Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Yingli Green Energy Holding Company Limited (NYSE:YGE)

Q1 2010 Earnings Call Transcript

May 24, 2010 8:00 am ET

Executives

Courtney Shike – Brunswick Group LLC

Miao Liansheng – Chairman and CEO

Bryan Li – Executive Director and CFO

Miao Qing – Director, IR

Robert Petrina – Managing Director of Yingli Green Energy Americas

Wang Yiyu – Chief Strategy Officer

Analysts

Min Zhou [ph] – Jefferies

Vishal Shah – Barclays Capital

Maheep [ph] – Credit Suisse

Sanjay Shrestha – Lazard Capital Markets

Dan Ries – Collins Stewart

Gary Hsueh – Oppenheimer & Company

Sunil Gupta – Morgan Stanley

Kelly Dougherty – Macquarie

Operator

Hello, ladies and gentlemen. This is Gina. I will be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited first quarter 2010 financial results 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 Courtney Shike from Brunswick Group. Courtney, please proceed.

Courtney Shike

Thank you, Gina, and thank you everyone who is joining us today for Yingli’s first quarter 2010 financial results conference call. A few hours ago, Yingli issued its first quarter 2010 earnings release, which can be found on the company's website at www.yinglisolar.com. I trust you have all had the chance to review it by now.

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. Wang Yiyu, Chief Strategy 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, IR Director.

The call today will feature a short presentation from Mr. Miao, covering business and operational developments and then Mr. Li will take you through a discussion of the company’s financial performance. After that, Mr. Li 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 Mr. Miao Liansheng. Please begin.

Miao Liansheng

(Interpreted) Hello, everyone. Thank you for joining us today. We saw continued robust and solid growth in this quarter, with shipments flattish over the fourth quarter and gross margins rising to an all-time high of 33.3%, up from 29.6% in Q4.

The jump in gross margin this quarter was attributable to the following three reasons. First, overall, we saw stable ASP throughout the quarter and there was in fact a slight ASP increase if no consideration is given to foreign exchange losses. Second, with increasing procurements of polysilicon from the spot market, the blended cost of raw materials continued to drop. Finally, with our improved cell conversion efficiency and yield rate, we continue to drive down our non-poly costs.

I will let Bryan take you through the rest of our financials in a moment. Overall, I think our strong Q1 results underline the effectiveness of our efforts to diversify our customer base, reduce costs, and strengthen our R&D capabilities. They also indicate a healthy demand for solar products across our key markets. Let me talk a bit more about our performance and expectations in each of these markets.

In Europe, German customers continue to dominate demand for our products in the first quarter, while demand from other European countries picked up substantially from the last quarter. We found our major German customers have shifted some of the efforts to markets outside of their home country, backed by their strong project development and distribution capabilities, which have been successful.

In order to mitigate any negative impact of policy changes in Germany in the second half of this year, we continue to explore the newer and developing European markets such as Spain, Italy, France, and Czech Republic. For example, recently we entered into a sales contract with MAETEL, Maessa Telecomunicaciones, a leading Spanish EPC company.

Under the terms of this contract, we will ship 33 megawatts of PV modules to MAETEL from the beginning of October 2010 through the end of April 2011. The PV modules to be shipped under this contract are expected to be installed in a PV solar power plant located in Curbans, France, which will be France's largest PV solar power facility according to the plant owner.

Thanks to our strong sales efforts, our customer portfolio was further diversified in the first quarter by implementing more flexible sales strategies, strengthening sales forces, and working with our customers. We are confident to emerge stronger in European markets.

In the United States, we are seeing strong demand from residential customers, small to middle-sized commercial projects, as well as utility-scale projects. This demand is driven by a combination of factors, which include attractive federal policies, state RPS requirements, improved project financing environment, and most importantly, decreasing system costs.

The United States is a market with great potential for solar – PV solar energy systems, given the country's growing energy usage and rich solar resources. Over the past few years, we have strategically invested in this market to lay a foundation for long-term development. Since 2009 when we opened our New York and California offices, we have built up local teams, while strengthening cooperation with leading players.

Our two most important markets in the United States, California and New Jersey, have maintained solid growth momentum. We have continued to lead a number of applications for the California Solar Initiative. And in New Jersey, we have signed a 10-megawatts supply agreement with SunDurance Energy, a leading developer and EPC, and have shipped substantial volumes during the first quarter.

Going forward, we view the United States as one of our most important markets and we are focusing on expanding and diversifying our customer base to strengthen our leadership in this market. We will continue to enhance our local presence on both technical and commercial perspectives and will strive to provide our customers with better products and services.

China was another key market for us this quarter, boosted by the Golden Sun project and the demonstration projects for BIPV applications. We see the emergence of strong demand from BIPV buildings for essential and commercial rooftop projects in Eastern China. Meanwhile, in Western China, the implementation of concession bidding is driving the development of utility-scale projects.

As of today, we have already shipped the majority of the PV modules we committed to the 10-megawatt on-grid project developed by SDIC in Dunhuang. Leading power companies in China have strong financial strength and a wealth of experience in project operations and electricity transmission. It is important for us to continue to work closely with major customers in China to explore the domestic market together.

Although we were running capacity of over 130% of the named capacity in the first quarter, we are now able to satisfy all the demand across key markets. We are looking forward to our upcoming capacity expansion projects in order to meet a strong and growing demand of our customers.

