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Executives

Rory Macpherson – Director, IR

Zhengrong Shi – Chairman and CEO

Steven Chan – President, Suntech America

Amy Zhang – CFO

Analysts

Jesse Pichel – Jefferies

Burt Chao – Simmons & Company

Sanjay Shrestha – Lazard Capital

Bob Stone – Cowen and Company

Lu Yeung – UBS

Vishal Shah – Barclays Capital

Sunil Gupta – Morgan Stanley

Kelly Dougherty – Macquarie

Mahdeep [ph] – Credit Suisse

Colin Rusch – ThinkEquity

Sam Dubinsky – Wells Fargo Securities

Gary Hsueh – Oppenheimer & Co

Shishir Singh – HSBC

Nitin Kumar – Nomura, Singapore

Dan Ries – Collins Stewart

Josh Baribeau – Canaccord

Suntech Power Holdings Co., Ltd. (STP) Q2 2010 Earnings Call Transcript August 18, 2010 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Suntech Power earnings conference call. My name is Lacey and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Rory Macpherson, Director of Investor Relations. Please proceed.

Rory Macpherson

Thank you. Hello everyone and welcome to Suntech second quarter 2010 earnings conference call. My name is Rory Macpherson, Suntech’s Director of Investor Relations.

On the call today we have Dr. Zhengrong Shi, Suntech’s Chairman and CEO; Steven Chan, President of Suntech America; Amy Zhang, our Chief Financial Officer; also Ian Tu, our Senior Financial Analyst who’ll participate in the Q&A following Dr. Shi’s closing remarks.

Before we continue during this conference call we will make certain forward-looking statements in an effort to assist you in understanding the company and its results. The forward-looking statements will be made under the safe harbor provisions of the US Private Securities Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, Suntech’s future results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our earnings release issued today and our SEC filings. Suntech does not undertake any obligation to update any forward-looking statements except as required under applicable law.

To enhance our presentation of information and data during this conference call, we have provided a set of PowerPoint slides which we will refer to as management delivers their prepared remarks. This presentation is posted on the main page of the Investor section of our Website.

As a reminder, this conference call is being recorded and the webcast replay will also be available on the Investor Relations section of Suntech’s Web site after this call. Please make note that all figures mentioned during this conference call are in US dollars.

I will now turn the call over to Suntech’s Chairman and CEO, Dr. Zhengrong Shi.

Zhengrong Shi

Hello and thank you for joining us. Please turn to Slide number 3 of the presentation. We are pleased to deliver top line revenue of $625 million in the second quarter of 2010, the highest quarterly revenue in Suntech’s history. This result is over 6% higher than revenue in the first quarter of 2010, and approximately 95% higher than the second quarter of 2009. This makes Suntech the world’s largest module producer by revenue, which is a significant milestone for the company.

This record revenue was driven by a 12% sequential increase in quarterly shipments as we added equipment to meet our 1.4 gigawatt capacity target, and outsourced a small percentage of production. Blended gross margin was 18.2% in line with guidance.

However, we ended this quarter with a loss of $175 million or $0.97 per diluted ADS as a result of impairments related to our investee company, Shunda Holdings, and thin film manufacturing equipments. I will like to discuss these two impairments first before going to our strong operational performance during the quarter.

Please return to Slide number 4. In 2007, during the height of polysilicon pricing, we invested in a 50 megawatt multi-silicon thin film line to diversify our product portfolio and lessen our silicon dependency.

However, given the ramp for in the cost of silicon and the improving competitiveness of crystalline silicon solar products, in addition to delays in achieving far more acceptance testing of the line we have chosen to reaffirm our commitment to our core crystalline silicon technology and have ceased the trial production of thin film products. As a result we recognized a $54.6 million of thin film equipment in the second quarter.

Regarding Shunda Holdings, in 2008 we invested in Shunda, a manufacturer of polysilicon and silicon wafers in order to strengthening our partnership and diversify our supply chain. Shunda recently was forced to reorganize.

While the result of reorganization has not yet been finalized, we have made provisions for a significant sequential decline in the value of this investment, and the increasing credit risk related to the prepayment we made to them.

I would like to note that these impacts are non-cash and do not affect our core operations in any way and we have secured sufficient wafer supply to meet all our production targets. Amy will discuss how these provisions and impairments impacted our second quarter results shortly.

Turning to operational performance, I’d like to start by giving an overview of the second quarter as well as our expectations for market demand in Europe and Asia over the next few quarters. As Stuart couldn’t join us today, I will also give an update on our Pluto technology. Steven will discuss recent developments in North America, and Amy will provide color on our financial results.

Please turn to Slide number 5. During the second quarter we witnessed strong demand across all global markets. Our shipments to Germany increased to 43% of our total mix as we moved to support our customers ahead of July reductions in feed-in tariffs. Despite the middle year reduction, we expect German demand to remain strong in the second half of 2010, as the returns on projects in Germany remain above the historical average.

Aside from Germany, the rest of Europe accounted for 32% of sales in the second quarter. We saw particularly strong demand in Benelux, France and Italy. With solid renewable energy incentives in place, we expect to see sustained growth in these three markets in the second half of 2010 and beyond.

To enhance our presence in the French market, we opened a new office in Montbonnot, near Grenoble, which we are focused on sales marketing and customer support. Our comprehensive portfolio of ground mount, rooftop and building integrated solar systems means that Suntech can supply to all segments of demand in the French market.

Please turn to Slide number 6. Asia accounted for 7% of sales in the second quarter. We are seeing ongoing diversification of markets in this region and we recently announced two significant supply agreements in emerging markets with huge solar potential.

First, we entered into a multi-megawatt supply agreement with Azure Power, Indian largest private solar project developer. With abundant sunlight resources and a lack of reliable energy supply, the Indian market is a sleeping giant in terms of the potential for long term solar demand. We are very pleased to be among the first non-Indian companies to meaningfully enter this new market.

Another region with abundant sunlight and a promising demand for solar energy is Southeast Asia. We are very pleased to spearhead sales into this region by supplying 34.5 megawatt of solar panels for the first phase of the largest solar power plant in Thailand and Southeast Asia.

