from ADM Capital to a non-recurring non-cash loss that has been recognized in the first half of 2009, including a loss on derivative liabilities of RMB 231.3 million, equivalent to US dollar 33.9 million, and a loss on debt extinguishment of RMB 244.7 million, equivalent to US dollar 35.9 million.

These two charges collectively impacted our full year 2009 EPS by $0.23 and $0.25 separately on a GAAP basis. Secondly, as a result of the derivative liability bifurcated from the company’s convertible notes issued in January 2009, the beneficial conversion feature of the convertible notes issued in July 2009, freestanding warrants issued in connection with a loan facility provided by ADM Capital in April 2009, and the equity component bifurcated from the company's convertible notes issued in December 2007.

Non-cash interest expenses of RMB 98.1 million, equivalent to US dollar 14.4 million was recognized in 2009, and actively impacted our full year EPS by $0.10 on a GAAP basis. Thirdly, a non-recurring non-cash impairment of RMB 131.2 million, equivalent to US dollar 19.2 million was recognized in the fourth quarter to write-off the carrying amount of the intangible assets relating to long-term supply agreements.

The EPS impact was negatively [ph] $0.13. It is important to note that the majority of these charges were non-recurring and non-cash in nature, and thus had no impact on our cash flow, nor did those charges affect our robust operational performance for the full year of 2009.

With that, I would turn to our guidance for 2010. Based on current market and operating conditions, estimated production capacity and a forecasted customer demand, the company expects its PV module shipment target to be in the estimated range of 950 MW to 1 GW for fiscal year 2010, which represents an increase of 80.8% to 90.4% compared to fiscal year 2009.

In addition, after taking into consideration the company's estimated blended cost of polysilicon in 2010, the expected average selling price of PV modules and the forecasted exchange rates of the Euro and US Dollar against the RMB. The company currently expects that its gross margin target for fiscal year 2010 to be in the estimated range of 27% to 29%.

Now, I would like to give some indicative targets and expectations for shipment and a gross margin targets in the first quarter of 2010. As Mr. Miao commented earlier, given the improved global economy, better credit environment for solar product financing and a strong demand from Germany, Italy, Spain, US and the other markets, we expect to continue running full capacity for the robust first-quarter with shipments flattish to the Q4 ‘09 level.

We expect the euro pricing remains flattish in first quarter 2010, the expected average sales price in US dollar terms in first-quarter 2010 may decrease slightly due to the depreciation of the euro against the US dollar, (inaudible) by our continuously declining blended cost of polysilicon, and an improving non-polysilicon processing costs and gram per watt. We currently expect the gross margin in the first quarter of 2010 to be flattish to Q4 2009 level.

I will now open the call to the questions. Operator.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jesse Pichel from Piper Jaffray. Please proceed.

Jesse Pichel – Piper Jaffray

Good evening, Chairman Miao, Mr. Li and the team. Congratulations on your strong operating results and guidance. First, can I ask you about the bad debt expense? Was that accounts receivable that became debt? And who were the two customers involved? And then I have a follow up question on ASPs.

Qing Miao

Okay. Thank you, Jesse. (Foreign Language)

Bryan Li

Thank you, Jesse, for your questions. And those two doubtful debts were incurred in the previous quarters. For competitive reasons, we are not going to talk about the details of the name of those two – of those two customers.

Jesse Pichel – Piper Jaffray

But it was actually debt and not accounts receivable? Can you elaborate on that part of it?

Bryan Li

Yes, accounts receivable.

Jesse Pichel – Piper Jaffray

Accounts receivable, okay. Regarding your guidance, you've guided to 27% to 29% margin for the full year 2010. Can you tell us what ASPs you're assuming there for the second half? There are many on Wall Street that think the pricing is going to be very difficult there in the second half. What are your thoughts?

Bryan Li

Thank you. Given our continuously growing solar market demand worldwide, and a much extended solar market geographically, we currently see roughly our euro term perspective 10% down in the second level from the first-half level.

Jesse Pichel – Piper Jaffray

Do you anticipate that Q3 2010 could be very weak because all of the pull-ins in Germany will have occurred in Q2? What do you think about the volumes there for Q3 in Germany?

Qing Miao

(Foreign Language) Hi, Jesse, and we don’t want to say directly, because for the shipments guidance, we have already given 950 to 1 GW. And actually the first half of this year, we occupy 40% of total shipments. In the second half we will be 60% and in the first half, the first-quarter actually down within 5% from the fourth quarter of last year, and in the second-quarter actually it will be up approximately 10% from first-quarter.