Most of you are familiar with our recent capacity expansion activities. In Baoding, we have the 300-megawatt expansion which utilizes the high-efficiency PANDA technology we've developed in conjunction with ECN and Amtech. We expect this expansion to come online in Q3 with an average cell conversion efficiency rate of at least 18.5%.

There is also the 100-megawatt expansion project in Hainan, which is also on track to come online in Q3. Adding this capacity will allow us to reach 1 gigawatt in total production capacity in Q3. Fine Silicon, our in-house polysilicon plant, is in its final stage of trial runs and is expected to achieve integrated production in mid-2010.

As we worked on building and diversifying our customer base across these markets, we initiated marketing efforts in both existing and emerging markets. You all know we have become an official sponsor of the upcoming 2010 FIFA World Cup in South Africa. We are the first renewable energy company and the first Chinese company to become an official sponsor. This is a great opportunity for us because it allows us to raise awareness of renewable energy while promoting our brand globally.

As part of our communications efforts of this sponsorship, in March, we hosted a delegation of journalists from around the world in Baoding. It was a great opportunity for foreign media to gain deeper understanding of Yingli and of solar energy and we saw increasing brand awareness, particularly in Europe.

We are also getting ready for the Intersolar 2010 Conference in Germany this June, one of the biggest industry exhibitions. We plan to invite customers, suppliers, investors, and analysts to exchange views and celebrate the FIFA World Cup. We expect, by doing so, we will build even stronger relationships with them in regional brands.

I want to briefly talk about Yingli's commitment to the community. In April, we reaffirmed our social commitment by donating to earthquake survivors in the Yushu region of Qinghai immediately after massive earthquake. Last year, we have attained SA 8000 certificate, a sign of our dedication to the health and safety of our workers and social responsibility.

Although the European sovereign debt crisis and the depreciation of the euro have caused concerns in the market, demand for PV products remains strong. Yingli has several strategies in place to capture more of this demand in a healthy and steady manner.

First, we are continuing to strengthen risk control in all markets; for example, to tighten credit assessments of customers and to accelerate collection of accounts receivables. Second, we have increased our foreign currency hedging activities to hedge risks of foreign exchange. Third, we are lowering costs by increasing cell conversion efficiency through PANDA project. Fourth, we are entering more medium and long-term agreements with major customers to strengthen our strategic relationships. Fifth, because of vertically integrated operations, we are not constrained by upstream product supply, such as wafers and cells, which also contributed to gross margin.

Finally, we take quality control seriously to guarantee the quality of our products. We recently received the TUV "Power Controlled" certificate, which further demonstrated our superior product quality.

I believe that with our industry-leading position, solid growth strategy, rapid capacity expansion, and strengthened risk control, we are well positioned for healthy and solid further growth.

Thank you. And now, I will let Bryan take you through our financials for this quarter.

Bryan Li

Thank you, Mr. Miao. And hello and a warm welcome to everyone who's joining us for (Technical Difficulty). In the first quarter, our business operation continued to perform very well and we saw healthy sales and profit trends.

Despite of the increasingly large demand on Yingli Solar's products, shipment volume was flattish quarter-over-quarter due to our capacity constraint in the first quarter. We are expecting to satisfy more customers' demands in the second half of the year when we are releasing the new 300 megawatts PANDA line production capacity and 100 megawatt Hainan production capacity.

Our record high gross margin of 33.3% this quarter once again demonstrates our industry-leading cost structure. I'm especially pleased with our enhanced cash position, which is a result of our improved profitability and robust operating cash flow in the first quarter.

I will now walk you through the details of our financial performance in the first quarter 2010. Total net revenue was RMB 2.45 billion, equivalent to $358.9 million in the first quarter, a slight decrease of 3.2% from RMB 2.53 billion in the fourth quarter 2009. The slight decrease was primarily due to the depreciation of the euro against the RMB and was partially offset by the slight improvement of selling prices in original currency term. PV module shipment volume was flattish compared to the last quarter.

In first quarter, we have achieved a capacity utilization rate of close to 130% for our existing 600 megawatts capacity, which was attributable to our continuous efforts in improving operational efficiency and cell conversion efficiency for years. Benefiting from our continued cost reduction efforts, the first quarter gross profit was RMB 815.4 million, equivalent to $119.5 million, an increase of 8.7% from RMB 750.4 million in fourth quarter 2009.

Gross margin in the first quarter reached a record high of 33.3%, while exceeding our previous gross margin guidance for the first quarter, demonstrating a continuously healthy and steady improvement trend from 29.6% in Q4 2009, 22.5% in third quarter 2009, and 19.8% in the second quarter 2009.

Before we move on to the next item, I would like to walk you through steps we have taken on the cost reduction front over the last couple of years, which have helped us reach this all-time gross margin high.

First, you may recall from previous guidance – previous earning conference calls that we have not made any long-term once-off provisions to write off the inventory costs of polysilicon prepayments since Q4 2008. We have continuously decreased our blended cost of polysilicon from an average of over $300 per kilogram for the full year of 2008 to around $120 per kilogram for the full year 2009 through gradual consumption of comparatively higher-priced polysilicon inventory and successful price renegotiations for the long-term polysilicon supply contracts.

