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Yingli Green Energy Holding Company Limited (NYSE:YGE)

Q3 2010 Earnings Call Transcript

November 19, 2010 8:00 am ET

Executives

Arthur Chen – Legal Counsel

Miao Liansheng – Chairman and CEO

Bryan Li – CFO

Miao Qing – Director, IR

Wang Yiyu – Chief Strategy Officer

Robert Petrina – Managing Director, Yingli Green Energy Americas

Analysts

Jesse Pichel – Jefferies

Dan Ries – Collins Stewart

Vishal Shah [ph] – Vishal Capital [ph]

Lu Yeung – UBS

Timothy Arcuri – Citi

Gary Hsueh – Oppenheimer

Satya Kumar – Credit Suisse

Adhira [ph] – Lazard Capital Markets

Amy Song – Goldman Sachs

Sam Dubinsky – Wells Fargo

Stuart Bush – RBC Capital Markets

Operator

Hello, ladies and gentlemen. This is Isha, and I will be your operator for this conference call. I would like to welcome everyone to the Yingli Green Energy Holding Company Limited third quarter 2010 financial results conference call. All lines have been placed on mute to prevent background noise. As a reminder, today’s conference call is being recorded. After today’s presentation, there will be a question-and-answer session. Please follow the instructions given at that time, if you would like to ask a question.

I would now like to transfer the call to the host for today’s call, Arthur Chen, In-house Legal Counsel of Yingli Green Energy. Arthur, please proceed.

Arthur Chen

Thank you, operator. And thank you, everyone, for joining us today for Yingli’s third quarter 2010 financial results conference call. On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Executive Director and Chief Financial Officer; Mr. Wang Yiyu, Chief Strategy Officer; Mr. Stuart Brannigan, Managing Director of Yingli Green Energy Europe; Mr. Robert Petrina, Managing Director of Yingli Green Energy Americas; and Ms. Miao Qing, IR Director.

The third quarter 2010 earnings release was issued earlier today and is available on the company’s website at www.yinglisolar.com. We have already provided supplemental presentation for today’s earnings call, which can also be found on our IR website. I hope you all had the chance to review it by now.

The call today will feature a short presentation from Mr. Miao covering business and development highlights, and then Mr. Li will take you through a discussion of the company’s financial results and updates. 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 US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, and similar phrases.

Such statements are based upon management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy’s control, which may cause Yingli Green Energy’s actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in Yingli Green Energy’s filings with the US 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 under applicable law.

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

Miao Liansheng

(Interpreted) Hello, everyone. Thank you for joining us today. First, I would like to discuss some quarterly business highlights and achievements. Please refer to page five to page eight of the presentation. Later on, Bryan Li, our CFO, will take you through our third quarter 2010 financial results.

In the third quarter, Yingli continued to deliver impressive operating results. PV module shipment volume increased by 25.2% compared with the second quarter, driven by robust market demand, growing global brand awareness, and the successful ramp-up of our manufacturing capacity. As a result of our tireless commitment to our cost reduction, we achieved a gross margin of 33.3%, well above the high end of our previous guidance.

Globally, we see continued strong volume demand and a stable pricing through the various PV markets. Europe remained a key component of global PV markets, and it continues to diversify the small countries’ increased demand for solar energy, Italy, France, Spain, UK, and Greece, all growing into attractive sizable markets, which are helping to reduce the industry’s reliance on Germany.

Outside Europe, we are seeing rapid development in emerging markets such as US where we have consolidated our position as one of the largest and most reliable suppliers of high quality PV modules. Recently, several products using Yingli solar modules have been completed, such as 15 megawatts projects with Kaiser Permanente, one of the largest distributed generation projects in the US, Constellation’s 4.4 megawatts utility project at Denver International Airport, and the solar power system at New York Jets’ team headquarters and training center.

In California, we exited the third quarter in third place to commercial installation applications capping a solid (inaudible) fourth quarter 2009. We are committed to tirelessly support our customers in the distribution, commercial, institutional, as well as utility segments to further expand our market share.

Demand for Yingli solar modules continued to increase in global market. Specifically, we see robust demand momentum for the Yingli Solar Panda modules due to their advantages such as high efficiency, low decoration, and superior performance in low radiation conditions. As of today, we have entered into a total of 722 megawatts of PV modules sales contracts, which are expected to be delivered in 2011. We expect the contract volume will reach 1 gigawatts by the end of this year. Customers are generally required to pay payments to issue the committed delivery in 2011.

The newly added 400 megawatts vertical integration production lines in our in-house polysilicon, Fine Silicon, have been ramping up smoothly from the start of commercial operation in early July and August respectively. We are confident that after the ramp-up period, the new capacity improvement, positive contribution to further enhancing our profitability and cost leadership.

The green market demand and our strong customer base have combined to enable us to deliver yet another key milestone via our rapid development. This quarter we launched 700 megawatts capacity expansions comprised of 600 megawatts of monocrystalline silicon-based manufacturing lines in Baoding and 100 megawatts of monocrystalline silicon-based manufacturing lines in Hainan Province. We expect these two expansion projects to be in production from the middle of 2011, and upon completion, they will bring our total nameplate capacity to 1.7 gigawatts.

