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JA Solar Holdings Co, Ltd. (NASDAQ:JASO)

Q1 2011 Earnings Call

May 10, 2011 8:00 a.m. ET

Executives

Martin Reidy - Brunswick Group

Peng Fang - CEO

Anthea Chung - CFO

Ming Yang - VP of Business Development and Corporate Communications

Analysts

Ming Chu - Jefferies

Mark Bachman - Auriga

Samuel Reed - Collins Stewart

Colin Rusch - ThinkEquity

Edwin Mok - Needham

Ahmar Zaman - Piper Jaffray

Kelly Dougherty - Macquarie

John Hardy - Gleacher & Company

Satya Kumar - Credit Suisse

Sam Dubinsky - Wells Fargo

Jay Greenblatt - Barclays Capital

Operator

Hello and thank you for standing by for JA Solar’s first quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. After management’s prepared remarks there will be a question and answer session. Today’s conference is being recorded.

If you have any objections you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Martin Reidy of Brunswick Group. Please proceed.

Martin Reidy

Thank you. Welcome to JA Solar’s first quarter 2011 earnings conference call. Joining us from the company are Dr. Peng Fang, CEO, Ms. Anthea Chung, CFO, and Mr. Ming Yang, VP of Business Development and Corporate Communications.

As stated in the press release, the oversimplified translation of CNY into US dollars, which is set at CNY6.5483 to US $1, is made solely for the convenience of the audience. References to dollars are the lawful currency of the USA. The press release published today provides detailed financial tables under conversion from CNY to USD.

On this call Dr. Fang will begin with an overview of our Q1 2011 results covering business and operational developments and following that, Anthea will provide details of the company’s financial performance and outlook. After our prepared remarks we will open up for questions for the remainder of the call.

We expect the entire call to last approximately one hour. Before we begin the formal remarks I would like to remind you that certain statements on today’s call including statements regarding expected future financial and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially.

These statements are made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ include general business and economic conditions in the solar industry, governmental support for the development of solar power, future shortage or availability of the supply of high purity silicon, demand for end-user products by consumers and the inventory levels of such products in the supply chain;

Changes in demand from significant customers, changes in demand for our major markets, changes in product mix, capacity utilization, level of competition, pricing pressures and declines in average selling prices, delays in the introduction of new product lines, continued success and technological innovations, shortage in supply of raw materials, availability of financing, exchange rate fluctuation, litigation and other risks as described in the company’s SEC filings, including its annual report on Form 20-F filed with the SEC.

Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results. You should not place undue reliance on these forward-looking statements. All information provided on today’s conference call speaks as of today’s date unless otherwise stated and the company undertakes no duty to update such information except as required under applicable law. I will now turn the call over to Dr. Peng Fang, CEO of JA Solar.

Peng Fang

Hello everyone and welcome to today’s call. We appreciate your interest in JA Solar. Despite a challenging market environment due to uncertainties surrounding the solar policy in Italy, we had a solid quarter with net sales of 556 million, operating profits of 83 million or 15% of sales, net income of 72 million and a diluted earnings per share of 41 cents per share.

Our position as market leader, strong support from our customers and diligent effort by our team have ensured that we have done relatively well despite the dynamic market environment. Solar cells and module shipments were 441 million in the first quarter, which means that we achieved 97% at the low end of our previously announced guidance.

Despite a certainly weaker first quarter, we saw good demand for our product across the rest of the customer base. However, our planned shut down during the Chinese New Year holiday this year had a greater than anticipated impact on our production and shipment schedules. This year we closed our factories for several days over the holiday to allow time for key equipment upgrades and facility maintenance, which was the first time we shut down the production in the last 18 months.

The ramp down and ramp up process before and after the holiday took longer than planned and as a result our first quarter solar sale production volumes were less than expected. This in turn impacted shipment volume. Overall, our total solar cell production volumes were roughly in line with our cell and module shipments for the quarter meaning that we shipped about the same as we produced during the first quarter.

In terms of geography, sales to customers outside of China were slightly more than 50% of sales. Sales to Europe represented approximately 35% of revenue with Germany accounting for the largest portion. Sales to US customers represented approximately 9% of revenue and India, Australia, Korea and other regions represented approximately 6.5% of revenue.

I should note also that as a result of two upgrades we carried out over the Chinese New Year during the month of March, we saw immediate conversion efficiency improvements. The average efficiency for our conventional multi-crystalline cell utilizing the upgraded equipment and the new developed GS3 process increased to 16.8% compared to the average efficiency of 16.4% in the previous quarter.

These key equipment upgrades will reduce our overall costs in the future quarters and ensure that we are even more competitive. Looking at our overall results for the first quarter, we began the year with positive results and I believe that our performance has been very encouraging particularly given the current environment. For the quarter JA Solar achieved a healthy gross margin of 17.3%, in line with our guidance, and a strong operation margin of 15%.