In the first quarter 2010, the blended poly costs declined by mid-teen percentage from the fourth quarter 2009 level and we expect this trend to last in the coming quarter. Secondly, through strong R&D and execution capabilities to continuously improve our yield rate, cell conversion efficiency, and operating efficiency, we have maintained a leading average photovoltaic cell efficiency level, of which the multi-crystalline cell was increased from 15.6% in 2008 to 16.2% in 2009 and 16.5% in the first quarter of 2010 on average.

For PANDA cell, which will start commercial operation in the second half of the year, the efficiency rates has already achieved 18.5% above during our internal trial production. For polysilicon consumption per watt, it was also decreased from 6.8 gram per watt in 2008 to 6.3% in 2009 and a 5.9% in the first quarter of 2010.

Third, our non-poly processing cost was reduced to $0.75 per watt in first quarter, a remarkable improvement from $0.80 for the full year 2009 and $0.85 for the full year of 2008, demonstrating our industry-leading cost position.

Looking forward, with the completion of our 300-megawatts high-efficiency mono-crystalline silicon-based manufacturing capacity expansion in Baoding, which will deploy technology developed through project PANDA, we believe that increased cell efficiency rate and the larger operating scale will allow the – will allow our polysilicon usage per watt and the non-polysilicon costs to continue to decrease. Further, the ramping-up of our in-house polysilicon plant, Fine Silicon, will leave more room for cost saving in the future.

Operating expenses in first quarter decreased to RMB 279.5 million, equivalent to $40.9 million from RMB 784.8 million in fourth quarter 2009. The high operating expenses in Q4 2009 was a result of non-cash impairment of intangible assets relating to – and a non-cash bad debt expenses of RMB 461 million. Operating expenses as a percentage of total net revenues decreased to 11.4% from 12.8% in the fourth quarter 2009, after excluding the two non-cash charges in Q4 2009.

During the course of preparation of our 2009 annual reports, one of our customers failed to perform its obligation under contractual arrangements it had entered into with us regarding certain accounts receivable outstanding as of December 31st, 2009. We are currently seeking legal advice on our options to recover the accounts receivable. A non-cash bad expense was recognized in the fourth quarter 2009 to provide a partial provision for the outstanding accounts receivable.

As a prudential measure, we have provide – we have provided an additional non-cash bad debt expenses to cover the full amount of the outstanding accounts receivable for the fourth quarter and the full year 2009, which was offset by adjusted income tax benefit and earning attributable to the non-controlling interests for these two periods. As a result, the net loss for the fourth quarter and the full year 2009 increased by RMB 61.9 million.

The impact of this additional non-cash bad debt expenses on the full year 2009 will be fully reflected in our annual report for 2009. This provision will be reversed in subsequent financial statements if we could recover a portion of the outstanding accounts receivable from this customer later on. As a result, first quarter's operating income of RMB 535.9 million, equivalent to $78.5 million, was significantly higher than the operating loss of RMB 34.4 million we recorded in Q4 2009. Operating margin was 21.9%, up from negative 1.4% in Q4 2009.

After excluding non-cash interest expenses, interest expense for this quarter was RMB 63.4 million, equivalent to $9.3 million compared to RMB 58.7 million in Q4 2009. The weighted average interest rate for the borrowings in the first quarter increased to 6.43% from 6.27% in Q4 2009, both measured on a basis excluding non-cash interest expenses.

Foreign currency exchange loss for the first – for the quarter was RMB 169.1 million, equivalent to $24.8 million. The euro depreciated approximately 6.52% against the RMB in the first quarter of 2010, which resulted in a big loss upon revaluation of accounts receivables and raw material prepayments denominated in euro at the end of this quarter.

Given the weak euro, triggered by the sovereign debt crisis and appreciation expected for RMB, we are prudently monitoring the foreign currency volatility risk through the following procedures.

First, cash flow wise, we are taking active procedures including accelerated accounts receivable collection and increased sales of accounts receivables to reduce the revaluation impact of accounts receivable, which accounts for majority of our net euro monetary assets.

Second, we are managing the net position of monetary assets and monetary liability against the different foreign currencies by closely monitoring the foreign currency percentage of our total sales, raw material purchase, and equipment purchase.

Third, we could constantly enact our hedging practice to hedge the euro and the U.S. dollar sales at a target rate which is formulated through annual budgeting process and it will be updated upon time to time based on the macroeconomy, market expectation, and management's evaluation.

Income tax expense was RMB 39.5 million, equivalent to $5.8 million in the first quarter 2010 compared to income tax benefit of RMB 63 million in the Q4 2009. The income tax expense was primarily due to the net operating income generated by our operating subsidiaries in this quarter.

Under the PRC Enterprise Income Tax Law and the various implementation rules, our two major operating subsidiaries, Tianwei Yingli was subject to an enterprise income tax rate of 12.5% in both 2009 and 2010 and Yingli China was subject to an enterprise income tax rate of 15% in both 2009 and 2010.

As a result of the factors discussed above, net income was RMB 190.9 million, equivalent to $28 million in first quarter 2010 compared to a net loss of RMB 106.7 million in Q4 2009. Diluted earnings per ordinary share and per ADS was RMB 1.24, equivalent to $0.18 in the first quarter compared to diluted loss per ordinary share and per ADS of RMB 0.72 in Q4 2009.

