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

Q1 2014 Results Earnings Conference Call

June 17, 2014 8:00 AM ET

Executives

Gene Chen - Director, Investor Relations

Miao Liansheng - Chairman and CEO

Wang Yiyu - Chief Financial Officer

Bryan Li - Executive Director and CSO

Miao Qing - Vice President, Corporate Communications

Robert Petrina - Vice President, Sales and Managing Director, Yingli America

Darren Thompson - Vice President, Sales and Managing Director, Yingli Europe

Zhenhua Fan - Director, Legal Affairs

Analysts

Min Xu - Roth Capital

Patrick Jobin - Credit Suisse

Andrew Hughes - Bank of America Merrill Lynch

Pranab Sarmah - AM Capital

Operator

Hello, ladies and gentlemen. This is Eric. I’ll be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited First Quarter of 2014 Financial Results Conference Call. All lines have been placed on mute to prevent background noise. After today’s presentation, there will be a question-and-answer session. Please follow the instruction given at that time if you would like to ask a question.

Now I would like to transfer the call to the host for today's call, Ms. [Gene Chen] (ph), Director of Investor Relations of Yingli Green Energy. [Gene] (ph), please proceed.

Gene Chen

Thank you, Operator. And thank you everyone for joining us today for Yingli’s first quarter of 2014 financial results conference call. The first quarter of 2014 earnings release was issued earlier today and available on the company’s website at www.yinglisolar.com. We have already provided supplemental presentation for today’s earnings call, which can be also found on our IR website. I hope you all have 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. Wang Yiyu, Chief Financial Officer; Mr. Bryan Li, Executive Director and Chief Strategy Officer; Ms. Miao Qing, Vice President of Corporate Communications; Mr. Robert Petrina, Vice President of Sales and Managing Director of Yingli America; Mr. Darren Thompson, Vice President of Sales and Managing Director of Yingli Europe; and Zhenhua Fan, Director of Legal Affairs.

The call today will feature a presentation from Mr. Miao, covering business and operational developments. Mr. Petrina and Mr. Thompson will talk about development of American, European and the other emerging markets with respectively; and then Mr. Wang will take you through a discussion of the company’s financial performance. After that, we 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 terminologies such as will, expect, anticipate, 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 involves 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 this 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 statements as a result of new information, future events or otherwise, except as required as applicable law.

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

Miao Liansheng

Hello, everyone. Thank you for joining us today. I’m very pleased to announce that during the first quarter of 2014, the company significantly improved its financial performance market, overall gross margin up 15.7%, a substantial increase from 12.2% in the fourth quarter of 2014. This was attributable to a slight increase in ASP of PV module and our ongoing efforts on cost reduction.

In the first quarter, a traditional slow season for PV industry will shift approximately 630 megawatt of PV modules, decreased by 33% from the fourth quarter of 2013, primarily due to a slower demand from China, as well as high delay associated with the certain projects in Algeria.

However, since the beginning of the second quarter, we have been seeing significant demand uptick from China, as well as emerging markets such South America, Southeast Asia and Africa, and that trend we believe that will continue in second half of 2014. We therefore expect our shipments in the second quarter to be in the range of 870 megawatt to 950 megawatts and we maintain our annual shipment guidance of 4 gigawatts to 4.2 gigawatts for fiscal year 2014.

In the first quarter, we witnessed a continued evolution of demand diversification. The exceptional demand from Japan and other emerging markets coupled with steady growth from U.S. and stabilization in Europe were important and promising signals for first quarter in 2014.

In Japan, our shipments increased by more than 50% quarter-over-quarter while our customer base quadrupled. This has been driven by a growth -- growing acceptance of a Yingli solar products as a [primary] (ph) of choice in both commercial and residential segments.

Furthermore, we have continued to build strong relationship with utility-scale project developers and several EPC contractors, thus well-positioned for future. However, the proportion for sales to market outside China, U.S. and Europe doubled and accounted for 35% of our total shipments in the first quarter of 2014, versus 16% in the fourth quarter of 2013.

Beyond module sales, Yingli is actively involved in a balanced downstream strategy through a variety of projects in order to maximize profitability while mitigating risk associated with downstream development.

The company currently has approximately 1 gigawatts of PV projects pipeline processing to different approval stages across 10 provinces in China such as Hebei, Xinjiang, Yunnan, Guangxi, and Heilongjiang province and continue to develop actively new pipeline for PV projects in other provinces including Inner Mongolia, Qinghai, Gansu and Ningxia province.