Gross margin declined versus the first quarter primarily because tooling accounted for a smaller percentage of shipments. Tooling declined to 12% of shipments in the first quarter from 23% during the fourth quarter. I should also note that also ASP declined sequentially. We were able to offset most of this with more internal wafer production and thereby lower our overall wafer costs.

I want to spend some time to highlight the three key drivers of our success in the first quarter because I believe that these three key drivers will continue to support our success in the future - first, our optimized cost structure, which is one of the most competitive in the industry. Second, our industry leading technology and R&D capability, which ensures that our products are popular in the market and appreciated by our customers.

And third, our unique business model, which is based on essentially long-term strategic relationships with a diversified customer base of leading solar players globally. Let me take a few moments to update you on some of the important progress we have made in each of these areas over the last quarter. Looking first at our cost structure, we continue to improve our manufacture costs and in the first quarter have been able to drive costs down even further by successfully executing a rigorous cost reduction program.

During the quarter we reduced our module processing costs by approximately 20% versus the first quarter of 2010 through yield improvements, lower material costs, higher productivity and other cost savings. We are on track to lower our module manufacture costs even further in the upcoming quarters. Our internal wafer production capacity is also helping us retain good margins as we optimize our product lines.

In the first quarter the volume of internally produced wafers more than doubled versus the first quarter. At the same time we optimized our wafer manufacturing process and achieved wafer processing cost reduction of more than 10% versus the previous quarter. We expect our wafer processing costs to decline further as we gain scale and further optimize our wafer production.

Along with the increase of internally manufactured wafers, we achieved a sequential decline in overall wafer costs in the middle double digits percent range. However, we did see an increase in overall cell processing costs during the first quarter as a result of higher price of silver and higher per watt factory depreciation costs due to factory shut downs over the Chinese New Year.

Increased silver prices had an impact about 2 cents per watt on cell manufacture costs. The trend in recent weeks has been more encouraging and since the end of April we saw the silver price dropping approximately 30% from the peak level. According to Bloomberg over the last week silver futures has seen the steepest weekly decline since 1975. As a result, we believe solar cell manufacturing costs should be relatively stable over the next few quarters.

Furthermore, the efforts of our process engineering and R&D team have enabled us to identify new processing metals that will reduce silver usage between 20-40% over the next several quarters. So as we roll this out we expect to further reduce our overall cell processing costs in the longer term. In terms of technology improvements JA Solar has a strong R&D team where we have a number of new technologies in development.

I am pleased to note that we made significant progress in efficiency gains during the quarter. By utilizing a unique semiconductor process to remove wafer impurities our R&D team made some important innovations this quarter, achieving an average efficiency of 17.2% in R&D with mass manufacturing developments.

Particularly promising is the fact that over 75% of the cells manufactured with the new process had 16.8 efficiency or higher and over 90% are 16.6% efficiency and higher. These rates are far superior to those for other products currently available on the market. We are therefore confident that our products are superior to our peers’ offerings and believe that this is reflected in the strong and sustained demand for our products despite the current market volatility.

Looking forward, we expect to further enhance this competitive advantage over our peers as we bring new technologies on stream such as our newly released metal high efficiency technology, which has efficiency in the 80% range utilizing low cost (more tile) wafer manufacturing methods. We are currently seeing very strong interest from our customers in totaling our high efficiency product.

Because our high efficiency technology leads the industry, utilizing our high performance solar cells we can produce more than modules with 10% more power compared to the industry low. This product serves the high need market where customers are looking to maximize power production and are willing to pay a premium for this product. JA Solar remains the technology leader in improving commercial efficiency and we expect that this will expand our lead in the future.

Turning to the third driver of JA Solar’s success story, our business model. We continue to focus on our strategy of forming valuable long-term partnerships upstream and downstream with key global solar players across high growth potential markets. The particular focus at this moment is the North American market. From talking to our strategic partners and the customers, we believe that the North American market is well positioned for significant growth in 2011 with strong activity in the utilities scale market.

In Cuba we signed some important agreements that will enable us to take advantage of this. For example, we have established a cell production GOB with AMC, which will enable us to expand our US footprint. Several of our customers also have significant product pipelines in North America and we believe we are well positioned to benefit from their project pipelines.

We are currently in discussions with our customers with a view of forming strategic partnerships to develop high powered 280-300 watt modules in mind specifically for utilities scale projects for an easier installation process and a normal balance of system costs. On the impact of the Japanese nuclear crisis, we are currently seeing a fundamental long-term change in global government attitudes towards renewable energy policy.