We have also pursued innovative financing mechanisms in order to accelerate our capacity expansion efforts. I’m delighted to report that one of our primary operating subsidiaries, Tianwei Yingli, has became the first Chinese solar company to successfully reach 2.4 billion RMB-denominated secured five-year medium-term notes in China and has issued the first account of RMB 1 billion on the PRC inter-bank debenture market. We expect to issue the second tranche with a principal amount of RMB 1.4 billion in the second quarter of 2011.

We continue our commitment to adopt cutting edge technologies and to help our customers drive down the balance system costs. On the pilot production line, our Panda cell efficiency has achieved a new record of 19.49%, a figure independently verified by a third party on our commercial 300 megawatts production lines. We currently have an average cell efficiency of 18.5%. We expect to increase that cell efficiency to 19.5% in 2011 and 20% in 2012.

At the same time, we have continued to justify manufacturing technologies of multi-crystalline silicon base for solar cells to improve conversion efficiency rate. We have already achieved 16.8% on commercial production lines and expect to achieve 17.0% in 2011 and 17.2% to 17.5% in 2012. Furthermore, construction of State Key Laboratory of PV Technology starts in this quarter and we will expect the lab to commercialize operation towards the end of 2011.

Recently, we successfully hosted our Third Annual Customer Conference in Hainan Province. Presented at the conference were more than 300 customers, business partners, and representatives of PV Industry Association, and commercial banks from around the globe. During the conference, we accessed the three pillars of our success; brand, quality and responsibility.

On November 3rd, we hosted our First Investor Day at our Baoding headquarters. We expect to host similar events regularly in future in the US, Europe and Asia, providing a communication platform to consistently address interest of our investors and analysts.

Thank you. Now I will hand the call over to CFO, Bryan Li, who will take you through the third quarter financial results. Thank you.

Bryan Li

Thank you, Mr. Miao. Hello, and thanks to everyone for joining us for today’s conference call. We are very happy to present very strong third quarter results with continuous growth in shipments, industry-leading cost structure, gross margin, and the record high EPS. You can now open the presentation slides and turn to page 10, and I will walk you through the highlights of this quarter.

The total revenues increased by 21.7% quarter-over-quarter to a historical high of $490.9 million. The increase was in line with 25.2% increase of quarterly shipments followed by the robust market demands, broader recognition of our premium brand, and the ramp-up of the new 400 megawatts production lines.

Gross margin was 33.3% in the third quarter, exceeding our previous estimated range of 31% to 32%. In this quarter, we have successfully managed our manufacturing costs despite of the ramp-up of the new 400 megawatts production lines and the in-house poly plant. This again demonstrates the advantage of our vertically integrated business model and the strong execution in the R&D capability.

EPS on a GAAP diluted basis increased by 111.2% quarter-over-quarter to historical high of $0.53. Production skill-wise, as Miao has mentioned, we have successfully expanded our nameplate production capacity from 400 megawatts vertically integrated production lines to 1 gigawatt in this quarter, including 300 megawatts high efficiency Panda production lines. In addition, Fine Silicon, our in-house 3000 metric tons polysilicon plant, has also started a commercial trial operation.

Given more visibility into Q4, I would like to provide our fourth quarter and full year 2010 guidance here. Driven by the robust market demand and successful ramp-up of our new 400 megawatts production lines, we estimate our fourth quarter shipments to continuously increase by mid-teen percentage over the Q3 level.

For full year 2010, we further raised our shipment target to the estimated range of 1,020 megawatts to 1,040 megawatts from the previous estimated range of 950 megawatts to 1 gigawatt for fiscal year 2010, which represents an increase of 94.2% to 98.0% compared to fiscal year 2009.

The net revenue for full year 2010 is estimated to be in the range of $1.78 billion to $1.81 billion. In addition, we further raise our full year 2010 gross margin guidance to the estimated range of 32.0% to 32.5% from the recently raised estimated range of 31% to 32%. I will give you more insights as we move through the in-depth analysis of our financial performance.

Let’s turn to the next two slides, slide 11 and slide 12, for a summary of key operating metrics in this quarter. Total net revenues were RMB 3.3 billion, equivalent to $490.9 million in the third quarter, an increase of 21.7% from RMB 2.7 billion in the second quarter due to the incremental capacity from the ramp-up of our 400 megawatts production lines and the firm average selling price in this quarter.

Gross profit was RMB 1.1 billion, equivalent to $163.6 million, in the third quarter, an increase of 20.9% from RMB 905.1 million in the second quarter. Operating expenses in the third quarter was RMB 358.7 million, equivalent to $53.6 million, comparing to RMB 339.7 million in the second quarter. Operating expenses as a percentage of total revenue was 10.9% in the third quarter, a decrease from 12.6% in the second quarter. The decrease was primarily attributable to the economy of scale and the tighter cost controls.

As a result, operating income in the third quarter was RMB 735.8 million, equivalent to $110.0 million, an increase of 30.1% from RMB 565.4 million in the second quarter. Operating margin was 22.4% in the third quarter, increased from 20.9% in the second quarter. Interest expenses was RMB 92.4 million, equivalent to $13.8 million, in the third quarter comparing to RMB 73.0 million in the second quarter. The increase was consistent with the increased size of borrowings to support our expansion projects and enlarged the size of business.