And in the third quarter it will be slightly higher than the second-quarter, actually much better than the first-half.

Jesse Pichel – Piper Jaffray

That's great news. And the last topic is you were recently honored there by senior officials from China visiting your plant. What were some of the topics discussed with these senior officials? And what does Chairman Miao think will occur there with a domestic solar market for China? Also, you're putting in a 100 MW plant in Hainan, should we assume that you will see some demand from the Hainan Province in China. Thank you very much.

Qing Miao

(Foreign Language)

Liansheng Miao

(Foreign Language)

Bryan Li

For Mr. Jiang Zemin [ph] or the delegation, Mr. Jiang and delegation actually, they first visited Fine Silicon, and they had a great interest in the production and the central monitoring of the facilities, and they asked a lot of questions relating to the specific technologies. And Mr. Jiang, actually he was very impressed, and actually he took notes in English for one page, just one detail. He commented that Fine Silicon was actually a significant breakthrough of the high-technology of the government of China.

And then he later visited manufacturing facilities for ingot, wafer and our modules in the Phase 3 of the company, and once again he thinks that our company was actually is a high tech PV manufacturer, and made a lot of contribution to the country. And the company actually, it is actually approximate to Beijing, but he didn't know it was so impressive. So he was surprised and impressed, and actually he said the company should promote the green energy, and to better contribute to the future.

And also for the Hainan 100 MW…

Liansheng Miao

(Foreign Language)

(Interpreted) Before Mr. Jiang’s visit, actually there was a first visit lead by Mr. (inaudible) marketing director of the National Energy Administration. Also served on NDRC, who is in charge of the policy-making of renewable energies, development of renewable energies, and then accompanied Mr. Jiang Zemin, is Zhang Guobao, who is the director of the National Energy Administration.

So those people were influential in policy-making in China, and another very positive sign is renewable energy, development of renewable energy including solar energy was one of the hottest topics mostly discussed during the plenary sessions of the People's Congress and Political Consultative Congress now currently taking place in Beijing.

Bryan Li

And two points I will actually supplement to the questions, one is we're very flattish here with everyone, and out of the 950 MW to 1 GW target for 2010, we have already secured more than 90% of the total targets through the legal binding sales contract. And secondly given the successful and the remarkable R&D initiative, and our strong execution capability, we target to continuously improve blended cost of polysilicon, gram per watt, non-polysilicon processing costs as well as the efficiency rate, and the operational efficiency just to solidify our cost leadership, and optimize the gross margin sequentially, while carrying out a market campaign enhancing Yingli Solar’s brand equity and increasing quality assurance.

So some key technical parameters, I would like to share with you, and together with our outlook for the future periods. And therefore the poly blended rate, and in the fourth quarter we have been able to manage a mid-teen percentage drop from the third quarter level, and we are anticipating a low-teen reduction in the first quarter 2010 to – from Q4 to ’09 level, and it will be turning towards $65 per kilo level at the end of this year.

For the non-poly processing cost, we have been able to improve the non-poly processing cost from $0.81 per watt from Q3 level to $0.76 per watt in Q4 level. And we target to get further another $0.05 down towards the end of this year to reach $0.70 per watt level, when we have closed 2010.

In regards to the gram per watt, in fourth-quarter, we have already reduced the gram per watt to 6 gram per watt level, and our target is to further reduced to 5.5 towards the end of this year 2010. And then lastly for the gross margin, for the whole year of 2010 we are targeting 27% to 29%. We believe in the first quarter of 2010, we will be able to remain flattish from Q4 ’09 level. Thank you.

Jesse Pichel – Piper Jaffray

Thank you for that strong outlook and thank you for the information. Congratulations. Bye.

Operator

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

Vishal Shah – Barclays Capital

Yes, thanks for taking my question. Bryan, thanks a lot for providing all those details because I had a lot of questions on that. But I still want to clarify. You said poly costs would be down to $65 level by the end of 2010, spot prices today are somewhere around $50. Why do you think it's going to take you so long to get to the $65 levels by the end of the year?

Bryan Li

Vishal thanks for the questions. Again as we discussed in the previous earnings conference call, our costing method is that we average costing methods. Since we have never written down the inventory since Q4 ’08. So we had to absorb the high cost, high price of polysilicon inventory through the quarter when we're consuming those high cost polysilicon. So it won't disappear in one day. It will be diluted, and getting close to the spot market’s level over the time.