On an adjusted non-GAAP basis, net income was RMB 246.8 million, equivalent to $36.2 million in first quarter 2010 compared to net income of RMB 75.7 million in Q4 2009. Adjusted non-GAAP diluted earnings per ordinary share and per ADS were RMB 1.60, equivalent to $0.23 in the first quarter 2010 compared to non-GAAP diluted earnings per ordinary share and per ADS of RMB 0.49 in Q4 2009.

On an adjusted non-GAAP basis and, if we further exclude the foreign currency exchange loss, net income was RMB 415.9 million, equivalent to $60.9 million in the first quarter 2010 compared to a net income of RMB 124.1 million in Q4 2009.

Adjusted non-GAAP diluted earnings per ordinary share and per ADS excluding foreign exchange loss were RMB 2.70, equivalent to $0.40 in first quarter 2010 compared to non-GAAP diluted earnings per ordinary share and per ADS excluding foreign exchange loss of RMB 0.80 in Q4 2009.

Now, let’s move to the balance sheet. Accounts receivable decreased by 32.2% to RMB 1.23 billion, equivalent to $180 million as of March 31st of 2010 from RMB 1.81 billion as of December 31st, 2009.

Day sales outstanding decreased to 45 days in Q4 2010 from 64 days in Q4 2009, primarily a result of the improved credit conditions for the solar project financing and the recovery of macroeconomics, our continued credit risk control efforts, together with the increasing product bankability. Accounts payable increased by 8.9% to RMB 2.02 billion, equivalent to $295.6 million as of March 31st of 2010 from RMB 1.85 billion as of December 31st, 2009. Payable days outstanding increased to 111 days in first quarter 2010 compared to 94 days in Q4 2009.

As a result of improved collection of accounts receivable and a proactive payment strategy, we generated a positive operating cash flow and further enhanced our cash position in this quarter. As of March 31st of 2010, we had RMB 4.36 billion, equivalent to $638.1 million in cash and restricted cash compared to RMB 3.63 billion as of December 31st, 2009. As of the date of this press release, we had approximately RMB 10.21 billion in authorized lines of credit, of which RMB 4.23 billion had not been utilized

With that, I will turn to guidance for 2010. Based on current market and operating conditions, estimated production capacity, and forecasted customer demands, we reaffirm our PV module shipment target to be in the estimated range of 950 megawatts to 1 gigawatt for the fiscal year of 2010, which represents an increase of 80.8% to 90.4% compared to the fiscal year 2009.

In addition, after taking into consideration of our estimated blended costs of polysilicon in 2010, the expected average selling price of photovoltaic modules and the forecasted exchange rate of the euro and the U.S. dollar against the RMB, we also reaffirm our estimated gross margin targets of 27% to 29% for the fiscal year of 2010.

Now, I would like to give some indicative targets and expectations for the shipment and gross margin in the second quarter of 2010. Given strong demands from Germany, the United States, Italy, France, Spain, and other markets, we continuously expect to operate at full capacity in the following quarters. Given more working days in the second quarter and improving operational efficiency, we expect the shipment in the second quarter 2010 will sequentially increase from first quarter 2010 by high-single digit percentage.

Despite of the negative impact of the euro depreciation to our second quarter's average selling price, we currently expect a strong gross margin to be in the estimated range of 29% to 30% in the second quarter 2010 a result of the firm average selling price and our continuous decline in blended costs of polysilicon, improving non-polysilicon processing costs and gram per watt.

I will now open the call to questions. Operators?

Question-and-Answer Session

Operator

(Operator Instructions). And please standby for your first question. And your first question is from the line of Min Zhou [ph] with Jefferies. Please go ahead.

Min Zhou – Jefferies

Good evening, Chairman Miao, Bryan, and team. Thanks for taking my question. Can you give us some update on your Germany and Europe exposure in Q1, Q2, and also for full year 2010? What is your hedging percentage in the next few quarters?

Miao Qing

(Foreign Language).

Miao Liansheng

(Interpreted) In order to the interest of time, Bryan will answer these two questions together.

Bryan Li

Yes, thanks for the questions. And Germany remains as the anchor market in the world, and also German orders is one of the major orders amongst all the customers from the different geographies. And in the first quarter of the year, Germany still occupies more than 50% of the market shares in our customer portfolios. And in the second quarter, we expect German orders to remain at a similar level or even slightly higher level than the 50% plus level we maintained in the first quarter.

And for a full year basis, we will expect that Germany will tick slightly above 50% of the total market share. And besides solidifying our orders from the German customers, we are also largely – fastly expanding our customer base in the United States and also the other regions across the world. And the customer portfolio is becoming more and more diversified than we saw in the last year. Thank you.

Min Zhou – Jefferies

Thanks. A quick follow-up. What is the ASP in Q1 and Q2, and what's the trend in Q3?

Miao Qing

(Foreign Language).

Bryan Li

Thanks again for the questions. In the first quarter, in the euro term and a U.S. dollar term, we have achieved a slight increase on the average selling price comparing to the fourth quarter of 2009 and due to the large – the big depreciation of euro against the RMB in the first quarter, so the average selling price in the first quarter of 2010 slightly decreased from Q4 '09's level. And in the following few quarters, we continue to see the euro pricing keep flat. And the U.S dollar pricing will be flat in the second quarter and we will – it will slightly decrease in the second half of the year.

Min Zhou – Jefferies

Great. Thanks a lot. See you at Intersolar.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Vishal Shah. Please go ahead.