During the first quarter of 2014, the company had started the construction of two ground-mounded PV plants, which are expected to be completed in the third quarter of 2014, with total capacity of up to 25 megawatts located in Hebei province.

The company also began to construct 110 megawatts of utility-scale projects and 20 megawatts of distributed generation projects located in Hebei, Guangxi and Sichuan province in June of 2014.

For all of those PV projects under construction, we have identified committed buyers that will undertake all or part of the equity of those projects, including the joint venture with China National Nuclear Corporation, and the renewable energy fund established with Shanghai Sailing Capital Investment Fund, etcetera. Meanwhile, the company continues to explore project development opportunities outside of China and expect to achieve significant milestones in the second half of 2014.

Based on the current project development status and the expectation progress of project pipelines, the company expects to build approximately 400 megawatts to 600 megawatts of PV projects through the end of 2014.

In order to support the rapid expansion of our downstream business and to efficiently manage capital expenditure and establish the strong financial platform, the company and Sailing Capital, the first large cross-border RMB private equity fund launched in China, jointly formed a RMB 1 billion fund. It aims to invest primarily in Yingli Green Energy's solar PV projects in China.

Yingli are leveraging each parties’ advantages in the respective sectors. The cooperation will not only open more options for the efficient commercialization of downstream projects, but also help transfer the most effective financing solutions and development as securitization of PV projects.

As cost continue to decline and efficiency increase, PV power is closing the cost gap, the traditional cost energy especially distributed generation off-grid systems. Given its importance as further in government’s efforts to promote solar applications for residential and commercial estates, we continue to focus on distributed PV generation.

Currently, we have about 20 megawatts distributed generation project under construction in Sichuan province which we have already entered into PPA with the large state owned company.

In the recently pronounced dated policy by the State Administration of Taxation starting from July 1st, the government will ask all buyers of the attributed PV power, i.e., the subsidiaries of a State Grid Corporation of China to invoice these distributed PV power owners. This (indiscernible) procedure will use and pass slowly on all parties and reduce transaction costs.

For distributed PV power owners with monthly revenue of less than RMB 20,000 which is roughly $3,252, they will be exempted from paying value-added tax. And for owners with monthly revenue of more than RMB 20,000, 50% of the AT will be exempted and this basically invoice their owners. Accordingly, we believe that the distributed PV project in China will accelerate given the coordination by all projects and steady stream of quarterly projects.

We have worked privately to build Yingli Solar into a global recognized universally for its innovative products and awesome quality. With the beginning of FIFA World Cup in Brazil, we’re adding other level to the goal of offering affordable energy to all.

To highlight our achievements in the recent market survey conducted by an independent agency, Yingli Solar came out as the third most recognized Chinese-origin brand in Germany after Lenovo and Huawei as an official sponsor of FIFA World Cup.

We will continue to make Yingli Solar household name in some of the fast-growing markets with the largest potential through the showcase of Chinese characters and promotion of the concept of solar applications of residential and commercial estate.

Finally, the company also plans to offset all of its current ambitions arising from its promotional activities in Brazil as part of its mission to help make the 2014 FIFA World Cup Brazil (indiscernible) in history.

Next Robert and Darren will walk you through the Americas, European and other markets. Robert please?

Robert Petrina

Thanks you, Mr. Miao. In the Americas, we began in the first quarter fiscal ’14 with the significant momentum of the record setting 2013. Year-over-year our revenues increased by 60% while quarter-over-quarter it was slightly down from what the tradition is very big fourth quarter. Building on the foundation of a healthy pipeline across the utility and distributed generation, we continue to develop new opportunities while servicing what we consider is a best-in-class portfolio of customers.

Importantly, the U.S. market has achieved a new and substantial run rate, the level that was confirmed by SEIA in their recently released record-breaking Q1 results for the U.S. market as a whole. In Latin America and the Caribbean, we continue to see tremendous activity and the formation of solid opportunities that would catalyze the nice wave of substantial growth in sustainable markets.

Also in Q1, we expanded the scope of work for our PV testing laboratories in South San Francisco by developing a remote other testing facility in (indiscernible) in order for us to better understand how product design leverage affect long-term outdoor performance in the same environment.

In the U.S., we made several product updates to our YGE-Z series PV modules in order to reduce material and handling costs. We also published (indiscernible) customers in order to facilitate innovation in mounting hardware and comp based growing number of ways in which our customers who can solve PV modules.