Additional non-cash accounting charge of RMB 50.9 million, equivalent to $7.6 million, was recognized in the third quarter upon a conversion of $26.3 million senior secured convertible notes due 2012 into our ordinary shares by Trustbridge Partners II, L.P. This additional charge was a non-cash accounting charge and didn’t impact our cash flow. We expect the conversion of the convertible notes to further improve our liquidity by reducing our debt level and a feature interest expense.

Foreign currency exchange gain was RMB 52.3 million, equivalent to $7.8 million, in the third quarter compared to a foreign exchange loss of RMB 158.6 million in the second quarter. The foreign currency exchange gain in this quarter was primarily due to the appreciation of the Euro against the RMB.

Income tax expenses was RMB 106.4 million, equivalent to $15.9 million, in the third quarter, compared to RMB 65.9 million in the second quarter. The increase was consistent with the increase in net income before tax in our major operating entities.

Our current effective tax rate for the third quarter was 16.4%, down from 19.2% in the second quarter. The applicable income tax rates for our major operating subsidiaries, Tianwei Yingli, Yingli Energy China, Fine Silicon, and Yingli Hainan, were 12.5%, 15.0%, 15.0%, and 25.0% respectively.

As a result of the factors discussed above, net income was RMB 456.1 million, equivalent to $68.2 million, in the third quarter, an increase of 109.4% from RMB 217.8 million in the second quarter. Net income margin was 13.9%, substantially improved over 8.1% in the second quarter.

Before we move on, I would like to discuss with you a simple non-GAAP reconciliation. In this quarter, four non-GAAP items were added back under GAAP figures, including $2.4 million share-based compensation expenses, $3.2 million non-cash interest expenses, $1.8 million amortization of intangible assets arising from the purchase price allocation, and $7.6 million additional accounting charge upon a conversion of the convertible notes.

In aggregate, these four items negatively impacted the diluted EPS by $0.09. As a result, on an adjusted non-GAAP basis, net income was RMB 556.6 million, equivalent to $83.2 million, in the third quarter, an increase of 113.2% from RMB 261.0 million in the second quarter. Adjusted non-GAAP diluted earnings per ordinary share and per ADS were RMB 3.57, equivalent to $0.53, in the third quarter, an increase of 111.2% from RMB 1.69 in the second quarter.

Now let’s move on to slide 13 for a detailed analysis of our sustainable industry cost leadership. Now I would like to walk you through steps we have taken on the cost reduction front over the last couple of years, which have helped us maintain this industry cost leadership position and to reach under the excitement on gross margin achievement.

Firstly, we continuously refused our blended poly costs for an average of over $300 per kilogram for the full year of 2008 to around $120 per kilogram for the full year of 2009. In the past three quarters of 2010, we also maintained the decreasing trend of blended poly costs. I would like to remind you again that we achieved this through cost reduction efforts without making any long-term once-off provisions to write down inventory costs in the previous quarters.

Secondly, our industry-leading non-silicon cost was $0.74 per watt in the third quarter, flattish to the second quarter level, a remarkable improvement from $0.80 for the full year of 2009 and $0.85 for the full year of 2008. I’m very proud to see that we have maintained the industry-leading $0.74 non-poly cost level in this quarter despite the ramp-up of our new 400 megawatts production lines. This is largely attributable to our cost-saving efforts through strong R&D and execution capabilities and our constant pursuance of operational excellence.

Thirdly, we have been keeping industry-leading average cell efficiency level. Efficiency of our multicrystalline cell increased about 15.6% in 2008 to 16.2% in 2009 and 16.5% in the third quarter of 2010. And the Panda cell efficiency has achieved 18.5% on commercial production lines. As a result, our polysilicon consumption per watt decreased about 6.8 gram per watt in 2008 to 6.3 gram in 2009 and 5.8 gram in the third quarter of 2010.

Looking forward, the increase in depreciation costs of in-house poly plant following the ramp-up progress and the increase in poly price will drive the blended poly cost in Q4, but the impact will be mainly offset by the higher average selling price and operational improvement of our 300 megawatts high efficiency Panda lines in the fourth quarter. So we currently estimate our Q4 gross margin to be in the range of 29% to 30%.

Now I would discuss our CapEx plan with you. As Mr. Miao had mentioned earlier, in order to meet the growing market demand and the increasing orders in Yingli Solar branded modules, we have recently launched new 700 megawatts capacity expansion projects, which are expected to start initial production in the middle of 2011 and further increase our nameplate capacity to 1.7 gigawatts in late 2011.

Q3 capital expenditure was approximately $130 million, and the Q4 number is expected to be flattish from Q3 level. The overall CapEx for the new 700-megawatt production lines was in the approximate range of $400 million, which is lower than our existing production lines as a result of the advancement and optimization of the design.

We expect to fund CapEx with long-term proceeds from several Chinese commercial banks together with our available cash. Especially, I’m delighted to say that we have become the first Chinese solar company to have completed a successful registration of RMB 2.4 billion in total and the issuance of the first tranche of RMB 1.0 billion medium-term notes on the PRC inter-bank debenture markets in October 2010 through one of our operating subsidiaries in China. Such innovative financing further enhanced our cash sufficiency and broadened financing channels for future funding needs.