Suntech’s position as the largest product of crystalline silicon solar panels, exceptional product performance and reliability and a global track record of more than 2.5 gigawatt were all key points in our winning bids. These contracts demonstrate Suntech’s ability to rapidly secure market share in emerging markets that have long-term growth potential.

Our average sales price fell by about 4% in the second quarter. This was primarily due to depreciation of the euro versus US dollar despite organic ASP increases in local currency pricing in a number of markets. The pricing environment in the second half seems relatively stable, though we do expect ASPs to tick down slightly in the third quarter.

Now, turning to our cost structure on Slide number 7, due to continuing optimization of our operations and the supply chain, we reduced our non-silicon cost structure to $0.52 per watt compared to $0.56 per watt in the first quarter. We believe this is among the lowest cost structure in the industry and we are on track to achieve our target of $0.50 per watt.

The other main component of our cost structure is the silicon wafer, which remained relatively stable in the second quarter. Due to the booming market demand, however, we have seen some upward pressure on wafer pricing and this has caused us to reconsider certain aspects of our silicon and wafer procurement strategy.

In many industries we have witnessed vertically integrated companies gradually move to specialize in one or more area of core competence as the industry grows and matures. With this in mind Suntech has concentrated on our core expertise in PV cell and module production and to rely on strategy of developing diverse supply relationships in minority shareholdings of upstream supplies.

Based on the current outlook, however, we may be exposed to the short-term fluctuation of silicon wafer prices as the solar industry continues to mature over the next 5 to 10 years.

So, while we are fully committed to maintaining and expanding our current supply relationships, we are considering partial upstream integration into the wafer segment of value chain to mitigate any supply fluctuation. The recent removal of non-compete clause in one of our supply agreements has removed contractive restrictions we had in this regard. We will keep you updated of any progress on this front.

Please turn to Slide number 8. Turning to production capacity, we achieved our target of 1.4 gigawatt of PV cell and module capacity by the end of the second quarter. With overwhelming demand for products, we have decided to accelerate the next phase of capacity expansion now intent to reach 1.8 gigawatt capacity by the end of 2010.

This expansion began late in the second quarter, and they were the key driver for expected 15% to 20% growth in shipments in the third quarter. And the increase of our annual shipment target from 1.3 gigawatt to 1.5 gigawatt.

Even with this increase in capacity we expect to continue to outsource a small percentage of production during the second half of the year, which will help us to meet the overwhelming demand from our customers. All of these products will enjoy Suntech’s industry-leading power output warranty and service commitments.

Please turn to Slide number 9, during the second quarter we successfully completed the installation of equipment that gave us 450 megawatt Pluto enabled production capacity with all this lines flexibly configured so as to be able to manufacture either Pluto or screen-printing technology.

We have also met good progress in resolving some of the bottlenecks in module production and have increased the monthly production of rate of high efficiency Pluto modules from 4 megawatt to 6 megawatt as all of our flexible production lines are currently fully engaged in order to meet the overwhelming market demand.

We plan to gradually shift some of the production to Pluto technology in small increments in the second half of the year without impacting our supply into the customers. We will update you on the progress of this ramp in future calls. The average efficiency of mass produced Pluto cells is now 19% on mono wafers and 17% on multi wafers, well above the industry average.

Customer feedback about the Pluto product has been very positive as it increases power output and space utilization, while decreasing their balance of system costs on a per watt basis. We look forward to expanding shipments of Pluto product to a greater proportion of customers in the future. Our CTO, Stuart Wenham, will be back next quarter to provide further updates on the development of this and our other technologies.

Now I would like to give an update on our investment in the Global Solar Fund. I’m pleased to say that GSF has made significant progress both in term of the project installation and the project financing front. In the third quarter, we received two payments from GSF investee companies totaling €27.7 million. The first payment of €1.7 million is towards the outstanding receivables from shipments made in 2009.

The European financing for the first set of projects has been fully approved and we expect to receive the remainder of the relayed outstanding receivables in the third quarter. Secondly, GSF has successfully secured and commenced drawdown from a second round of project financing from different banks for additional projects in its portfolio.

With secure financing in place and the stringent payment terms, Suntech agreed to make further shipment to GSF. To-date we have already received approximately €26 million of recent shipment to GSF and we intend to continue to send shipments in the second half of the year.

The associated revenue will be clearly disclosed in our third quarter and the fourth quarter earnings reports. As GSF starts to complete project in the second half of this year, it will progress, it will be able to track record, that we’re in full access to financing for future projects and have start to generate returns for Suntech’s investment, where it could be updated on their progress.

We view project financing as a integral component to solar project development and I see many opportunities to leverage our relationship with well capitalized financial institutions to accelerate solar projects that utilize Suntech modules. Amy Zhang has decided to drive these initiatives and create long-term pipeline of projects that Suntech can participate in as module supplier or investor.

Amy will also lead Suntech investment and M&A initiatives. Amy’s leadership in Suntech over the last five years has been invaluable, and we have no doubt that she will strive in this new role. We are currently looking for a new CFO, and expect to announce a replacement within the next three to six months.

Please turn to Slide number 10. I’m also pleased to announce the promotion of a host of talent within Suntech that will work closely with me to manage the company’s future growth. David Hogg formerly the CEO of CSG Solar, and our Head of Europe has been appointed to Chief Operating Officer, Andrew Beebe, who joined us through our acquisition of EI Solution, will assume the role of Chief Commercial Officer in charge of global sales and marketing and Hongkuan Jiang, who has over 20 years of experience in human resource management at a multinational companies has been appointed as Chief Human Resources Officer. This team will assist me in Suntech executive decisions and the coordination of all global initiatives.

To head our key regional business units, we have appointed three senior Suntech executives – Steven Chan, formerly Suntech’s Chief Strategy Officer and the President of Global Sales and Marketing is our President of Suntech America, Jerry Stokes, formerly our VP of Business Development and Strategy is our new President of Suntech Europe, and James Hu, who has proven to be a leading sales executive in his three years in Suntech has been promoted to President of APMEA, which encompasses the Asia Pacific, Middle East, and Africa.