Governments around the world are looking to reduce their reliance on nuclear power and significantly increase their use of renewable in their energy mix. This is particularly the case in countries such as China, Germany and Japan. So the solar sector is well positioned to benefit from this long-term shift from nuclear to fossil fuel to renewable energies.

And as the cost of solar continues to decline we are confident that we will see an increase in the adoption of clean, renewable solar power generation around the world. While market conditions remain challenging and highly competitive, we believe we can maintain our leadership position by focusing our effort on improving our technology, extending our cost leadership and building more high valued, long-term customer partnerships.

Looking ahead, due to the dynamics of the Italian market the industry is facing price and margin pressure in Q2. Based on market conditions and customer demand we currently expect to ship more than 400 megawatts during the second quarter. Our shipment estimate for full year 2011 remains unchanged at 2.2 gigawatts. With that I will turn the call over to Anthea for the financial highlights.

Anthea Chung

Thank you Dr. Fang and thanks to everyone for joining today’s call. In Q1 we shipped in total 451 megawatts of cells and modules and recognized revenue of $556.4 million. Our Q1 revenue was 32.5 million or 5.5% less than Q4 2010 for the reasons that Dr. Fang just outlined.

However, compared with the same quarter a year before we saw over 65% shipment growth and over 90% revenue growth versus the first quarter of 2010. In Q1 our shipment mix was 65% solar cells, 12% tooling and 23% module shipments. Q1 gross margins were $96.3 million or 17.3% of net revenue, which is in line with our estimate of high teens gross margin in Q1 and below our Q4 2010 gross margin of 19.2%.

Although we experienced a decline in average selling price in Q1, the impact was largely offset by a decrease in wafer costs compared with Q4 last year. The decrease in gross margin was primarily due to changes in our product mix with the higher margin cell floating shipments accounting for only 12% of total shipments in Q1 compared with 23% in Q4 last year. Total operating expenses in the first quarter were $13 million, representing 2.3% of net revenue.

This compared with 22.9 million or 3.9% of net revenue in the fourth quarter. We recorded a reversal of provisions for prepayments of 4.3 million in Q1. Excluding this adjustment our total operating expenses for Q1 would have been $17.3 million or approximately 3.1% of net revenue. The lower operating expenses was a result of continued effort on expense and cost control.

Income from operations was 83.3 million or 15% of net revenue in Q1. This compares with 90.2 million of income from operations in Q4 or 15.3% of net revenue. Interest expense in Q1 totaled $9.7 million, similar to Q4 2010 expense of $9.9 million. Interest expense in both periods included a non-cash interest expense of 3.8 million, representing accretion of discount to convertible bonds.

Included in other income of $8.3 million was 5.5 million of non-cash gain from change in fair value of derivatives related to our convertible bonds and 1.7 million of foreign exchange gain from translations of certain balance sheet items denominated in foreign currency. GAAP earnings per diluted ADS in Q4 were 41 cents compared with 60 cents in the fourth quarter last year.

In Q4 last year we recorded a gain of 34.6 million of proceeds from sales of Lehman Notes, which we sold in a 20 cent gain per diluted ADS. Excluding the impact of this transaction earnings per ADS for Q1 2011 was in line with that for Q4 2010. Compared to the same period last year, earnings per diluted ADS increased 66% mainly due to higher revenue and shipments.

Income tax expense for Q1 was $11.3 million and the tax rate for the quarter was 13.8%, similar to 2010 full year tax rate of 12%. On the balance sheet side our total receivables at the end of Q1 were $178 million, 33.6 million higher than Q4 2010 balance of $144.4 million. Our days sales outstanding remained at a healthy level of 29 days. Total inventories at the end of Q1 were $189.6 million, 16.5 million lower than the balance at Q4 2010 of $206.1 million.

Average inventory turns in Q1 stood at 37 days. Total prepayments to suppliers were $369.4 million, slightly up from 344.9 million at the end of Q4 2010. We expect to utilize $103.5 million of prepayments or 28% over the next 12 months. In terms of liquidity, the company generated a positive operating cash flow of $64.2 million in Q1 2011, an increase from Q4 2010 operating cash flow of 25.8 million.

CapEx for the quarter was 106.8 million. We have $422.2 million of cash on hand and the total working capital at March 31 was $711.8 million. We continue to maintain a healthy balance sheet to support the company’s long-term growth and weather any potential volatility in the industry. We do not have any short-term loans outstanding.

Total long-term bank loan outstanding was $321.5 million and face value of our convertible bonds through 2015 was $228 million. This concludes our prepared remarks. I will now open the call to questions. Operator.

Question and Answer Session

Operator

Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a 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.

(Operator instructions) And our first question comes from the line of Jessie Pichel representing Jefferies. Please proceed.

