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Executives

Rory Macpherson – Director, IR

Dr. Zhengrong Shi – Chairman and CEO

Andrew Beebe – Chief Commercial Officer

David King – CFO

Analysts

Min Xu – Jefferies

Tim Arcuri – Citi

Robert Stone – Cowen & Co.

Sanjay Shrestha – Lazard Capital Markets

Brian Gamble – Simmons & Co.

Dan Ries – Collins Stewart

Satya Kumar – Credit Suisse

Mehdi Hosseini – Susquehanna

Paul Clegg – Mizuho

Kelly Dougherty – Macquarie

Sam Dubinsky – Wells Fargo

Pavel Molchanov – Raymond James

Edwin Mok – Needham & Company

Josh Baribeau – Canaccord

Gordon Johnson – Axiom Capital Management

Shaun Parmar – Piper Jaffray

Suntech Power Holdings Co. Ltd. (STP) Q1 2011 Earnings Call May 25, 2011 8:00 AM ET

Operator

Good day, ladies and gentlemen. And welcome to the First Quarter 2011 Suntech Power Holdings Company Limited Earnings Call. My name is Modesto [ph] and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

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. Rory Macpherson, Director of Investor Relations. Please proceed, sir.

Rory Macpherson

Thank you. Hello, everyone. And welcome to Suntech’s first quarter 2011 earnings conference call. My name is Rory Macpherson, Suntech’s Director of Investor Relations.

On the call today, Dr. Zhengrong Shi, Suntech’s Chairman and CEO, will give an overview of our performance and major initiatives; and Andrew Beebe, our Chief Commercial Officer, will discuss sales and markets. We are pleased to introduce you today our new Chief Financial Officer, David King, who will summarize our financial performance.

During this conference call, we will make certain forward-looking statements in an effort to assist you in understanding the company and its results. The forward-looking statements will be made under the Safe Harbor provisions of the U.S. Private Securities Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, Suntech’s future results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our earnings release issued today and our SEC filings. Suntech does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

To enhance our presentation of information and data during this conference call, we have provided a set of PowerPoint slides for your reference. This presentation is posted on the main page of the Investor Relations section of our website.

We have allocated one hour for the conference call and will endeavor to fill as many questions as possible within that timeframe. Please limit questions to one question and one follow-up so we can try to speak with everyone.

As a reminder, this conference call is being recorded and the webcast replay will also be available on the Investor Relations section of our website after this call. Please make note that all figures mentioned during this conference call are in U.S. dollars unless otherwise specified.

I will now turn the call over to Suntech’s Chairman and CEO, Dr. Zhengrong Shi.

Dr. Zhengrong Shi

Thank you, Rory. Hello and thank you for joining us. In the first quarter of 2011 Suntech performed well despite the challenges presented by the policy uncertainty in Italy and the seasonality, especially in Germany.

The highlights of the quarter were, first, a 280 basis point increase in gross margin from the fourth quarter of 2010, which was driven by the increase in internally produced wafers and second, our planned sales diversification between different geographies which close to 50% of revenues generated from markets outside of Europe. This included an increase in shipments to China, which represented 8% of total revenues, compared to 4% in the previous quarter.

Shipments were up 63% year-over-year. However, due to Italy and the seasonality, they were around 3% lower than the fourth quarter of 2010.

Revenues were $877 million, up 49% year-over-year and a gross margin increased to 19% from 16.2% in the fourth quarter of 2010. We generated net income of $32 million or $0.17 per diluted ADS.

Now, I will give update on our key operational initiatives. Our recently acquired silicon ingot and wafer slicing facility is now fully integrated and operating smoothly. We expanded our installed wafer capacity to 1000-megawatt by the end of the first quarter, we’re ahead of target of 800-megawatt.

The lower cost of wafers produced in this facility was the primary reason for our gross margin improvement, despite lower ASP. We are on track to achieve 1.2-gigawatt of wafer capacity later this year, which will represent 50% of our total module capacity.

In addition to the lower cost of internally produced wafers, we also benefit from the recent downward trend of both polysilicon and our silicon wafers that have accelerated over the past month.

Our JV cell facility added 400-megawatt of capacity by the end of the first quarter taking our total sale and module capacity to 2.2-gigawatt. We are on track to achieve 2.4-gigawatt of installed capacity by the middle of the year.

On the technology front, we are on plan with the production ramp of Pluto power cells and modules. In addition to delivering superior power per square inch, the Pluto modules have showed exceptionally durability in good quality testing.

We have subjective Pluto panel to highest risk combined cycle tests way above the test criteria stimulated by the IC and UA quality standards. The results have been impressive. We are on track to ship 200-megawatt this year and we have scale our product sales and our deliveries across Europe and we’ve introduced Pluto to the Americas in the second half of the year.

Now, I will provide update our investments in the Global Solar Fund. In 2010, GSF invested companies completed construction of 105-megawatt of solar project in Italy. Of these, roughly 80-megawatt have been connected to the grid and are receiving the 2010 feed-in tariff, the remaining 25-megawatt target to be connected by the end of June as per the same actual decree. We will provide further update as we proceeds through this process.

Finally, before I turn the call over to Andrew, we are very pleased to introduce our new Chief Financial Officer, David King, who joined Suntech last month. A seasoned Executive, David was formerly the CFO of Tetra Tech, a leading engineering and construction provider for the resource management, energy and infrastructure market.

He brings all the right elements to Suntech, expansive financial credentials, strong public company background, a global business perspective and the dedication to sustainability and social responsibility programs. He is already proving to be a valued asset to the company and we are pleased to welcome him as part of our global leadership team.

