Executives
Paul Combs - VP, Strategic Planning
Gareth Kung - CFO
Ping Peter Xie - President and CEO
Sung Sunli - CSO
Analysts
Kelly Dougherty - Macquarie
Sam Dubinsky - Wells Fargo
Jesse Pichel - Jefferies
Dan Ries - Collins Stewart
Edwin Mok - Needham
Josh Baribeau - Canaccord
Brian Gamble - Simmons & Company
Lou Young - UBS
Rob Stone - Cowen & Company
Paul Klegg - Mizzuo
Solarfun Power Holdings Co. (SOLF) Q1 2011 Earnings Call May 24, 2011 8:00 AM ET
Operator
Good day ladies and gentlemen and welcome to the Q1 2011 Hanwha Solarone Company Limited earnings conference call. My name is Steve and I will be your operator today. At this time all participants are in a listen only mode. We will be conducting a question and answer session towards the end of today’s call.
If at any time you require operator assistance please press star followed by 0 and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Paul Combs, Vice President of Investor Relations.
Paul Combs
Thank you Steve and good morning everyone and welcome to our call. Joining me today are my colleagues Peter Xie, our President and CEO, Gareth Kung, our CFO and Sung Sunli, our CSO. Gareth will open with some review and highlights of the first quarter followed by Peter who will discuss our key initiatives for the remainder of 2011 and give a brief outlook for the second quarter and remainder of the year.
Before we continue I need to remind you that you can download a PowerPoint file that will accompany this presentation on our Web site. If you are on our mailing list you should have received this file in conjunction with our earnings release. I need also to take a moment and remind you of our Safe Harbor policy, which is also included in the earnings release and posted in its entirety on Slide 2 of the slide package. Now Gareth will walk us through the details of the 2011 first quarter.
Gareth Kung
Thanks Paul. Good morning everyone. Hopefully you have had the opportunity to review our release before the cal. I’ll provide some summary comments here with focus on the key financial metrics. (Unintelligible) - the presentation my comments cover Slides 3-7, Slides 3-5 outline the financial highlights of the first quarter 2011.
Revenue for the first quarter was up 3.9% from the prior quarter reaching 335.2 million. ASP decreased as forecast to 1.71 as compared to 1.79 reported for the fourth quarter. Total shipments including module processing services reached 248.5 megawatts in the first quarter, above our forecast range of 235-245 megawatts and showed good quarter over quarter growth of 13.6%.
We are particularly pleased with this accomplishment when considering the relatively tough demand environment for the industry encountered for much of the quarter. Module processing services accounted for approximately 11% of total revenue for the first quarter. As illustrated in the pie chart on Slide 4 you can see that shipments to Germany picked up. Italy was impacted by the incentive change, intensified by incentive change uncertainties.
And new growth markets like China and the US remain vibrant. We continued to do well in Australia where we have maintained a relatively strong brand for some time. (Note better) shipments to the Netherlands at 10% (unintelligible). The Netherlands is a popular port destination for many of our European customers.
Based on shipment data and excluding module processing services for the first quarter of 2011 Germany increased from 35% to 39% of shipments compared to the fourth quarter last year. Italy declined from 19% to 11%. China and the US accounted for 9% and 10% of shipments respectively. (Unintelligible) - market were Australia at 10%, France 6% and Netherlands at 10%.
Gross profit totaled 54.5 million for the first quarter and was down 16.7% quarter over quarter due primarily to lower ASP and a gross margin of 16.3% as compared to 20.3% of the previous quarter. Slide 6 outlines our cost structure. Raw materials along the value chain remain relatively tight and increasingly more expensive, especially for core silicon. This accounted for the increase in the blended COGS award excluding module processing services from $1.41 in the fourth quarter to $1.43 for the first quarter.
Blended COGS into account the production costs, core silicon and non-silicon, using internal wafers and internal cells as a cause of external resource wafer and cell platform costs. For modules made with internal wafers and cells we experienced an increase in the manufacturing cost per watt to $1.27 from $1.20, again primarily due to higher silicon costs and additional other raw materials, particularly (silver paste).
For the first quarter we averaged a positive cost of approximately $73 per KG, up from $67 per KG in the fourth quarter. Portfolio prices have begun to ease in second quarter and we expect the trend to continue into the second half of 2011. Operating profit totaled 30.8 million with operating margin contracting some in the first quarter to 11.6% from the 14% recorded in the fourth quarter of 2010. Note that operating expenses as a percentage of revenue were likely lower than most of you would model and what we have previously indicated at 4.7% in the first quarter.