In their new roles this team will be tasked with improving operational efficiency and advancing Suntech’s industry leading customer service, and implementing our long-term growth and development strategies. I’m very confident that we have the right group of experienced executives in place to guide Suntech as we move to multi-gigawatt manufacturing and ramp our delivery of advanced solar solutions to communities across the globe.

I’ll now turn the call to Steven Chan to update you on our North American initiatives.

Steven Chan

Thank you, Dr. Shi. Please turn to Slide number 11. During the second quarter, we were pleased to see signs of an acceleration of solar demand in North American market. Revenues generated from North America grew around 35% sequentially and represented 13% of Suntech’s total sales compared to 10% in the first quarter.

According to California Solar Initiative data, applications are up 260% year-over-year, and Suntech continues to maintain a leadership position in its market with over 15% of reservation slated to use Suntech panels.

In the Mid-Atlantic States, Canada is also building strongly. Our North American dealer network continues to expand as customers recognize that Suntech is not only a stable source of extremely reliable solar panels, but an industry-leading provider of service and sale support.

We not have close to 400 companies in our North American network including both authorized dealers and our premier Suntech partners. This network provides Suntech with a stable stream of revenue that helps to even out the bumps of our utility business.

We anticipate that sales of solar systems to utility customers will be one of the highest growth segments of the North American solar market, projects in this segment represent close to 20% of shipments in the second quarter and we are expecting that this will increase to close to 50% of total sales by 2012.

To address this opportunity we have decided to focus on direct module sales rather than project development through our Gemini Solar platform. We believe this allows us to concentrate on our core competence, partner with multiple project developers and minimize channel conflicts. As such, we have decided to let Fotowatio Renewable Ventures to take the lead in the Austin Energy project and we will participate as a key module supplier.

Looking into the second half of 2010, we are excited by the prospects ahead of us. With over 60 people in our regional team and a further 75 due to join us at our Arizona facility, we have one of the strongest presence in the North American solar markets.

Our wide range of skill sets and depth of solar experience enables us to share to know-how that we have generated from delivering over 2.5 gigawatts of solar panels globally with our customers. With the expansion of Suntech’s annual capacity and shipment targets, we now believe we will able to more than quadruple our sales to the North American market in 2010 and secure close to 20% market share.

I will turn the call over to Amy to give a quick review of our financials. Amy?

Amy Zhang

Thank you, Steve. Please now turn to Slide number 12. Our net revenue for the second quarter was $625.1 million, representing 6% sequential growth and 95% growth year-over-year. Gross profit and margin decreased in the second quarter 2010 to $113.9 million and 18.2% from $114.5 million 19.5%, respectively, in the first quarter. The sequential decline in gross margin was primarily due to a depreciation of the euro versus the US dollar in the second quarter, which has a direct impact on our reporting currency ASP.

Gross margin for core wafer to module business was 20.4%. Our consolidate margin was lower than our core business gross margin, mainly due to a small percentage of systems sales to China and a single digit percent of outsourced production.

Silicon wafer costs including inventory impact were relatively flat and our non-silicon costs fell to US$0.52 per watt from US$0.56 per watt in the first quarter. We are on track to achieve our target of US$0.50 per watt non-silicon costs to help with comparison to some of our peers. Please note that non-silicon costs include the cost of all non-silicon materials, processing and depreciation, but excludes freight charge and share based compensation.

Operating expenses for the second quarter of 2010 were $132.9 million or $21.3% of revenue. This increase was primarily due to a one-time prepayment provision of $25 million to account for risks associated with the delivery of silicon wafer from Shunda Holdings, and a $54.6 million impairment of our thin film PV equipment.

Excluding these non-cash impairment items, our organic operating expenses were $53 million versus $51 million in the first quarter of 2010. Loss from operations was $19.1 million and operating margin was negative 3.1% in the second quarter of 2010 compared to an operating income of $36.5 million and operating margin of 10.8% in the first quarter of 2010.

Net interest expenses for remained relatively flat in the second quarter at $22.7 million. Please note that $8.8 million of this was non-cash interest expense, which was mainly due to the accounting treatment of our convertible notes.

While the demand environment and other solar fundamentals continue to improve in the second quarter, the depreciation of the euro created a headwind to earnings. In the second quarter, we recognized $61.4 million of foreign exchange loss, this was primarily a result of the reduction in valuation of certain euro denominated current FX, such as accounts receivable and cash and cash equivalents, as the euro depreciated about 9.6% against the US dollar.

The FX loss in the second quarter was partially offset by our gains from hedging activities of $24.1 million. Foreign exchange loss, net of hedging gains, was approximately $37.3 million in the second quarter of 2010 equivalent to $0.21 per ADS.

We intend to maintain at least 70% hedging coverage of our euro exposure in future quarters to minimize the impact of fluctuations in the euro to US dollar rate.

Based on an assumed rate of $1.29 to the euro, the FX revaluation impact in the third quarter should be substantially offset by our hedging positions that are already in place. Due to Shunda’s reorganization and the high risk associated with Shunda, we incurred impairments of investment of $101.1 million in the second quarter of 2010. As a result, we recognized a net loss in the equity in affiliates of $100.6 million.

Net loss attributable to holders of ordinary shares for the second quarter of 2010 was $174.9 million, or $0.97 per diluted ADS, down from first quarter net income of $20.7 million or $0.11 per diluted ADS. The non-cash impairment charges and provisions related to thin film and Shunda had a negative impact of approximately $1 per diluted ADS.

The major non-cash related expenses were share-based compensation charges of $6 million, the $8.8 million of non-cash interest expenses that I mentioned earlier, and the depreciation and amortization expenses of $20.5 million.

CapEx which was primarily for newly installed cell and module capacity totaled $92.6 million in the second quarter leaning CapEx in the first half of 2010 to $165 million.

Please now turn to Slide number 13, turning to the balance sheet, our cash and cash equivalents amounted $765.6 million at the end of the quarter, up from $677.2 million as of March 31, 2010.