Vishal Shah – Barclays Capital

Yes, thanks for taking my question. Just on the gross margin guidance, can you talk about what your assumptions are for polysilicon costs in the second quarter and back half of the year? And also, how do you see pricing develop in the second half? You said flat euro pricing in Q2. What about Q3, Q4?

Bryan Li

Thank you. Thank you, Vishal. And as I discussed in earlier questions and for the average selling price, in the second quarter – in the second quarter, we see the euro term keeps flat and the dollar term also – will also have a – the dollar term has a slight decrease. So on a combined basis and reflecting the anticipated depreciation of euro against the RMB, we currently expect the average selling price in U.S. dollar – in U.S. dollar conversion will show a high-single digit decrease from the first quarter's level.

And for the fourth quarter – and the fourth quarter of this year, the average selling price in U.S. dollar conversion will be slightly decreased from the second quarter's level. That was for the average sales price.

And on the poly front – and we continuously reduce the blended rate of polysilicon through the consumption of the high-cost – high-priced polysilicon inventory. And in the first quarter, we saw a low-teen percentage decrease on the blended rate of polysilicon from Q4 '09's level and from Q2 to Q3 and Q4, we expect a high-single digit percent decrease on the blended rate of polysilicon in Q2 from Q1's level, and it will continue a slight decrease trend from Q2's level to Q3 and Q4. Thank you.

Vishal Shah – Barclays Capital

So just to follow up, you said a slight decrease on first-half level in pricing. Are we talking about less than 5%, less than 10%? Can you give us some range, please?

Bryan Li

Yes. It's low-single – low-single digit in the first half. Low-single digit first half –

Vishal Shah – Barclays Capital

In the second half? In the second half of 2010, pricing in euro terms will be down low-single digit, you said?

Bryan Li

Yes. That's actually for the second half of the year, low-single digit decrease in the second half on the average sales price in U.S. dollar conversion term from second quarter of 2010.

Vishal Shah – Barclays Capital

What assumption are you making for the euro?

Bryan Li

You mean the exchange rate?

Vishal Shah – Barclays Capital

Yes.

Bryan Li

We bake the exchange rate by referencing to the market expectation we can get from the bankers and analysts. And basically, the euro, we will – and I think we expect that the euro will continue depreciation towards 1.2 level at the end of this year.

Vishal Shah – Barclays Capital

Okay. And what kind of visibility do you have at this point on the second half shipments that you are talking about? Are you fully sold out for Q3 and Q4?

Miao Qing

(Foreign Language).

Bryan Li

Close to 100% percentage, which is for the December-January – above 95%, I think.

Vishal Shah – Barclays Capital

Okay. Thank you.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Satya Kumar. Please go ahead.

Maheep – Credit Suisse

Hi, this is Maheep [ph] on behalf of Satya Kumar. Thanks for taking the question. My question is on the capacity expansion. Are you planning further capacity expansion apart from the 400 megawatts, and what will be the split between PANDA and multi-crystalline capacity?

Miao Qing

(Foreign Language).

Bryan Li

And I said this earlier and we – as we discussed in the earning conference call, we are now constructing a 300 megawatts project PANDA line at Baoding and another 100 megawatts line in Hainan province. And we expect – and the capacity, we'll start bringing online in the – from the middle of this year. And so in the second half of the year, we will see a meaningful increase in production capacity coming off those two newly – additional production lines. And beyond the 300 megawatts and 100 megawatts expansion capacity, we currently have not yet formed any final decision on any future expansion plans.

Maheep – Credit Suisse

My second question on the poly part. How much production are you targeting from the internal poly for 2010 and 2011?

Miao Qing

(Foreign Language).

Bryan Li

We will – as we schedule to ramp up the capacity from the middle of this year and as we are expecting in the second half of the year and their – the capacity coming from the Fine Silicon will be 600 to 800 metric tons. And for next year, we are expecting 2,400 to 2,500 metric ton capacity.

Maheep – Credit Suisse

Thank you. And one last question on the regulatory part. On the China, have you any updates on the national feed-in tariff? And we have been hearing some news flow on the North American capacity expansion. Could you provide any color on that? Thanks a lot.

Miao Qing

Sorry, Satya. Can you just repeat your question loudly because I can't hear you clearly? Sorry.

Maheep – Credit Suisse

Yes, my last question was on the China feed-in tariff. Do you have any updates on that? And a follow-up on the news flow on your North American capacity expansion plan. Can you provide any color on that?

Miao Qing

(Foreign Language).

Miao Liansheng

(Interpreted) The U.S. government is actively planning the subsidy program. Right now, you have heard of concession bidding, as well as the Golden Sun program. According to my estimation, under concession bidding for this year, next year we are going to have probably more than 200 megawatts will be planned and eventually approved by Chinese government. For the feed-in tariff, which is expected to be coming in the second half of this year, as well as a further revise on the renewable energy law and further detailed tender [ph] regulations, we estimate that the feed-in tariff would be RMB 1.15 to RMB 1.2 per kilowatt hour.

So another big project the Chinese government right now is planning is not related to the feed-in tariff to the large utility-scale projects, as well as rooftop commercial systems. But the one – another one, which you probably haven't heard in other countries, to subsidize those 20 million [ph] populations who have no access to electricity so far and those will be totally (inaudible) by the Chinese government. For us, we expect the second half of this year, our – the total shipment to the Chinese market will occupy by 5%, around 5% of the total target output annually. And next year, we are looking forward to ship around 200 megawatts in Chinese markets.