At this time, I will now turn the call over to our Chief Commercial Officer, Andrew Beebe, who will provide an update on global sales and marketing. Andrew?

Andrew Beebe

Thank you, Dr. Shi. We’ve all seen significant changes in the market since we last spoke in March. The nuclear disaster in Japan led to a reevaluation of the energy landscape in countries across the globe.

Over 250,000 people joined anti-nuclear protest in Germany and seven nuclear plants were shutdown. Italy introduced an expanded 23-gigawatt solar target by 2016 and discussions in China point to a lower nuclear goal and a higher solar target.

While there will be limited impact in 2011 demand these are significant signs that solar will continue to gain a more prominent role in the global energy mix in Japan and around the world.

Now turning to our performance, let me start with our ongoing geographic diversification effort. Diversification has been important to us for two key reasons. Firstly, it enables us to reduce power key risk associated with any one given market. And secondly, it supports our goal to increase share in some of the high growth markets in the Americas and what we call APMEA, the Asia Pacific, Middle East and Africa regions.

In the first quarter, 52% of our revenues were generated from European market, compared to 61% in the prior quarter. Revenues generated from the Americas were 18%, down from 19% in the fourth quarter and sales to APMEA generated 30% of our first quarter revenues up from 20% in the prior quarter. As we’ve discussed in the past, this shift has been a global strategy of ours for a number of years and we’re pleased with the progress.

Total shipments were up 63% year-over-year and roughly 3% lower than the prior quarter, compared to our previous expectations of stable shipments. The key reasons for this decline were the policy uncertainty in Italy and first quarter seasonality particularly weather in Germany.

Despite the reduction, we are confident that we gained market share during the quarter as various analyst’s estimate that the global panel shipments declined by more than 10% in the first quarter of 2011.

As we have discussed previously, this is what we expect in a period of slower demand and higher supply. When customers have the choice, they choose Suntech’s reliability, track record and technology. In a word, they choose our bankability.

Let me move on to a discussion of some of our key markets. As expected, over the past months competition has started to heat up in the industry as few European countries adjusted their subsidy program leading to tight project economics and a shift in demand from the ground to the rooftop.

In Italy, the markets fall due to policy uncertainty in March and April. So we are very pleased with the finalization of the fourth Conto Energia in Italy earlier this month. The 2016 target of 23-gigawatt is well above the previous target of 8-gigawatt, which gives a clear indication that the Italian government supports the continued rollout of solar energy.

The incentives are designed to stimulate the rooftop market and we are already seeing a pickup in demand. Our partners with the largest rooftop installers, our partnerships with the largest rooftop installers and the value added resellers in Italy, mean that we are well prepared to address this market segment.

The German market will face a mid-year feed-in tariff cut and while demand has been slower than expected, we are seeing growing demand during the second quarter ahead of the tariff cut. Module price reduction should improve project economics in Germany in the second half of the year and facilitate stronger pull-through.

I’m happy to discuss other European markets in the Q&A, but just briefly I’ll cover a few more. France is currently challenged due to the recently – recent policy shift and we expect demand to improve there in the second half of the year. And of course, the U.K, the Netherlands, Greece and Spain round out other key European market, all countries where we have significant traction with actual themes on the ground.

To summarize, we see a challenging regulatory environment in Europe for the first half of the year, making our strategy to diversify into other geographies all the more important. The Americas continue to be a strong contributor to quarterly revenues with 18% of the total more or less in line with the fourth quarter of 2010.

On the policy front, California continues to improve its green credential with the 33% renewal portfolio standard by 2020 being signed into law. We continue to expand our North American residential and commercial dealer network and hold strong market share in this segment.

In the utility market customers are demonstrating a preference for Suntech’s quality, reliability and unmatched track record. We’re also pleased that our Sempra project has passed the final regulatory hurdles with the California PUC.

Our Arizona manufacturing facility is progressing well. We recently added a third shift, which will take annualized module capacity to 50-megawatt to help us better serve the demand for ARRA-compliant module.

Revenues generated from Asia Pacific, Middle East and Africa increased significantly in the first quarter, representing 30% of total revenues, compared with 20% in the fourth quarter of 2010. We hold market share leadership in most of these emerging markets and are strategically positioned to benefit from the long-term growth prospects.

This is a direct result of our ongoing investment in building an extensive sales network, our global brand recognition, our track record and universally bankable offering in this region.

We’re particularly excited about the long-term potential of the Chinese solar market. A senior official of the highly influential National Development and Reform Commission recently stated that China’s 2020 solar target would be increased from 20-gigawatt to 50-gigawatt.

But this is not yet official policy. It gives an excellent insight into the improving position that solar holds in Beijing and the potential of the Chinese market. Sales to China represented 8% of revenues in the first quarter and we expect a similar contribution through the rest of 2011.

Turning to ASP and shipment outlook, ASPs in the first quarter fell by low single-digit from the fourth quarter of 2010, slightly better than our expectations. In the second quarter we’re starting to see much stronger price pressure and we expect ASPs to fall by high single-digit percentage.

We expect shipments to increase by low single-digit percentage in the second quarter. This should take us to roughly 45% of our annual shipments in the – by the end of the first half of the year. Historically, shipments in the second half of the year account for roughly 60% of annual shipments, so we’re confident that our shipment guidance is achievable.

To summarize, the next two to three quarters will be challenging. However, we’re seeing the expected light [ph] quality take shape across the industry and we are well-positioned to adapt to that and other changes in the market.

Our cost is declining as we ramp our initial wafering capabilities and our customers increasingly recognize the importance of partnering with best-of-breed brands that can deliver high performance, reliable products, as well as value-added solutions beyond the panel such as third-party financing solutions.