Lastly due to reversal of (accrual), this is largely due to reversal of accrued operating expenses. We expect this category will return to a more normalized level of 6-7% for the remainder of the year as we continue to invest in strengthening our brand, distribution and research and development. Interest expense remained flat at 6.4 million.
We experienced a net foreign exchange loss of 5.6 million. Our hedging program successfully reduced but not eliminated the impact of rising euros during the quarter. On a non-GAAP basis net income for the first quarter was 23.6 million or 20 cents per basic APS, down 45.7% as compared to 38.3 million and 52 cents for the fourth quarter respectively.
Note that we previously reported (trend) expense in the non-GAAP EPS for basic APS for the fourth quarter, which included the high tax reassumptions. The 52 cents number now used for the fourth quarter reflects a more normalized tax rate of approximately 15%. On a US GAAP basis net income attributable to shareholders for the first quarter reached 22.8 million as compared to 56.2 million in the fourth quarter of 2010.
GAAP EPS per basic APS was 27 cents versus 76 cents in the fourth quarter and on a 30.5% increase in the average shares outstanding. Shifting to balance sheet summarized in Slide 7, as of March 31, 2011 we have a cash balance of 207 million, down about 40 million from the prior quarter as we began to invest in higher manufacturing capacity.
Net working capital totaled 379.7 million. The company increased its outstanding short-term debt during the quarter to 115.8 million. We have accessed existing bank rate facilities in order to fund 2011 capital programs. Accounts receivable rose to 263 million in line with shipment and revenue trends and extended payment terms required to meet customers’ demand during the uncertain market environment.
Days sales outstanding increased from 55 days in the fourth quarter to 62 days this quarter. Inventories increased 31 million during the quarter to 151.3 million. Days inventory outstanding increased slightly from 40 days in the prior quarter to 44 days in the first quarter. Capital expenditures for the first quarter were 94.4 million. We anticipate spending approximately 450 million in capital spending during 2011.
The combination of cash on hand and new debt facilities currently being pursued will be sufficient to fund these expenditures. Our balance sheet remains strong with net debt to equity ratio of only about 7%. This puts us in a strong position to fund our future growth. Peter will focus on the current business trends as well as areas of management focus for the remainder of 2011. He will also provide outlook for 2011 second quarter and the full year. Peter.
Ping Peter Xie
Thanks Gareth. As Gareth noted, we were quite pleased with our results in our unit growth in the first quarter. We think this validates our quality product, widespread credibility and the improving brand. There is no question that overall global demand was reduced in the fourth quarter and we have seen the challenge of overcoming this in other companies’ results throughout the solar value chain.
Difficult winter weather in Europe, uncertainty regarding Italy’s incentive structure and the inventories building in many channels of distribution all contributed. Slide 8 outlines our brand initiatives for 2011. There are really three important themes that will move the needle towards improving revenues and profitability for us so that is where we will focus our attention for today.
These are higher volumes, increased capacity and lower processing costs. They are interrelated. For example, higher capacity allows larger shipment volumes and thus more vertical integration and reduced costs. Let’s start with an update on our capacity expansion. We are on track with previously indicated expansion plans and look forward to a meaningful expansion in capacity beginning in the third quarter.
Turning to Slide 9, we are more closely aligning our internal wafer, cell and the module capacity as the year progresses. This will largely eliminate our need for purchasing external cells and meet our incremental demand for wafers internally. As you can see from our most recent financials, we have a potential 12 cent per watt reduction in cost through vertical integration. Currently the gross margin of our own in-house produced module is around 25%.
So you can see the potential going forward. The other important benefit to larger skill is the ability to capture higher shipments. The second quarter now underway is a case in point. Demand in April and May was slow due to the Italian incentive uncertainty and the customers pushed out orders. Now as demand accelerates into June in the final months of the quarter, we are operating our factory at full utilization.
Yet you can only produce 90 megawatts per months, limiting our full quarter shipments for the second quarter to around 200 megawatts. We will be in a much better position beginning in the third quarter to capture higher shipments as demand continues to rebound. We anticipate a resumption of growth in the given market as module prices are now at levels making IRs once again attractive as well as continued strong demand for newer, large potential markets like China and the US.
The North American market could exceed 25% of shipments excluding module processing in the second quarter. Our aggressive investment in personnel, brand and the growing availability there is now bearing fruit. We remain extremely optimistic about the longer term prospects in China and believe as module prices continue to trend lower and demand continues to grow, the Chinese government will eventually institute a built in tariff program leading to a substantial increase in market size.