Vishal Shah – Barclays Capital

How much high cost poly inventory do you have on your books today?

Bryan Li

It is not a simple math. When we are applying them with average costing methods and our inventory costs will be getting diluted when we are purchasing more low cost polysilicon from the spot market, and then that will form a lower starting point for the next quarter as inventory costs. And then that starting point of the inventory costs in the next quarter will get continuously diluted, when we are purchasing more low cost polysilicon in the next quarter.

So it is a step down process, and the high cost polysilicon – the inventory cost will be getting lower and lower gradually.

Vishal Shah – Barclays Capital

Maybe I can follow up with you later on that, but one of the follow-up was – is on your gross margin guidance for Q1, you said flattish margins, low teen reduction in poly costs in Q1. If I did the math you're looking at somewhere close to $1.80, maybe even lower than $1.80 per watt in pricing. Is that right? Because it looks like your pricing in Q4 was somewhere slightly lower than – slightly below $1.90 per watt.

Bryan Li

For the first quarter in euro terms, and we believe the euro pricing will be flattish from Q4 level, but since the euro has been depreciated by approximately 5% from the end of 2009. So that will negatively impact the pricing in dollar when we convert in to the US dollar. But on the cost side and as we saw a low-teen reduction on the blended rate of polysilicon.

But since now the polysilicon only occupies roughly 40% of the total cost. So when you are doing the math, you would need to take 40% of the low teen reduction of the blended rate of polysilicon, and then back out the gross margin forecast.

Vishal Shah – Barclays Capital

Okay and then just two housekeeping questions. What sort of OpEx guide do you have for the full year and also for Q1? And when you start your poly plant, what kind of depreciation expense do you have to start modeling for that?

Bryan Li

Yeah, sure. For your first question, our target is to we will start to, given the increased scale of operation this year, we anticipate to reduce the OpEx percentage to revenue to 10% by the end of this year. But it will be at close to 12% in the first quarter and then gradually down to 10%, when we are exiting 2010. And then for…

Vishal Shah – Barclays Capital

Yes, for the depreciation expense.

Bryan Li

Yeah, for the depreciation expense, the poly plant will start ramp up from the second half of this year, and before that in the first-half of the year, still during the testing period. So the depreciation will be a step up pattern, but when we are reaching, when we start ramping up the capacity in the second half, the all in depreciation charge will be somewhere close to $10 million every quarter.

Vishal Shah – Barclays Capital

Okay great, thank you so much.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Kelly Dougherty from Macquarie. Please proceed.

Kelly Dougherty – Macquarie

Hi, thanks for taking my question. You've obviously been producing well above nameplate capacity and the 2010 guidance suggests you'll continue. So I'm just wondering how many megawatts of wafer cells and modules you can make yourself and how much you think you might have to buy from third parties to attain your guidance for this year?

(Foreign Language)

Qing Miao

(Interpreted) Hi, Kelly. And thanks for the question. Actually, we currently do not have plans to do total manufacturing to meet our shipment target of 950 MW to 1 GW. Let me help you to go through briefly how can we achieve 1 GW, I mean guidance. For the current 600 MW, we already have in the headquarters, which allow us to reduce from 750 MW to 780 MW.

For the upcoming 300 MW, actually we estimate by the end, I mean by this year we will have approximately 150 MW to be produced. And for the Hainan facility, we estimate it will be 50 MW to 70 MW to be produced. So combined for those productions, we can actually have our total production of 1 GW. And those are largely I mean the very high kind of utilization rate of 600 MW are really benefit of our technology innovation, as well as increasing yield rate.

Kelly Dougherty – Macquarie

Okay, so when do you think the Hainan lines will be up and running and then the same I guess, with the 300 megawatts? Is that something that you'll have up by midyear?

Qing Miao

Yes, Hainan 300 MW actually will complete installation commissioning by the very end of second quarter and we will trial production very early of third quarter. And Hainan will start trial production, as well, kind of earlier in the third quarter as well.

Kelly Dougherty – Macquarie

Okay, and how should we think about the CapEx spend for the full year, and then maybe the difference between your standard lines versus the new PANDA lines that you are going to install on a cost per watt basis?