The increase in cash and cash equivalents was primarily due to a decrease in restricted cash as a result of the release of funds used to guarantee credit lines. The cash receivable totaled $405 million as of June 30, 2010, compared with $467.7 million as of March 31, 2010.

Day sales outstanding was 58 days in the second quarter compared to 72 days in the first quarter of 2010. The quarterly improvement in accounts receivable and DSOs was primarily due to a better collection effort and working capital management in the second quarter of 2010.

Inventory increased to $381.5 million in the second quarter in the expectation of strong shipment growth in the third quarter. Accounts payable totaled $366.1 million as of June 30, 2010 compared with $384.3 million as of March 31, 2010.

Now turning to guidance on Slide number 14, in the second quarter of 2010, we expect 15% to 20% growth in shipments sequentially. Consolidated gross margin in the second quarter of 2010 is expected to be in the mid to high teens, which is based on an assumed exchange rate of $1.29 to the euro.

Due to strong demand we have increased our 2010 shipment target of PV products from 1.3 gigawatt to more than 1.5 gigawatt, which is 113% higher than our 2009 total shipments. We successfully completed our plant expansion to 1.4 gigawatts of PV cell and module production capacity by the end of the second quarter, and now plan to increase our year end capacity to 1.8 gigawatts.

Full year capital expenditures are expected to be approximately $300 million to $350 million. We intend to fund the additional CapEx with cash on hand, operating cash flow, and existing credit lines.

That concludes our prepared remarks today. Operator, please go ahead with questions.

Question-and-Answer Session

Operator

(Operator instructions). And our first question will come from the line of Jesse Pichel with Jefferies. Please proceed.

Jesse Pichel – Jefferies

Good evening Dr, Zhengrong and Amy. You alluded to possible upstream integration and since the CapEx on the ingots and wafers is much more than cells and modules, how do you think you would finance that expansion? And also there’s a lot of investor concern there that volumes and pricing are going to fall precipitously there in Q1 of 2011 because of German seasonality, do you think that there is enough demand outside of Germany to prevent a precipitous fall off? Thank you very much.

Zhengrong Shi

Okay. Look, as we indicated, it is necessary for us to do some in-house wafering to maintain supply stability, and as Amy just said, we have cash on hand, operating cash flow, and also existing credit line, so we believe we should be able to have cash to expend, but at this moment we have options. We are evaluating, so we haven’t decided to exactly what to do and we’ll update you when we they become available.

Regarding the ASP, for the second half we see the ASPs are fairly stable, although, as I said, in Q3 there is little bit tick down of ASP. As for 2011 so far there’s a lot of positive requests from all customers, and in regard of ASP-wise, it’s purely determined by demand and supply situation. So, I think at this moment it is hard to tell. I think the upcoming PVSEC meeting in Valencia probably make a situation more visible in the future.

Jesse Pichel – Jefferies

Great. Thank you very much, Dr. Zheng.

Operator

And our next question will come from the line of Burt Chao with Simmons & Company. Please proceed.

Burt Chao – Simmons & Company

Good evening. Thank you for taking the question. Could you maybe go in terms of the detail about your processing cost currently and also going forward with your new additional capacity, roughly where you are on CapEx per watt and how you anticipate Pluto fitting into the mix for the 1.87 gigawatts of total capacity by the end of this year?

Amy Zhang

I will take the call for the processing cost down roadmap. As indicated and mentioned earlier, our current processing cost in Q2 was at $0.52 per watt compared to Q1 of $0.56 per watt. Again, this is purely a result of the improvement on the operational efficiency and also the utilization of the material and also volume advantage for price negotiation, and I think in line with the expansion of the capacity and demand scale out pricing and negotiations bargaining powers will still remain strong with the suppliers. Also in line with the improvements on the technology and efficiency sides, we believe that bringing it down to US$0.50 per watt toward the end of the year is definitely feasible and doable and on normal track.

Zhengrong Shi

Regarding the expansion of up to 1.6 gigawatts cell capacity by end of the year, and as what I just said, at this moment our Pluto-enabled production line is actually configured to doing both screen-printing technology or Pluto technology and we have configured 450 megawatt Pluto technology at this moment, and it’s fairly convenient for us to retrofit the conventional production line into Pluto.

Regarding manufacturing cost of Pluto, at this moment because the volume is still fairly small and the manufacturing cost is slightly higher than the conventional one, we believe once the manufacturing volume is going up so the cost per watt basis should at least be similar.

Burt Chao – Simmons & Company

Okay, great. And then second, there’ve been some concerns regarding the macroeconomic outlook for Chinese lending. Have you noticed anything or have you experienced any impact on your ability to borrow from Chinese banks from this change in lending policy from the Central Bank in China?

Amy Zhang

I think the lending policy so far has been more restricted and strict on the government related spendings because of the stimulus package implemented during the financial crisis, starting from Q4 ‘08 toward the end of ‘09. What they have talked about regarding the control of lending is mainly related to that.

On the other hand I think Chinese PDLC [ph], the central government and also commercial banks and joint stocks are fully aware of their responsibility to encourage the renewable energy in term of their technology improvement, scale expansion and even project financing. All of these, within the same sector, Suntech definitely is a leading, outstanding, high bankable brand, with high bankable product and it's not only recognized by the international banking or lending players, but also the Chinese banks as well. So far we haven’t seen any restriction in terms of cutting down our granted credit facility and so far out of the total granted facility we have only used up less than 50% of what we have granted so far. I don’t see any problem regarding that credit line to continuously remain available for Suntech growth.

Burt Chao – Simmons & Company

Wonderful. Thanks so much again for taking the question.

Operator

And our next question will come from the line of Sanjay Shrestha with Lazard Capital. Please proceed.

Sanjay Shrestha – Lazard Capital

Thanks. Two questions please. First one, could you sort of give more as to the market traction in Pluto modules, especially in terms of what kind of pricing premium can they sustain? The second question was related to second round of bidding in China. Given the strong interest of some of the large utilities for the second round, and the relationship Suntech has with these large utilities, what kind of involvement should we see from Suntech in the second round of bidding?