Looking forward, we anticipate more product changes in the second half of year for standard PV modules as a result of our continuous improvement efforts. Building off the success of our ongoing product quality test program, we’ll be launching an expensive ongoing product durability test program between third party labs in our own PV testing laboratory, based on the proposed qualification plus test protocol developed by Enron.

This is in order to validate the design and durability of newly sold PV modules. Q1 2014 started continuation of Yingli’s leadership within Latin America and the Caribbean. The company continue to increase its key customer base and Yingli’s sales. We saw significant increase in activity of utility-scale projects in Central America and Chile and were informed of our selection as a module supplier to a significant project with the Central America.

We have also begun working closely with numerous project developers to finalize details of supply to utilities of projects within the region. Our Mexican and Brazilian subsidiaries continued expansion of local operations, including completing several inventory returns for supply to their respective local market.

In addition to executing on our sales plan, it continues to be driving cost on our supply chain in leveraging our technical capabilities. We have also seen positive results from our focus on visual activities as enabler of customer acquisition. We have witnessed the 350% increase for year in the west side conversion rates and we’re proud to be one of the top leading manufacturers in social media, having recently surpassed 30,000 followers on Facebook.

With the tremendous platform offered by the 2014 FIFA World Cup, and our digital activation for our June, July, we built the infrastructure to manage, qualify and service what will be an exponential increase in the number of sales within this South American region as well as across the world.

We will also be bolstering relationships with our customer by hosting numerous members of theirs team and partners from the Americas region during the turnaround. Looking on that the second quarter is shaping up as our best second quarter ever with demand across all segments ever growing. The second half of the year looks extremely strong, however the new trading investigation is creating uncertainty as designed.

However, with the overwhelming majority of the industry unite us in the effort to maintain the free trade of solid products. We will continue to defend ourselves to the integrity of this incredibly resilient industry.

As we mentioned during the last call, we are energized by the corporation and support of our customers and other few stakeholders and together we will navigate the uncertainty of this new trade position. Ultimately we will persevere and be able to refocus on our key mission, which is to drive the planning of solar energy, profit sentiment and the work.

Thank you. Darren will now walk you through Europe and some of the other emerging markets.

Darren Thompson

Thank you, Robert. In Q1, we experience the sequential increase in shipments to Europe as a result of success in winning our supply to several U.K. project previously announced during our Q4 earnings call. Combined to the decrease on overall growth shipments, to others regions in Q1 versus Q4, Europe’s contribution to our global shipments in Q1 was 18.4% versus 10.8% in the previous quarter.

Gentlemen, PV system grid connections through to the end of April have been tracking at an average rates of 156 megawatts per month below our original forecast of 200 megawatts per month. Based on channel discussions during Intersolar, there are signs that market demand will adjust higher tools to government corridor as we move into the peak installation period.

Demand curation will also be supported by lowering of the minimum import price from the 1st of April, helping to neutralize the impact of monthly feed-in-tariff reductions since January. The U.K. market is positioned to become the largest European market in 2014 with the stable incentive policy for both utility-scale projects and rooftop distributed generation.

This illustrates of our success in securing supply to 64 megawatts of utility-scale projects in Q1 and in addition, supplying 5.8 megawatts at our higher efficiency PANDA series panels to the U.K.’s largest rooftop projects owned by multinational car manufacturing company.

In France, we rewarded nearly 50% of the latest round of the French National Tender Program equating to 185 megawatts to be supplied through 2014 and 2015. The cornerstone of our success was our strategic partnership with our local French panel manufacturer to produce new branded panels to help our Yingli sales.

Selection of supplies was based on stringent ranking criteria, including minimization of carbon footprint, contribution to innovative research and development and the purchase price to generate the electricity.

Moving across to the East Mediterranean, following an after-success last quarter, securing a largest supply contract to date in Israel with 27.5 built-ups, our investment in our local team in Turkey begins to payoff. As recently, we were awarded a panel supply contract for 30 megawatts of utility-scale projects across the country for delivery through 2014 and into Q1 2015. We anticipate securing additional supply opportunities in Turkey through 2014.

We continue to invest in our customer portfolio to grant presence in the local team in the Balkan region. We held our first Balkan Customer Conference Event in Croatia, scheduled around the opening match of the 2014 FIFA World Cup last week between Croatia and Brazil. The event was attended by over 25 customers and local financing institutions from around the region.

Looking forward, our order book for Europe in Q2 is solid and showing healthy growth versus Q1. If the regulatory situation remains stable through the rest 2014, we anticipate that the current level of demand we see in Q2 will be sustainable into the second half of the year with potential upside due to the U.K. utility scale project demand.

We continue to build our grass root presence customer base and capability in the Middle East and relatively state market development will begin to gain traction particularly in June. Looking towards the remainder of the 2014, we will further expand our operations by establishing a permanent sales office in Dubai to support the region’s substantial utility in commercial scale opportunities.

Local product inventory will follow in Q3 in June to better serve our customers by shorten lead times. The Jordanian market is showing a healthy growth in the commercial segment just driven by the high cost of the electricity. Jordan has also awarded its first round of utility PPAs for projects which were due to be built in early 2015.

Egypt has also emerged as a strong market with demand in the off-grid, residential and commercial segments followed by planned utility-scale projects. While expanding into the region, we’re optimistic about the long-term prospects of the Saudi and United Arab Emirates markets with obviously the potential for significant volume moving to support the utility-scale projects in the coming years.

Dubai has already started the process by announcing the 100 megawatt DEWA IPP project but in Saudi, renewable energy program does show some delays. Overall we expect 2014 through 2015 to be the tipping point for the Middle East solar market, as we see more and more certain of our sectors developing while a large scale utility projects have been planned for longer term developments.

Moving across to Africa, Yingli has awarded panel supply to a 1 megawatt project in Kenya, the largest project in East Africa. The solar system offset will be purchase from the grid and also displays its fuel from backup diesel generators when the grid is down.

South Africa during Q1, Yingli achieved success with supply panels with two solar systems, one for 300 kilowatt peak on the roof of a major electrical equipment manufacturer and the second for 100 kilowatt peak on the roof of a car dealership. These commercial milestones demonstrate growing opportunities in South Africa beyond utility-scale projects but our local team in Johannesburg is positioned to capture.

In Australia, the federal government continues to review the mechanism which currently supports solar system up to 100 kilowatt peak under the renewable energy target. This combined with the anti-dumping case creates some uncertainty in the marketplace. Although local team in Australia faces several headwinds, we continue to develop our sales channel to gain access and secure supply to commercial rooftop projects and anticipate that investments in these activities will shortly begin to bear fruit.

In South East Asia, political instability in Thailand continues its utility-scale project opportunities and in Indonesia, we expect tenders to be released in the rooftop after the pending election in July. Last week, we announced the commissioning of the largest solar project in Malaysia of 10.3 megawatts powered by over 40,000 Yingli panels. The power system will supply approximately 13.6 million kilowatt hours of clean electric per annum.

Our local team in Singapore continues to work with our regional partners to identify and convert similar opportunities through 2014.

Now, I’ll hand over the call to our CFO, Mr. Wang Yiyu. Thank you.

Wang Yiyu

Thank you, Darren. And thank you for all participating in our first quarter 2014 earnings update. I am glad to report this quarter’s results and I will take a few minutes to work you through all the key metrics. We’re excited with the improved overall gross margins of 15.7% in the first quarter of 2014 compared to 12.2% in the Q4 last year. This is expected to be demand in the range of 14 to 16 percentage also in the second half -- second quarter of 2014 in line with our revived guidance of a lower 30 percentage decline.

Our total previous module shipment in Q1 were 630.8 megawatts, including 6.1 shipment for our own PV plant in China, down by 32.9% in megawatts quarter-over-quarter. The decrease in the PV module shipment was primarily due to the traditional seasonality, slowest demand in China after huge first quarter and slightly delay in the PV module delivery schedule for some project.

Total net revenues decreased by 27.6% quarter-over-quarter to US$432.2 million. Importantly, the average selling price of PV module improved slightly in Q1 due to the company’s continued efforts in optimizing its geographic distribution focus on the sales to higher priced markets.

On the cost side, our in-house polysilicon cost per watt continued to decrease quarter-over-quarter as our efforts driving cost down through consistent technology improvement and upgrade. Due to the higher ASP and our continuing efforts on cost reduction, overall gross margin were 15.7% in the first quarter of 2014, up from 12.2% in the first quarter of 2013.

Gross margin for sales of PV module was 16.8% in the first quarter of 2014, a market increase from 13.1% in Q4 2013. Our gross margin was US$67.8 million in Q1 compared to US$74.6 million in quarter first 2013, mainly due to the relatively lower total net revenues.

Moving down to the operating lines. Operating expenses were US$88.5 million in Q1. The company recognized cash bad debt provision of US$12.2 million relating to one customer. In Q4 2013 operating expenses were US$172.8 million, which included provision for inventory purchase commitment, excluding one-off item mentioned above.

Operating expenses were US$76.4 million in Q1, a significantly decrease from US$96.4 million in Q4 last year. Overall, operating expenses as a percentage of net revenues were 20% -- 20.5% in Q1, compared to 28.2% in Q4 2013.

EBITDA was US$35.7 million in Q4 2014, showing a significant improvement from a negative EBITDA of US$34.4 million in Q4 2013. Interest expense in Q1 were US$40.5 million, reflecting a slightly decrease from US$42.4 million in previous quarter.

The weighted average interest rate of company’s borrowings was 6.42% in Q1, compared to 6.33% in Q4. By the end of Q1, the company has an aggregate of US$2.4 billion of bank borrowings and medium notes, a similar level to that in Q4.

In April company successfully to complete the offering -- full year offering with net proceeds of approximately US$83 million. Given net U.S. dollar denominated liability position and the appreciation of U.S. dollar against RMB in this quarter, foreign currency exchange loss was US$2.2 million in Q1.

Operating income tax benefit of US$3.0 million, net loss in Q1 was US$55.0 million and loss per ordinary share and per ADS was US$0.35 on GAAP basis. On an adjusted non-GAAP basis, net loss was US$54.5 million and loss per ordinary share and per ADS was US$0.35.

Let’s move to our balance sheet. As of March 31, 2014, our cash and cash equivalents were US$204.8 million improved from US$182.6 million as of December 31, 2013. As March 31, 2013, our restricted cash was US$277.7 million, slightly decreased from US$279.6 million as of December 31, 2013.

Operating cash flow in the first quarter remained positive and has continuously improved since the beginning of 2013 due to the relatively lower total revenue in Q1 2014. Days sales outstanding and days payable outstanding both increased, while accounts receivable and accounts payable had a slightly lower balance compared with that in Q4 2013.

As end of Q1, our accounts receivable decreased to US$742.6 million from US$771.9 million at the end of Q4 2013. Days sales outstanding were 150 days in Q1 compared to 113 days in previous quarter.

Inventory was US$342.6 million as of the end of Q1, compared to US$335.7 million as of December 31, 2013. Inventory turnover days were 85 days in Q1, compared to 56 days in Q4. Accounts payable was US$869.2 million as of March 31, 2014, compared to US$910.4 million as end of December 31. Days payable outstanding was 215 days in Q1, compared to 152 days in Q4 2013.

We will continue to maintain positive relationship with our main lenders in China. As of to date, we have approximately [US$1.08] (ph) billion in unutilized short-term lines of credit and US$338.8 million committed long-term facility that can be drawn down in the near future.

Now I would like to discuss our guidance for Q2 and full year 2014. Based on the current market conditions and our book of business, we expect our module shipment in Q2 2014 to be in the range from 870 megawatt to 950 megawatt, including an estimate of 30 megawatt to 60 megawatt shipment to our own PV plants. We also expected our gross margin in Q2 in the range of 14 to 16 percentage in Q2 2014.

Beginning in the second quarter we have seen significantly uptick in the demand from China, as well as emerging market in South America, Southeast Asia and Africa, and we expect this trend will continue through 2014.

Based on our current order backlog and the positive market prospectus, we reiterate our 2014 shipment guidance to be in the range from 4 gigawatt to 4.2 gigawatt, including 400 megawatt to 600 megawatt shipment from our PV system, represents an increase of 23.7% to 29.9% from 2013.

For a geographic breakdown of Q2 2014, we expect around 30% of our shipment will come from China, around 20% from Americas, around 20% from Europe and about 30% from rest of the world.

Now I would like to open the call to questions. Operator, please proceed.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Vishal Shah from Deutsche Bank. Please ask your question.

Unidentified Analyst

Hi, everyone. This is [Jim] (ph) on the line for Vishal. Thanks for taking the question. I just wanted to touch on the policy announcement in China that you guys have talked about? Could you go over the details there and what this implies for the mix between utility and [digital] (ph) for the year?