Additionally – I mean, for the company, we are taking several projects that I would like to highlight. The first one is probably one of the largest commercial rooftop systems in Hainan Province; it's 30 megawatts. And there's several smaller projects in Hubei Province. Actually, some of the projects have already kicked off.

Right now – would you like to give a rough – kind of a brief update on the U.S. facility? Because we do not have – we can only answer actually one question to everyone. So Robert, could you please (inaudible) your answer? Thanks.

Robert Petrina

With respect to our U.S. plants, we are still evaluating our expansion plans are looking forward to a solution that will provide us with the best long-term economic returns. So we are still in process for doing that.

Miao Qing

Thank you, Robert.

Robert Petrina

Sure.

Maheep – Credit Suisse

Thanks.

Operator

Your next question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Please go ahead.

Sanjay Shrestha – Lazard Capital Markets

Thank you. First of all, congratulations on a great quarter, guys. A couple of quick questions here. Number one, R&D actually was down quite a bit in the quarter. Does that mean you are – probably have spent all the money you need to spend on your PANDA project and that's the new level of the R&D we should expect going forward?

Miao Qing

(Foreign Language).

Miao Liansheng

(Interpreted) The analysis is correct. Actually in the fourth quarter of last year, on the 30-megawatt cell production – pilot production line with PANDA technology, we have – we already received 80.3% to 80.5% efficiency range. So right now, we are doing some regular improvements in the small kind of adjustments. So we do not have that much spending on the PANDA pilot production line.

Sanjay Shrestha – Lazard Capital Markets

Okay, great. Then, after that, when you guys talk about your poly prices continuing to go down, is the poly prices in like the mid $70 range at this point in time? And two, as you have your in-house poly production come online sometime in the middle of this year, how much will that contribute to the cost reduction and what do you expect that cost to be? And is it unfair to think that your poly prices goes down somewhere around $50 to $55 a kilogram by the end of this year?

Bryan Li

Thank you. Thank you for your question, of course. For the spot market price for the polysilicon we see now, it's within – it's close to $55. But for some high-cost polysilicons with high purity, it could be as high as $60. And in the first quarter of this year, our – the blended rate of polysilicon we use for our production has already reduced to high $70 level.

Sanjay Shrestha – Lazard Capital Markets

High?

Bryan Li

Yes, it's high $70 level.

Sanjay Shrestha – Lazard Capital Markets

Okay, got it.

Bryan Li

And in the second quarter, we will continue – we expect it moves down to $60 level or slightly below the $60 level. And then it will be pretty much similar – at a similar level in Q3 from the second quarter level, given the ramp-up of Fine Silicon in the third quarter. But in the last quarter, we will expect it will come down and due to the reducing – the reduction on the poly – in the Fine Silicon production cost.

Sanjay Shrestha – Lazard Capital Markets

Okay, okay. One last question for me then, guys. I just want to make sure I'm understanding this right. So you guys say your gross margin guidance is based on the euro exchange rate of 1.2. And – so – but when I run this poly math, right, and take into consideration where the pricing could be even by the end of 2010, I see you guys are being somewhat conservative here, which is right, but I just want to make sure that I'm doing the math right or at least thinking about it logically.

And second part of my question is, are you guys – how are you guys thinking about the potential appreciation in RMB and your competitive positioning as a function of that, and how are you planning on hedging it?

Bryan Li

Thanks again. Let me answer your second question first. For the potential RMB appreciation and potential euro depreciation in the following few quarters, we have already engaged active steps towards the – towards mitigating the foreign currency exposure. And as we discussed earlier in the early sections, we – and a couple of things we are doing. One is we shortened the accounts receivable collection period and also we increased the sales of accounts receivable to shorten the period and that will last.

And then we also engaged – as we also engaged the hedging for the euro and – for the euro against RMB and the U.S. dollar against RMB. And at the rate, and as we bake your model and we use 1.2 as euro against the U.S. dollar and also we – as we anticipate RMB versus – the RMB versus U.S. dollar will gradually reduce towards the 6.5 level by the end of the year.

Sanjay Shrestha – Lazard Capital Markets

Got it. So is it fair to say that if things just play out to be like this and not worse than this, there is upside to your gross margin guidance?

Bryan Li

Yes, we hope we will deliver the upsides to our shareholders.

Sanjay Shrestha – Lazard Capital Markets

Okay, terrific. Thank you so much, guys.

Bryan Li

Thank you very much.

Operator

Your next question is from the line of Dan Ries with Collins Stewart. Please go ahead.

Dan Ries – Collins Stewart

Hi. Thank you for taking my call, and great quarter. I'm curious, if the euro were to meaningfully weaken from here, even half of that 1.2 euro exchange to the dollar, is there a level where you would consider – start to raise European pricing to help minimize the impact?

Miao Qing

(Foreign Language).

Wang Yiyu

Hi, Dan. This is Yiyu. I think the – actually, we already started to talk with some of our customers who are originally pricing their contract in euro by transferring some to U.S. dollar level. So I think we will have a fixed amount on the expectation on the exchange rate, but what we are talking about is we are really using the competition's exchange rate we can hedge, so the euro to the U.S. dollar and to get what you thought I can get to assess whether I'm going to price in U.S. dollar or price in the euro. So I hope this can help to answer your question.