We are beginning to see orders from new markets as well like Greece, India, Thailand and Turkey. We anticipate our first shipments to Hanwha’s downstream business unit later this year. Hanwha is actively nurturing projects in new markets like Thailand and the Philippines. In addition, we have started working closely with the Hanwha Treaty Unit, which has a global presence.
Having this entity as our all source sales team, we will expand our geographic reach and increase our customer base as well as drive higher shipments. We have already started shipment through this quarter through Hanwha Treaty. We understand the importance of driving non-poly processing costs down particularly in this environment of rapidly declining prices in industry available capacity.
We have some encouraging news on that front. Our non-poly processing costs for a standard multi module in Q1 were 77 cents as compared to 78 cents in the prior quarter. Our plan is to take this cost down to the lower 70s by year end. Here are the factors driving that progress as highlighted on Slide 10. Probably the most immediate positive impact will begin in the third quarter as we begin to recycle slurries used in our webbing operations.
Previously we only recycled 50% of our slurry needs and (unintelligible). Beginning in the third quarter we will take a significant amount of slurry recycling in-house and reduce our slurry needs by over 25%. This has a significant positive impact on processing costs, we estimate as much as 2 cents per watt.
There is the potential to capture reduced costs in the module processing area as we treat our supply chain, seek alternative and many times local suppliers and use substitute products for the same performance at a lower cost. Our initiative to convert 160 megawatts of existing cell line to selective emitter technology is nearing completion. Through higher cell efficiencies we are currently reporting 86% per module, to reduce our processing costs by as much as 5%.
Much of our new capacity will be equipped with the selective emitter technology. Finally, we believe we may be on the threshold of a major technology breakthrough, which would result in a significant reduction in silver paste usage. All of the four above mentioned initiatives are real and active. We remain confident that combined we will achieve our goal of non-poly processing costs approaching 70 cents by year end.
Now let me conclude with some specific targets for 2011 second quarter and for the full year as shown on Slide 11. We see second quarter shipments increasing to approximately 200 megawatts. We believe the second quarter will be the low point for gross margins in 2011 as we expect raw material input costs to further decline in the second half. Non-poly processing costs will improve as I outlined earlier and to benefit from our increased vertical integration as new capacity comes on stream.
For the full year we are maintaining our shipment guidance of between 1-1.2 gigawatts, up a minimum of 25% year over year. That concludes our formal comments and we would be pleased to answer any questions you may have. Operator.
Question and Answer Session
Operator
Certainly sir. And ladies and gentlemen, if you would like to ask a question you may do so by pressing star, 1. If your question has been answered or to withdraw your question, star, 2. (Operator instructions) Your first question comes from the line of Kelly Dougherty with Macquarie.
Kelly Dougherty
Hi guys. Thanks very much for taking the question. Just wanted to confirm for the second quarter guidance, it’s not a function of the demand not being there. It’s more a function of running the facility at lower utilization in April and May and then coming back up to full utilization in June and not being able to produce more than 200 megawatts. Is that the way to think about it?
Ping Peter Xie
Yes, you are correct because if you look at our capacity in the first half, our capacity nearly remained flat. Most of our capacity will start coming online towards the end of Q2 and the beginning of Q3. So the month of June we just don’t have enough capacity.
Kelly Dougherty
Okay. But you were able to ship more than 200 megawatts in the first quarter. Is it just that the lines - you ramped down utilization in April and May because demand was slower so you didn’t want to build too much inventory?
Ping Peter Xie
Correct because we saw the price was dropping in terms of the import poly cost. We intentionally turned down our factory a little bit.
Kelly Dougherty
Great. Thanks. And then if you could just give us a little bit more color on your margin expectations for the second quarter, I know you said that you think things should bottom out in the second quarter and then improve in the third as you increase integration. And you have these other initiatives but any kind of quantification of where you think we can go from a margin perspective in the second quarter? Kind of comment on ASPs, what you think poly prices will do, things like that.
Gareth Kung
Yes. Just to give you more color on the gross margins this year in Q2, it’s going to be at the mid to low teens in Q2. The main reason for that is because actually we expect about high teens reduction or decline in the ASP. But at the same time we have some high cost inventory that will be used up in Q2 that actually lowers gross margin in the second quarter.
But as we look forward to Q3 because as we see the use of our high cost inventory and with the current market trend in the market prices for the raw material costs, we expect actually that in Q3 our gross margin will recover to high teens.
Kelly Dougherty
Great. Thanks. Just one quick clarification - the high teens decline in ASP that is because of the high cost inventory or you think?
Gareth Kung
No. You may not have heard correctly. What I was saying is that the ASP decline in Q2 is about in the high single digits. I’m sorry I said it wrong in the first place.