Lastly, price reduction is stimulating elasticity of demand and solar is approaching grid parity in many markets across the globe. As we emerge from this transition period we expect to be the market leader serving a solar market several times larger than today.

At this point, I’d like to turn the call over to our CFO, David King for a review of the financials. David?

David King

Thank you, Andrew. And hello to everyone on the call. First, let me say, I’m pleased to join the impressive team at Suntech. From my discussions with my new colleagues and our global partners, it is clear that we are well-positioned to benefit from the exclusive growth of the industry which still in its infancy. I look forward to the future expansion of Suntech.

Now, I will discuss the first quarter results. Our revenue increased 49% year-over-year to $877 million. Sequentially, revenue was down around 7% due to pricing – policy uncertainty in Italy and seasonality particularly in Germany. Approximately 95% of our revenue was generated from the sale of PV modules.

Consolidated gross margin improved 280 basis points to 19% in the first quarter 2011 from 16.2% in the fourth quarter of 2010. The improvement was due mainly to a reduction in the wafer cost as we utilized around 150-megawatt of internally produced wafer during the quarter.

Wafer to module non-silicon conversion costs excluding freight and share-based compensation increased slightly to $0.54 in the first quarter from $0.51 in the prior quarter. This was largely a result of a spike in silver price and RMB appreciation.

We expect the conversion costs to stabilize at this level in the near-term before resuming it downward trend. As we become more vertically integrated we will start to provide you with more information about our poly to module conversion cost.

Operating expenses were $72 million or around $8.3 million – 8.3% of revenue, compared to $63 million in the prior quarter. The increase in OpEx was due mainly to the integration of our wafer subsidiary and $6.5 million non-cash amortization expense.

This was related to the acquisition and about $6 million of the $6.5 million will now repeat in future quarters. Our organic OpEx should be in the range of 7% to 8% of revenue in the second quarter.

Income from operations increased by 49% year-over-year to $94.5 million and operating margin was 10.8%.

Net interest expense was $30.3 million up from $23.5 million in the prior quarter. Please note that $10 million of this or $0.06 per diluted ADS was non-cash interest expense, which was a result of accounting treatment of our convertible notes.

Interest expense was higher as we invested in our wafer capacity and working capital. We expect they will remain at a similar level in the second quarter.

With the rapid appreciation of euro versus U.S. dollar, we realized a foreign currency exchange gain of $30 million in this first quarter of 2011, which was offset by hedging loss of $57 million in the same quarter. As a result, we realized a net FX related loss of around $26 million.

Looking into the second quarter, based on a euro-U.S. dollar exchange rate of $1.41, we expect to recognize no gain or loss in the foreign exchange gain loss line to give you an idea of the sensitivity. If the euro appreciates by $0.01 from $1.41 we would recognize roughly a $2.5 million gain and vice versa.

In the other expense line, which reflects our hedging gain or loss, we currently expect a hedging loss of approximately $25 million in the second quarter. The main reason for the hedging loss is because we entered into a number of contracts in mid 2010 with an average rate of $1.31.

In terms of sensitivity, if the euro appreciates by €0.01 against the U.S. dollar, the hedging loss will increase by about $4.5 million and vice versa.

Please note this is an estimate. We will continue to enhance our hedging positions by improving our forecasting process and utilize more accounting and planning strategy.

Tax expense was $5.5 million or an effective tax rate of about 15%. We expect the tax rate will increase to around 20% for the rest of the year. The main reason for the increase is because our recently acquire wafer subsidiaries is subject to a standard tax rate of 25% rather than the high tax rate of 15%. We are in the process of (inaudible) for the high tax status. We expect to achieve the 15% rate within the next six to 12 – six to nine months.

Net income was $32 million or $0.17 per diluted ADS, now that this includes $27 million impact from foreign exchange or $0.15 roughly. The tax and the non-cash interest expense of $10 million or about $0.06 roughly.

One time amortization expense of $6 million, as I mentioned previously or about $0.03, excluding all these items, now net income would have been $75 million or $0.41 per diluted ADS.

Total CapEx for the quarter was $129 million, which was related mainly to the expansion of our wafer facilities.

Turning to some of key balance sheet item, our cash and cash equivalents totaled $783 million, compared to $872 million as of December 31, 2010.

DSO increased to 73 days from 49 days in the fourth quarter. It was due mainly to the majority of shipments occur within the month of March.

Inventory declined to $550 million to – from $558 million in the fourth quarter. The operation team has been very focus on improving inventory management in the past two quarters. This is an excellent result given the market conditions.

Short-term borrowings were $1.6 billion as of March 31, 2011, compared with $1.4 billion as of December 31, 2010. The increase in borrowings was due to investment in CapEx and working capital.

Now turning to guidance. For the second quarter of 2011, we expect PV shipments to grow at a low single-digit rate. Gross margin is expected to be relatively flat compared to first quarter. For the full year, we reiterate our shipment target of 2.2 gigawatts. Given the pricing environment we are seeing, we are revising down our full year revenue guidance slightly to $3.3 billion to $3.5 billion and the gross margin percentage to high teen.

We just lost a slide here. Okay, I am back here. We expect to achieve 2.4 gigawatts of cell and module production capacity by the end of the second quarter of which 600 megawatt of cell capacity will be owned and operated by joint venture. We also expect to achieve 1.2 gigawatts of wafer capacity by the end of 2011. Our CapEx forecast remains at $250 million to $270 million for the year.

Before I send the call to questions, let me outline some of the key priorities that I intend to focus on in the next 6 to 12 months. First, I will continue our efforts to restructure our balance sheet. First, by converting some of our short-term debt to longer term debt and by taking advantage of lower cost borrowing offshore.