As of today, the company had approximately RMB 4.9 billion in unutilized short-term lines of credit and RMB 2.6 billion committed long-term facility that we can drawn down any time in the near future.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Jesse Pichel representing Jefferies. Please proceed.

Jesse Pichel – Jefferies

Yes. Hello, everyone. Congratulations on the strong quarter and guidance. It seems like Germany has really fallen in terms of their solar installation business because they can’t get modules at the right price and that’s because of strong world demand. Do you think that the vendors, OEMs like Yingli will lower the price sufficiently so that the German market can remain healthy next year – of course, lower, but at least healthy? And also, coming from Europe, it seems like some of the vendors are asking for 110 euros and they are saying that that price would move the German market. Do you agree that 110 euros would create a healthy Germany? Thank you.

Miao Qing

So, Jesse, this is Miao Qing. (inaudible) your question is really about the ASP trained in Germany in 2011?

Jesse Pichel – Jefferies

And if that would create a healthy Germany? Because it seems like Germany is lower now because they can’t get modules at a low enough price.

Miao Qing

Okay. Let me translate it briefly. (Foreign Language)

Wang Yiyu

Jesse, this is Yiyu. I think first is, right now, the Germany customer, we have to really define like German-based customer or Germany customer. So – which means right now, Germany customer really diversify their market share around the whole Europe and even to the US. If we only talk about Germany customer for next year, Germany market, actually based on the secure contracts we have signed and we do see a very slight decline for price we offer to Germany. Regarding to Europe, 1.1 euro price trend may happen to Germany customer. Currently, we don’t see that’s necessary to offer at such a lower price.

Jesse Pichel – Jefferies

Interesting. Yiyu, let me ask you, what efficiencies are the Panda modules that you are shipping today to some of your largest customers?

Wang Yiyu

I think based on the current efficiency of the panel we deliver, the cell price is at least 18.5, which finally drives the Panda – which should finally drive the panel efficiency should be at least 7% to 8% higher than our multicrystalline panel.

Jesse Pichel – Jefferies

And congratulations on being one of the first module suppliers that are qualified for the Chinese Golden Sun project. Yiyu, do you think that there are more Golden Sun projects to come? Has this put Yingli in a good position to win more Golden Sun projects, and when might they be announced?

Wang Yiyu

Right now, this Golden Sun is just the first round. As we used to explain before, the China has two different inventive schemes we should cover ground project and building integrate our roofing project separately. So this is the first round. Right now, the first round has been very actively applied by those invested in China, which currently the applied figure is much more than the first round of planned fee [ph] by the China government is going to do. So we strongly believe there will be another second round of Golden Sun, which will be continuously to be kicked off very soon. So currently, Yingli has been the top supplier to this Golden Sun for the first round. We believe based on this position and our market position in China, we definitely will be one of the leading suppliers to supply to the future Golden Sun projects in China.

Jesse Pichel – Jefferies

Great. Thank you very much.

Wang Yiyu

You’re welcome.

Operator

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

Dan Ries – Collins Stewart

Thank you, and good evening. I guess two questions. Can you give us some sense for the purchase order coverage for the first quarter 2011 as opposed to framework agreement and maybe some sense for the split of what US, Germany and Italy might represent in that order book?

Wang Yiyu

Currently, we have secured more than 700 megawatts for next year. So, for all the other sales contract we secured, the average provides the whole year. And we expect that we can get [ph] close to 1 gigawatts secured order by the end of this year. Actually, we got more orders than we can supply. For the remaining, we’ll be more carefully to select those strategic customers in certain markets to ensure our overall sales strategy consistent with the company’s mid and long-term plan. Sorry?

Dan Ries – Collins Stewart

Those are framework agreements. Are those framework agreements or purchase orders?

Wang Yiyu

No, no, no. The contract I talk about is a secure contract with the legally ending contract with most of them with prepayments, which to ensure the business of these contracts.

Miao Qing

Robert, would you like to talk briefly about the – I mean, the signing of those contracts in the US market for delivery of 2011?

Robert Petrina

Yes. I mean – Daniel, can you hear me okay?

Dan Ries – Collins Stewart

Yes.

Robert Petrina

So, just to add on from the US perspective, the contracts that we are discussing are not frameworks but contracts with delivery schedules and so on and so forth. So really for us in the US, I mean, in Q1, it’s basically a fully booked environment. So that is definitely the case for the first half of 2011 and appears to be shaping up for in the second half beyond that. So that’s how we (inaudible) here.

Dan Ries – Collins Stewart

If I could just ask one quick question maybe for Bryan, can you give us a sense for the depreciation absorbed on Fine Silicon in the third quarter and what it might be in the fourth quarter? Does it change?

Bryan Li

Yes, thank you. The depreciation of Fine Silicon is depreciated following the progress of the ramp-up schedule. Because the ramp-up is moving on, so the depreciation will be gradually amortized into the income statement over the quarters and to reach the full scope in the first half of next year. So for the third quarter, it’s not really material for the third quarter. For the fourth quarter, it will start to increase. But it won’t reach the 100% full scope level because of the ramp-up is still going on. But I would think it will be – the depreciation will reach in the fourth quarter roughly 50% of the full scope and the depreciation charge of the poly plant.

Dan Ries – Collins Stewart

Okay. Thank you.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Vishal Shah representing Vishal Capital [ph]. Please proceed.

Vishal Shah – Vishal Capital

Yes, hi. Thanks for taking my question. Bryan, can you maybe provide us some sense of gross margin outlook for 2011 now that you have some visibility on 2011 pricing? And can you also talk about where some of the first half orders are doing? What’s the split going to be between Germany, Italy, US and all the other markets that you’ve listed on the slides? Thank you.

Miao Qing

Okay. Bryan will take your question regarding the trend of gross margin 2011 and Yiyu will take your second question regarding the shipments’ geographic breakdown in 2011. Thank you.

Bryan Li

Now we continue to see a strong demand moving towards 2011. And the price tied in the first half of 2011. And currently, from the orders and the contracts we have already signed in a legal biding format, we believe average selling price in the first half of next year will be close to flattish from the fourth quarter 2010 level. And then it will start to decline slightly in the third quarter and the fourth quarter sequentially. And on the cost front, and as we see the costs will as well move up slightly and due to the increasing poly costs and also the ramp-up costs for the new capacities, we are moving faster ahead of the previous schedule on the ramp-up and also to better control on the existing expansion capacities, as we have seen in the Q3 performance. So we believe the costs – we will have great chance to make that – to bring our costs comparable to the cost level we have in the second half of this year.

Wang Yiyu

Regarding the global geographic market diversification, with the success we have been achieving in US and China will be more explorable market, which we expect the market share in the US will be close to 14.2% for next year, and in China, it could be roughly 5% for the first half of next year and will reach to 10% to 15% for the second half of next year. And for Germany, we expect the diversification can be lower to 39%. And among this total volume, we expected 30% of the total volume we sell to Germany customer will be diversified to out of European market, like Italy, France and some other European countries. Then for the other European markets, we expect to deliver roughly 23%. And then the rest of the world, it takes about 3.8%.

Vishal Shah – Vishal Capital

That’s very helpful. Thank you. Is this – just to clarify, is this plate of the 722 megawatt of orders we received so far or the 1 gigawatt you expect to receive by the end of the year?

Wang Yiyu

I think this is based on the already secured contract and also the remaining contract that we are talking right now This is a kind of diversification for the overall 2011 revenue.

Vishal Shah – Vishal Capital

So just to clarify, 39% of your 1 gigawatt –

Wang Yiyu

39% to Germany customer.

Vishal Shah – Vishal Capital

Right. And what percentage will be to Italy specifically? You said –

Wang Yiyu

To Italy next year – for the rest of Europe, it’s around 23%. I think for Italy it’s roughly 7% to 8%.

Vishal Shah – Vishal Capital

Okay. And did you just – just to clarify, did you say that your non-polysilicon is going to go up in Q1 or earlier than Q1, Q2 also?

Wang Yiyu

We currently see – we currently expect the non-polysilicon may slightly go up by a couple of cents, probably $0.01 or $0.02 in the first half of next year given the ramp-up of the new facilities. Again, as I discussed earlier, based on the ramp-up results we had in the third quarter, which seems ahead of us, which seems ahead of our ramp-up schedule. And also the performance of the new lines is better than the existing production lines. So we hope to control the non-polysilicon costs at par with the second half – with the level in the second half of this year.

Vishal Shah – Vishal Capital

Great. Thank you very much.

Wang Yiyu

Thank you.

Operator

Your next question comes from the line of Lu Yeung representing UBS. Please proceed.

Lu Yeung – UBS

Hi, congratulations on the results. I’ve got a question for Bryan. As you prepare for the ramp of Fine Silicon and Panda, what kind of operating expense are you expecting the fourth quarter and whether you receive from the foreign exchange gain and loss as for that’s on the (inaudible) cash strategy in the fourth quarter? Can you help us understand these obviously in the fourth quarter?

Bryan Li

Sure, thank you. Based on the – given the better cost control and also the enlarged – in larger scale of business, we have enjoyed the benefit of scale on the economy and are also the better – on the cost control front. So the operating expenses as a percentage to revenue in the third quarter have been reduced to 10.9% from 12.6% in the second quarter. And as our business continues to grow, although there will be some ramp-up costs incurred and associated with the Fine Silicon plant and the new 300 megawatts capacity, we believe we can still control the operating expenses as a percentage of revenue below the level of Q3. So I currently expect the cost and the – the SG&A will be close to the level of 9.0% to 9.3% of the total revenue in the fourth quarter.

Lu Yeung – UBS

Can you provide guidance for 2011 as well?

Bryan Li

We don’t do SG&A guidance for 2011 at this moment. But our internal target for the SG&A is to control the total SG&A in the range of 9.5% to 10.0% of the growth of the business.

Lu Yeung – UBS

Can you also give us some update of your interest expense since you’ve been issuing some of the medium-term notes recently? I mean, what should be the level for the interest expense going forward?

Bryan Li

Yes, sure. As you may have been aware of the interest rate in the recent press release regarding the issuance of medium-term notes, it bears a 4.3% annual interest rate. And so, on an overall level and given – partial of the interest expenses will be capitalized into the projects as we are expanding. And so the overall interest – so the overall interest level will increase gradually from the third quarter level into fourth quarter and the first quarter. But I don’t think to the magnitude it will be very significant.

Lu Yeung – UBS

I see. I have a follow-up question for Robert. It looks like Yingli has been gaining share in the US. And what kind of percentage though will be coming from the US next year? And where does some of the tax incentives exploration will change the behavior of your orders in the US for next year?

Robert Petrina

Can you repeat the first part of the question, please?

Lu Yeung – UBS

I just want to know what kind of percentage of sales will be going to the US next year and where does some of the exploration of the tax incentives will change the behavior of your orders.

Robert Petrina

I think you mentioned earlier that the general range will be around 15% of the overall megawatts from Yingli is with the North American market as a baseline. I think in terms of the polysilicon environment, as we all know right now, everybody is doing what they can to push the 15.03 [ph] forward and have the cash grant extended. The industry is going to continue, I think, in a very healthy way with or without the extension, but certainly the extension of the cash grants helps move more projects quicker. But we feel quite confident at least in our client portfolio that irrespective of what polysilicon does at the end of this year (inaudible) discussion will well position (inaudible). Market in the US for next year seems and appeared very robust, and we feel very strong about it.

Lu Yeung – UBS

I see. Can you comment on the pricing in the US as well?

Robert Petrina

I think from our standpoint, we see pricing in the US as being very firm. I think it’s flat with the second half of 2010 into the first half of 2011. And I think given the current level that some of our peers have, I think, discussed, the range is quite similar to where things are in Europe. So it’s really – closing of that gap that before we’re actually faced with, the US pricing used to lag compared to Europe. But at this point, it’s actually quite attractive.

Lu Yeung – UBS

I see. Thank you very much.

Operator

Your next question comes from the line of Timothy Arcuri representing Citi. Please proceed.

Timothy Arcuri – Citi

Hi. Couple of things. Can you give us an idea of what your poly ramp looks like next year and sort of what we could expect in terms of poly costs exiting next year?

Miao Qing

(Foreign Language)

Bryan Li

We currently ramp up the Fine Silicon plant according to the ramp-up schedule. And the progress is in line with our expectation, and we currently expect for next year and we will be able to produce 1,500 to 2,000 metric ton polysilicon. And in terms of the initial cost during the ramp-up stage before we reach the stable full capacity of the design and of the designed capacity, the cost will be close to $60 to $65 per kilogram level.

Timothy Arcuri – Citi

Okay, great. Thank you. Can you also give us some idea of your ingot and your wafering costs? Is it fair to assume that it’s sort of in the $0.30 a lot range or is it a little bit lower than that?

Bryan Li

We have the industry-leading position on the cost component. And for the wafering stage, we – roughly 30% of the total non-poly cost is attributable to the wafering. And roughly 25% of the total non-poly cost is attributable to the cell processing and the rest of 45% of the total non-poly costs goes to the module processing.

Timothy Arcuri – Citi

Okay. And then just last question, on the poly ramp through the year, sort of you look at your cost ramp through the year, what’s the trajectory going to be sort of on the production as you exit the year? You said that you’re going to do 1,500 to 2,000 tons for the entire year. But what’s their trajectory going to be as you exit the year? Thanks.

Bryan Li

We have started producing polysilicon since the third quarter of this year. And we currently expect we will be able to gradually reach the level of full capacity in the second half of next year. So that will get us to 1,500 to 2,000.

Operator

(Operator instructions) Your next question comes from the line of Gary Hsueh representing Oppenheimer. Please proceed.

Gary Hsueh – Oppenheimer

Yes, thank you. Hi. I just wanted to get a sense of your vision about pricing and the environment in 2011. Pretty well known big German integrator was saying basically that they thought that Germany would be setting the stage for worldwide module kind of clearing prices in 2011. I’m wondering if you agree with that and wondering if you see a slight sort of silver lining next year in terms of diversification, done a decent job here diversifying near-term. Do you think that diversification next year could help sort of sequester or make it more defensible against kind of German lead pricing erosion throughout 2011? And I have a quick follow-up here for Bryan.

Wang Yiyu

Thank you for the question. I think the first is definitely we’ll be more diversified in the – around the whole world market to ensure this is what we support our growing capacity. And then I think for Germany, again, I mean, German market is a very mature market with the most longest history in the solar market. So this is what we see our core market for the next like – at least a few years. But again, our Germany market customers, they are also diversified as their markets around Europe and the whole world, that why when we talk about pricing with them, not only in this year but also for next year, is not a pricing that simply will be impacted by the Germany bidding tariff change. Actually, we clearly understand that every Germany customers market diversification, how much will be used our panel outside Germany to ensure our pricing system is really (inaudible) priced compared to other market purchase. This is also very good transaction to ensure when we will divest our market again, we can lower our risk from one or two specific markets in some (inaudible) use..

Gary Hsueh – Oppenheimer

Okay, great. And quickly, Bryan, here, I think you mentioned or referred to two headwinds here, leading to margins going down in Q4. The two that I heard were Fine Silicon depreciation coming online and then non-poly costs going up slightly in Q4. Can you help break down – of the gross margin decline in Q4, how much is coming from incremental Fine Silicon depreciation and how much is coming from non-poly costs going up at least temporarily near-term in Q4?

Bryan Li

Yes, thank you. Before I answer these questions, Gary, I would like to supplement your first questions. And in the pricing environment, I think everybody understands that in the spot markets and also for the Western solar manufacturers, their price is still higher than the Chinese peers. And even our price is rising. It’s rising amongst the peer group in China. And so those are still a delta between the price of Yingli and the price of the spot market price as well as the Western solar manufacturers, which means, under the spot market price and the higher level of Western manufacturers’ price, the project economics was to work for most of the areas. So I think and given the longstanding quarterly assurance and the increasing brand awareness and the reputations of Yingli Solar, we’re actually working squeezing the pricing delta between our companies and the spot market price and those of Western solar manufacturers’ pricing level.

So in this regard, and you will really see – and as we are – as Yingli Solar brand is becoming more and more widely accepted by our customer, Western customers, our pricing our level is increasing – and from the Chinese peer group. So that will give us large benefits on the pricing premiums over the other peer companies. So that’s why we are confident on the pricing expectation we are currently seeing, and we’ll be still able to ship the capacity we can produce in next year. And the total orders in the contracts and the customer interest has largely exceeded multiple times, exceeds where we can maximize produce for 2011. So we’re very confident on the pricing indications we discussed earlier. For your second question, I have explained earlier in the previous sections, for Fine Silicon, the depreciation will be expect to reach 50% of the full depreciation charge in the fourth quarter. And we depreciate the poly plant over 10 years on average since we can see simply back order numbers. And for the non-poly processing costs, I currently expect $0.01 to $0.02 increase on a per watt basis given the ramp-up. Thank you.

Miao Qing

Operator? Hello, operator, are you online? We’ll just ask the latest to question.

Bryan Li

It’s Gary. It’s Gary from Oppenheimer.

Miao Qing

Gary, can you hear us? We will just ask (inaudible) for those analysts and investors, please be online for a while. Thanks.

Operator

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

Satya Kumar – Credit Suisse

Yes. Hi, thanks. Can you hear me?

Miao Qing

Yes, we can hear you.

Satya Kumar – Credit Suisse

Yes, hi. Thanks for taking my question. Just wanted to ask a question on the receivables. The receivable days has increased by a little bit and the receivables haven’t increased. I was wondering what was driving that and how you expect to see this to trend in Q4. And sort of a bigger picture question, (inaudible) you’re talking about fairly stable pricing in the first half compared to this quarter. At these prices, there is sort of not very good incentive for your competitors to slow down capacity expansions, and we’ve seen an increase in the rate of capacity expansions. What would you rather want to see from an industry ability standpoint as having stable pricing, the right sort of trends it has, any good excess capacity, or do you actually want to have pricing go down so you could get your low-cost market share (inaudible) of the decrease incapacity additions?

Bryan Li

Thank you, Satya. I will answer your first question. The accounts receivable went up in line with the new capacity coming on line mainly in the third quarter. And so we have more capacity to ship in the third quarter. So that has given the average 30 to 40 days shipping time were required upon for each delivery on the sea. So it will bring up the accounts receivable level at the end of this quarter. And for the next quarter, for the year-end, as we continue to ramp up and reach the full capacity of the new 300 megawatts lines and another 100 megawatts lines in Hainan, so I will continue to expect the accounts receivable on an absolute dollar amount to increase in the fourth quarter.

And in terms of the DSO, you see it’s getting slightly increased from the second quarter levels into fourth quarter – into third quarter. And it will again slightly increase from third quarter level to the fourth quarter level due to the higher ending balance of our accounts receivable at the end of this year. But overall, I think the higher accounts receivable and higher DSO is rising from the newly ramp-up capacity we had online in the second half of this year. When we are moving to the first quarter of next year, I think it would normalize to the level of the second – on the DSO front, it will normalize to the level of second quarter of this year. Thanks.

Operator

Your next question comes from the line of Adhira [ph] representing Lazard Capital Markets. Please proceed.

Adhira – Lazard Capital Markets

Hi, thanks for taking my questions. You plan to expand your capacity to 1.7 gigawatts for next year and you have 1 gigawatts of contracts signed up so far. Could you help us understand when should we expect to see this new capacity being allocated out and what would be some of the potential targeted markets here?

Miao Qing

Actually, before we answer this question, for the last question, we’d still like to add some more comments. Can we add some more comments to answer your question shortly?

Adhira – Lazard Capital Markets

Sure.

Wang Yiyu

I think for the supply and the demand situation for next year, I think definitely more capacity will be reached to the market, which is consistent with the growing market demand for 2011 and also for the solar business. I think, I guess, Bryan explained before, panel – Yingli has achieved a world brand name and a historical presence in the past few years. And I think when we talk about competition for next year, which is not (inaudible) guarantee and the historical performance of each panel supplier. That’s why we believe Yingli has been well positioned in this perspective and to ensure, we don’t need necessarily to simply compete on pricing with those new places in this industry.

Bryan Li

And for your question, in terms of the plant capacity for next year, first of all, I would like to say, the 1.7 gigawatts you mentioned is the nameplate capacity for – after the successful ramp-up of the 700 megawatts capacity. So the 1.7 is the nameplate. And it has ramped up as a lumpy process. So it will take time to gradually ramp the new capacity to reach the full capacity throughout next year. So we currently, as we plan, and we will start commercial – we will start trial operation of the new 700 megawatts capacity in the middle of next year and expect to reach full capacity in late next year. So capacity-wise, it will be – the actual production output would be different from the nameplate capacity. But I think given everybody knows, Yingli has the ability to reach higher than 130% utilization of the existing production lines, which we will be able to produce more than the pirated nameplate capacity in next year. So the number – we will give guidance of the 2011 shipment in the next quarters and when we are moving to Q4.

Adhira – Lazard Capital Markets

Got it. One quick follow-up here. When we look to 2011, how should we sort of think about your total silicon needs, and in what part of that would come from sort of long-term contracts, internal (inaudible), potentially spot market, and what would that imply for silicon, average silicon price for next year?

Bryan Li

I think first is, we – at this moment, we secured more than 60% of the total poly need for 2011.Much of them are to (inaudible) historical long contracts and the new long-term contract we have signed recently. And we expected the weighted price will be in the range between $50 to $60 per kilo for 2011. And then this has been also considered the internal poly supply from the Fine Silicon.

Adhira – Lazard Capital Markets

Got it. Thank you.

Operator

Your next question comes from the line of Amy Song representing Goldman Sachs. Please proceed.

Amy Song – Goldman Sachs

Hi, thanks for taking my question. Just to follow up with the previous polysilicon cost, what the average between 55 to 60. Can you give us a sequential view of the fourth quarter to first quarter of next year, is sequentially down with the percentage and going forward?

Bryan Li

Thank you, Amy. We currently expect on a blended basis, which means that which is the cost reflected in the cost of production, and we will expect the blended poly costs to go up at high-single digits from Q3 to Q4. And it will go slightly down into Q1 ’11 and slightly down in Q2 and it’s slightly down in Q3 and Q4 sequentially.

Amy Song – Goldman Sachs

Okay. Then, would you imply if poly coming down and we’ll sort of like parade [ph] it with the ASP decline, that is the decline in ASP outlook in the second half of next year?

Bryan Li

I think the overall pricing guidance we have given for 2011, we said it’s slightly lower than the average rate of Q4, which we already consider the overall 2011 pricing trends. As we mentioned, right now when we signed the contract, it’s not a contract just for Q1, Q2 next year. It’s a contract for the whole year from Q1 to Q4 deliveries.

Wang Yiyu

In addition, as the poly is in indirect association with the end market demands at a module and a system front, so if you see any fluctuation on the module price, it will reflect it backwards to the poly price.

Amy Song – Goldman Sachs

At the same quarter?

Wang Yiyu

It would be a time lag, but we need to observe the market.

Amy Song – Goldman Sachs

Okay, got it. Thank you.

Wang Yiyu

Thank you.

Operator

Your next question comes from the line of Sam Dubinsky representing Wells Fargo. Please proceed.

Sam Dubinsky – Wells Fargo

Hey, guys. Could you disclose what other revenue is? I see over the past several quarters it has been doubling quarter-over-quarter. What is that? And how many megawatts does that represent of your quarter-over-quarter increase? And how should we think about that for Q4 and next year?

Wang Yiyu

I think the other revenue mainly represents the installation revenue for some small projects in China. And I think it won’t be material. It won’t be material going forward.

Sam Dubinsky – Wells Fargo

Okay. And does that going to include in your megawatt shipment guidance? I just want to – if shipments were up 25% in Q3, does that – is some of those shipments included in the other revenue or is that just considered panel shipments?

Bryan Li

We only target about panel shipments.

Sam Dubinsky – Wells Fargo

Okay. Great. Thank you very much.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Stuart Bush representing RBC Capital Markets. Please proceed.

Stuart Bush – RBC Capital Markets

Yes, good evening. Good quarter. I was hoping you could comment on some press releases, some usual (inaudible) signing a contract in South Africa for a $435 million manufacturing plant. And then also if you can give us any update on your plans to build a plant here in Phoenix or Austin in US. Thanks.

Bryan Li

First is, I personally joined (inaudible). And I can only say I never met any South African officials. I never talk about any expansions lying in South Africa. I just did a very broad percentage of Yingli historical business like what Yingli plans to do worldwide. So I really cannot comment on where this information coming from.

Stuart Bush – RBC Capital Markets

Okay. Any update on your plans in the US for manufacturing plants?

Bryan Li

Currently, we are still looking on the potential opportunities. I think our target is not only just thinking to build a US manufacturing facility. But we are also planning to build an R&D and after-sales service center to ensure we are well positioned in the US, given this huge potential market and we can provide very high quality service to all of our customers.

Stuart Bush – RBC Capital Markets

Okay. Thank you very much.

Operator

And that concludes our call today. I would now like to transfer the call back over to Ms. Miao Qing for closing remarks. You may proceed.

Miao Qing

Thanks to all for participating in today’s call. So if you have any further questions, please do not hesitate to contact either me or Bryan or the IR department. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect, and have a great day.

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