Bryan Li

On a cost per watt basis for the Hainan 100 MW lines, it will cost us roughly $1.20 per watt, given the offset of the headquarter, and there are some of the multi-sharing facilities. We are currently located and the headquarter cannot be utilized by the Hainan facilities. For the other 300 MW high-efficiency cell facility, we are going to build a headquarter, and the rate is also close to $1.20, because its high efficiency mono-crystalline facilities, but we are confident that we can according to the industry practice, and also the lower BOS [ph] cost for the high-efficiency cell, we will have a premium for the mono-crystalline product.

Kelly Dougherty – Macquarie

So you're looking to spend kind of $450m to $500m in CapEx in 2010, is that the way we should think about it?

Bryan Li

We won't spend the cost in 2010 in one shot. It will be progressively spent. And also in the 300 MW press release we put out earlier before the earnings release, we have already secured a 1.5 billion RMB project finance loan for five-year tenure from one of the largest commercial banks in China. So that money was for the 300 MW capacity.

Kelly Dougherty – Macquarie

Okay, so how much should we think about your spending on CapEx this year though?

Bryan Li

For this year, I will say we will spend 70% to 75% of the total in the CapEx in this year, and the remaining will be paid next year.

Kelly Dougherty – Macquarie

So have like a $350m number is a good number to think about?

Bryan Li

Yeah, I think for fourth-quarter estimation purpose.

Kelly Dougherty – Macquarie

Okay. Then just one other question about Fine Silicon, I know you're in trial production and you haven't seen the full extent of what it can do, but I'm just wondering if you've seen anything that might change your production cost assumptions either up or down? And then maybe if you could just give us an idea of what kind of cost assumptions and volume from Fine Silicon are in your guidance for 27% to 29% gross margins for this year?

Bryan Li

Sure. We plan to start up, ramp up the in-house polysilicon facility from the second half of the year. During the initial trial period, where we're looking at $60 to $65 per kilo. But in terms of the production throughput for this year, we probably will only look at 600 metric tons to 900 metric tons.

Kelly Dougherty – Macquarie

Okay, and then what price do you have factored in there for the second half of the year to the 27% to 29% gross margin, is that the $60 to $65?

Bryan Li

That is correct. It is all in.

Kelly Dougherty – Macquarie

Okay great. Thank you very much.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Dan Ries from Collins Stewart. Please proceed.

Dan Ries – Collins Stewart

Can you give us some color as to how much of those have either a price specified or a price that's going to be determined by a formula such as if the feed-in tariff declines X the price is set by that mechanism?

Qing Miao

Okay, Bryan can you take that question first, and then Stuart can you give some – both Stuart and Robert, can you give some supplement to this question.

Bryan Li

Yes. Thanks for the questions. And as I said, as we discussed earlier more than 90% of the capacity of the target has been locked through the legal binding contract. For the contract, where will be executing in the first-half of the year, both price and volume are fixed. And for the contract, we are going to execute in the second half of the year, and we for a large volume of the contract feel the fixed price, fixed volume contract, and there will be some contract, and subject to the pricing adjustment mechanism.

And then Stuart will further supplement the contrast datas in the second half of the year.

Stuart Brannigan

Okay. Hi, Dan. Hi everybody. I think first and foremost just a little bit of background on the market. As everybody rightly recognizes, the feed-in tariff reduction in Germany is good and pretty crazy first-half of the year. And so you can see that we are pretty stretched to deliver the product to all of our customers, who are trying very hard to execute as much as they possibly can in the first-half in Germany.

Now, the majority of our customers in Europe, although a lot of them do have German addresses and therefore the invoices has a German address. They have an awful lot of activity outside of Germany in Italy, France, Spain, Greece even into the US. And so they have (inaudible) facilities, and at the moment the vast majority of their resources are focused in and around the German market, and trying to finish off the execution.

I think they are still going to be a very strong third-quarter in Europe as everybody moves their attention from Germany into Italy, Spain, France, Greece et cetera. And we have seen that clearly the feed-in tariffs from those regions, and enable you to have a higher system price in Germany. So, we feel pretty confident that for the third quarter, we are not going to see too much price erosion, because it is a question of having a sensible conversation with our customers around getting that balance of profitability for them, and for us in making the systems work okay.

So, as Bryan says, quite a lot of those contracts have fixed price, but there are obviously some where we are going to renegotiate. So, I think it is very fair the gross margin guidance and the shipping guidance that is in that so far. Robert.