Second, I believe we need to strengthen our planning and forecasting process. The revenue expense forecast impact how we produce and ship, how we hedge our currency exposure and how we guide our investors. This is fundamental and very important to the business and will be a key focus of mine.

Last but not least, I will explore opportunities to work with our banking partners to bundle our products with their financing solution, as Andrew mentioned previously, third-party financing support to help grow our top line.

Now, I will turn the call to Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question today comes from the line of Jesse Pichel with Jefferies. Please proceed.

Min Xu – Jefferies

Hey, this is Min Xu for Jesse. Thanks for taking my question. Seems like the vertical integration strategy is paying off and you have done an excellent job managing your inventory. Can you tell us what’s your utilization level in Q1 and in Q2 and also what is your poly cost in Q1 and Q2?

Dr. Zhengrong Shi

Okay. Our utilization rate of Q1 is around 85% and in Q2, we believe they will increase to above 90%, when we are talking about – the utilization rate is, you know, actually already above our name plate of capacity as we discussed in the past. And the poly cost in the first quarter was probably about $60 per kilogram and we see this cost will decline quite significantly in the second and beyond.

Min Xu - Jefferies

So you’re seeing poly in Q1 is already 60 and even going lower in Q2?

Dr. Zhengrong Shi

Yes. Bear in mind, our poly – we have lot of long-term contracts. Our poly prices is always below the per market price.

Min Xu – Jefferies

Great. And a follow up. So you mentioned China’s 2020 solar target has increased to 50 gigawatts. Can you give us some color on near-term China demands specifically near-term Golden some projects and how there are a lot of people are bidding very low price on those projects, can you give us some color on that?

Dr. Zhengrong Shi

And as I discussed with you in the past, I personally have spend a lot of effort in lobby various departments of the government and I am very pleased to see in the China market this year start to really take off. So, I believe this year China market probably will be around 1 plus gigawatt shipment this year and there’s, Golden Sunshine project. There is bidding project for the utility scale projects and there is also several power companies or generation companies that start to invest in building solar projects already in China.

Min Xu – Jefferies

So as are these and Chinese ASPs generally lower than your average ASP?

Dr. Zhengrong Shi

Slightly lower than the average ASP.

Min Xu – Jefferies

Okay. Great. Thanks a lot for the color.

Dr. Zhengrong Shi

Okay. Thank you.

Operator

Your next question comes from the line of Tim Arcuri with Citi. Please proceed.

Tim Arcuri – Citi

Hi, hi thanks. You do some very good market work and I was wondering what your view was in terms of what price – what module price we have to get you to see a significant amount of module capacity shut down. So, if you, sort of look at cash cost for all the module capacity in the world what’s the price at which you get say 10, 5 to 10 gigawatts plus worth of sale capacity that gets shutdown because you fall below cash cost? Thanks.

Dr. Zhengrong Shi

I think it is clear at this moment there is over supply situation in the market and ASP has a full fairly past in the last couple of months and of course, there is a lot of idle capacities in the industry. So that’s why as we say at this moment, the customer apply to quality, the top brands. So that's why, although there is a lot of inventories, as according to analysts report feeding the channels and there is lot of in many idle lines sitting there. So from Suntech point of view, we still see quite healthy growth this moment and as we can imagine for the Tier 2, Tier 3 manufacturers in order for them to turn on the production line they probably will sell the product at the cash costs. So that’s what we see in some cases already.

Tim Arcuri – Citi

Okay. So you think that, even if we get meaningfully below cash cost for some of the Tier 2 to Tier 3 guys that, they'll continue to run the cell lines?

Dr. Zhengrong Shi

Probably it is very difficult for them because as I said at this moment the customers, they care very much about brand, track record and also reliability. So I think in the Tier 1 companies will definitely gain market share at this moment.

Tim Arcuri – Citi

Okay.

Andrew Beebe

Yeah. And I’ll just add Tim that I think what you are going to see, that the first stage probably in the retrenchment of the supply is the lack of announced build-out actually happening. So the four people, people are slow in production but before they actually shutdown shop entirely, you are going to see a whole bunch of demand that I think a lot of the analysts were projecting to come online in the next 18 months actually not happen and that will be sort of a silent process and I think it will take a while probably to digest it. But certainly, a lot of new build-out that people were expecting to do were – just isn't happening in the industry.

Tim Arcuri – Citi

Okay. Thank you very much.

Operator

Your next question comes from the line of Rob Stone with Cowen and Company. Please proceed.

Robert Stone – Cowen & Co.

Good evening gentlemen and welcome Mr. King, it’s nice to see so many crisp clear detail. My question has to do with the outlook for pricing and margins. First of all, if you could just comment on what was it that caused you to miss your expected gross margin for the first quarter and what are the elements of your gross margin expectation in Q2 in terms of cost movements? Is it more poly, non-silicon and finally on the high teens gross margin for the year, what ASP decline is behind that? Thank you.

Dr. Zhengrong Shi

Yeah. Hello, Rob and yes, Q1 was certainly quite dynamic and if you look at our guidance for gross margin what will happen is there was about 150 megawatt internally produced wafer in up – into our cell and module production and so that was sort of a slightly lower than our expectation. And secondly, is because if you notice our processing cost is because of spike of civil price and on depreciation that’s also up a little bit and, of course, there is ASP decline as well. So that sort of put together results in slightly lower gross margin.

And polysilicon, actually as I said earlier, in the first quarter it was about $60 per kilogram, which is I think below our market price. And looking forward, polysilicon prices were continuously dropped and if you look at the spot price at this moment, it’s already around $60 per kilogram. We see it will continue to drop fast in the second half. And also, the wafer price actually dropped even faster.

