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Executives

Dr. Zhengrong Shi – Chairman and Chief Executive Officer

Andrew Beebe – Chief Commercial Officer

David King – Chief Financial Officer

Rory Macpherson – Director of Investor Relations

Analysts

Satya Kumar – Credit Suisse

Jesse Pichel – Jefferies & Company

Sanjay Shrestha – Lazard Capital Markets

James Medvedev – Cowen & Company

Dan Ries – Collins Stewart

Kelly Dougherty – Macquarie Research

[Bichel] Shaw – Deutsche Bank

Colin Rusch – ThinkEquity

Brian Gamble – Simmons & Company

Aaron Chu – Maxim Group

Pranab Sarmah – Daiwa Institute of Research

Nitin Kumar – Nomura

Suntech Power Holdings Co. Ltd. (STP) Q3 2011 Earnings Call November 22, 2011 7:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2011 Suntech Power Holdings Co. Ltd. Earnings Conference Call. My name is Ann and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. (Operator instructions.) I would now like to turn the presentation over to Mr. Rory Macpherson, Director of Investor Relations. Please proceed, Sir.

Rory Macpherson

Thank you. Hello everyone, and welcome to Suntech’s Q3 2011 earnings conference call. My name is Rory Macpherson, Suntech’s Director of Investor Relations. On the call today are Dr. Zhengrong Shi, Suntech’s Chairman and CEO who will give an overview of our performance and operational initiatives; Andrew Beebe, our Chief Commercial Officer who will discuss sales and markets; and David King, our Chief Financial Officer who will discuss our financial performance.

During this conference call we will make some 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 US 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 the 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 allotted one hour for the conference call and will endeavor to field as many questions as possible within that timeframe. Please limit questions to one question per person and one follow-up. As a reminder, this call is being recorded and the webcast replay will also be available on the Investor Relations section of Suntech’s website after this call. Please note that all figures mentioned during the call are in US dollars unless otherwise specified.

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

Dr. Zhengrong Shi

Hello and thank you for joining us. Please turn to page 4. We were pleased to achieve strong shipments and gross margin results in Q3. Despite the due pressures of a volatile macroeconomic environment in Europe and an oversupply of TV modules, our shipments increased 16% sequentially in line with our guidance and our gross margin came in at 13.3% which is at the high end of our Q3 guidance of 11% to 13%. There were two primary drivers of our strong top line performance: first, customers’ preference to what we supply let our [backlog] have an excellent track record in a high performance product; and second, the strength and the strength and the geographic diversity of our sales channels. We have invested in building our globally diverse sales network for many years now and this is one of the clear benefits.

Operationally, we successfully reduced our cost of goods sold nearly in line with the [wafer price] decline. Our ASPs declined by approximately 16% sequentially while costs per box declined by approximately 14% quarter-over-quarter. The key element of cost reductions was a continued decline of [poly silicone] and wafer prices and a reduction of our poly to module non-silicone costs. Due to our strong relationships with our upstream suppliers we are confident that we’ll be able to continue to access poly silicone and silicone wafers at costs close to full market prices. Looking forward, cost reduction is a core focus of our Operations Team and our target to reduce our non-silicon [collusion] costs are now (inaudible) 65% at the end of 2012.

Turning to capacity on page 5, we achieved 1.6 GW of wafer capacity in line with our vertical integration strategy. Our cell and wafer capacity remained at 2.4 GW. While the total shipments in Q3 were in line with our expectations we have seen softness in the European markets continue into Q4, and as this has led us to reduce our annual shipment target from 2.2 GW to 2 GW for the full year 2011. Andrew will give you further color on our shipments and the markets shortly.

We expect that the softer demand environment will continue into Q1 which is seasonally impacted by winter in Northern Europe, Chinese New Year as well as (inaudible) direct reduction in most end markets. With the weak demand outlook for the next two to three quarters, we have decided to accelerate the implementation of a range of initiatives highlighted on page 6, that will optimize our operations while continuing to put out production efficiency. We also target to first improve OPEX capital by $200 million by the end of the year; second, reduce operating expenses by at least 20% in 2012; and third, to hold capacity expansion in 2012.

Through these initiatives, Suntech will become a leaner and a more competitive organization. We will have greater focus on our core competencies and maintain financial and operational stability. Ultimately we believe this focus will help us to emerge in an even stronger market position.

I would now like to give you our perspective of where we see the market going in the next twelve months. It is clear that the solar industry is suffering from excess capacity in all [thickets] of the value chain. This is the common issue faced by young industries that have shown high returns on investment. To recalibrate the supply and the demand we believe the industry needs to go through a process of capitalization, liquidation, and then consolidation.

The industry simply cannot support 300+ sale and [modular] manufacturers, so the companies left will capitulate and exit the industry. This will lead to liquidation of more of the inventory and a continued pressure on pricing in the near term. The result of this will be industry consolidation and a small group of competitive manufacturers.

As we outlined at our Analyst Day nearly one year ago in December, 2010, we believe that the successful manufacturers will be those who can produce both a low-cost and a bankable product. Needless to say, with our rapidly declining cost structure, track record of over 5 GW of PV installations and a reputation for quality and performance, we are confident that Suntech will be at the forefront of this category of low-cost and bankable producers.

The consolidation has already started. According to our estimates, the market share of the six top PV module suppliers increased from 26% in Q2 2010 to 55% in Q2 2011. We expect this trend to continue as customers recognize the importance of partnering with companies that are in a position to be long-term players. We expect that Q4 2011 and the first half of 2012 will be challenging for all solar companies as we move through this process of consolidation. However, we expect to return to profitability and to see demand growth by the middle of 2012.