Zhengrong Shi

As I said, the volume of total production is fairly small, only around 6 megawatt per month. So, the production cost is slightly higher than that for screen-printed solar cells. And of course for ASPs, we do have some premium, because of this high efficiency, I think, a premium probably around 15% over the conventional model.

Sanjay Shrestha – Lazard Capital

Great. And the second round bidding in China?

Zhengrong Shi

Yes, for China, I mean, it’s good to see government is getting serious to support solar industry, and this the second round of 280 megawatt bidding process, the government sort of determined to chose winner based on the lowest bidding electricity price, and of course recognize the project can’t be built until sometime in 2012, so there is still some time for further cost reductions, but certainly at this moment at the current cost level, the bidding price are around 0.7 to 0.9 on the per kilowatt hour is not profitable. So at the moment, Suntech does not participate in this round.

Sanjay Shrestha – Lazard Capital

All right, thank you

Operator

And our next question will come from the line of Bob Stone with Cowen and Company. Please proceed.

Bob Stone – Cowen and Company

Hi, my questions are related to a little bit more color on the revenue breakdown as between your core, what you outsourced and the other items, and how will outsourcing influence your gross margin in Q3 and the second half, are you outsourcing module production as well or just cell?

Amy Zhang

As I said the dilution from the non-core business is mainly from the OEM modules, actually it’s not only the outsourcing of the modules, its full outsourcing from wafer to modules, and also regarding the system sales to Chinese market. These two segments of the business is actually a very small and trivial percentage of the total revenue. I think OEM is only less than 7% of the total module business, total volumes sold, and systems sales to Chinese markets less than 3%. We expect that in Q3 it will stay still relatively trivial flat percentage of the total shipments and sales volume, so we are trying to manage and control the impact of this low single digit gross margin business to further dilute the core business.

Bob Stone – Cowen and Company

So do you expect a similar percentage of outsourced production in Q3 or as you catch up on capacity, is that going down, I’m just trying to understand the factors influencing your blended gross margin target for Q3?

Amy Zhang

I think, it’s just going to be definitely below 5% going further, and once our own capacity is completed and built we definitely will still heavily, mainly rely on our own in-house production capacity instead of OEM.

Bob Stone – Cowen and Company

Great, thank you.

Operator

And our next question will come from the line of Lu Yeung with UBS. Please proceed.

Lu Yeung – UBS

Thanks for taking my question. Follow-up to the margin questions. Could you maybe tell us more what kind of wafer cost increases you see in Q3 and perhaps Q4, and based on your margin guidance, it appears to be flat to slightly down in Q3?

Amy Zhang

Right. As Dr. Shi just said, the ASP of modules will definitely ticker down a bit, and the average purchase price of wafers will ticker up a bit. Again, it’s definitely down or up, definitely by low single-digit percent in Q3. I think in Q4 it will be relatively stable, but again the impact to the gross margin will depend on the FX fluctuation. In terms of the guidance of gross margin, I think, we’re still going to be able to maintain the gross margin to mid-to-high teen percentage in Q3 and toward the end of the year.

Lu Yeung – UBS

Should we expect any impairment charges in Q3 and could you provide us some update on Asia Silicon please?

Amy Zhang

Asia Silicon is doing well. No further impairments so far.

Lu Yeung – UBS

No further impairment in Q3 from Shunda, I guess?

Amy Zhang

No.

Lu Yeung – UBS

Okay. Thanks a lot.

Amy Zhang

Yes. As we said it’s all one-off.

Operator

And our next question will come from the line of Vishal Shah with Barclays Capital. Please proceed.

Vishal Shah – Barclays Capital

Hi, thanks for taking my question. Question on 2011 outlook, Steve, can you maybe talk about how you think the US market will do for you in 2011 and what kind of revenue mix should we expect in 2011, now that Germany is going to slow down somewhat?

Steven Chan

Sure Vishal. In terms of the US market we look at US with Canada together, and so for this year we look at it as being, I would say, for Suntech about 260 plus, a little bit more than that in terms of megawatts, which we think could be approximately a little bit less than 20% of the total market. Next year we are looking to drive that up beyond 500 megawatts and potentially higher. We recognize that we’re in an allocation environment now and so we actually look at the US market as being one of our largest growth markets and then we also look at Ontario, Canada as being a market of great opportunities as well. We do feel that we have a good track in terms of solutions for local content modules in Ontario.

Vishal Shah – Barclays Capital

And then as far as markets outside of Germany are concerned, you think Germany is still going to be on 40% to 50% of the total revenue next year or do you think it’s going to be a much lower?

Steven Chan

Well, we’ve actually steadily reduced that as a percentage of our total sales. So not so much because we are reducing the sales to Germany, but just that the sale to the other regions have just grown quicker. So, as we add additional capacity, which has been, adding incremental sales in other regions, so the sales to Germany would steadily be reduced as a percentage of our total sales as we add additional capacity. So, like if you look at the US as a comparative indicator, I think we started the year at round 10% of our total Suntech shipments coming from the US and towards the end of the year that will be closer to 20%.

Vishal Shah – Barclays Capital

And then one last question for Dr. Shi, as you look at 2011, when do you need to make capacity decisions to bring capacity more than 1.8 gigawatts, are we looking at back half of the year or you start planning for that now? For the wafering business, what kind of capacity we are talking about and have you made the equipment decisions yet?

Zhengrong Shi

Look, for capacity, for the next year, I am pleased that we can tell, we are pleased that we would ship 1.8 gigawatts next year, and it could more and because we have some facilities ready and it’s just a matter of adding production line, so that can occur pretty quickly. As for wafering business, I think there are number of options we are evaluating, including acquisition and organic growth, and we have not yet decided which is the best option or maybe both and we will update you as soon as it becomes available.

Operator

And our next question will come from the line of Sunil Gupta with Morgan Stanley. Please proceed.

Sunil Gupta – Morgan Stanley

Thank you. Dr. Shi, I wanted to get perspective on your cost roadmap, so you brought it down to $0.52 non-silicon cost, if we look ahead in 2011 without any internal wafer manufacturing, what do you think this cost could achieve and how would you achieve any future reductions?