So, with that I think that’s why we believe for the second quarter we can sort of maintain our flattish gross margin as compared to first quarter.

Robert Stone – Cowen & Co.

Dr. Shi, what is your wafer cost in Q1 and what do you think it will be in Q2?

Dr. Zhengrong Shi

I think our planned wafer cost for Q1 was probably like about 15% drop compared to Q4. So, I think Andrew, maybe you can add a bit of color by ASP trends?

Andrew Beebe

Sure. Sure, I mean, I think the revised guidance that we’ve given for the whole year reflects perspective on volume being very strong throughout the year, but ASP continuing to evolve downwards and I think that ASP reflects our view on the guidance or the total numbers there reflect the ASP guidance down.

Robert Stone – Cowen & Co.

Okay. Thank you.

Operator

Your next question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Please proceed.

Sanjay Shrestha – Lazard Capital Markets

Thank you. Two questions please. One is, could you please touch on – provide us little bit more detail about your diversification efforts, especially as it relates to China, Japan and APMEA?

And over the next 12 months, what percentage of your shipments would you expect to come from these markets? And maybe you could touch on pricing also in these markets?

Dr. Zhengrong Shi

Andrew, please?

Andrew Beebe

Yeah. Yeah. I mean basically as we’ve talked about over the last couple of quarters, we’ve been very focused on identifying not just the growth markets, but the exact countries and exact states within those countries where we see a lot of growth. So, that’s allowed us over a three-year period to redirect the sales and marketing organization or at least grow it in the direction of those growth regions.

And the two big regions that we’ve talked about previously with you and here today are North America and the APMEA region. And just a breakdown, obviously, North America we are seeing a lot of growth in Canada and then in select states across the U.S., but mainly on the West and East Coast, New Jersey and California, Arizona and soon we hope markets like Texas.

In APMEA, the picture is pretty targeted as well. China is offering us a great deal of growth opportunity, but we also have leadership positions in Thailand where we have a number one share, Israel and Australia where we have excellent market share and strong growth. We are very focused on emerging markets and India has been a favorite emerging market I think for a couple of years. And like the U.S. and China over the last two, where I think we were all excitedly waiting for the growth to happen, we are starting to finally see that take shape in India, although I think it will not strongly emerge until 2012.

Now, in terms of the diversification, the picture we have outlined in the past continues – we expect to be 50% or slightly below in Europe by the end of the year on the whole year and the Americas should be about 20% and the APMEA region should be about 30% to end the year.

You had a question about pricing as well?

Sanjay Shrestha – Lazard Capital Markets

Question on the relative pricing in these markets versus the developed markets?

Andrew Beebe

Yeah. Interestingly, pricing is pretty dynamic, particularly over the last couple of quarters, but I think we are starting to see a conversion, particularly if you normalize things to currency. So, while, there have been large disparities in the past, I think we’ll probably see those maybe not, perfectly converge, but come tighter and tighter together and certainly as we look at our projections, we are comfortable with the gross margins that we’ve projected based on this mix in terms of diversification of geography.

Sanjay Shrestha – Lazard Capital Markets

Got it. My second question was on the second half dynamics, could you talk about where do you expect to see growth in the second half and what generally would you expect for pricing to trend in the second half of this year?

Andrew Beebe

Sure. I think that the annual guidance numbers give you a sense of where we expect pricing to go. We’ve been pleased with how well things held in Q1 and with what we saw and have seen there and I think we are perfectly happy with where they are going to be over the next few quarters.

So, I think the guidance speaks for itself.

Sanjay Shrestha – Lazard Capital Markets

All right. Thank you.

Operator

Your next question comes from the line of Brian Gamble with Simmons & Company. Please proceed.

Brian Gamble – Simmons & Co.

Maybe a follow up for Andrew first? Andrew how big do you think the India market could be by 2012?

Andrew Beebe

The India market this year, I mean, I think we look at it in a 300 to 500 lines, although I have certainly seen brackets that are much bigger in both directions and 2012, it could be a gigawatt, but we are looking in the 800 to 1.2 range.

And I think what we have seen historically in the U.S., now we are seeing in China, we saw in Italy and Germany, when markets get to a gigawatt scale, almost regardless of the sort of per capita or size nature of the country, things start to gel and take off and people recognize that as a market and ecosystems get built. So, that’s why we look at 2012 as being an India moment.

Brian Gamble – Simmons & Co.

And then from your internal capacity, it seems like you might be on a track to reach north of 2.4 for the full year. Maybe you could talk about the potential to beat that number.

And then, Dr. Shi, you mentioned earlier the internally used wafers for the quarter 150 megawatts were slightly lower than your expectation, any particular reason why that was and how do you expect to kind of what megawatts are you expecting for the back half of the year as far as internally used portions?

Dr. Zhengrong Shi

Okay. And our capacity ramp up for the first quarter for internal wafering already reached 1 gigawatt. So, we are on track to reach 1.2 gigawatts later this year. So, I think in the future quarters we believe we should be able to produce 200 to 250 megawatt in-house wafer per quarter.

And in terms of cell and module capacity, of course like we are, I think previously we guided we had some flexibility. We are constantly monitoring our market development, you know develop. So, then we can first – hold fast we should expand our capacity.

Brian Gamble – Simmons & Co.

Great. Thank you.

Dr. Zhengrong Shi

But the minimum will be 2.4 gigawatts.

Operator

(Operator Instructions) Your next question comes from the line of Dan Ries with Collins Stewart. Please proceed.

Dan Ries – Collins Stewart

Hi. Thank you for taking my question. Japan, I think you have a fairly developed presence there, could you say roughly what that was as a percentage of revenue?