Robert Petrina

Dan, from our perspective in the US, I mean our agreements are fixed, and we don't have complex formulas and so on. So I think everything has been covered.

Dan Ries – Collins Stewart

Okay, great. Bryan, if I could, just one last quick one. Tax rate for 2010? And when does the ADM-related non-cash charge in the interest income line end? Does it end during the year or does it carry on into 2011? Thanks.

Bryan Li

No, it is zero. The rate is zero.

Dan Ries – Collins Stewart

0% is the tax rate for the year?

Bryan Li

Yes. So that is for the expense portion, where we are doing deferred tax calculation.

Dan Ries – Collins Stewart

Okay. I'll follow up with you on that.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Stephen Chin from UBS. Please proceed.

Amar Zaman – UBS

Hi. This is Amar Zaman calling for Stephen Chin. I have some questions about the US market. You've spoken about the US market being a big growth market for you. Can you tell us what your share of the US market was at the end of 2009 and how that – how you expect it to trend for 2010, and if you could, what your shipments were in '09?

Qing Miao

Hi, Robert, can you take this question please.

Robert Petrina

Sure. With respect to what our share of 2009 was it is very much dependent on which numbers you use as a total market size, and certainly the official numbers end up coming from SEIA, the Solar Energy Industry Association, and those numbers have not yet been published. We, as Mr. Miao alluded to in the opening speech, however gain that give us lot of momentum. In the US market we don't disclose regional shipments by specific countries, but certainly feel very optimistic about our prospects for 2010.

And again the 2010 market numbers are pretty broad in their ranges, but we feel very confident about our position, and the role they play in the overall market in 2010.

Amar Zaman – UBS

Just as a follow-up, would you – how would you rank Yingli in the US? Are you in the top three, the top five?

Robert Petrina

With respect to volumes or in which regard?

Amar Zaman – UBS

In respect to – with respect to share.

Robert Petrina

In 2010?

Amar Zaman – UBS

2009 and 2010.

Robert Petrina

I would say in 2009 we would be – we would not be in the top three. I think the CSI data for the fourth quarter in terms of applications put us as the fifth company. Certainly, our side of the US market was somewhat late in the second half of 2009. I think the fair place for us to be is in the top 10, and not knowing the actual numbers, it is hard for me to say where we ended up, not knowing sort of what the basis is for a comparison.

Amar Zaman – UBS

Thank you.

Operator

Your next question comes from the line of Satya Kumar from Credit Suisse. Please proceed.

Satya Kumar – Credit Suisse

Thanks for taking my question. I just wanted to clarify the OpEx number in Q4. What was the clean OpEx number? Was it $47.4m?

Qing Miao

Hello Satya, can you repeat your question again, because we cannot hear you clearly?

Satya Kumar – Credit Suisse

Yes. I just wanted to clarify the clean OpEx number ex the charges in Q4. Was that number $47.4m? Is that what Bryan said?

Bryan Li

Yes, excluding those non-cash numbers it should be in a percentage to revenue should be 12.8%.

Satya Kumar – Credit Suisse

Can you give me a little bit of clarity as to why the percentage of revenue is increasing? I would expect that with increasing shipments you should get a little bit of benefit. Why is the percentage of OpEx going up?

Bryan Li

Yes, that is because our capacity in the fourth quarter of last year, we started to add a new 300 MW or 200 MW capacity was added in the fourth quarter of ’09. So that will incur proportionately the operating expenses to facilitate the new addition of 200 MW capacity. And also we are taking more active steps in expanding our market footprint to the other markets, as well as the last quarter of the year, and to conclude the evaluation for the corporate business for the internal management perspective.

Satya Kumar – Credit Suisse

Okay. Can you give a little bit of color on the shipments by geography in Q4 and Q1? And do you have any thoughts on what it will be for the rest of this year?

Bryan Li

Yeah, sure. For the fourth quarter of the year, we shipped close to 65% of our products to the German customers. But there is one point I would like to remind you is, when we're calculating the statistics of the geography, we can only categorize the customer by the region of their location. As everybody knows, and for a lot of our customers even the German customer, there are still contributing – they are still distributing their products outside of Germany and a large portion of their purchase.

So in terms of how much our modules will flow into Germany, and it will be hard to analyze. But if we just use the original, the customers we saw, close to 65% modules sold to the German customers, and close to 20 plus percentage to the other European countries, including the Eastern European and South European. Then the remaining 10% distributed to the US market and the China markets.