Zhenhua Fan

Okay. I’ll maybe translate to Mr. Miao. [Foreign Language]

Miao Liansheng

[Foreign Language] So first thing to your question. So basically it highlights three key points. The first is based on the most recently meeting leading by the energy bureau and other instruction of our (indiscernible). Bureau of Energy leading this meeting to -- with all the key utility company and the solar company in China to talk about the whole development of solar industry from last June to 2014 June, to talk about all the development effects and difficulties the industry are facing.

So after the -- during the meeting, the energy of bureau gave several guidance. The first is they wanted to assess with the development of those ongoing project whatever loophole from last year or whatever currently we’re developing. Maybe there are signal showing that if some of our project are not moving very fast as people planned and those kind of unutilized [quotes] (ph) are ongoing [quotes] (ph) versus the relating approvals can be reallocated through some province or some investors if they had more concrete pipeline.

The second is the energy of bureau shows a very strong commitment to the development of the distribution market. As we list some of the policies in Mr. Miao’s speech, they tried to asses with the development of the distribution market through synchronized application procedure by announced those effects benefit with round of procedures to further enhance the incentive to the distribution market.

We also expect maybe the government will announce some updated new feed-in-tariff systems or incentive programs to fully further support the distribution market. That’s why put all these together, the energy bureau officials also very clearly commits their 2014 overall installation target.

The second is recently based on what the grid company planned, there will be nine lines with higher voltage transmission lines to be built in the Inner Mongolia province for both East and the west, also in Yunnan and the Gansu province. In accordance with those development and buildup in the high voltage transmission line which gave a more capacity for huge round of projects to be built in this area but result in a concern on connection to the grid and a transmission electricity from those area to the province which need electricity.

So servicing is after this meeting, our Chairman, Mr. (indiscernible) listened the recording of this meeting and also in the recent China National Energy Security strategy and to develop renewable also become one of the elements that the China will be considered while it is under whole energy security plan for the whole China.

So put all these higher signals together, we could recently plus what has been announced second half of last year until now, we are quite confident to hear the China’s strong -- government’s strong commitment to the development of the solar market in China and we are getting more and more confident that the China market will become more and more large, reliable and which will give us more chance in the downstream business in China in the coming quarters in the next few years. Thank you.

Unidentified Analyst

Okay. That’s really helpful. Maybe could you guys just touch on the U.S. market shipments and what kind of visibility you have in the second half shipments as the trade case continues?

Darren Thompson

Maybe I will give some comments and I can ask Robert Petrina to give some supplement. So basically in post Q1 and Q2, our shipment to U.S. is very strong and even during the -- before and after the announcement of the CVD -- preliminary CVD in early June, we still see a very strong demand from U.S. customers in the second half of this year.

Our customers are very actively talking with us about different solutions how to reason, fairly solve the issues through commercial solutions and also based on our current assessment and understanding of the background scope and even the potential anti-dumping duty which may announce by the end of July, we believe that such kind of announcement or additional cost that arising from kind of potential tariff will not significantly impair the second half of our U.S. market demand. So Robert, you have anything to add.

Robert Petrina

I think you have covered. I think there is a number of structures are being activated that will go out, so the markets continue to grow. And I think as I mentioned in my prepared remarks, the industry is working to find a way to get, there is a demand is strong and there is a willingness across the Board for people to find or have mutual support varies.

Unidentified Analyst

Okay. Thank you.

Robert Petrina

Thank you very much.

Operator

Thank you. And your next question comes from the line of Min Xu from Roth Capital. Please ask your question.

Min Xu - Roth Capital

Hey, guys. Thank you very much for taking my question. First of all, congratulations for getting great exposure on the world cup tournament, that’s a great marketing.

Wang Yiyu

Thank you, Min.

Min Xu - Roth Capital

Yes. So my first question is actually a follow-up on the U.S. trade case. So you mentioned you’re exploring different structures to minimize the impact to your U.S. business, can you give us some color on that, what exactly that you’re trying to do there? And second, what was your U.S. module ASP in Q2 and what do you expect that to be -- ASP to be in Q3?

Wang Yiyu

I think we are -- firstly, we are working with our business partners and our lawyers in very detailed and then analyze the scope and those detailed information of the trade case. So at this moment given the ADS have been still not announced, has not yet ready to disclose a very mature daily solution at this moment. But based on what expect -- based on our estimated range about the coming ADS not only through our understanding, but also through negotiation with those business partners, we believe this range will be somehow in a reasonable range, which means the extra incremental cost arising from this and the dumping case should be in a range that can be fairly absorbed by the whole value chain to ensure the demand in U.S. won’t be significantly impaired.