Zhengrong Shi

Look I mean for the cost components, we have non-silicon cost at this moment of about $0.50, like definitely there is operation efficiency we can capture, and I think more importantly, development of new material which can replace some of the material we are using at this moment, because as solar becoming mainstream industry and many companies starting innovation to develop a new material, which is lower cost and also higher reliability. So, we see this cost will be gradually coming down to hit the $0.50 per watt, then to below $0.50 per watt gradually.

Sunil Gupta – Morgan Stanley

Okay. And I have a follow-up on GSF. So you mentioned that you shipped additional products to GSF in Q3. How much have you shipped already in Q3 and what kind of shipments do you expect to GSF in second half of 2010?

Zhengrong Shi

I think GSF have secured the project financing for the project. We plan to ship around 100 megawatt for the second half and so far we have received, we have shipped about €27 million equivalent of shipment to GSF.

Sunil Gupta – Morgan Stanley

And maybe just a last follow-up. So, the way I understood the numbers you said you got €27.7 million payments of which €1.7 million is for what was shipped last year, and I guess €26 million is for what you just shipped. Why is the payment for those old shipments so slow and for the newer shipments you’ve got all the payments. So, why is this particular pattern and when will you receive all of that?

Zhengrong Shi

I think, because different project financing process, and the first project financing was a club deal because the deal was done during financial crisis. So, as you can imagine, it’s actually relatively small project, but because a club deal involves multiple banks, I think the approving process and efficiency is probably not as higher. But so far, all the condition precedent for the first project financing is nearly complete, so we believe actually this $1.7 million is actually is one of the ETC contract company. They’ve already started to pay the procurement to GSF. So, that sort of also give you some idea that project financing drawdown will happen very soon in the future.

Sunil Gupta – Morgan Stanley

Okay, thank you.

Operator

And our next question will come from the line of Kelly Dougherty with Macquarie. Please proceed.

Kelly Dougherty – Macquarie

Hi. Thanks for taking the question. I just want to follow-up on GSF real quick. Do you expect to get the entire amount even though pricing has declined pretty significantly since then? And then I am just wondering is there any other outstanding customer relationships that have taken significantly longer to receive the funds kind of like the GSF situation?

Zhengrong Shi

I think the GSF situation, as I just said because of this club deal and the project financing situation that has been delayed, the process. And we expect the rest of AR should be able to be collected in Q3. For other projects, to be honest, about over 70% of sales actually is going to the commercial and the residential, so only about 20% probably goes in the big project and some of these project customers they are ETC customers, they actually use their own balance sheet to finance their construction. So definitely the payment issue is a lot different, because in case of GSF we deal directly with developers.

Kelly Dougherty – Macquarie

Sure. But I guess I’m wondering is there any other receivables out there that are –

Zhengrong Shi

Not really.

Kelly Dougherty – Macquarie

I know you said you’re on target for the $0.50 processing by the end of this year. Just wondering, how we think about improvements in those costs as we go forward, obviously you’ve got conversion efficiency in Pluto. How much further down can those costs go?

Zhengrong Shi

Well, I think if you look at crystalline silicon module costs, there actually silicon and wafer still is major component of the cost and for example, from other companies reporting like manufacturing cost of wafer probably is including silicon probably is about $0.60 or below $0.60 per watt, and if you look at market price at this moment, wafer in probably the range from $0.80 to even $0.90 per watt. I mean, that’s what will give you an idea. So cost reduction of crystalline silicon module, down to say $1 per watt or even below is quite doable.

It’s just like if this was a gross margin along the value chains can be averaged though even now to it’s quite doable, and actually if you look at this, actually processing cost from wafer to module is actually not that higher. So, of course with the efficiency and as I said earlier, the new material implementation, I think the manufacturing cost from wafer to module can be further reduced to below $0.50. So, next probably year or two it’s quite doable and overall to reach $1 per watt, or even below $1 per watt is also quite doable in the next few years.

Kelly Dougherty – Macquarie

Improvements in virgin efficiency and other things they are doing, can you take another 10% out of processing costs next year, or have you gotten a lot of the low hanging fruit and the cost improvements are going to be slower than that?

Zhengrong Shi

Well, as I said, 1% in efficiency will result in about 7% to 8% in cost reduction, if there is no additional cost associated with this efficiency improvement.

Kelly Dougherty – Macquarie

Okay, thank you.

Operator

And our next question will come from the line of Satya Kumar with Credit Suisse. Please proceed.

Mahdeep – Credit Suisse

Hi, this is Mahdeep [ph] on behalf of Satya Kumar. Can you please provide the geographic breakup for the second half of 2010?

Zhengrong Shi

Steven, could you give a breakdown?

Steven Chan

For each of the sales region. Yes, so we’re looking for Europe to be around 50 plus percent, which Germany is the majority, and then I would say Italy and France would be the next two, and in the US, around 20% of our total sales. Japan somewhere close to 5% and then the rest of the regions would probably be less than 5%.

Mahdeep – Credit Suisse

Okay. How should we look at your operating expenses for the rest half of the year, are there any prepayments or any charges to be included over there?

Zhengrong Shi

There is no impairment or one-time charge in the future quarters.

Mahdeep – Credit Suisse

So, we can expect it around 11% to 12% OpEx going forward or 7%?

Zhengrong Shi

Sorry, didn’t get it.

Amy Zhang

I didn’t hear you very clearly.

Mahdeep – Credit Suisse

Can we expect around 7% run rate for OpEx going forward?

Zhengrong Shi

7%.

Amy Zhang

You mean the OpEx?

Mahdeep – Credit Suisse

Yes the operating expense.

Amy Zhang

The actual run rate without these extraordinary one-off items would be within the range of $53 million to $55 million a quarter.

Mahdeep – Credit Suisse

Okay, great. Thanks a lot.

Operator

And our next question will come from the line of Colin Rusch with ThinkEquity. Please proceed.