Kelly Dougherty
Okay. Great. So high single digits and then the inventory cost is on top of that or it’s in the high single digits because of the inventory?
Gareth Kung
I think in the second quarter you have a high single digit decline in ASP and cost, there is some decline in the same quarter but it’s not much because we have some high cost inventory, which is why resulting in a lower gross margin in the second quarter.
Ping Peter Xie
Yes.
Gareth Kung
As we use up the high cost inventory in the second quarter and we have a lower cost of raw material in the third quarter, we’re going to see our margins recover to high teens.
Kelly Dougherty
Great. Thanks. Just one more on that and then what do you think about for poly costs? You’re at $73 in the first quarter. How do we think about that in the second quarter?
Ping Peter Xie
Yes. So second quarter I think right now we’re seeing the poly cost is down below $70 and we expect that will continue to move down. And just further comment to what Gareth just said earlier, if you look at poly and the wafer price coming down, it isn’t really coming down until end of May.
And so we would expect the cost of poly would continue to go down maybe towards $50-ish near the end of this year.
Kelly Dougherty
Thanks very much guys.
Operator
And your next question comes from the line of Sam Dubinsky with Wells Fargo.
Sam Dubinsky
Hey guys. A couple of quick questions - where are cell and wafer spot prices at today?
Ping Peter Xie
Sam, the cell price now we actually see anywhere between 85-90 cents. The wafer price is below 70 cents depending on which venders and we are between 65-70 cents.
Sam Dubinsky
If pricing continues to decline for these inputs or even stays at these levels, will you reevaluate your vertical integration plans?
Ping Peter Xie
So if you look at the vertical integrations, I think that’s a very good question. That pretty much depends on what the poly cost is at. If the poly cost is at $50, I think it’s still cheaper making your wafer internally than buying it. We think it’s very likely that poly will reduce substantially in cost.
Gareth Kung
And this is in combination with the fact that actually we are going to first increase our non-silicon cost for the wafer in operations in the third quarter.
Sam Dubinsky
Got you. And then just in terms of the Italian market, I’m not sure if I heard this in the commentary but have you seen a noticeable pick up yet in the demand with the new subsidy plan?
Ping Peter Xie
Yes. Definitely we are seeing orders coming just from that market. In April and May we’re seeing orders pushed out. The customers put their orders on hold. Now I think starting the end of May we’re starting to see orders coming back from Italy.
Sam Dubinsky
Is it the same magnitude as before or is it much more of a moderate pace? And I have one last question.
Ping Peter Xie
So as you see from our Italian exposure, we’re typically not very high in Italian exposure. So we didn’t see tremendous orders from Italy.
Sam Dubinsky
Okay. And my last one is can you just talk about price ranges on the market? How does your pricing compare to let’s say a tier three vender? Is there a lot of inventory out there of lower quality panels or is your pricing pretty much in line with the market?
Ping Peter Xie
Well, I think we’re priced pretty much in line with the tier one guys. The tier three guys, the price can be anywhere and the price we see for the amount of inventory especially for the tier two and tier three guys, mostly tier three guys because they are not very bankable. So the only question is really the price especially in China. We see recently there are several Chinese programs as an order of 700 megawatts but we see the price is coming very low prices.
Sam Dubinsky
Okay. Thank you.
Operator
And your next question comes from the line of Jesse Pichel with Jefferies.
Jesse Pichel
Hello gentlemen. Thanks for the question. What was your module processing megawatts for first quarter and what is your outlook for second quarter? And I have a follow up.
Gareth Kung
For the first quarter it’s about 70-75 megawatts.
Jesse Pichel
And for 2Q?
Gareth Kung
2Q we are expecting about 45 megawatts.
Jesse Pichel
45 megawatts. So you have a much better inventory days than your peers and you had discipline to ramp down your factory thus far in 2Q. But your 2Q guidance is much lower than your peers’ in terms of they’re guiding for 30% plus sequential growth.
Do you think that not having that inventory will put you at a disadvantage relative to the second quarter pick up we’re seeing in Germany and Italy? Or can you just walk us through your decision to ramp down the facility versus building inventory for the pick up and gaining share?
Gareth Kung
I think it’s really a gamble of what you decide to do. We look at our capacity, our second quarter is flat with first quarter. In April/May there is so much uncertainty, right? So I think we just didn’t want to gamble too much and that’s our decision. I think most of our capacity building started in Q3 we believe we took a disciplined approach. In the long run you’re probably going to win. In the short term it’s hard to tell.
Jesse Pichel
That makes sense. And if I could just fit one more in, one of the rationales for the Hanwha investment aside from poly silicon was potentially developing projects off the Hanwha balance sheet. And I’m wondering have you seen any development of a pipeline there? And when do you think there might be some synergies realized from that?
Ping Peter Xie
Absolutely. We are seeing the pipeline being developed. Actually we’ve already started shipping some modules to that pipeline. So right now I don’t see significant numbers in our 2011. It’s probably in the high single digit percentage point this year. Next year we’ll see a more meaningful number coming from that downstream development.
Jesse Pichel
Thank you very much.
Operator
And your next question comes from the line of Dan Ries with Collins Stewart.
Dan Ries
Hi. Thanks for taking the call. I’m curious about the accounts receivable rise. While it wasn’t too bad, certainly we have seen worse. I’m wondering if it was spread out among many geographies or if it were specific to certain markets. And maybe could you say if any, what portion of that might be more than 90 days at this point? And what I’m curious of is did Italian buyers extend their accounts receivable for a specifically longer time than others?
Gareth Kung
Yes. I think the increase in the days sales outstanding is pretty much spread out to all the regions. So far actually we see as far as Q1 is concerned actually we don’t have many cases whereby the payment term is more than 90 days. But as the year progresses we see actually the payment term to be extended further.
Ping Peter Xie
Yes.
Dan Ries
And are your terms to customers similar in all geographies or do you have some geographies that get 60 days, some get 45 days, some get 75 days?
Gareth Kung
Actually that depends on customer by customer. But in terms of the payment terms, we don’t see on average basis much difference between regions.
Ping Peter Xie
And Dan, it’s already a case by case, it’s customer specific. So we don’t really differentiate between regions.
Dan Ries
Maybe a real quick one, your short-term debt rose. Has Hanwha’s minority stake impacted your access to borrowing or your borrowing costs at all at this point?
Gareth Kung
Actually I think the balance sheet with Hanwha increased our access to bank borrowing because other than in the past we relied very much on the Chinese banks. Right now actually we have developed a relationship with some of the Korean banks that really helped us in terms of getting more assets to the banking facilities.
Dan Ries
And are those similar interest rates?
Gareth Kung
Yes.
Dan Ries
Thanks very much.
Operator
And your next question is from the line of Edwin Mok with Needham.
Edwin Mok
Hi. So can I ask you first in terms of geographic mix in the first quarter Germany becomes pretty big and I guess it’s a two-part question. First is how do you look at the Germany market in the second quarter? And the second thing is for the full year how do you think your geographic mix could change as you go through the second half of this year?
Ping Peter Xie
Yes. For the second half of this year we would expect US becoming a more significant portion of our business. As I said earlier, we have that second quarter potential shipment from the US can be 20-25% in the second quarter. Our expectation is US probably over the second half of full year probably around 15% or so and China may be another 10-15% and ROW is about 20% and Europe still maybe 50-55.
Gareth Kung
Just to comment a little bit on the German market, which you asked, actually with the decline in the module pricing we see that for many of the installs in Germany they install modules at a pretty attractive IR at this point in time. So we do expect actually the German market to recover in the very near future. In fact, I think based on the discussions we have with the sales team in Europe, we do see pick up in our shipments to Germany.
Edwin Mok
I see. Great. That’s very helpful. And then just on the increase in total produced wafer costs from $1.20-1.27, I was wondering is it possible for you to quantify how much of that increase was polynization versus non-poly silicon costs? And can you minus what is your (grand total consumption)?
Gareth Kung
Our grand total consumption is about 6 grams (unintelligible) - and what was the first part of the question? I’m sorry, I think I lost that.
Edwin Mok
Yes. So the first part of the question is if you look at the 6 grams that you just mentioned and calculate it, it seems like there are maybe around 3 cents of the increase come from non-silicon costs. Is that the majority of the silver or is it any other thing that causes the increase of non-silicon costs?
Ping Peter Xie
That mostly is because of silver increase and also in the first quarter I think we also saw some other material increase mostly because of like a glass and aluminum. Those are real material increases. I’ve seen glass coming down recently but in the beginning I think we’ll see all the materials increase in price.
Gareth Kung
Yes. I think the other factor is actually the mix between the OEM modules and the standard modules. Actually the OEM modules cost a little higher than standard modules. So with changing the mix that also has an impact on non-silicon costs.
Edwin Mok
I see. Very helpful. And sorry, one quick follow up, when I look at your wafer capacity for the year and target is actually higher than what you guys projected last year, is that just coming from increased efficiency or you guys are actually adding new lines or increasing your plan to add new lines for wafer?
Gareth Kung
That’s a very good question. For the wafer we are looking at the generation six machines. We didn’t really add new lines for generation six machines, which take more materials. So that automatically gives you capacity to one gigawatt. And the wafers, I think we added incrementally a small amount of lines to match the wafer capacity.
Edwin Mok
I see. Great. That’s all I have. Thank you.
Operator
And your next question comes from the line of Josh Baribeau with Canaccord.
Josh Baribeau
Thanks. This is actually along the same lines as the other question in terms of the cell increase. How much of that is better throughput, better yield and better conversion efficiency for the selective emitter? And how much is just raw equipment?
Gareth Kung
For the sales increase the plan we have here is mostly through this raw equipment increase.
Josh Baribeau
Okay. And can you remind me is everything you’re adding going to be selective emitter? Or are you retrofitting lines? Or is it a combination of the both?
Gareth Kung
So we are doing everything we have can be retrofitted to kind of selective emitter compatible, right? So as we start implementing the line at the beginning, it’s probably not going to be selective emitters because the older equipment we kind of placed orders at the end of last year. So selective emitter we’re actually testing them out in the first half of this year. So as soon as we prove them and run them in our factory then we’re going to start retrofitting our new lines.
Josh Baribeau
Okay. Great. And then just one follow up, can you also remind us your percentage of contracted versus spot, poly and wafer and how those contracts look in terms of what is contracted, how they look in terms of how often prices are reset or what they’re based on?
Ping Peter Xie
Yes. Our contracted volume towards our niche of poly this year is about 60-70%. So most of them are kind of not fixed price but fixed volume so you can negotiate the price as you go on a quarterly or maybe monthly basis. On a wafer level I would say it’s probably much less. Wafer is in terms of contract volumes, probably around 50%-ish.
Josh Baribeau
Okay. Great. Thank you.
Operator
And your next question is from the line of Brian Gamble with Simmons & Company.
Brian Gamble
Good morning guys. On the lowering your utilization to take us back to one of the questions from earlier, was it that you didn’t want to hold the inventory? Were you uncomfortable at the higher inventory levels that you had prior back in 2010 and that’s why you didn’t want to bring inventory in? Or was it strictly due to current manufacturing costs or your current cost of poly and not wanting to put higher cost inventory into the inventory? So I’m just trying to figure out if it’s the raw level that you’re worried about or just the cost that you would have to put it in at.
Gareth Kung
I think it’s both. We’re managing our inventory very carefully so we have an internal inventory target of inventory days and turnovers. And also during rapidly changing environments we watch that high cost of inventory very carefully. So as soon as we see the price start cracking we’ll watch very closely if it can consume inventory or not. If it cannot and we have uncertainty of whether we can consume an inventory then we’ll put the breaks on the factory to wait until the cloud clears.
Brian Gamble
Great. And then you mentioned the Hanwha relationship would help the pipeline as far as development projects in the small single digits this year, more meaningfully next year. Have you seen other tangible benefits already from the relationship? And how do you see that progressing for the rest of the year?
Ping Peter Xie
Yes. There are several benefits, one is from the downstream as I said earlier. We are already shipping volume to our downstream pipelines. And also secondly, we are shipping volumes through the Hanwha Treaty sales channels to newer regions and new countries.
And further on the mature side we are benefitting from buying a little material, for example (unintelligible) from Hanwha Chemicals. And also we’re testing (new) machines in our factories from the Hanwha (P&M). They are actually manufacturing manufacturing machines for us. So we expect that will give us further cost benefits in terms of our capacity running and also have a very close relationship working with the process equipment manufacturers.
Now I think most importantly with Hanwha is helping us on the customer side with brand and bankability because many of our customers view us as very bankable and you have a big company to back you up for 25 years.
Gareth Kung
And I’ll add actually I mentioned earlier that with the Hanwha relationships we are able to have better access to Korean banking facilities. That is all positive for us.
Brian Gamble
Great. And then lastly real quick on housekeeping, tax rate pretty high during the quarter relative to where it was last year. What should we be modeling for the rest of the year?
Ping Peter Xie
Actually for Q1 we have some exchanges which we incurred overseas that we cannot claim deductions. For example, we have some hedging losses overseas that we cannot claim deduction in China. That should result in a higher tax rate in Q1.
Brian Gamble
And for the remainder of the year it should be lower?
Ping Peter Xie
Yes.
Brian Gamble
To what degree?
Ping Peter Xie
We think that right now we should be looking at about 20%.
Brian Gamble
Great. Thanks guys.
Operator
And your next question comes from the line of Lou Young with UBS.
Lou Young
Hi. Can you hear me?
Ping Peter Xie
Yes, very clearly.
Lou Young
Are you purchasing any external cells on June second quarter? And also what is your presumed cost of wafers compared to your blended wafer costs for the second quarter?
Ping Peter Xie
Second quarter we did purchase about 10 megawatts of external cells and that was because that was in the beginning part of the quarter when the demand was strong. That’s why we committed to purchase external cells. In terms of the wafer costs we still see relatively high wafer costs in first quarter because there was some high inventory.
Right now we’re looking at the wafer costs in the same quarter to be about 80-85 cents per watt. But as mentioned, as we use up this high cost inventory in the same quarter we see our raw material costs to come down very substantially in Q3.
Lou Young
And in terms of your non-silicon costs you talk about targeting 70 cents by the end of the year. Can you help us to think about how much has come from say consumable prices or how much is coming from economy of scale from your integration?
Ping Peter Xie
Okay. So a lot of them actually are coming from the consumable costs like the top ten materials coming from slurries, coming from silicon carbide, coming from the selling wires and EVA back sheets, junction box - all that. And I think as we start running capacity we also see a benefit of the scales as they start talking to the suppliers. I think just recently we’ve actually seen some substantial movement on suppliers in terms of pricing and raw materials.
Lou Young
Last question I have from me is if you look at the inventories can you break it out into finished goods materials and work in progress?
Gareth Kung
Yes. Just looking at the numbers right now for the inventory at the end of Q1 most of these are in the work in progress.
Lou Young
Okay.
Operator
And your next question is from the line of Rob Stone with Cowen & Company.
Rob Stone
Good evening gentlemen. I wanted to first focus on your comments on silver and your program to reduce the cost of silver paste. Can you say what is the cost of silver paste per watt approximately now? And then how much of a reduction this new program - is that something related to selective emitter or any other color please?
Gareth Kung
Yes. I think the silver cost right now is maybe about 7 or 8 cents per watt. Our thinking is if this program we have is successful our plan is we can maybe shave out probably a reduction of 40-50% of silver cost. That’s the thinking we have. In terms of selective emitter, I think that’s mostly coming from efficiency improvement but it’s different from what we have in mind for the silver reductions.
Rob Stone
So is that replacing silver with something else from metallization or just somehow using it more efficiently?
Ping Peter Xie
At this point I can’t say too much about it. But I think just by using it more efficiently it’s not enough.
Rob Stone
Okay. Finally, sort of a big picture strategic question - you mentioned that going forward you hope to become more balanced in terms of your vertical integration and reduce your outside purchases along the value chain. How do you see the market changing in the next year or two in terms of focus on your own branded products versus module processing and OEM services?
Ping Peter Xie
Yes. So we continue to see our own brand will grow much faster than OEM brand and module processing as we continue to push very hard our own brand with all the initiatives we have especially with the Hanwha brand and the advertising and marketing efforts we are putting into place in 2011.
We see that will grow at a very big time especially in the emerging markets like in the US and in China and in Asia. Like I said, our 20-25% shipment in Q2 to US, that’s mostly through our own brand and not through OEM relationships.
Rob Stone
So similarly along those lines, it sounded like the prices you were quoting on spot for wafers and cells would leave very little margin for a cell only manufacturer. Do you see this as part of an overall trend where the industry would be moving towards vertically integrated, owned brand players and eroding the position of a module only or a cell only business model?
Ping Peter Xie
From our perspective I think that module only or cell only type models are going to be a harder business to be in. But I think different people have different perspectives on the business models. Maybe they can tolerate different margins but from our perspective I think a cell only, module only, if you want to adopt that business model you have to accept lower margins.
Rob Stone
Okay. Thank you very much.
Operator
And your next question comes from the line of Paul Klegg with Mizzuo.
Paul Klegg
Hi. Thanks for taking my question. I was wondering if you could comment on the module processing business this quarter. It seems like it was sort of seasonally strong given the performance of the rest of the module sales in the quarter. And then can you talk about what the gross margins were on that business during the quarter?
Ping Peter Xie
We mentioned for the module processing in Q1 was about 60-65 megawatts. In terms of gross margin it’s pretty much close to our corporate average.
Paul Klegg
Close to your corporate average. Okay. That’s helpful. And then can you comment, I didn’t hear this well when you mentioned it in the prepared remarks. But the reversal of accrued expenses in the first quarter, could you repeat that? And does it have any effect on the subsequent quarters?
Ping Peter Xie
Yes. We had some reversal of the operating expenses provided for in the previous quarter. The impact is about 4-5 million. So actually if you back out this over accrual the OpEx for the quarter is about 20 million US.
Paul Klegg
Okay. And is that - can you - what was the explanation for the reversal? And do you expect to have any other impacts like this during the year?
Ping Peter Xie
This will be one time actually.
Paul Klegg
Okay. And what was the reason for the reversal?
Ping Peter Xie
Just some over provisions in the prior quarters that we decided to resolve.
Paul Klegg
Okay. And I’m sorry, housekeeping but this was already covered. You said 20% tax rate, is that for the remainder of the year or is that the full year tax rate including the first quarter?
Ping Peter Xie
We’re looking at it for the remainder of the year.
Paul Klegg
Okay. And then you mentioned German IRs a couple times on this call. I was wondering what are you seeing in German IRs after the step down if you were to use your modules for example on a project?
Ping Peter Xie
German IR, I think typical German is expecting IR around 8% and I think for business with the price down I would expect their number is actually going to be better than 8%.
Paul Klegg
Okay. Thanks very much.
Operator
And you have a follow up question from the line of Kelly Dougherty with Macquarie.
Kelly Dougherty
Thanks. Just two quick ones - how should we think about your interest rates trending? We have seen some increases in China but maybe you’re moving toward using more Korean financing. And then maybe if you could talk about the split between long-term rates versus short-term rates.
Ping Peter Xie
Yes. We do see the interest rate going up for the remainder of the year especially because the PROC have been tightening (their grip) in China. So right now in terms of funding for expansion we are in discussion with banks to secure more long-term debt.
Kelly Dougherty
And what would the interest rate differential be between your short-term debt versus your long-term debt?
Ping Peter Xie
It would be about 2%.
Kelly Dougherty
2%. So can you kind of give us an idea of the short-term interest rate you’re paying right now.
Ping Peter Xie
Okay. Right now we should also distinguish because we are trying to take on more US dollar borrowing as compared to PRB borrowings. So in terms of the long-term interest rate for the US borrowing and China is about 6%.
Kelly Dougherty
Okay. And then just one quick last one - can you help us think about you talked about selling more into the Chinese market. How did Chinese ASPs stack up relative to pricing in other markets? And do you think that will change at all as we move throughout the next few quarters?
Ping Peter Xie
That’s a very good question. I think at the beginning of this year or late last year we see the Chinese prices on par with other markets. But especially towards the end of the second quarter we see actually Chinese prices clashing. What we see mostly are some of the bids.
We’re seeing a lot of the tier two and tier three players are being invited to the bidding. The price coming from the tier two and tier three guys are very, very low compared with the typical tier one guys. So we expect there is probably some near term desperate movement in terms of dumping inventories.
Kelly Dougherty
Does that at all change how you think about from a megawatt perspective what you think about shipping into China this year?
Ping Peter Xie
Right now I think that is probably very near term. Those prices we are seeing are not sustainable because some of the prices we see are just below cost.
Kelly Dougherty
Okay. Great. Thanks very much.
Operator
And you have a follow up question from the line of Dan Ries with Collin Stewart.
Dan Ries
Hi. The OEM business, which I mean not the processing business but the actual OEM business, could you say what portion of revenue that was? And if the trends in that business were any different from the overall, was that more stable, less stable, more price pressure, less price pressure?
Ping Peter Xie
So Dan, traditionally our OEM business is pretty stable. I think that actually in Q1 we also see a strong demand from the OEM business. I think in Q2 we see some weakening of the OEM business in Q2. Over the long run we see the OEM business is going to be mostly concentrated in Europe probably being a stable business. But the margin is probably around similar to our standard module as well.
Dan Ries
Are you adding new customers in that business or just sticking to the customers you have?
Ping Peter Xie
We are in active discussion with quite a few customers especially recently. So we are kind of carefully selecting our partners so it’s somebody with a stronger brand and with also kind of bigger size. Actually we don’t take OEM for small volumes. We don’t take just any OEMs. So if it’s a small volume or not a sizeable business we don’t take them because our brand is probably stronger than some of the so called OEMs.
Dan Ries
Thank you very much.
Operator
That concludes the Q&A portion of today’s conference. I would like to turn the call back over to Mr. Paul Combs for any closing remarks.
Paul Combs
Great. Thank you Steve. Before completing the call I’d like to highlight our investor meeting May 9 in Munich during InterSolar for those investors attending the show. Slide 12 in your pack outlines the details and location. We hope to see many of you there. Thank you and that concludes our call.
Operator
And that does conclude the presentation today. You may now disconnect. Have a good day.
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