The second thing is our USP somehow has been slightly increased in Q2 compared to Q1. So of course, we are not disclosing the exact range of our U.S. ASP, but it’s quite reasonably generate a margin while we sell to this market. And at this moment regarding to the Q3 U.S. price, as I mentioned, we ask you waiting for the final ADS result, but we expect that the final module pricing USP should be anyway higher than Q2, because anyway there will be some incremental cost will be added to the current production cost, I mean inbound cost of module from China to U.S.

Min Xu - Roth Capital

Okay. That’s really helpful. And quick follow-up, is the 12.2 million bad debt provision included in selling expense or G&A and can you give us some color on how the SG&A and R&D will trend in the next few quarters?

Wang Yiyu

Okay. So first, it’s in the G&A. And in Q2, we expect that our total SG&A and R&D will be further decreased based on Q1’s level, maybe by roughly 12% to 15%. This is assumed -- this is even when our shipment will be continued to increase in Q2 versus Q1.

Min Xu - Roth Capital

Great. Thank you very much.

Wang Yiyu

You are welcome.

Operator

And your next question comes from the line of Patrick Jobin from Credit Suisse. Please ask your question.

Patrick Jobin - Credit Suisse

Hi. Good evening. Thanks for taking the question. First question, I am just trying to understand kind of your outlook for gross margins, given the mix shift to some regions or markets or with lower ASPs, China is just looking at your mix into Q2 and then for 2014. So I guess can you talk to the ASP trends you are expecting kind of throughout the year overall or your cost roadmap? And then I have a follow-up. Thanks.

Wang Yiyu

Okay. So as we continue to optimize our sales geographic by selling to more high sales -- high ASP market, plus our marketing efforts, we expect in Q2 our total ASP will be very close to Q1 level, very, very close to. And meanwhile, we expect that given the current market demand and the -- in this market position we expect that Q2 -- Q3, Q4 our ASP will be somehow flat than our Q2 level. So regarding to the production cost, first, we will continue to decrease our production cost quarter by quarter. So we expected our poly cost should be now in the very slightly above $40 and we expect it in Q2 and we expect that this will be continued to decrease quarter by quarter and gradually through end of 2014, it will be in the range of below $40 level. So our poly cost level will be slightly above 10 -- very slightly above $10 and we believe -- in U.S. dollar sense and that we believe this give our cost effort, we believe we will also able to decrease this very slightly quarter by quarter. So to all, this is for the internal module cost, production cost from Yingli module trends through the 2014.

Patrick Jobin - Credit Suisse

Thank you. That’s very helpful. Then just two quick follow-ups. One, I just want to make sure I understood, you are looking at OpEx declining 12% to 15% versus Q1 levels throughout the remainder of the year, is that right? Is that after or excluding the bad debt expense in Q1? And then just the follow-up on the comments on policy evolution kind of talking about potentially reallocating quota and projects are not progressing. I assumed that quota would remain either utility or distributed generation to be reallocated to other areas or would there possibly be a category reallocation as well? Thanks.

Wang Yiyu

Okay. So I think first thing is regarding to the Q2 OpEx, you are right. Excluding the bad debt provision in Q1, we will still able to decrease OpEx in Q2 based on Q1’s level given we will be continuous doing cost of control efforts and benefited from scale increase. And this kind of the OpEx will be also continued to decrease slightly quarter by quarter, while quarter by quarter our module shipments in megawatts will be continued to increase. As we mentioned, our target is to contain the overall OpEX in dollar amount level in 2014 no more than 2013.

So regarding to your question about the China policy, etcetera, so I think at this moment based on all the information we heard and that we read and we communicated through our channels meetings, we believe the China government and their first priority is strongly committed to the overall installation target that they needed to achieve in 2014. At this moment, it’s too early to predict what kind of detailed policies they may use further maybe including reallocation, maybe through assess with the distribution market more and more by announce the more incentive program or even announce some kind of additional incentive program for the distribution market. But the most important thing is the overall target to the China government is something much more important than how it has been allocated to the chain distribution or ground project.

Patrick Jobin - Credit Suisse

Great. Thank you so much.

Wang Yiyu

Okay. Thank you, Patrick.

Operator

And your next question comes from the line of Krish Sankar from Bank of America Merrill Lynch. Please ask your question.