Ming Chu

Hi. This is Ming Chu for Jessie. Thanks for taking my question. You maintain your full year guidance despite a weak Q2. Can you give us some color on your pipeline and what gives you confidence that other orders will be pushed to second half? Thanks.

Ming Yang

Hi. This is Ming. Thank you for the question. So in terms of our overall shipment I think we’re still optimistic about the rest of the year particularly after the Italian energy has been finalized. We’re now seeing very promising activities especially on order inquiries and then we believe the market should be able to restore in a few weeks, maybe in two to three weeks.

And then at the same time also seeing promising activities out of Germany because the RRs are now very attractive for systems. In fact, some of the system is now reaching high single digits (of maybe 9-10% return). And then at the same time we believe that given what’s happened in the German market, the activity level in March and April, the mid-year turn may not be so severe. So I think that’s also making the year looking pretty good.

And at the same time, in terms of order pop, we’re now seeing a lot of order activity increase per project in the second half of the year as well and then we also have good support from our customers. And we expect two additional customers going forward as well.

Ming Chu

Great to hear that we’re seeing increasing activities after the Italian regulation fell that way. So we’re definitely seeing a lot of demand but what is the ASP looking right after the Italian regulation? And also, can you give us some more color on utilization in Q2?

Ming Yang

So you ASP trend or more?

Ming Chu

Yes. So what’s the ASP trend look like before and after the Italian regulation is out?

Ming Yang

I think right now it’s difficult to determine what the ASP levels will be after Italy. I think a lot of it will be determined on market activity levels and demand levels. But right now I think for the month of April for example, we saw ASP maybe decline in the high single digit level range because of percentage relative to Q1.

Ming Chu

Okay.

Ming Yang

And we believe there is high potential that ASP could stabilize or even recover a little bit for the rest of Q2.

Ming Chu

Great. And given the high inventory level across the supply chain what would be your utilization trend in Q2 and maybe Q3?

Ming Yang

I think utilization you can look at our guidance relative to our actual production capacity. So I think that would give you an estimate of our utilization rate.

Ming Chu

Great. Thanks a lot Ming.

Operator

And our next question comes from the line of Mark Bachman representing Auriga. Please proceed.

Mark Bachman

Hi Ming. Can you give us some more detail on the SG&A line of this model? You are at the same level that you were a year ago, that 11.2 million at 556 million in revenues. And last year you only did 279. I want to understand this a little bit more on how the model could perform so well here or if this is a one-time hit.

Anthea Chung

I think we have explained we did have a one-time adjustment of $4.3 million. But excluding that item that operating expense is roughly 17 million. So on a go forward basis it should be in the range between $17-20 million per quarter.

Mark Bachman

And so even at that $17 million level Anthea, you were lower in sales than you were in the previous quarters. I’m just wondering where are you getting your efficiency stand in your SG&A line?

Anthea Chung

First of all, we do have tight cost and expense control here at JA. Second, for part of these expenses we’re seeing about 70% actually are fixed expenses. So therefore we do have the business model here even though we’ve increased the revenue and operating expense did not increase.

Ming Yang

Let me just add really quickly so in terms of business model, we focus on long-term strategic partnerships especially with local players for example in Germany and the US and we do not maintain a large type of sales staff in those overseas regions. It’s really how we save operating expenses relative to a lot of our peers.

Mark Bachman

Okay. Second follow up question - wafer pricing. What are you seeing right now on wafer pricing and how is that starting to trend given your relationship GCL?

Ming Yang

So let me discuss it in order, okay? So one is in terms of the spot market wafer pricing trends just over the past 1-1/2 to two weeks or so we saw very promising declines in spot wafer costs. They probably decreased in the mid-double percent range or so relative to Q1. So this is at a faster rate overall in terms of spot wafer pricing relative to spot cell pricing.

So we believe that this is beneficial for the industry longer term especially for JA in terms of wafer cost reductions. And in terms of relationship, GCL is going very strong. We’re the largest customer of GCL. They’re a strategic partner for us. They really support us. So I mean we expect to continue to receive their support and have low cost wafers going forward under a long-term contract.

Mark Bachman

All right. And Ming, will you - I know you want to talk in percentages here but can you give us some US dollar quotes on what you’re seeing or US penny quotes on what you’re seeing on the wafer side?

Anthea Chung

The wafer costs?

Ming Yang

Yes. It’s very sensitive. So we would actually prefer not to be exact. But I think you can check on reports like (PB & Son) or something like that. I think that will give you a good estimate of what the current wafer pricing looks like.

Mark Bachman

All right. Fair enough. Thanks so much.

Operator

And our next question comes from the line of Samuel Reed representing Collins Stewart. Please proceed.

Samuel Reed

Hi. Thank you for taking my question. I was curious could you give us - you have given us a geographic breakdown. I’m wondering on your cell shipments if you could say what portion of your cell shipments do you think are the top ten module vendors? We think you have some big customers that you probably can’t announce but can you at least let us know that?