Colin Rusch – ThinkEquity

Thanks so much. Can you give us an update on what your expectations for shipments and pricing from Glory Silicon as well as from MEMC through the rest of this year and into next year?

Zhengrong Shi

You mean the wafer?

Colin Rusch – ThinkEquity

Yes.

Zhengrong Shi

We only provide blended wafer price, so we don’t give breakdowns.

Colin Rusch – ThinkEquity

Can you give us a little bit more color on the operating expense line, the G&A, what the increase was and how you see the investment playing out over the next couple of quarters?

Amy Zhang

As I said, the total OpEx, the conventional organic run rate would be within the range of $53 million to $55 million per quarter. In this particular Q2, there was a few million incremental extra spending on the G&A side and that was mainly due to, a), for being more conservative on accrual of some contract obligations that need to be fulfilled, and b), actually it’s in line with our setup of the global sales offices and other operational offices in new emerging markets. So, this spending actually, definitely is one-off and we feel quite confident to manage that at the run rate of $55 million per quarter in term of operating expenditure.

Colin Rusch – ThinkEquity

Great, thank you so much.

Operator

And our next question will come from the line of Sam Dubinsky with Wells Fargo Securities. Please proceed.

Sam Dubinsky – Wells Fargo Securities

Hi, guys. Couple of quick questions. Did you make an additional investment in GSF this quarter or do you plan to make additional payments to GSF in 2H?

Amy Zhang

We don’t have any additional investment in GSF, and we are not planning to further invest in GSF either.

Sam Dubinsky – Wells Fargo Securities

I know you said you’re hedged more for Q3, should we expect a FX gain in Q3 just if the euro depreciates a bit?

Amy Zhang

Yes, as people can tell, the translation loss for Q2 is $61 million and also offset with this $24 million gain, we’ve still got the net loss of $37 million. That was simply because of this huge decline of euro incurred in Q2. If you look at the market rate ending 31 March, the euro rate was $1.35 and versus this 30 June, $1.22. So, it was more than 9% decline, with absolute US$0.13 drop. In Q2 we had a euro exposure of $420 million to $430 million net exposure, so the translation loss was out was definitely out of this $0.13, it was around $55 million.

In Q3, I think our net exposure of euro could be managed below $300 million. With this more eased fluctuation of euro versus US dollar, we believe that the exchange fluctuation would be significantly controlled and also the exposure of FX loss would be effectively offset by the hedged gain out of the contracts that are already in place. Again, in term of 12 months strategy, we’re still going to hedge between 70% to 80% of our net euro exposure in balance sheet and also forecasted sales with this rate coverage.

Sam Dubinsky – Wells Fargo Securities

So just to be clear, you are more hedged for Q3 than Q2, so we won’t see a big gain for Q3, that’ll be sort of neutralish for euro?

Amy Zhang

It just depends on the ending at euro rate on the 30th of September, right.

Sam Dubinsky – Wells Fargo Securities

But if we assume it rolls at today’s rate, what should we expect?

Amy Zhang

If it’s $1.27, it will be minimized at neutral, zero.

Sam Dubinsky – Wells Fargo Securities

And then how should we think about equity income going forward, given that you still have some wafer investments that are doing very well, and you obviously should received some project income soon. How should we model other income in the back half of this year, and then in 2011 equity income?

Amy Zhang

Yes. I mean, quarterly, it’s difficult to predict, again, the quarterly result is not audited and it’s purely because they’re based on the management reports submitted by each affiliated companies. We believe that out of the current investee companies either we’ve got most of the risks truly and fully covered by this one-off impairment or out of those who are really doing well they are making quite healthy profit and bottom line, in line with their own operation and also their growth plans. I rather just leave that until the year end, because by then the results will be audited and more accurate.

Sam Dubinsky – Wells Fargo Securities

But in Q1, you had a $4.6 million gain in equity income, in Q1 this year you had under $5 million, I’m sorry, in Q4 of last year you had around $6 million, the wafer market is a little bit stronger today than it was back then, so should we model $5 million a quarter in equity income or…?

Amy Zhang

Yes. You can do that.

Sam Dubinsky – Wells Fargo Securities

Thank you.

Operator

And our next question will come from the line of Gary Hsueh with Oppenheimer & Co. Please proceed.

Gary Hsueh – Oppenheimer & Co.

Yes, thank you for taking my question. I’m curious about GSF again, I think, I’ve heard about the second round of financing for GSF projects not being a club deal anymore, and also more stringent I think I heard payment terms, are both of those factors what give you confidence in terms of resuming module shipments to GSF, could you confirm that? And in terms of a follow-up question, also about another hot button wafering, just upstream integration I didn’t hear you basically say that there is a potential for another JV in wafering, what basically drove you to kind of exclude joint venture partnerships as a way of expanding upstream integrations in terms of wafering?

Zhengrong Shi

On GSF, you know as we say it; they are ready for the second round of project financing. The secured project financing has already drawdown, and plus like we have more stricter payment terms, so basically we recognize the revenue when we receive the payment, so that’s what we have confidence in for second project financing and the AR situation will be much better. Regarding the upstream and we feel in this very dynamic and pretty mature industry, so absolute control of this process is quite important to determine stability in pricing.

Gary Hsueh – Oppenheimer & Co.

Yes. I was just curious why have you ruled out a joint venture, because it seems to me that a joint venture partnership in terms of wafering would be the most advantageous way of controlling your own wafer supply, setting up a joint venture and not actually having to incur your own CapEx in terms of expanding capacity?

Zhengrong Shi

Of course, we don’t rule out the JV and it depends on who you partner with. Of course JV is one option.

Gary Hsueh – Oppenheimer & Co.

Okay. Perfect. Thank you.

Operator

And our next question will come from the line of Shishir Singh with HSBC. Please proceed.

Shishir Singh – HSBC

Hi, thanks for taking the question. Just one question on the China ASPs. Obviously, I think this 280 megawatt tender you said that you would be opting out and you will not be participating, so how should we look at the ASP environment evolving in China going into 2011? Do you think it’ll continue to be very low ASP market, and you will opt out of that market rather than participating into it, and then I have a follow-up question?