Andrew Hughes - Bank of America Merrill Lynch

Hello, everyone. You have Andrew Hughes on for Krish. I am wondering if you can help us understand how many megawatts -- system megawatts were recognized as revenue in Q1 and what the outlook is for the year, I know, the shipment targets 400 to 600, but understanding what might happen on the revenue line would be helpful?

Wang Yiyu

At this moment, we announced very mature amount in Q1 for the system revenue and in Q2, the system revenue won’t be -- also won’t be very large because most our projects we will kick off is in later Q2 and Q3. So we except from -- maybe from second half of Q3 and through Q4 we will gradually recognize revenue on those systems in our income statement.

Andrew Hughes - Bank of America Merrill Lynch

And are you planning to sell most of the 400 megawatts to 600 megawatts in shipments or are these projects you are seeking to retain, what sort of the strategy there?

Wang Yiyu

Okay. So based on our current expectation we expect roughly 50% of the project we are developing now will be sold through our downstream exit mechanism like our joint venture or those equity fund we raised, maybe we will hold roughly 50% by the end of this year and maybe we sell them in the second half -- first half of next year or maybe hold them on balance sheet.

Andrew Hughes - Bank of America Merrill Lynch

Great. And then just one quick on the U.S market maybe for, Robert, any expectations for the mix of U.S. shipments to shift over the balance of 2014 given, what’s, given the trade decision and maybe some other market dynamics?

Robert Petrina

Shift towards what? Can you clarify…

Andrew Hughes - Bank of America Merrill Lynch

The sale segment breakdown between distributed -- distributor, residential and institutional utility, just curious if you see that mix shift shifting throughout the balance of 2014 and then into 2015 given the tariff or any other market dynamics you are seeing?

Robert Petrina

I think it’s too early to tell right now. I think, clearly, utility projects have much longer cycles and are well underway. So I don’t think you are going to see an immediate reaction but as we progress we will definitely I think see some shift potential depending where things end up, but for now I think it’s again too pre-mature, the decisions that have been made are preliminary and are subject to and will change, so it’s just something that we have just sort of hold still through the rattling at this point

Andrew Hughes - Bank of America Merrill Lynch

Okay. Thanks everyone.

Operator

Thank you. And your last question for today comes from the line of Pranab Sarmah from AM Capital. Please ask your question.

Pranab Sarmah - AM Capital

Hi. Thank you for taking my question. My question is on your, if I see your guidance for 2014, specific second half of 2014, you expect rest of the world will go up quite significantly, it’s been more than twice of your first half shipment at least, rest of the world probably account more than two times of your first half shipment. Can you give some color in terms of market that rest of world will expect to grow significantly in second half?

Wang Yiyu

Okay. I think, yes, you are right, our rest of the world market grows very fast compared to Q4 2013, due to America contributed roughly say by Japan market, our South African market, India, Middle East, Southeast Asia. Like for Japan maybe roughly -- will be roughly 10% to 12% will be -- go to Japan market, then maybe North African market will be roughly 5% then remaining is rest of the world.

Pranab Sarmah - AM Capital

That will be the strength on the second half of this year, right, 2014?

Wang Yiyu

Yeah. This will be roughly, I mean, in Q2, in second half of the year, the trend will be somehow same, quarter-by-quarter.

Pranab Sarmah - AM Capital

And could you give little color on bad debt provision [Technical Difficulty]?

Wang Yiyu

Sorry, I cannot hear this question very clearly, some of the reason of what?

Pranab Sarmah - AM Capital

The bad debt provision you made on the Q1, the $12.2 million, can you give little bit of color, what the customer?

Wang Yiyu

Okay. So, this is owned by a China company and for little bit long time, because we are being taking direct different kind of approaches including communication with the management, some of the pre-legal action and also some legal assessment.

At this moment, there is nothing happened, towards the worst scenario, the company is still there, everything is still, the company still operating, but given the time is too long and there is not too much solid policy progress, so we are collecting the money in the past few quarters, several quarters. That’s why for product we will -- we decided, management decision to approve this provision.

But it does not mean that its bad debt now, we will continue all efforts to continue approaching this customer and try to get as much as we can in the following quarters through different ways.

Pranab Sarmah - AM Capital

Thank you very much.

Wang Yiyu

You’re welcome.

Operator

Thank you. And that does concludes our call today. Now I would like to transfer the call back to Ms. [Gene Chen] (ph) for closing remarks.

Gene Chen

Thank you. If you have additional questions, please feel free to contact our IR team. Thank you and good-bye.

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