Ming Yang

Hi Sam, this is Ming. We actually don’t have it broken out like that. But I think you can assume probably 80% or more of our solar cells are into well known tier one module manufacturers.

Samuel Reed

Okay. Great. Now the module strategy I think was a little over 100 megawatts this quarter. In the past you have discussed maybe half a gigawatt as being your 2011 target for modules. Has that been relaxed at all? Do you think you could go higher than that or are you limiting yourself in that? Because it seems like there is more demand for your modules than that in the market.

Peng Fang

We certainly don’t rule out doing more modules. So right now we respond to our customer requesting and we continue supporting our cell customers and we do see more activities in the module area as well. We can ramp up to capacity relatively quickly and also depending on the customer and market demand.

Samuel Reed

Maybe just one last quick one - Italy, the new policy includes a 10% EU mandate. Do you think that could help JA Solar in terms of shipping cells to Europe for people who want to do final assembly within the EU?

Ming Yang

Yes. I think that’s where our unique business model is where we do OEM modules for customers and also we can deliver solar cells to them. So we do see significant growth in terms of meeting EU provisions. So we’ve already seen very strong interest from Italian manufacturers who work with us.

Samuel Reed

Thank you very much.

Operator

And our next question comes from the line of Colin Rusch representing ThinkEquity. Please proceed.

Colin Rusch

Thanks for taking my question. As you look at lighter sales in 2Q but an aggressive ramp in sales in the second half, how are you expecting to manage your utilization levels relative to finish rates?

I know you said that we could look at the shipment guidance for 2Q utilization but are you shutting things down for longer portions and then ramping back up to higher utilization levels later in the quarter? And how should we think about finished rate inventory activity in 2Q?

Anthea Chung

As Ming mentioned earlier, I think if you just do the math of utilization we kind of guided that there is roughly 80%. So no, we don’t have plans to shut down at this moment. Are we doing it? I think we arrange the production schedule differently and in the second half of the year we’re anticipating the utilization rates to go a lot higher than 80%.

Colin Rusch

So how should I think about lead times for cells? Are you having to carry inventory for your customers and deliver just in time? Or are you still getting a couple weeks notice from your customers?

Ming Yang

Lead time for solar cells anywhere between two weeks to up to six weeks, something in that range.

Colin Rusch

Great. And thinking about future tooling efforts on the factory, how much of the factory base is fully retooled? And how many initiatives do you have that you’re working on right now that we can see some retooling and some changes in conversion efficiency over the next several quarters?

Ming Yang

Okay. In terms of tool upgrades and it’s not going to be a continuous effort going forward. So we finished most of the main tool upgrades but then also we have for example automation programs that we’re undergoing. So I think that will continue to increase our production efficiency and also our conversion efficiency.

Colin Rusch

Okay. Great. Thanks so much.

Operator

And our next question comes from the line of Edwin Mok representing Needham. Please proceed.

Edwin Mok

Hi. Thanks for taking my question. So first question is just on your capacity. It looks like you’ve done a great job on wafer. Can you remind us where is your wafer capacity right now and where it would be by year end? Similarly, on the cell capacity given the slower demand right now, are you guys still ramping your cell capacity for this year?

Anthea Chung

Edwin, hi. For the wafer side currently our wafer capacity is slightly higher than 300 megawatts. But the end of the year we estimate it’s going to be roughly 600 megawatts. On the cell side current capacity is around 2.1 gigawatts and by year end the plan is still to reach roughly 3 gigawatts.

Edwin Mok

To follow up on that, does that include your joint venture with MEMC, included in that 3 gigawatt number? I’m just trying to understand how that JV impacts the capacity that is available to you.

Anthea Chung

We include a very small portion of that JV because only a small portion is designated for JA use.

Edwin Mok

I see. Very helpful. And then one last question on the 2Q guidance - I was wondering how do you guys think of your mix of cell versus module in 2Q and tied to that, do you guys have outlook for margin in the second quarter?

Anthea Chung

So to answer the product mix question first, the module percentage is roughly going to be around between 20-25% of total shipments. That’s roughly the same as this quarter. So regarding the second question of gross margin outlook, is that right?

Edwin Mok

Yes, that’s correct. Thank you.

Anthea Chung

Yes. So as Dr. Fang mentioned, the current market condition is very dynamic. With Italian renewable energy law finally approved we expect the market will start in a few weeks. At the same time we are also seeing promising activities in the German market. However, due to previous uncertainties with the Italian market, the market today is very competitive.

At this point as Ming mentioned earlier, it is difficult to predict the ASP trend for the rest of the quarter although we are seeing ASP pressures. So at this time we are also seeing market prices for wafers coming down significantly so therefore it is difficult to predict gross margin at this point although you can assume that we are seeing similar gross margin pressure as the rest of our industry peers.

Edwin Mok

Okay. Maybe just one quick follow up to that, right? In terms of one input for margins is cost, right? And you guys mentioned wafer reduction as well as conversion costs should come down - sorry. Wafer production should go down in the second quarter and conversion costs should come down in the second quarter. So should we expect overall costs to come down in the high single digits or can you give us a range on that?

Ming Yang

So Edwin, in terms of wafer costs it looks like it could come down sequentially maybe in the high single digits, maybe up to 10% or so. That’s what we’re currently estimating now. Again, that’s also very much dependent on the market environment.

Edwin Mok

Great. Thank you.

Operator

And our next question comes from the line of Ahmar Zaman representing Piper Jaffray. Please proceed.

Ahmar Zaman

Hi. Thank you for taking my question. Given you have maintained your full year guidance here in the past you had given us some color into how much of your full year guidance has been contracted out. Can you give us an update on that?

Ming Yang

Hi Ahmar. This is Ming. So I think currently we’re still looking at about a similar percentage of our shipment is contracted out as the previous quarter. It’s not materially different than what it was before.

Ahmar Zaman

Great. And then just to kind of the follow up on the previous question about gross margins, so given your wafer costs are going to be down about the 10% range, you mentioned your overall conversion costs are also going to be down sequentially.

And given that ASP are uncertain, should we assume gross margins to be flattish going forward or slightly above or slightly below?

Ming Yang

I think based on the current market condition we’re assuming very severe pricing pressure in the market. So I think you can assume that there will be some margin pressure relative to this quarter.

Ahmar Zaman

Thank you very much.

Operator

And our next question comes from the line of Kelly Dougherty representing Macquarie. Please proceed.

Kelly Dougherty

Hi. Thanks for taking the question. I just want to follow up on the second quarter guidance. 400 plus megawatts can mean a lot of things so I’m just wondering if you’re being conservative because Italy hasn’t picked up yet or we’re about half way through the quarter already. So can you at least tell us what kind of visibility you have, maybe what you have indicated for second quarter deliveries?

Ming Yang

So hi Kelly, this is Ming. I would say overall visibility is good but again characterized by uncertainty. Certainly going into April we had more orders for April than what we had actually achieved.

I think a lot of it is due to the market uncertainty in Italy especially related to the banks where some of the banks have not cancelled financing but delayed financing for projects pending clarity on Italian law. So since then we have already seen order inquiry activities pick up significantly in Italy. But like we said, the Italian market will take about two to three weeks to really restart given the pause they had earlier. So until we see some of the actual activity that happens we want to be realistic about our shipment expectations for Q2.

Kelly Dougherty

Okay. Understood. And then maybe a little bit more insight into the cost structure to help us think about the margin impact of running at 80% utilization.

Ming Yang

So I think you can assume overall cell processing costs should be roughly similar to this quarter, something in a similar range.

Kelly Dougherty

And that’s outside of what’s happening with silver prices that should impact utilization?

Ming Yang

Based on current silver pricing levels we believe our silver pace costs in Q2 relative to Q1 should be relatively similar.

Kelly Dougherty

So if silver prices are similar and utilization is only 80% where do we see the impact on processing costs?

Anthea Chung

So Kelly, the reason is about the same because in Q1 we have less calendar days to manufacture because of the Chinese New Year. So therefore actually the output is lower in Q1 because of Chinese New Year holiday.

Kelly Dougherty

Okay. So it’s a relatively similar level of utilization that we saw?

Anthea Chung

Yes, that’s right.

Kelly Dougherty

Okay. Perfect. And then just switching to wafers again real quickly, can you help us think about how many wafers internally you expect to produce this year and then where you think wafer processing costs can go as you scale?

Ming Yang

In terms of total wafer production I think it’ll be dependent on how quickly we ramp up our next phase of capacity. Expansion is scheduled for the second half of this year but in terms of second quarter I think the production will be similar to our first quarter level, which is pretty much full ramp of our existing capacity.

Kelly Dougherty

Okay. And then maybe an idea on wafer and module processing costs?

Anthea Chung

The wafer and module processing costs Kelly, we actually historically have not disclosed the cost number in detail. But we are very competitive to I think the peers in the industry.

Kelly Dougherty

Okay. And then just one more question on the tooling business, obviously the contribution was low in the first quarter. Is that just the market dynamics? And then how do you expect it to trend for the second quarter and the rest of the year?

Anthea Chung

So in the near term we estimate it’s going to be in the range of 10-15%. In mid to long term range we see tooling to be in the range of 20-25%. It will go up but in the near term it will stay around 10-15%.

Kelly Dougherty

And is mid to long term in the second half of this year or is that next year?

Anthea Chung

Hold on one second.

Ming Yang

Second half of this year, yes.

Kelly Dougherty

Okay. Thanks very much.

Operator

And our next question comes from the line of John Hardy representing Gleacher & Company. Please proceed.

John Hardy

Yes. Thanks for taking my question. I guess I have one for Ming. In 2009 when we saw sort of an analogous downdraft, obviously not as severe this time around, we saw you begin to win a lot of orders from high cost cell manufacturers from Europe. And that was sort of an early view on some of the market share gains you’ve had since then.

So I was curious through this downturn and now that you’re seeing orders pick back up with some solidification in Italy, do you have any early view on whose cost structures are too high to compete at the new cost levels and maybe how much capacity you think could come offline because of that and help balance supply and demand?

Ming Yang

Hi John. It’s Ming. Thanks for your question. So I think right now we’re certainly seeing significant market share gains for JA Solar relative to our other Asian peers particularly those out of Taiwan for example as well as other competitive Chinese manufacturers. Again, I think we lead both in cost structure and also on efficiency levels.

So I think that’s really making us very well positioned to compete going forward and make our products more popular in the market.

John Hardy

Okay. I guess I can maybe - that’s helpful but maybe asked another way, are you seeing a material number of new customers that were previously manufacturing their own cells come back at this lower price level?

Ming Yang

Well, I think certainly for us on the cell level relative to other pure play solar cell manufacturers we have already seen that we’re capturing some market share where some players are used to procuring from Taiwan for example because they could not buy from us now have shifted the majority of their procurement to JA.

John Hardy

Okay.

Ming Yang

Yes.

John Hardy

Okay. And I guess one specific one on the MEMC deal, so are you going to be manufacturing any modules for them as well or is it strictly cells? I guess I’m trying to figure out what the margin stack looks like to you on sort of passing through their wafers.

Peng Fang

Yes. MEMC specifically asked for cell JV so we are jointly invested to build the first phase is 250 megawatts cell manufacture capacity 50/50% owned. But that doesn’t mean we couldn’t do the modules for them. So in addition to the cell JV we also are doing on the supply agreement basis for some modules.

John Hardy

I’m sorry. So there is an agreement on some module work?

Peng Fang

It’s not in the JV with MEMC to do modules but they can basically give us orders to modules on a contract basis.

John Hardy

Okay. Thank you.

Operator

And our next question comes from the line of Satya Kumar representing Credit Suisse. Please proceed.

Satya Kumar

Yes, hi. Thanks for taking my question. You mentioned that your capacity was 2.1 gigawatts in Q1 and the utilization rate is 80% in Q2. Is it fair to say that capacity growth is minimal in Q2 and more so that 900 megawatts of capacity growth is happening in the second half?

Anthea Chung

That’s correct.

Satya Kumar

Okay. A question on linearity in Q2, your peers in Taiwan who were manufacturing solar cells have reported about 37% decline in the month of April for sales month on month, which is the largest decline for them in over five years and they seem to be fairly cautious on the month of May as well.

You were mentioning that you expect that the Italian market will restart in the next two to three weeks. I was wondering relative to your peers in Taiwan how have your intraquarter sales tracked so far? And how back end loaded is Q2 for you this year?

Ming Yang

Thanks Satya. In particular relative to Taiwan I think one is we’re gaining market share against them on the cell front. So like we said, some of their customers who used to buy from Taiwan now have shifted to procure from us and we have seen that trend very significantly in the months of March and April.

And at the same time our business models also differ where we focus on long-term strategic partnership and Taiwan primarily focuses on spot sales. And spot sales tend to be the first to go during weaker markets and at the same time we have seen significant explosion to the module where we have OEM relationships with a lot of the German players for example.

So that’s how it’s different. And then in terms of the Italian market we serve both Italian end customers via modules as well as solar cells. So we do believe we have better visibility to the market than some of our peers.

Satya Kumar

Okay. And in terms of your average production conversion efficiency what is the target for Q2? And do you have a goal for the actual average production for the end of the year? And can you talk a little bit about what you plan to do in terms of the efficiency roadmaps that you’re using other things like mono wafers or (unintelligible) - or other things in the actual production?

Ming Yang

Okay. So in terms of overall average efficiency we believe that for Q2 for multi we should hit about 16.8% or so and then around 18% for mono. And then at the same time by year end for the provisional products we believe multi could be in the maybe 16.8-17% range and then mono in the 18% or higher range.

And for our high efficiency products for example, for the Maple product it may be in the mid-17% range and then for the high efficiency model maybe in the mid-18% to up to 19%-ish level.