Satya Kumar – Credit Suisse

And how about for Q1 of this year?

Bryan Li

For Q1 and for German markets, we were seeing a similar level, close to 65% to the German markets, and for the portion that goes to the other European countries will slightly go down, and then the portion to the US will go up?

Satya Kumar – Credit Suisse

Okay. And do you have a sense as to right now, of the 950 MW to 1 GW shipments, in the second half of this year, what the geographical shipment mix would look like?

Bryan Li

Sure. And as we are pursuing the diversification of our revenue portfolio across the different countries, so for the whole year 2010, and we're anticipating to ship close to 50% to the German markets, and roughly 20% to other European countries, and then the US proportion will go above 10%, and also China’s will increase to slightly less than 10%, and then the rest of the world will shatter the remaining.

Satya Kumar – Credit Suisse

Okay. And lastly, on your capacity expansion, the new 300 MW PANDA capacity expansion you mentioned will come online from early Q3. Is it correct?

Qing Miao

Yes, correct.

Satya Kumar – Credit Suisse

Okay. Can you let me know, in terms of future strategy for capacity expansions, are you going to focus on expanding only PANDA-type capacity or are you going to expand the old multi capacity? And for PANDA, whose furnaces are you using to make the wafers?

Yiyu Wang

This is Yiyu, the chief strategy officer of the company. I think basically for the future expansion, we will have a reasonable mix between mono and multi-crystalline, basically we won’t – we have not decided yet, but I think it will be a mix between mono and multi. Regarding to the question on the furnaces for the mono-crystalline, actually they are all imported from overseas suppliers.

Satya Kumar – Credit Suisse

Is it the same supplier that supplies multi or a different supplier?

Yiyu Wang

I cannot give comments right now, but it is from the top tier equipment supplier outside China.

Satya Kumar – Credit Suisse

All right. Thank you.

Yiyu Wang

No problem.

Operator

Ladies and gentlemen, due to time constraint, we will only be able to take one last question, and that question comes from the line of Lu Yeung from Merrill Lynch. Please proceed. Lu, your line is open. You may proceed with your question.

Lu Yeung – Merrill Lynch

Can you hear me?

Qing Miao

Yes, we can.

Bryan Li

Yes, we can.

Lu Yeung – Merrill Lynch

Can you hear me?

Qing Miao

Yes, yes. Hello.

Lu Yeung – Merrill Lynch

Yes. Bryan, I have a question on your targeting non-silicon costs of $0.70. Does that include the PANDA lines, higher cost from PANDA by the end of the year?

Bryan Li

For the numbers we talk about for the first quarter and the second quarter, it didn't include as we anticipate the PANDA line will come online, we will start ramping in the second half. But for our annual targets of $0.70 when we exit 2010, it is included.

Lu Yeung – Merrill Lynch

And how much of the shipment is – would be PANDA by the end of the year, in the second half?

Bryan Li

We currently forecast, as we start ramping in the middle of the year. So, we currently estimate roughly 50% of the capacity will be brought online in the second half of the year.

Lu Yeung – Merrill Lynch

So you will have roughly 150 megawatt of PANDA products?

Bryan Li

Close to that number.

Lu Yeung – Merrill Lynch

I see. One last question I have is based on your new strategy with PANDA lines, and your probably slightly higher silicon cost going forward, is it fair to assume that your pricing strategy will be less aggressive this year compared to last year, meaning that you probably wait and see what your competitors are doing in terms of pricing before you make a price move? How should we think about that?

(Foreign Language)

Bryan Li

(Interpreted) I think this comment for the first, for 2009, so we are very aggressive on pricing, but we still reached the targeted gross margin that we give the guidance in the early of 2009. The second is for 2010, our key target will be focused on how to further decrease our cost by further development of our technology side, like incremental of the PANDA project, by including also other actions to further decrease our cost through increase of the performance and technology advantage of our products, which we believe will be the base for our – fundamental base for our long-term competitiveness in this industry.

Lu Yeung – Merrill Lynch

All right. Thank you very much.

Liansheng Miao

Thank you.

Operator

At this time, we have no further questions.

Qing Miao

Okay, thank you for joining us today, and if you have any further questions, please do not hesitate to contact us. Good bye and good day, thanks.

Operator

Ladies and gentlemen, thank you very much for your participation in today’s conference call. You may now disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!