Zhengrong Shi

At this moment the ASP in China market has increased compared to six months ago. So but again, (inaudible) really depending upon the supply and demand situation, and if we in Q1, Q2 next year, if we demand still far ahead of supply, I think, the ASP in China will also be up. So perhaps there is some percentage of discount compared to overseas market, but still the ASP shouldn’t be as low as what people expected.

Shishir Singh – HSBC

Would it be possible to quantify what percentage discount to, let’s say European market, the China ASPs are?

Zhengrong Shi

Probably around 10%.

Shishir Singh – HSBC

My follow-up question is regarding Germany. Obviously, there has been some recent commentary about market slowdown in third quarter in the German demand. Do you think that lower ASPs, higher IRRs can stimulate the demand back or do you think it’s getting close to the saturation there?

Zhengrong Shi

Well, as far as from our delivery point of view we’re fully sold out for the rest of the year, and the demand from our German customers are still very strong.

Shishir Singh – HSBC

So, going into 2011 you don’t expect lower ASPs needed in that market?

Zhengrong Shi

Well, as expected, I mean we expect that ASPs should reduce slightly because of the FIT reduction, but that only occurred in Germany and in other market like Italy and France also ASP is also reduced from next year. The IRR, I believe, the overall heating however is still much higher compared to the solar installation in the countries. I think if there is oversupply situation the ASP has to drop, but if the demand is till high probably ASP will halt.

Shishir Singh – HSBC

Thank you.

Operator

And our next question will come from the line of Nitin Kumar with Nomura, Singapore. Please proceed.

Nitin Kumar – Nomura, Singapore

Hi. Excellent set of results. Just kind of wondering, is there remaining portion from Shunda that is still left on your balance sheet?

Amy Zhang

Yes. All of the original investments plus the recent two years equity pickup and then net of the impairment, we still have around $20 million, $21 million left in Shunda investment.

Nitin Kumar – Nomura, Singapore

How do you see if there is any risk to that remaining amount?

Amy Zhang

Shunda is still producing and shipping wafers to Suntech. We’ve got this formula worked out based on business case built around different scenarios and we still see high probability that the remaining value would be sufficient enough to cover any potential risk coming out of the potential restructuring of the shareholding structure.

Nitin Kumar – Nomura, Singapore

Just in terms of your wafer capacity expansions, I understand you have GCL plant that being set up in conjunction and close to your factory and then you are looking at investment into your own in-house capacity. What kind of consolidation in your supplier base should we look at, would you be focusing on like, only these two portions of your wafer supply or would you be considering more wafers suppliers?

Zhengrong Shi

We are committed to all our supplier relationship and we expand upon that because our own capacity will expand with time, and at this moment we’ll say we have certain percentage, I will say probably, 25% to 50%, but we have not finalized the number, because as we said, we believe long-term to specialize in our specialty, competence probably makes sense, but just like the industry is so immature, so we need to maintain some stability of supply.

Nitin Kumar – Nomura, Singapore

Understand. Thanks for the question.

Operator

And our next question will come from the line of Dan Ries with Collins Stewart. Please proceed.

Dan Ries – Collins Stewart

Hi, good evening, and thanks for taking the question. I’m a little surprised by the ASP comment in that, some others, some of your competitor have guided for higher ASP in 3Q and certainly our channel checks show ASPs having risen in Europe, plus you have a mix shift to the US which I think at this point might have higher ASP. I guess my question is, today did Suntech have a particularly large premium in the second quarter that’s causing your ASP guidance to be down where others are up.

Zhengrong Shi

Look, I think, we see definitely the ASP for the spot market is higher, so many of the competitors, I think they are spot business based anyway, so in long-term our commitment to our customers’ and you look at all customer relationship is very stable and steady. So, that’s why our ASP has been long term based. Perhaps if you look for one month space or one quarter space, maybe our premium is not that high, but if you look at average over year or couple of years our premium position is very obvious.

Also we believe, if in case next year, say there is a oversupply situation, because many of the customers, because they couldn’t get sufficient supply from premium brand and tier-1 supplier, I think if the oversupply situation occurs, I think most of the customer will come back to their premium brand suppliers like us.

Dan Ries – Collins Stewart

You indicated that you had to change a provision of the contract that now enables you to build your own wafer agreements. Did you have to give any concession to the other side of the contract in order to get that concession from them?

Zhengrong Shi

Not really, because these are all mutual benefits, and as I said, the industry is still dynamic. I mean nobody can foresee what happening two years later, so I think it is all mutual beneficial.

Dan Ries – Collins Stewart

Okay, thank you very much.

Operator

And our final question will come from the line of J. Dorsheimer with Canaccord. Please proceed.

Josh Baribeau – Canaccord

Hi, thanks for taking the question. It’s actually Josh Baribeau for J. So debt keeps coming up a bit. Could you talk maybe about how you view your optimal capital structure, maybe debt-to-cap or debt-to-equity ratio?

Amy Zhang

I think really even though debt-to-equity ratio is higher than 100%, but that’s mainly due to a large portion of the convertible notes being counted as debt instead of equity. I think that in line with our scale and also operating activities getting stronger and operating cash inflow coming in, I expect to gradually minimize and bring down the short-term and long-term borrowing in longer run, and also replace that kind of direct borrowing with other instruments and other products that can also better manage our debt-to-equity ratio. I don’t expect the debt-to-equity ratio will be further going up.

Josh Baribeau – Canaccord Adams

Okay. Just further clarification on the gross margin, the core gross margin at 20.4%, does that include stock-based compensation and freight, or is that sort of based off of that $0.52 figure for processing cost?

Amy Zhang

It’s GAAP basis, all in.

Josh Baribeau – Canaccord

Okay, thank you.

Operator

Ladies and gentlemen that’s all the time we have for questions. I would now like to turn the call back over to Dr. Shi for any closing remarks.

Zhengrong Shi

I am sorry we didn’t have time to get to everyone’s questions. Please don’t hesitate to contact any of IR representatives after the call. Thank you. Have a nice day.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day everyone.

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