And then really how do you think solar demand will play out in that market now? Will it be a low as they deal with other issues in the near term, but then a bigger market in 2012, any color on how you think that will play would be helpful?

Andrew Beebe

Sure.

Dr. Zhengrong Shi

Andrew could you answer this?

Andrew Beebe

Yeah. I mean suffice it to say, it was a very difficult quarter and as I think we reported previously, we do have a large presence there about 90 people and everybody was fine from the affected problems they had. The Japanese market is very interesting and I know people are watching very closely. It was about 4% revenue in Q1, which was down from our expectations. Obviously we sold virtually nothing after the events there.

It holds a lot of promise in 2012, to be sure and certainly there are some upside in 2011, but the real impact from the decisions they are making almost real-time announcements coming right now about new builds, mandates and things like that. I don’t think we’ll really play out and be built into models until three, six months from now and we don't expect them to have significant 2011 impact, but we do expect them to have significant 2012 impact.

Dan Ries – Collins Stewart

Thank you.

Operator

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

Satya Kumar – Credit Suisse

Yeah. Hi. Thanks for taking my question. I wanted to go back to the polysilicon question, in Q1 obviously your poly contracts have helped you as your average cost was $60 much less than the spot price, which I believe was $80, $85. As we go to the second half, I was wondering if you could quantify what your procurement cost could drop to and I am wondering these costs – I mean how much will these contracts reduce the leverage you have as the spot prices go down to say $40 on average in second half?

Dr. Zhengrong Shi

Yeah. I think, for the second half we expect polysilicon price will be probably around – will be $45 per kilogram.

Satya Kumar – Credit Suisse

I am sorry, is that your procurement cost or is that the market cost expectation?

Dr. Zhengrong Shi

Our blended [ph].

Satya Kumar – Credit Suisse

Blended procurement cost? Okay. That’s very good. Also, I was wondering if you have any view on the inventories that’s out there. Recently some market research ones are talking about 10 gigawatts of finished solar panel inventories in the supply chain. I was wondering if you had any color in terms of on the ground what the inventory levels are?

Dr. Zhengrong Shi

Yeah. Maybe Andrew, can you give some color on this issue?

Andrew Beebe

Sure. I think probably most of those questions are concerned were directed towards Europe and like they say, is that we definitely saw the channels get backed up and we have a lot of deep relationships and long term relationships with our customers where they share a lot inventory data.

We're finally seeing since the Italian logjam has been broken this – those inventories are moving out and in fact many of our largest customers across Europe and particularly in Germany are re-upping their orders right now. So I think from our perspective at least we're seeing that inventory – our inventory get moved through successfully.

Satya Kumar – Credit Suisse

Got it. Thank you.

Operator

Your next question comes from the line of Mehdi Hosseini with Susquehanna. Please proceed.

Mehdi Hosseini – Susquehanna

Yes. Thanks for taking the question. One question for David, you talked about trying to change some of the short-term borrowing to long-term by going offshore. Do you expect any meaningful changes to the debt covenants or collaterals that are used if you go countries outside of China? And also what was – can you tell me what was the cash from operation?

And I have one question for Dr. Shi, don't you think that hardly remaining about 50 is actually going to help Suntech as the industry leader by helping eliminate the marginal players; if poly remains about 50 then they have no choice but to sell below cash and eventually sooner than later marginal players will go away. So I want to hear your opinion on that topic?

Dr. Zhengrong Shi

Yeah. May be David answered his question, I can go ahead to answer your question first. And obviously for the market leader like Suntech, we continue to gain market share because our brands and bankability and other in the place and of course with continued decline of our production cost and in the technology and differentiated product. So I think, definitely this consolidation were happening in the industry we're already seeing this happening. So how fast this will happen, I think it really depends on a how long this downturn will maintain. So I think definitely 1 Tier, 2 Tier, 3 players will end up being consolidated in the future.

David King

In terms of longer term debt, while other regions that we want to make sure we give you better acceptability in our financial position is the longer term debt. So we don't have to for example hold large amount of cash, we'll cycle our cash to service our debt every month end, every quarter end. If I can have a $1 or long term debt I'll be able to use that dollar to pay down $2 of short term debt and that's the leverage I can get out of it and the covenant will be similar.

And we are also the offshore debt at the Renminbi market is a little bit less than what we are paying onshore in the short-term debt. So and amongst – so this is just a few steps we are taking in industry and we are also focusing hard on our working capital management and working with Andrew in terms of how to focus on how managements KPIs and as well as focused on credit terms. So I think this is a combination of many things that we try to achieve.

Mehdi Hosseini – Susquehanna

And the cash from operation this quarter?

David King

Cash from operation this quarter would be negative. On the full-year basis we expect to target between $100 to $200 million.

Mehdi Hosseini – Susquehanna

Okay. And just going back to the covenants, I still want to get some more clarification, as you try to move some of the debt to the longer term, how could, how do you foresee the covenants or collateral impacting your working capital management? I mean do you see any incremental restrictions in certain ratios, EBITDA or should we assume that there won't be any increase in working capital requirement or some of the other metrics that some of the longer term covenants may require?

David King

We will only go longer term when we have no loan restrictions than what we have now.

Mehdi Hosseini – Susquehanna

Got it. Thank you.

Operator

Your next question comes from the line of Paul Clegg with Mizuho. Please proceed.

Paul Clegg – Mizuho

Hi. Thanks for taking my question. Has, – question about GSF, how much of your receivables at the end of the quarter were GSF?

Dr. Zhengrong Shi

Probably about $44 million.