Dan Ries – Collins Stewart

Okay. Maybe I could ask it – maybe to follow up, the dollar – the contracts the European customers paying you in dollars, can you say roughly what portion of your sales were in dollars in the first quarter versus the fourth quarter? Was there a meaningful shift that occurred or is it more in the future?

Wang Yiyu

I think right now above 50% – slightly above 50% is pricing in euro and roughly 45% is pricing in U.S. dollar and remaining 5% is pricing in RMB. So I expect that the euro percentage will be slightly decreasing in the second half of 2010 by increase of the U.S. dollar.

Dan Ries – Collins Stewart

Was it a similar percentage in the fourth quarter of 2009?

Wang Yiyu

I think the fourth quarter of 2009 should be – have more euro. The percentage of euro should be more high, maybe close to 60%, even a little bit high.

Dan Ries – Collins Stewart

Okay. And I think – Bryan, I think you mentioned the – I mean, I see the shortening of the accounts receivable. Did you mention – did you say that you also sold some accounts receivable, what I call factoring, or selling them to a financial institution?

Bryan Li

That's correct. And this has been taken as one of the major financial management of our company since last year, since the crisis. So that helps us one – on one hand and shortened the collection periods of accounts receivable. And secondly, it also helps us to mitigate the risk of accounts receivable collection. And third, it will also help us to alleviate from the foreign currency exchange exposures when the rates are volatile.

Dan Ries – Collins Stewart

Do you take that – the haircut that you normally take when you sell an accounts receivable, is that a contra revenue item or do you account for that as like in other financial income or loss?

Bryan Li

No. The way we did is, when we complete a transaction – a sales transaction, and for some of the revenue and we will – on a selective basis and we will sell to the counterparties, to the external agents. And so they will buy. And once we buy, all the legal applications and titles have transferred to the external agents. And so they will take full responsibility of collecting the money and not us. And then we will – upon that time and upon the transfer of legal title, we will record the cash received and also reduce the accounts receivable.

Dan Ries – Collins Stewart

Okay. Thank you very much.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Gary Hsueh with Oppenheimer & Company. Please go ahead.

Gary Hsueh – Oppenheimer & Company

Great, thanks. That's Gary Hsueh with Oppenheimer. Just a quick follow-up. I didn't follow the entire discussion. But could you summarize this again and tell me what you think your euro-denominated revenue exposure is in Q1 and what your euro-denominated revenue exposure is in Q2? And how much – or how successful do you think you will be in terms of renegotiating contract customers to U.S.-denominated terms in Q2? And I have a follow-up.

Bryan Li

For the both – for Q1, the euro roughly represents about 50% of total revenue. U.S. dollar is 45%, and the remaining 5% is RMB. We expect that this kind of percentage will remain the same. Maybe the euro can be slightly decreased by increasing U.S. dollar. And this kind of trend will be the same for the second half of 2010.

Gary Hsueh – Oppenheimer & Company

Okay. And just a lot of other Asia-based solar companies on the cell module side have been pretty successful and talking about how they can reduce or cut almost in half their euro-denominated revenue exposure. I mean, is there any reason why you can't achieve that kind of magnitude as well?

Bryan Li

I – probably, the first is, you have – it really depends on whether it's a panel supply or it's a cell supply. So some of the cell supply, we didn’t do that because most of their customers are panel manufacturers in China. Then, regarding to your question, I think we believe though the euro is still a kind of concern, but I think this kind of percentage at least we feel pretty much comfortable, plus those hedging policy and other policy our company is engaging into can keep the risk at a reasonable level.

Gary Hsueh – Oppenheimer & Company

Okay. And just a –

Bryan Li

Gary, to further supplement – sorry. To further supplement what you said, we have two – basically, we have two key metrics when we are evaluating the U.S. dollar sales and the euro sales under the current conditions. And for the U.S. dollar terms, we can, for sure, push some of the customers and shift their euro-denominated contract to U.S.-dollar denominated contract. It has already happened for some of the cases.

And – but for the U.S. dollar term, we are expecting a downward trend in the second half of the year. So this is for the U.S. dollar term. And if we really want to go that direction, we need to take the downward trend for the U.S. dollar in the second half of the year. But on the other side, on the euro terms, we are seeing the euro pricing has been flattish or even for some of the cases, has been increased – increasing in the second half of the year. So that has actually closed – narrowed down – narrowed the gap between the U.S. dollar term and the euro pricing.

So at a point, we need to – we are managing these issues carefully. We are not – we don't want to push everything towards the U.S. dollar or everything towards the euro and as – we don't have a – we can't make a bet on the – on what is the euro exchange rate in the second half of the year. But we are – but what we are doing internally is really we are actively managing these issues. We have weekly meeting and look at what expected – what is market expectation on the foreign exchange rate, and then decide to what extent we want to shift the contract from euro-denominated to U.S. dollar denominated. So it's a balance.

Gary Hsueh – Oppenheimer & Company

Okay. Okay, I think I understand that perfectly. Thanks for the detailed answer. Just a follow-up question based on your poly costs. You talked about basically the ability to reduce poly costs on a blended basis throughout this year, considering a $50 to $55 per kilo external cost. Are you changing or revising down your internal Fine Silicon poly cost, which should – I thought have been at $60 to $65, so I thought there would have been a quarter where your blended poly costs would start to go back up in the second half, or has your projected cost for your Fine Silicon poly now come down lower than $60 per kilo?