Satya Kumar

One last question on how you’re running the factory. Basically right now the utilization rate is low let’s say, right? And the market demand is weak. Do you build cells to a forecast of orders or do you basically get the PO for a firm commitment on delivery and you manage your inventory such that you deliver to a firm price on a PO?

Because you did a pretty good job in Q1 in managing your inventory so I was wondering how you’re managing the factory order and loading right now.

Anthea Chung

Most of our products actually are standard products so we don’t really produce based on PO. However, by saying that, our sales team basically do the forecast on a weekly basis and we work with the production team so we do watch and monitor inventory very, very closely and we adjust the production schedule to adjust the production volume.

Satya Kumar

Okay. Thank you.

Operator

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

Sam Dubinsky

Hey guys. Just a couple quick ones - spot market pricing for cells has been pretty weak in the past several months. Are you pricing in line or at a premium to the spot market?

Ming Yang

I would say generally we’re anywhere in the range from below in line to above depending on customer, product type. It’s very difficult but on average you can say we’re in line.

Sam Dubinsky

Okay. And where are spot market ASP for cells today?

Ming Yang

Cells anywhere ballpark between say $1.05 to maybe $1.10.

Sam Dubinsky

Okay. And just for clarification in cost structure, how much did your poly and wafer costs decline sequentially in 1Q? I guess on the wafer side blended, on the poly side how much did it quarter over quarter?

Ming Yang

So on the wafer side I think we said somewhere in the low teens, right?

Sam Dubinsky

In the low teens. Okay. And was there a big benefit from that external purchasing?

Ming Yang

What do you mean?

Sam Dubinsky

Was it from third party purchases? Is that a big reason why your costs declined or was it the in-house wafers a bigger contributor?

Ming Yang

It was primarily the in-house wafers, yes.

Sam Dubinsky

Okay. And what were your poly costs in Q1?

Ming Yang

The average maybe $60-70, something in that range.

Sam Dubinsky

And how do you see that in Q2?

Ming Yang

Q2, it’s difficult to predict depending on where the market ends up. It could be flat to down.

Sam Dubinsky

Okay. And just on the panel front, where do you see spot panel ASP today? I know there has been restraint. Is 1.05 euro a good market? I know that you guys are a new vendor. Are you pricing at that range or are you pricing above or below that?

Ming Yang

Again, the range is actually very wide. It depends on the customer, the different OEM customers have different build material for example. At the same time, it depends if it’s going to a system or different markets. So it’s anywhere right now say between 1.05 euro to maybe 1.10 euro or so.

Sam Dubinsky

Okay. And my last one is just in Q1 how much did your ASP for the cell business excluding towing, how much did they decline sequentially? Can you give me a range or a ballpark?

Ming Yang

Blended basis I think around very high single digit to around 10%.

Sam Dubinsky

Okay. Great. Thank you very much.

Operator

And our next question comes from the line of Jay Greenblatt representing Barclays Capital. Please proceed.

Jay Greenblatt

Hi. Thanks guys for taking my question. I just wanted to quickly ask about the back half guidance. Where do you see geographically the majority of these sales coming from?

Ming Yang

I think from multiple markets actually but certainly we believe up to the market restart in Italy I think Europe will recover. And then at the same time summer is typically the big insulation season.

And also we’re seeing very promising activity in the US particularly on the utilities scale project level. We’re seeing very significant amount of order increase for the market and that’s typically targeted for the second half of this year and the same for the China market as well. We’re also seeing purchasing activities in this market and that will be primarily in the second half of this year as well.

Jay Greenblatt

And for the US and China market is that primarily modules or are you shipping cells to those markets?

Ming Yang

China we do actually currently primarily cells. But for projects it would be both cells and modules. And US would be primarily modules for utilities projects.

Jay Greenblatt

Understood. And did you - I think I might have missed this and I apologize. Did you give you a full year guidance number for modules?

Ming Yang

Right now preliminarily between 500-600 megawatts for the year.

Jay Greenblatt

Okay. Great. And then for the second half of the year, I know it’s still a little early. But have your customers given you any indication of what they’re looking to pay for in terms of module ASP? I know you mentioned the low end of the 1.05 euro. Could that get as low as 0.95 euro or does that seem too low to you?

Ming Yang

I mean anything is possible in this market, right? But right now that sounds very low. We have not provided pricing that low to our customers.

Jay Greenblatt

Great. Thanks.

Operator

We are now approaching the end of the conference. I would now turn the call over to Ming Yang, Vice President of JA Solar for closing remarks. Please proceed.

Ming Yang

Thank you everyone for joining us today. We appreciate your interest in JA Solar. If you would like to arrange a meeting with us or if you have any further questions please contact or email our IR firm Brunswick Group and they will be happy to help you.

Their contact info is on today’s press release. Thank you again for your continued support and we look forward to talking with you in the coming months.

Operator

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

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