Paul Clegg – Mizuho

About $44 million, okay.

Dr. Zhengrong Shi

Yes.

Paul Clegg – Mizuho

And another question for David, actually congratulations on the new role and I also appreciate the detailed on the non-cash items. Is there any plan to start producing a quarterly cash flow statement? I know you're not required to do it, but I think a lot of investors would find it helpful?

David King

Yes. And on the GSF let me just finish it, we actually received addition of about $6 million of payment in April on that $44 million.

Paul Clegg – Mizuho

Over the $44 million.

David King

Yes. Yeah. And we do plan to issue cash flow statement in the coming quarters that's another to do that's on my list.

Paul Clegg – Mizuho

Excellent, but...

David King

One and very few.

Paul Clegg – Mizuho

That's great news. I'm glad to hear it.

Operator

Your next question comes from the line of Kelly Dougherty with Macquarie. Please proceed.

Kelly Dougherty – Macquarie

Hi. Thanks for taking the question. I just want to follow up a bit on GSF, how much of the pipeline was for Italian projects and where do they stand with the ones that they haven't yet completed given the changes that we've seen?

Dr. Zhengrong Shi

Okay. As we reported before, GSF had about 240 megawatts in our project pipeline and last year GSF completed 105 megawatt in Italy. As at the moment they connected 80 megawatt to the grid which as we know we are subjected to 2010 feed in tariff. There is remaining 25 megawatt to be connected before the end of June and the rest of the project is still under development at this moment.

Kelly Dougherty – Macquarie

So, they're still going ahead, if they were recorded on your balance sheet assuming a difference...

Dr. Zhengrong Shi

They are not recorded in our balance sheet only 105 megawatt was recorded.

Kelly Dougherty – Macquarie

So, there is no risk of any kind of write-downs associated with GSF because they've completed everything that you've already accounted for.

Dr. Zhengrong Shi

Yes. True, yeah.

Operator

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

Sam Dubinsky – Wells Fargo

Hey guys, just a follow up on GSF, just to be clear, is GSF clearly compliant with the loan covenants from China Development Bank because just reading your 10-K borrowing I know that they've extended some terms but will the repercussions to Suntech as some of these projects are not grid connect in time? And then I have a follow up?

Dr. Zhengrong Shi

Yes. As of this moment GSF they still have good relationship with CDB and everything is on track.

Sam Dubinsky – Wells Fargo

But if these things are not grid connected in time for whatever reason is GSF liable or is Suntech liable to pay back the debt? And then just in that (inaudible) could you just discuss our funding for these projects worked, I thought initially is was through a consortium of banks, but now I see China Development Bank is involved, could you just talk about how the funding works?

Dr. Zhengrong Shi

I think we have several banks for the project financing and what reported just for this project is only financed by China Development Bank and there are some other projects which involved European Banks.

Sam Dubinsky – Wells Fargo

Okay. Who is the recourse to you, GSF or to Suntech if some of these projects are not grid connected in time?

Dr. Zhengrong Shi

GSF.

Sam Dubinsky – Wells Fargo

Okay. And just to find a different note, based on where wafer ASPs have gone to in recent months does it make sense to expand internal wafer capacity further in 2012?

Dr. Zhengrong Shi

As we reported before, our strategy is just keep that above 50% in-house wafer, we believe this is a good balance.

Sam Dubinsky – Wells Fargo

Okay. Thank you.

Dr. Zhengrong Shi

Yeah.

Operator

Your next question comes from the line of Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov – Raymond James

Thanks for taking my question. Just two quick ones, first for Dr. Shi, you mentioned 1 plus gigawatt of Chinese demand this year, what share of that market do you think Suntech will have?

Dr. Zhengrong Shi

Probably 10 plus percent, in 8 to 10%, around 10%.

Pavel Molchanov – Raymond James

And do you expect to be the number one player in the domestic market?

Dr. Zhengrong Shi

We are leading player in most markets including China.

Pavel Molchanov – Raymond James

Okay. Then just a quick one also for David King, have you drawn down any of your loan framework with the China Development Bank?

David King

Currently minimal.

Pavel Molchanov – Raymond James

Okay. Thanks very much.

Operator

Your next question comes from the line of Edwin Mok with Needham & Company. Please proceed.

Edwin Mok – Needham & Company

Hi. Thanks for taking my question. So, first question is on Pluto, how much do you expect to produce this year and how is that progressing and in terms of your capacity are you converting more of your lines to Pluto?

Dr. Zhengrong Shi

Yeah. We are producing at least 200 megawatt Pluto module this year and in a way this market slowdown actually helped us to ramp up Pluto more quickly and so we are way on track to ramp up our Pluto capacity.

Edwin Mok – Needham & Company

Okay. Sorry just fall for that is, how much did you produce in the first quarter offshore on Pluto?

Dr. Zhengrong Shi

We produced probably about 20 megawatt in the first quarter.

Edwin Mok – Needham & Company

Great. That was very helpful. And then just my fault, the question is actually related to the cell joint venture, can you remind us what impact, as you ramp your production and based on your full year guidance you have been producing the cell joint venture. Do you actually expect to recognize slightly higher cost, because you have to pay basically pay your cost to the JV? How do we now think about that?

Dr. Zhengrong Shi

Yeah. That's a good question and actually the business model at the moment is Suntech provide wafers to the JV and then JV will process the wafers into cells so that's the arrangement at the moment. The processing price is slightly below the market price due to this JV relationship and as Suntech provides management expertise and technology and plus we are still the largest shareholder of the JV that means the dividend and putting together the overall impact of this cost increases are minimal.

Edwin Mok – Needham & Company

Great. Thanks.