Bryan Li

In the third quarter of the year, currently on a conservative basis, we expect that Fine Silicon will be producing at a roughly $65 or even to $65 to $70 range in the initial three months. And then it will come down, it will come down to $60 to $65 in the fourth quarter of this year. So in the third quarter – that's what we said. In the third quarter, we think the poly – the blended rate of polysilicon could be flattish from the second quarter of the year. But in the fourth quarter, it will continue to climb down from the third quarter level.

Gary Hsueh – Oppenheimer & Company

Okay. And just finally, does that cost assumption – does it assume internal feedstock for Silane or external feedstock for Silane?

Miao Qing

Sorry, I didn't get your question, but –

Gary Hsueh – Oppenheimer & Company

I just –

Miao Qing

We always take one question from every analyst, because essentially we could have more analysts to ask –

Gary Hsueh – Oppenheimer & Company

I'm sorry about that. I'll ask that offline. Thank you.

Operator

Your next question comes from the line of Sunil Gupta with Morgan Stanley. Please go ahead.

Sunil Gupta – Morgan Stanley

Thank you for taking my questions. I have a few follow-ups on some of the earlier questions. First is on the receivables. You mentioned that 50% of your receivables are euro-denominated now. What percentage of that is currently hedged and at what rate, and how long can you hedge your receivables or – is it less than three months or can you extend it beyond three months?

Bryan Li

Thank you, Sunil, for your questions. The hedge – the expiration of the hedging contract fall exactly with the expected payments of the accounts receivable when we are doing the hedge – when we are doing the hedging. And so if the accounts receivable – if the collection periods for accounts receivables stipulated in the sales agreements is 60 days and that will go – the hedging will go 60 days. If it's 30 days, that will go 30 days.

And then to your first question, the percentage of hedging we have done in the first quarter, as I discussed earlier, we have internal rate, which is formulated based on the market expectation and our annual budget, as well as the internal evaluation. So we are only doing the hedging when we are – when the rates hit our target rates. So that was the practice for the first quarter.

And in the second – from the second quarter onwards and as the volatility of the euro becomes intensified, we will be more careful in monitoring the fluctuation and the market expectation on the – of the euro against the U.S. dollar to mitigate potential currency volatility risk. Thank you.

Sunil Gupta – Morgan Stanley

And so what is that internal rate right now and effectively, what percentage have you hedged as of now?

Bryan Li

Our internal rate is revised – is updated from time to time based on the market expectation and our internal expectation. And I'm not – and we don't disclose – we don't talk about the internal rate now.

Sunil Gupta – Morgan Stanley

And –

Miao Qing

Sorry, Sunil. I can only take two questions from you. Thanks for your questions and you can do follow-up calls tomorrow or the day after tomorrow with us.

Sunil Gupta – Morgan Stanley

Thank you.

Operator

Due to time frame, your last question comes from the line of Kelly Dougherty of Macquarie. Please go ahead.

Kelly Dougherty – Macquarie

Hi. Thanks for taking the question. I'm just wondering as to, are you still targeting $0.70 for your year-end processing costs? And then I think you said in the past that you want to focus more on promoting the Yingli brand. So just wondering how we should think about operating expenses, especially with the FIFA sponsorship. Should we go with the 1Q level as a good run rate for the rest of the year, at least from an absolute dollar amount?

Bryan Li

Thank you, Kelly, for your questions. And let me answer your first question and the second question first and then the other then the executive could as well – will supplement to your second questions. And for the non-poly processing costs, it's still on track towards the $0.70 when we – towards the end of this year, it's still on track, as we are going to ramping up the 300 megawatts high-efficiency cell in the second half of the year. So we are – so it's still on track.

And second – secondly, for the – for – sorry, what – your second question is?

Kelly Dougherty – Macquarie

The OpEx –

Bryan Li

Okay, okay. Okay, so for the OpEx, we have successfully reduced the OpEx to 11.4% in this quarter and we will continue to keep track of the OpEx as a percentage to revenue towards the end of the year. And we – we are expecting to control the total OpEx in the second half of the year between 10% to 11%.

Kelly Dougherty – Macquarie

And I think we've spoken before about your FIFA sponsorship. You are able to spread those costs over five quarters, I think? And if you could just kind of give us a little bit of information on the accounting for that and how much you've actually spent for the sponsorship?

Bryan Li

Yes, sure. The sponsor – the sponsors – the majority of the sponsorship beneficiary period will be within this year. So from accounting standpoint, we amortize the sponsorship fees from the first quarter through the fourth quarter of this year in four different tranches.

Kelly Dougherty – Macquarie

And how much are the overall costs?

Bryan Li

Sorry. Given the confidentiality agreements with FIFA, we are not able to talk about the exact dollar amount of the sponsorship agreement.

Kelly Dougherty – Macquarie

Okay. Thank you.

Bryan Li

Thank you.

Operator

That concludes the Q&A session. I would like to turn the call back over to Miao Qing for closing statements.

Miao Qing

Okay. Thanks, everyone for joining today's call. And if you have any follow-up questions, please either e-mail ir@yinglisolar.com or you can make reservation with us to do conference call or I can see you all in Intersolar conference. And you are welcome to join our party.

Operator

That concludes today's presentation. Thank you for your participation, you may now disconnect. Have a great 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!

Source: Yingli Green Energy Holding Company Limited Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts