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

Q4 2010 Earnings Call

February 18, 2011 8:00 AM ET

Executives

Arthur Chen – Legal Counsel

Miao Liansheng – Chairman and CEO

Bryan Li – Director and CFO

Qing Miao – Director of IR

Yiyu Wang – CSO

Analysts

Jesse Pichel – Piper Jaffray

Dan Ries – Collins Stewart

Vishal Shah – Barclays Capital

Lu Yeung – UBS

Satya Kumar – Credit Suisse

Sanjay Shrestha – Lazard Capital

Tim Arcuri – Citi

Nick Xue – Goldman Sachs

Sunil Gupta – Morgan Stanley

Operator

Hello ladies and gentlemen, this is Tanya. I will be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holdings Company Limited fourth quarter and full year 2010 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 instructions 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, 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 fourth quarter and full year 2010 financial results conference call.

The fourth quarter and full year 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.

On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Xiaoqiang Zheng, Vice president; Mr. Bryan Li, Executive Director, Vice President 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.

In the call today, we have feature and opening remarks by Mr. Miao and a presentation from Mr. Zheng covering business and operational developments. Then Mr. Li, will take you through a discussion of the company’s financial performance. After that we will open up the floor to questions from the audience.

Before beginning, Yingli Green Energy’s management team would like to remind audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as a mandate and as defined in the US Private Securities Litigation Reform Act of 1995. This forward-looking statement can be identified by terminologies such as will, expect, 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 this 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 would now like to turn the call over to Mr. Miao Liansheng, please begin.

Miao Liansheng

[Interpreted] Hello, everyone. Thank you for joining us today. In China, we just celebrated the Lunar New Year. I would like to take this opportunity to wish you a wonderful year of rabbits.

First, Mr. (inaudible) our Vice President will discuss some quarterly and yearly business highlights and achievements before handling the call over to Bryan Li our CFO, who will take you through the fourth quarter and the fiscal year 2010 financial results. Mr. (inaudible) joined us in 2004 and has been overseeing the company’s operation for eight years. Okay, (inaudible) will begin.

Hello everyone and welcome, for today, I will discuss some business highlights and achievements in fourth quarter and full year 2010. I’m pleased to report that we concluded a successful 2010, punctuated by another strong quarter of sustainable profitability. In the fourth quarter PV shipment volumes increased by 21.6% and our gross margins reached 22.9%. Full year 2010 shipment volume reached to 1061.6 megawatt beating our previous guidance of 1020 megawatts to 1040 megawatts. Our success was primarily driven by the continuously robust market demand, our competitive cost structure, diversified customer base and well-established Yingli Solar brand.

The European market continued to provide the largest demand for PV products and approximately 60-80% of our global sales were made in Europe in 2010. In 2011, we expect to continue to generate about around 60% of our global sales in Europe

In addition to the strengthening our position in 50 European markets, we have also achieved great success in fast growing markets such as Italy, France, Greece, and the UK. In Italy, we have built high-profile customer base including large utility companies such as ACEA and (Edison).

In lieu of strong growth momentum in Italy in 2011, we will further enhance our corporation with these customers to expand our market share. In 2010, we were selected to provide solar modules to a 33 megawatts project currently under construction in France, which we expect to be the largest PV Solar power plants in the country.

We are confident to further diversify our market exposure in Europe in 2011 by combining our strong regional sales efforts with our partner’s strong channel building capabilities. Well, we are solidifying our footprint in Europe. We have never stopped exploring new and emerging markets.

In other areas in the world, in 2010 the US market accounted for over 10% of our global sales. We expect this to increase to 13% to 15% in 2011 as we continue to diversify our regional exposure and take advantage of our momentum in Americas.

Throughout 2010, we continue to build on our past success in the US distributed generation market. This is most relevant in our relation leadership in the California Solar Initiative Program based on applications and installations Yingli finished as the top supplier to commercial segment in 2010.

In California, we have also made significant progress in the residential segments where we jump to the second place in CSI region in the fourth quarter of 2010.

Finally, in the utility segment, we concluded shipment to the largest utility project and we're proud to announce our growing success by acting as the exclusive suppliers to four ground-mount utility scale projects totally over 55 megawatts. At the same, we have continued to expand our American team and have continued to fearlessly target and providing our clients with the highest value in the industry.

The Chinese government has demonstrated its strong commitment to boost renewable energy utilization has recently announced a five year plan. The renewable energy industry including solar energy has been identified as swain of China strategic emerging industry by Central Government of China.

On December 2nd, 2010, the Ministry of Finance did a median to further boost the utilization of renewable energy in China. In the meeting, the Chinese government declared its expectation to further expand its PV project portfolio in the next two years to reach a minimum run rate of 1,000 Megawatts per year after 2012.

You know wonder 2010, a total amount of 272 megawatts PV projects were announced under Golden Sun program sponsored by Ministry of Finance of China. We are honored to mark another significant business milestone in our expansion in domestic solo market. To being selected to supply approximately 70% of the PV modules, according to the guidance of Golden Sun program. The Ministry of Finance wanted RMB 749.4 million in December of 2010 as advance of payment under the terms of the sales agreement with system owners. We are scheduling to shift the majority of PV modules in second half of 2011.

To support our rapid expansion of market geographic and the customer portfolios, we keep this project decedent to promote the Yingli solar brand in broader markets to the sponsorship of 2010 FIFA world cup in South Africa. We are also continuing our marketing efforts by recently becoming the official premium partner of FC Bayern Munchen, one of the most successful and partner of Football Clubs in the world. We firmly believe that based on the right touch to push our brands once that closes to end customers.

As a leader in renewable energy industry, our mission is to provide affordable green energy for everyone. In order to achieve this mission, we have (inaudible) on reducing manufacturing costs of PV modules through technology innovation.

(Inaudible) we are continuing to make progress on the large-scale R&D projects such as PANDA project on commercial protection line we have reached another historical high cell efficiency rate of 19.89%, further strengthening our confidence in the long-term cell efficiency. Furthermore, we have taken advantage of the R&D afforded by our vertical integrated business models and have leveraged this robust platform to optimize the manufacturing technical through the valuation.

As of today, we have already signed close to 1.4 gigawatt of cell contracts for shipment in 2011, based on customer's continuously strong demand and our quickly expanded manufacturing copper voltage. We are expecting to ship between 1.7 gigawatts and to 1.75 gigawatts of PV modules in full year of 2011.

We just started an activity in place, I strongly believe that Yingli is well positioned, in an industry leading position and emerge stronger in 2011. Thank you. I will now turn the call to Bryan our CFO, who will take you through the financial results for the quarter and full-year 2010.

Bryan Li

Thank you Mr. Chen and hello and thanks to everyone for joining us for today’s conference call. We are very pleased to present our results for the fourth quarter and the full-year 2010. Later we will provide guidance for the fiscal quarter and the full-year 2011.

Now you can open the presentation slides and turn to page four and I will walk you through the highlights of the fourth quarter and the full-year 2010.

In the fourth quarter 2010, the total revenues increased by 23.8% quarter-over-quarter to a historical high of US $616.1 million. The increase was in line with a 21.6% increase of quarterly shipment reflected a robust market demand further recognition of our premium brand and a diversified customer base fueled by the ramp up of capacity expansion.

Gross margin was 32.9% in the fourth quarter exceeding our previous guidance range of 29% to 30% due to improved average setting price and an efficient production control. The slight decrease compared to gross margin of 33.3% in previous quarter was primarily attributable to the increase in blended cost of polysilicon partially offset by the improved average selling price.

EPS on a GAAP diluted basis increased by 4.5% quarter-over-quarter to a historical high of US $0.57. For the full-year 2010 PV module shipment increased by 102.1% year-over-year to 1.06 gigawatts exceeding the high-end of our previously announced guidance of 1.02 gigawatts to 1.04 gigawatts due to more efficient ramp-up of capacity expansion.

Total net revenue were RMB 12.5 billion equivalent to US $1.9 billion exceeding the high-end of the company’s produced announced guidance of US $1.78 billion to US $1.81 billion.

Gross margin of 33.2% exceeded the high-end of our previously announced guidance of 32% to 32.5%. EPS on a GAAP diluted basis increased by 423.2% year-over-year to a historical high of $1.61.

Given more visibility into first quarter 2011, I would like to provide you our first quarter and the full-year 2011 guidance here. Driven by the robust market demand and the in-house utilization rates of our new 400 megawatts production lines, we estimate our first quarter shipments to increase by middle-single digit percentage over the fourth quarter 2010 level despite after Chinese Spring Festival holiday in February.

For full-year 2011, based on current market and operating conditions, estimated production capacity and the forecasted customer demand we expect our PV module shipment target to be in the estimated range of 1.7 gigawatts to 1.75 gigawatts for full-year 2011, which represents an increase of 60.1% to 64.8% compared to full-year 2010.

Let’s turn to slide 11 and slide 12. For a summary, our key operating metrics in the fourth quarter and the full-year 2010. Further net revenue were RMB 4.1 billion equivalent to US $616.1 million in the fourth quarter, an increase of 23.8% or RMB 3.3 billion in the third quarter. The increase was primarily attributable to a 21.6% increase in PV module shipment and improved average selling price.

Gross profit was RMB 1.3 billion equivalent to US $222.7 million in the fourth quarter, an increase of 22.2% for RMB 1.1 billion in the third quarter. Operating expenses was RMB 394.3 million, equivalent to $59.7 million in the fourth quarter compared to RMB 358.7 million in the third quarter. Operating expenses as a percentage to total revenue was 9.7% in the fourth quarter representing a decrease from 10.9% in the third quarter 2010. The decrease quarter-over-quarter was primarily attributable to increasing economy of scale and more effective cost control.

As a result, operating income in the fourth quarter was RMB 943.5 million, equivalent to $142.9 million and an increase of 28.2% for RMB 735.8 million in the third quarter. Operating margin was 23.2% in the fourth quarter increased from 22.4% in the third quarter. Interest rate expense was RMB 130.6 million, equivalent to $19.8 million in the fourth quarter compared to RMB 92.4 million in the third quarter. The increase in interest expense was primarily attributable to the decrease of the capitalized interest expenses resulted from the completion of 400 megawatts production capacity in later quarter 2010 as well as the expanded scale of borrowings.

As of December 31st of 2010, the company had an aggregate of RMB 9.1 billion equivalent to US $1.4 billion bank borrowings and a convertible notes and medium-term notes representing an increase of 13.1% for RMB 8.1 billion as of September 30th, 2010.

Foreign exchange loss was RMB 62.9 million, equivalent to $9.5 million in the fourth quarter compared to a foreign exchange gain of RMB 52.3 million in the third quarter. The foreign currency exchange loss in the fourth quarter was primarily attributable to the depreciation of euro and the US dollar against the RMB.

Income tax expenses was RMB 89.3 million equivalent to US $13.5 million in the fourth quarter compared to RMB 106.4 million in the third quarter. Our effective tax rate for the fourth quarter was 11.8% down from 16.4% in the third quarter. The applicable income tax relief for our major operating subsidiaries Tianwei Yingli, Yingli Energy China, Fine Silicon, and Yingli Hainan were 12.5%, 15% and 25% respectively. As the result of the factors discussed above, net income was RMB 554.4 million, equivalent to US $84 million in the fourth quarter an increase of 21.5% for RMB 456.1 million in the third quarter.

Before we move on, I would like to discuss with you a simple non-GAAP reconciliation. In the fourth quarter three non-GAAP items were added back to the GAAP figures, including US $2.4 million share based composition expenses, US $2.4 million and cash interest expenses and US $1.8 million amortization of intangible assets arising from the purchase price allocation.

In aggregate these three items negatively impacted the diluted EPS by 5 US studs. As a result, on an adjusted and a GAAP basis, net income was RMB 598.3 million, equivalent to US $90.7 million in the fourth quarter an increase of 7.5% for RMB 556.6 million in the third quarter. Adjusted non-GAAP diluted earnings for ordinary share and per ADS were RMB 3.783 equivalent to $0.57 in the fourth quarter, an increase of 4.5% from RMB 3.57 in the third quarter.

Before we move on, we would like to mention that in our news release, adjusted and non-GAAP diluted earnings for ordinary share and per ADS in the fourth quarter of 2009 should read as an increase of 788.1% from RMB $0.42, rather than 747.5% from RMB $0.44 as already issued (inaudible).

Now I would like to present our financial performance for the full-year 2010. Total net revenue in 2010 were RMB 12.5 billion equivalent to US $1.9 billion, an increase of 72.3% from RMB 7.3 billion in 2009. PV module shipment volume in 2010 was 1.06 gigawatts, an increase of 102.1% from 525.3 megawatts in 2009. The increase in total shipments was primarily due to the robust market demands, broader recognition of our premium brands and the diversified customer base which was supported by the completion of an additional 400 megawatts of total production capacity for each polysilicon ingots and wafers, PV cell and PV modules in the third quarter of 2010.

The increase in that revenue was consistent with the increase in shipment volume year-over-year and was partially offset by the decrease in the average selling price for PV module compared to 2009.

Gross profit in 2010 was RMB 4.2 billion, equivalent to US $629.2 million an increase of 142.2% for RMB 1.7 billion in 2009. Gross margin was 33.2% in 2010, a substantial increase from 23.6% in 2009. The increase in gross margin in 2010 was primarily a result of the company's continues efforts in the cost reduction and increase in economy of scale despite of the decrease in the average of selling price for PV modules.

Operating expenses in 2010 were RMB 1.4 billion, equivalent to US $207.9 million compared to RMB 1.4 billion in 2009. The higher operating expenses in 2009 included a cash impairment of intangible assets and cash debt expenses of RMB 453.8 million. After excluding that 2 million cash charge, operating expenses in 2009 was RMB 942 million the increasing operating expenses in 2010 was primarily attributable to the company's expanded a scale of operations and higher selling expenses relating to the 2010 FIFA World cup sponsorship.

Operating expenses as a percentage of net revenue after excluding the 2 million cash charges in 2009 were 11% in 2010, a decrease from 13% in 2009. As a result, operating income in 2010 was RMB 2.8 billion equivalent to $421.3 million, an increase of 772.9% for RMB 318.6 million in 2009. Operating margin was 22.2% in 2010, increase of around 4.4% in 2009. Interest expense in 2010 was RMB 387.2 million equivalent to US $58.7 million compared to 364.1 million in 2009. The interest expense in 2010 included a non-cash interest expenses of RMB 80.6 million, equivalent to US $12.2 million compared to RMB 75.8 million in 2010.

Such non-cash interest expenses were primarily related to certain financial instruments issued in 2009. Foreign currency exchange loss was RMB 338.2 million, equivalent to US $51.2 million in 2010 compared to a foreign exchange gain of RMB 38.4 million in 2009. The foreign currency exchange loss in 2010 was primarily due to the depreciation of the Euro and the US dollar against the RMB.

Additional non-cash accounting charge of RMB 50.9 million, equivalent to US $7.7 million was recognized in the third quarter of 2010 upon the conversion of US $26.2 million. Convertible notes in to ordinary shares of the company by Trustbridge Partners compared to an additional non-cash accounting charge of RMB 22.2 million in 2009. This additional charge was a non-cash charge and it did impact the company’s cash flow.

A loss on debt extinguishment of RMB 244.7 million and a loss of derivative liabilities of RMB 231.3 million were recognized in 2009, which will primarily attributable to a certain financial instrument issued in 2009. There were no similar transactions incurred in 2010.

Income tax expenses was RMB 301.1 million equivalent to US $45.6 million in 2010 compared to an income tax benefit of RMB 31.8 million in 2009. The income tax expenses in 2010 was primarily attributable to the net operating income generated by Tianwei Yingli and Yingli China. The income tax benefit in 2009 was primarily attributable to the write-off of deferred tax liability as a result of the intangible asset impairment.

Net income was RMB 1.4 billion, equivalent to US $215 million and fully diluted earnings per ordinary share and per ADS were RMB 9.06 equivalent to US $1.37 in 2010. On an adjusted and non-GAAP basis, net income was RMB 1.7 billion equivalent to US $251.9 million in 2010 adjusted in non-GAAP fully diluted earnings per ordinary share and a per ADS were RMB 10.62 equivalent to US $1.61 in 2010.

Now, let’s move on to slide 13 for a detailed analysis of our cost structure. Fourth quarter 2010 witnessed a complex mix of cost trend. As previously mentioned, our blended cost increased by low-teen percentage compared to third quarter 2010 as a result of temporarily increase in spot market price. Despite a ramp-up costs of 400 megawatts vertically integrated production lines and a Fine Silicon we have maintained a flattish non-poly costs and poly consumption per watt thanks to the improvement of operational efficiency.

As a one of the leading vertically integrated PV manufactures with low cost structure, we have been reducing polysilicon and the non-polysilicon costs through continuous improvements in yield rate and a cell efficiency rate, together with tighter cost controls.

On an annual basis, blended poly costs decreased substantially by average of over US $300 per kilogram in year 2008 to around US $120 per kilogram in year 2009 to around US $70 per kilogram in year 2010. Non-silicon costs for the full year 2010 was approximately $0.74 per watt, a remarkable improvement from $0.89 for the full year 2009 and $0.92 for the full year 2008.

Efficiency of our multi-crystalline cell increased around 15.6% in 2008 to 16.2% in 2009 and a further 16.8% in 2010 and a PANDA cell efficiency has already achieved 18.5% on commercial production lines. As a result, our polysilicon consumption per watt decreased around 6.8 gram per watt in 2008 to 6.3 in 2009 in an average of 5.8 in year 2010.

Looking forward, we expect to see a flat to down ASP in original currency after considering the depreciation of US dollar and Euro. We currently estimate our first quarter 2011 gross margin to be in the range of 30% to 31%.

Moving on to the balance sheet. Benefited from positive operating and the financing cash flow in the fourth quarter, cash and a restricted cash increased to RMB 6.5 billion equivalent to US $985 million as of December 31st, 2010. 84.83% increase for RMB 4.4 billion as of September 30th, 2010.

As of December 31st 2010, accounts receivable was RMB 2.10 billion equivalent to US $318.2 million compared to RMB 2.06 billion as of September 30th 2010. Day sales outstanding improved to 46 days in the fourth quarter of 2010 from 56 days in the third quarter of 2010 and 65 days in the fourth quarter of 2009.

As of December 31st, 2010, advances from our customers increased significantly to RMB 1 billion equivalent to US $151.7 million for RMB 48.3 million, as of September 30th, 2010 and RMB 30.6 million as of December 31st of 2009.

Primarily attributable to the advance payment received as a selected suppliers of the Golden Sun program, as well as the down payment received of our customers to secure their respective sales contract for delivery in 2011. As a result, working capital representing current assets less current liabilities was RMB 3.1 billion, equivalent to US $473.3 million as of December 31st of 2010 an increase of 62% for RMB 1.9 billion as of September 30th, 2010.

As of the date of this press release, we had approximately RMB 4.8 million in unutilized short-term lines of credit and RMB 2.7 billion committed a long-term facility that can be drawn down in the near future.

Now, I would like to open the call to the questions, operator.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Jesse Pichel with Jaffray’s. Please proceed with your question.

Jesse Pichel – Piper Jaffray

With respect to PANDA at 19% plus efficiency sales, what type of module efficiencies are you getting, and can you repeat how much you’re going to ship in 2011 and I would like to know what your strategy there is? Can you get SunPower like premiums for this product and what end market are you going to sell the product? Thank you.

Qing Miao

Okay, thank you Jesse. So, for the first part, regarding the (inaudible) as it turned out we (inaudible) like a premiums on the price, will be answered by Yiyu Wang our CFO and regarding the shipments will be answered by the CFO Bryan Li. Thank you. Can you please begin thanks?

Bryan Li

Yes, the strategy for PANDA sales is ready to introduce a high efficiency PV Modules to our customers as we believe in the future and the customer will be more and more concentrated in getting increasing interest in the high efficiency PV modules given the limited space of the installation. And also as well as the rising rooftop markets across the geography.

And we started to ship the PANDA modules to our customers and we are getting premiums of PANDA modules over the traditional multi-crystalline modules. And so for you first question, yes and we are getting premiums of PV PANDA modules. And in terms of the shipments of PANDA modules in 2011, and for the 300 megawatts, PANDA lines which was putting through the commercial operation in last first four quarters and this line, these 300 lines, 300 megawatts lines will be running full capacity in 2011. And currently, pretty much all of the PANDA modules have been secured by our customers and we are receiving more increasing orders on the PANDA lines, but unfortunately we count that as five all of their requests.

Jesse Pichel – Piper Jaffray

That's great. Do you have a view on how commodity price increases could affect your cost structure, specifically silver paste and I'm not sure how much silver is in silver paste, and what the price effect would be. Do you have any view on that?

Yiyu Wang

Jesse, mainly the cost of module production or the cost of the installation of the system.

Jesse Pichel – Piper Jaffray

Well then, I guess for you would be the module production. Are you seeing steel prices go up? Are you seeing aluminum or rather or silver, is that affecting your cost structure at all?

Yiyu Wang

Well, I think for every module material supply they are all getting targeted, that ensure their costs will etch up beating tariff, decrease by every year which is something no one can avoid. So, I think we built up the module, material should be increased as smooth their technical innovation or increase about the scale. Actually, this is also one of the reasons why we want to increase the sales issuances continuously because the roughly 4.5% increase in sales issuances is lower the module cost of buy around the 4 to 5% so it's of very significance.

Bryan Li

Hi Jesse, to further supplement his comments and yes there things lay last year 2010, and we saw for some of the basic and elemental materials and the price has been rising. And recently from late last year and the beginning of this year, those basic material has been, the price has been stabilized, so that’s number one. And then number two, for the vendors of those auxiliary materials like aluminum. And those guys are now are expanding their capacity and also they are improving the operational efficiency and they’re pushing the RMB initiatives since a while ago. So their cost has been reducing despite of the increase in those basic and elemental materials.

So those suppliers are still able to provide a decreasing cost of their products to the photovoltaic bakers to reach and optimize the cost structure. And lastly, starting from last year we saw more and more players coming to the respective markets of aluminum, glass and all of those markets. And after a year, some of them have evidence and provided accident track records of the quality and after-sales service. So the company is also considering to adjusting the supply on metrics by leveraging the cost and the quality to get a best optimization of the cost structure. So having said that, I have to take all the efforts and we currently expect the non-party costs in 2011, will be decreasing sequentially quarter-over-quarters in 2011.

Jesse Pichel – Piper Jaffray

That's great to hear, Bryan. And if I could fit in one more question; it seems like leverage to the US market and the Chinese market will be critical as the European markets peak. You're clearly the winner thus far in China. What do you need to do to increase your market share in the US? And specifically, do you need a US plant which I understand management had considered at one point.

Robert Petrina

Sure Jesse. And I think to continue to increase our market in the US we have to do what we’ve been doing. We had a very good year in 2010, I think we’ve done well across all segments and certainly having US manufacturing presence is important and the company could consider that, but I think we look at 2011, a lot of optimism and we’ll continue to do well in all three segments residential commercial, as well as utility.

Jesse Pichel – Piper Jaffray

How is US pricing relative to the rest of the world right now, Rob, while I have you on the line?

Robert Petrina

I think it’s fairly consistent, I think that’s been the case for the last three quarters. So I think that’s actually important difference as opposed to the previous period. So it's pretty similar.

Operator

Our next question will come from the line of Dan Ries with Collins Stewart. You may proceed with your question.

Dan Ries – Collins Stewart

Can you comment maybe on recent demand trends that you've been seeing in Italy given some of the recent news? How it's trended thus far in the first quarter? And are your customers trying to accelerate any deliveries for mid-year? And have you picked up any concerns from your customers about the potential for policy changes during the second half of 2011, specifically in Italy?

Yiyu Wang

Hi Dan, I think firstly, the customer profile we established is for those long-term players which diversifies through different in settlement including ETC tribute and find (inaudible) company that’s why the market has been reasonably diversification to ensure it won't be increased by some kind of macro (inaudible) use.

Actually, having said that, at the end of last year everybody is aware that the Italy feed-in-tariff won’t be first touching by every fourth months (inaudible) that’s why we slightly adjust our sales shortage to deliver a little bit more from generally March and comes through April to catch the first round of heart beating (inaudible) and leave a little bit some more volume which is to avoid if the market has been changed beyond our expectation. That’s why we're considering our existing customer portfolio and also the sales strategy, we believe that our current heading market and feeding (inaudible) won't give us and also actually regarding to the recently discussion about the potential additional feed-in-tariff cut in 2011, at least at this moment based on our channel talking with (inaudible) consolidators in Italy. At this moment we don’t expect that there will be additional feed-in-tariff change beyond what the (inaudible) announced that’s why we see the Italian market will be also very important market in Europe for 2011, and there is also a comparatively large market?

Dan Ries

Maybe one quick one; you mentioned the Golden Sun volumes are skewed to the second half of the year. Are the prices on those modules lower than your worldwide average; do you think it will have an impact? And when would you expect China price to converge with worldwide price, if there is a difference?

Qing Miao

[Interpreted]. Okay, thank you. So, Golden Sun program needs only one type of what Chinese Government would like to introduce and DRC may also introduce (inaudible) target. For the Golden Sun programs, there are several advantages. First, the pricings are very close to the pricing on where exactly in the second half of this year and we also like everyone also take the consideration of R&D appreciation, maybe also minimize GAAP with overseas market. And, the third advantage is the shipment tax rate will be also from second half of 2011 and the minority quantity will be shipped in first quarter of 2012, last but it’s not in the and it’s also very most important is, we have already received 750 million RMB prepayment from Ministry of Finance, and the remaining quantity will be paid before shipment. So, we think that it’s overall it’s a very big and that we will continue to support Chinese government promotion on solar energy. Thank you.

Operator

Our next question comes from the line of Vishal Shah with Barclays. Please proceed with your question.

Vishal Shah – Barclays Capital

On the Golden Sun program, I just wanted to clarify, from the disclosure that you've provided so far, you get to a price of $1.72 per watt in the second half. Is that really how we should think about pricing in that market in the second half? And, can you also maybe comment on for the contracts that you've signed? What kind of pricing you're seeing versus the first half comments that you've made. And then finally, can you maybe comment on the gross margin outlook for the entire year? You've historically provided a range of gross margins for 2010 in the past, so I was wondering why you haven't really commented on full year gross margins. Thank you.

Bryan Li

For the module supplied to the Golden Sun programs, and I think we haven’t talked about the price but I think the overall level of that price, what we discussed most of the shipments of what happened in the second half of this year. And so the price, it was slightly lower than the price that we offered to the other markets, but there was a variable on that, if the RMB continued to appreciate at a faster phase in the second half of the year, then you will start to see the price on the Golden Sun program is moving closer to the price we had offered to the other markets, so that’s number one.

And, I think for the Golden Sun program, that’s Mr. Miao commented earlier in the previous questions, it’s not only for the purpose to secure in large orders, but it also for a strategic market entrance. Because, the China market, everybody knows the China market will be a bigger market for sure in the future, and so if you don’t support the Chinese government at an earlier stage, then you will be facing problems in the future when the door of China starts to open. And, so it’s just we have to leverage both the strategic consideration and the financial consideration into our decisions. So we believe that decision of Golden Sun program is reasonable.

And, then for your gross margin questions, and we didn’t provide annual gross margin, for that is mainly for the competitive reason. Get the market, particularly in the second half of this year would be very sensitive. And what I can discuss here is that we for the ASP and we currently expect for every quarter starting from first quarter to the end of Q4 2011 will indicate, actually down in the first quarter and slightly down in the second quarter. And then in the second half to the second half it will show a low single digit, to mid-single digit decrease from the first half level. Of course it will be down by two step by step throughout the quarters.

And on the cost side, we saw the blended array of polysilicon will show a flattish trend from Q4 2010, to Q1 ’11 and then will keep flattish in the second quarter and then we’ll go slightly down in third quarter and the high single digit down in Q4 2011.

On the (inaudible) party cost sides and as we discussed earlier in the previous questions, we are expecting a sequential decline of $0.01 to $0.02 of all the quarters through towards the end of this year despite after ramp up of the new capacities across the year. Thank you.

Operator

Our next question comes from the line of Lu Yeung with UBS. You may proceed with your question.

Lu Yeung – UBS

Bryan, I see that you have significant improvement in the operating expense in the fourth quarter. Just want to see whether in 2011 you‘ll be able to OpEx at now lower than 10% of sales.

Bryan Li

Yes that's our targets. It will be lower than 10%.

Lu Yeung – UBS

And also on your capacity plan you previously indicated the nameplate for the end of the year would be 1.7 gigawatt. And given that your shipment will be 1.7, when do you see your nameplate will achieve 1.7, or, indeed, whether you will be increasing actually more as you go through the year?

Bryan Li

Yes, for the new 600 megawatts capacity we’re currently constructing plus 100 new capacity under construction in (inaudible) and it will complete installation in the third quarter as star ramp from late third and quarter and so, due to the continuous efforts of the R&D and increasing operation or efficiencies throughout the years. So we can capture yield off our existing production capacity has already exceeded 130% of the nameplate capacity. So factoring these two considerations and we guided the annual shipment volumes for 2011 will be in the range of 1.7 gigawatts to 1.75 gigawatts.

Operator

Our next question comes from the line of Satya Kumar with Credit Suisse. Please proceed with your question.

Satya Kumar – Credit Suisse

I was wondering if you could clarify the European exporter a little bit. Slide six, if I add up the percentages there it says that Europe could be 70%, and you mentioned 60% in the prepared comments. I just wanted to clarify that please.

Qing Miao

So would you like to take this (inaudible) Europe question?

Yiyu Wang

Are you talking about 2010 or our expectation in 2011?

Satya Kumar – Credit Suisse

Expectation in 2011.

Yiyu Wang

Okay so basically we plan to sales around the 36% of total output in Germany, close to 10% to Italy and around 22% for the rest of Europe which you anticipate is roughly close to 70%. One thing to additionally comment here is including in the volume, a 36% we sales through Germany, actually 50% of this volume will be installed in those European markets other than Germany, most likely in Italy or France or like this.

Satya Kumar – Credit Suisse

In terms of your shipment trends for the year for the purpose of my reconciliation, you said shipments will be up mid-single digits in Q1. Are you thinking about sort of low teen's sequential increase in shipments for the remainder of the year each quarter to get to guidance. Is that roughly the right level of shipment ramp we should think about?

Bryan Li

Yes, I would be currently expecting first quarter well on the shipment side, the first quarter shipment will go up at a middle single digit percentage from Q4 level and a second quarter will go flattish and then given the new capacity coming from the new lines in the second half of the year. You will see the third quarter shipments and the fourth quarter shipments continue to climb and then to get you the 1.7 gigawatts to 1.75 gigawatts.

Satya Kumar – Credit Suisse

Okay, it looks like you're making good progress on PANDA on commercial cell efficiency, I was wondering if you could disclose how many megawatts of modules you made with PANDA in Q4 and how you expect the ramp to be in 2011.

Qing Miao

Hold on a second, so give it to Bryan, who would like to take the question for 2011. I will answer for you and as we just stated during our third quarter conference call in 2010 which is at the kind of, given the 300 megawatts just to ramp up in late quarter of last year and earlier fourth quarter. So the PANDA total shipments was slightly higher than 60 megawatts in 2010.

So in 2011, would you like to take the question regarding to the, between PANDA and non-PANDA.

Yiyu Wang

I think in 2011 it could be around 25 to 30% of our total output, roughly.

Satya Kumar – Credit Suisse

And lastly for Bryan, China has been trying to tighten from lending standards. I was wondering if you could talk about your gross debt exposure to Chinese banks and how we should model interest costs for the remainder of the year and how you're assuming that will track.

Bryan Li

Yes, you are right. The Chinese financial institutions have started (inaudible) from the beginning of the year and we have been talking with a lot of the banks and we know them. These (inaudible) has happened particularly in two areas. One is the real asset market, because that was the (inaudible) that is most of the concerns to the Central governments. So pretty much the lending to the asset markets has pretty much stopped or largely slowed down since the beginning of the year.

And the second phenomenon we have to observe is the bank now has given the credit lending on a selective basis. They will hesitate to lend the money to the industry which is not included in the government encouraged industry in the 12th five year planning. And for the other industries if it's included in the government encouraged industry in the 12th five year planning and the bank will be chasing (inaudible) instead of and a hesitation on lending the money. And fortunately the renewable energy and the solar energy has been selected as one of the seven encouraged industry by the Chinese governments in their 12 five year planning. And so we're actually on the (inaudible) side, we're getting more and more interest, where and are getting chased by the different banks including the top gear, the large domestic bank and also the foreign banks in China and for a lending negotiation.

And one more thing I would like to add on is the bank is shifting focus from lending the working capital loans to a private finance loans because the working capital loans it's hard to manage by the PDOC and the regulatory bodies in China and if the prices fluctuates every day. So the Chinese government and the regulatory bodies and they really want to take control of those variable lending solution in China on a daily basis. So they encourage the banks to lend the long-term private finance loans instead of a working capital loans. The working capital loans is getting restricted on a size of lending on a daily basis by the regulatory bodies.

So for Yingli and the money we're seeking for is to support the private finance and also the industry is one of the seven encouraged industry by the Chinese governments. So we're actually in a much better situation. These tightening credit control gives post pressures to the traditional industry and the real industry, then leaves much more rooms to the solar industry.

Operator

I would just like to remind all questionnaires that we will take one question each time from each caller. If you have more than one question, please request to join the question queue after your first question has been addressed. Our next question will come from the line of Sanjay Shrestha with Lazard Capital. Please proceed with your question.

Sanjay Shrestha – Lazard Capital

Two quick questions from my side please. Given the expected shipments of 1.7 gigawatts for 2011, can you sort of remind us again on your silicon procurement strategy between fine silicon, long-term contracts and your potential exposure to the stock market here?

Yiyu Wang

For the procurement strategy we will fund a reasonable diversifications through launch in contracts, as a spot rates. Actually roughly maybe around 60 to 70% of the total poly we need will be secure the contracts and for the remaining, it will be purchased through the spot contract with the (inaudible). We will limit a very small percentage of the purchase from the direct spot market. Actually in our overall (inaudible) strategy which we find silicon as a long-term supply.

Sanjay Shrestha – Lazard Capital

Got and a quick follow-up question if I may here. Bryan, how should we think about CapEx for 2011 and potentially any changes we should see in operating cash flow for '11?

Bryan Li

Yes, currently the total budget based on the special planned that we have already formed and we are expecting approximately $550 million as it will be dispersed in 2011 to supply projects.

Operator

Our next question will come from the line of Tim Arcuri with Citi. Please proceed with your question.

Tim Arcuri – Citi

I just wanted to may be touch base on maybe some of the outlook for this system business in 2011. Any guidance you can give there in terms of maybe general margin guidance or perhaps anything you can offer there?

Qing Miao

Can you provide some guidance for 2011? Sir, we didn’t get your question exactly, so can you just give it shortly?

Tim Arcuri – Citi

Yes, that 8 million or so in revenues for systems in 2010. Where do you expect that to go in 2011?

Qing Miao

Are we talking about the Golden Sun program?

Bryan Li

No Tim's referring to the (Indian) and US dollars system revenue and incurred in 2010 and whether we will be as expecting the similar system revenue in 2011. And currently we don't expect and there won't be any material system revenue incurred in 2011. For 2010 it's really a small project in China and for some of the solar application project in China for example the solar street lights and where we sign the contract with the local government, they also required us to install all the orders solar street light system. So then we performed surveys and are generating such type of revenue. But it's not a mainstream of our business.

Tim Arcuri – Citi

And if I could ask one last question here. Could you just give a little bit more color and any more idea on how the ramp of your polysilicon production is coming.

Bryan Li

We had been continuously ramped up the polysilicon and polysilicon plants and it’s a different chemical process from the manufacturing process of our PV modules. So it’s a lumpy process, it takes longer time to overcome all the technical hurdles and recently we have overcome one of the biggest technical step in the longer ramp up process. So we are pretty confident and are just starting to reach full capacity in the middle of the year. So that will bring the expected production capacity, production volume of polysilicon to at least 1,000 metric ton this year. We could deliver upsides, it depends on how faster we can commercialize the experience and we are accumulating in the ramp up process and also the rest of the minor technical hurdles we need to overcome. And so we will provide much more clarity in the next quarter while we are doing our conference call. Thanks.

Tim Arcuri – Citi

And are you still looking for cost there? Are you still targeting, I think previously you said about $25 a kilogram. Is that still a goal for production there?

Bryan Li

That is the ultimate target and it will take multiple steps through which $25 US per kilograms. And the depreciation charge of polysilicons and in our total cost it appears so is non-material. It only brings $0.01 to $0.02 US per watt basis to the total modules because of this all. To the module benefits really not significant.

Operator

Our next question will come from the line of Nick Xue with Goldman Sachs. Please proceed with your question.

Nick Xue – Goldman Sachs

You have mentioned that you have 1.4 gigawatt module constantly for 2011. Have you got any prepayment from your customers like the Golden Sun program.

Bryan Li

Yes of course and you look at the advance from customers, as of December 31, 2010 we have received roughly RMB 1 billion as advance from the customers and there are two major thoughts of these advance from our customers one of which is a RMB 740 million coming under the Golden Sun programs and the rest of them are from our customers.

Operator

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

Sunil Gupta – Morgan Stanley

Thanks for taking my questions. I have two questions. In Q4 did you had to buy any cells or wafers in the external market and also on your Fine Silicon plant, how many of polysilicon did you produce in Q4 and what was the average cost of production? Thank you.

Yiyu Wang

We buy very limited sales from external supplies and before we buy the sale, we were communicated with the customer to ensure the activity (inaudible) of the quality (inaudible).

Sunil Gupta – Morgan Stanley

How about wafers?

Yiyu Wang

How about what? Sorry say it again?

Sunil Gupta – Morgan Stanley

Did you had to buy any wafers also in the external market?

Yiyu Wang

Sorry I didn’t hear it very clearly.

Sunil Gupta – Morgan Stanley

Did you buy any wafers in the external market in Q4?

Yiyu Wang

No, no, no, never. We never buy any wafers.

Sunil Gupta – Morgan Stanley

Okay. And how about polysilicon, how many tons of polysilicon did you produce in Q4 internally and what was the average cost?

Qing Miao

Hi this is (inaudible). We are producing the limited as we said before in 2010 and so in 2011 we are expecting producing much more than that and actually on the rate of tantalization has been a little bit lower than what we expected originally. But recently our team has fought back various small (inaudible) and we had been getting the solution and the problem will be solved, already from second quarters step by step. Thank you.

Sunil Gupta – Morgan Stanley

And as you entered this year, what kind of cost do you expect to achieve for your polysilicon manufacturing?

Qing Miao

In the first half of this year, we’re expecting the polysilicon costs producing costs will be 60 to 65. In the second half of this year we are expecting it to be coming down by $10 or even more than that.

Operator

Due to our time restraints, we will now close the Q&A session. I would like to hand the call back over to management for closing.

Qing Miao

Okay, thank you everyone for joining us today. I am sorry we do not have enough time to take everyone’s call. [Technical Difficulty].

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