Dr. Zhengrong Shi

Yeah.

Operator

Your next question comes from the line of Josh Baribeau with Canaccord. Please proceed.

Josh Baribeau – Canaccord

Hi. Thanks. Could you just provide an update on how many of that 105 megawatts to GSF has actually been sold?

Dr. Zhengrong Shi

We haven't sold any megawatt of this project yet, but GSF management is assessing a number of options in trying to monetize the project.

Josh Baribeau – Canaccord

Okay. And also can you just remind me with respect to the 600 megawatt cell joint venture, do you have access to the full 600 megawatts or is the joint venture selling elsewhere?

Dr. Zhengrong Shi

We have preferential rights to utilize all the 600 megawatt capacity if we want to.

Josh Baribeau – Canaccord

Okay. Great. Thank you.

Dr. Zhengrong Shi

Yeah.

Operator

Your next question comes from the line of Gordon Johnson with Axiom Capital Management. Please proceed.

Gordon Johnson – Axiom Capital Management

Thanks for taking my question. Just a couple, on your internal module cost can you tell us what's your total internal module cost for this quarter?

Dr. Zhengrong Shi

Sorry, could you repeat the question again Gordon?

Gordon Johnson – Axiom Capital Management

Your internal module costs per watt, I think last quarter they were around 133 per watt based on your gross margin this quarter I'm getting that down a penny, but I just wanted to hear from you guys specifically what that number was this quarter?

Dr. Zhengrong Shi

Oh we don't disclose this number usually.

Gordon Johnson – Axiom Capital Management

Okay. Can you tell me whether it was flat or down?

Dr. Zhengrong Shi

Is down.

Gordon Johnson – Axiom Capital Management

Okay. Okay.

Dr. Zhengrong Shi

Thank you.

Gordon Johnson – Axiom Capital Management

And then on the inventory. Your inventory continues to be at a record level despite shipments at a record level this quarter. Can you tell us about given where prices are going, any potential risk of possible inventory write-downs as prices deteriorate further later this year?

Dr. Zhengrong Shi

We believe our inventory management in Q1 was quite good compared to our peers. So, that's because we have very sophisticated sales structure in the market on the ground. So, we know what market developing on time or proactively. So, our management has focused very much on inventory management in our procurement products. As David said we need to continue to strengthen our planning and forecast. I think we will, our inventory management will get better with time.

Gordon Johnson – Axiom Capital Management

Can you tell me how much inventory was at the JV level?

David King

At this moment, it's minimum.

Gordon Johnson – Axiom Capital Management

Okay. And then lastly on your operating cash flow, can you give us a specific number, you said it was negative for the quarter, but can you give us a specific number?

David King

We don't disclose that and I think I mentioned in the future that we will be providing cash flow statement from second quarter on.

Operator

Your next question comes from the line of Ahmar Zaman with Piper Jaffray. Please proceed.

Shaun Parmar – Piper Jaffray

This is Shaun Parmar [ph]. I was wondering, if we talk about your poly cost, how much of your poly is under long-term contracts and at some point as the spot market adjusts is it to your advantage to have a greater exposure to the spot market?

Dr. Zhengrong Shi

Yeah. Okay. It's about 65% on the long-term contract and the rest is from spot market and so far we're having always to see long-term contract poly is much lower than the spot market price. We believe this tend to be the continuing trend to be the case in the future. But another hand for many long-term contracts we have quite flexible terms with our supply.

Shaun Parmar – Piper Jaffray

Great. And you've reiterated your full year guidance. Can you talk a little bit about what gives you the confidence that you're going to be able to hit that with all of the sort of delays and the level of inventory in Europe that we've seen so far in the first half?

Dr. Zhengrong Shi

Andrew will give you confidence. Andrew?

Andrew Beebe

Sure. Yeah. Look, we're well through Q2 and we've got strong visibility here and we've just built and as you've seen from our announcement on the larger scale, but it goes all the way down to the smaller scale, in each of the regions that we work in we work with leading brands and this partnership allows us a great deal of visibility and confidence into their pipeline. So and with that I think we stand by the guidance for the second half of the year.

Shaun Parmar – Piper Jaffray

And how much of that is...

Dr. Zhengrong Shi

Yeah. Actually, just at that point, compared to historic trend I think this year we're doing better than in the past.

David King

Yeah. I mean, we'll end the first half at 45% through the year and historically we end the first half at 40% through the year. So at least from the historic trending perspectives we're tracking well.

Shaun Parmar – Piper Jaffray

Very good. And can you tell us how much of your guided megawatts for the year are under contract already?

David King

Yeah. I mean, we've talked about this previously. We have very strong contracts for majority of our megawatts not just in the next couple of quarters, but it goes out into next year. So we're very confident with where we are with the boxed in contracts, but I think we're also signing and announcing new ones on a regular basis.

So as we've seen and as we expected over the last year, we're starting to see a shift from this environment where if you've got volume of any product at all you can sell it because demand is so strong to a market where people are going to be – customers are going to be much more selective and you'll have brighter quality and they will be demanding bankability.

And that's allowed us not just to rely on the growth in our very, very strong customer base, but to reach out to and have many new customers reaching out to us who are looking for that safety as we've talked about as companies go through transformation.

Dr. Zhengrong Shi

Hello?

Shaun Parmar – Piper Jaffray

Great. Thank you.

Operator

Ladies and gentlemen that does conclude our question-and-answer session. I would now like to turn the call back to Dr. Shi for closing remarks.

Dr. Zhengrong Shi

Thank you everybody. Thank you for joining our call today and if there are further questions then you are most welcome to talk to our, myself, CFO, Andrew and other Executives. Have a nice day.

Operator

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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