These near-term challenges make it difficult to recognize the progress that the industry has made over the past decade. Ten years ago, solar was an outlier in the energy industry and a [competitor to the top string] by energy professionals. Today, solar has reached to parity with retail electricity rates in multiple countries all over the world. In fact, in 2012 the feed-in tariff for large-scale solar systems in Germany at €0.18 per KWH, well below the retail electricity rate of €0.22 per KWH; and €0.01 below the feed-in tariff for offshore oil.

This is a historic milestone for our industry and we won’t stop there. The next step is to reach parity with wholesale electricity. This target, we believe, can be achieved within the next five years in places like the United States. As government utility development and investors recognize the progress that solar has made, we will see a new long-term period of solar progress.

Now, I will turn the call over to Andrew Beebe who will discuss our global sales and markets.

Andrew Beebe

Thank you, Dr. Shi. Please turn to page 7. We are pleased to have met our shipment and ASP projections particularly given the macroeconomic challenges in Europe and the price pressure driven by oversupply. As Dr. Shi highlighted, the strength of our shipments was largely due to a slight de-quality in the volatile environment of the diversification of our sales channels.

Looking at page 8, shipments for Q3 increased 18% sequentially and 36% versus Q3 2010. In keeping with our strategy to distribute sales across geographies, we achieved a more diverse revenue split in Q3. 40% of our revenues were generated from European markets, approximately 20% from the Americas, and 40% from the rest of world markets, or what we call APMEA. Let me give you some color about these different markets. Turning to page 9, we’ll first look at Europe.

While European markets continued to be the number one destination for Suntech panels in Q3, European demand was impacted by two important factors. First, the sovereign debt crisis that began in Greece and threatened to spread to other Eurozone countries created an environment of uncertainty, causing some end users to delay their procurement decisions. Second, the rapid drop in poly silicon prices and the corresponding drop in the price of crystalline silicone modules created inventory management issues for distributors and caused some of our customers and their customers to wait on the sidelines or place smaller orders.

Predictably, the German market continued to be our strongest market in Q3. While we have seen a recent pickup in demand in Germany ahead of the new year feed-in tariff reduction the rebound has been less than expected.

With attractive project economics the Italian market continued to recover in Q3. However, limited access to construction finance has narrowed the number of developers that have the expertise, relationships and capital to implement projects quickly. With our large presence in Italy and across Europe, Suntech has the on-the-ground expertise to support developers on more complex projects and we are in an excellent position to benefit from this trend. Greece, France, Benelux, the UK and Spain were the other main European markets for our modules this quarter.

Turning now to the Americas, we’re very excited to have recently appointed John Lefebvre as President of the Suntech America business unit in Q3. Coming from a four-year track record leading sales and channel strategy at Solar City, John brings the ideal mix of industry experience and proven business development capabilities to our operations in the US. We are already the market leader in this region and with John at the helm I’m confident we’ll further grow our share in the Americas.

Q3 sales to the Americas represented 20% of our total, down from 21% in the prior quarter despite an absolute MW growth. Looking forward, we see a strong pull in of demand due to the potential cash grant change and we expect at least 50% sequential growth in shipments in the Americas in Q4. One unfortunate development in the US is the trade petition filed by the foreign company Solar World which claims that Chinese panel manufacturers are engaging in unfair trade. This action could be extremely damaging to the entire US solar industry value chain and its over 100,000 US jobs. We are well prepared to substantiate our strict adherence to fair international trade practices and we are vigorously defending our case to continue giving access to cost-affordable solar markets across America.

The reality is nobody wins from trade wars in solar. The industry is now truly globalized and highly interdependent as many of our silicone suppliers, equipment suppliers and customers are US-based companies. Despite Solar World’s massive PR campaign there are no major US companies supporting this petition, including our customers, our vendors, or even our competitors. Whatever the outcome, as a global company with global supply chains we will do everything in our power to ensure business as usual for our customers in the US and around the world.

Now, looking at our sales in the rest of the world, we are very pleased to see strong growth as it accounted for 40% of total revenues compared to 26% in Q2 2011. The primary driver in this region was the China market which accelerated rapidly on the announcement of a new feed-in tariff. In fact, we believe the Chinese market will top 2 GW this year, well above our earlier projection of 1 GW.

We are also pleased to build on our global partnerships in the Chinese market. For example, we recently started collaborating with [Versal], one of our preferred customers and a leading solar developer in Germany to co-develop projects in China’s [Xing Hai] Province. This openness toward best-in-class global development expertise is a trend we hope will continue in China.

The Indian and Japanese markets are two other high-potential markets that we are focused on. In Japan, we believe we have the strongest market position out of all non-Japanese PV players and we’re gaining traction in the Indian market which is poised for significant growth next year. Thailand and Australia round out the APMEA regions for us as strong markets.

Turning to our average selling price, for Q3 ASP declined around 16% for Q2 in line with our projections of mid to high teen price reduction. While this is a substantial drop we continue to maintain our modest price premium above our core competitors in the crystalline silicone space. This premium is primarily due to the quality and performance of Suntech’s modules compared to our peers.

In Q4, the continued decline in the prices of silicone and wafers and competition between module suppliers will drive prices even lower. As a result, we currently expect a low-teen sequential price decline in Q4.

Looking into Q4 demand, the rebound in Europe has occurred later than expected and many markets in APMEA are slowing down toward the end of the year. While this will be partially offset by robust demand in the Americas, we do expect Q4 shipments to decline more than 20% versus Q3. As a result, we have revised down our full-year shipment target from 2.2 GW to 2 GW flat.

As Dr. Shi outlined, we expect the environment of lean demand and extreme competition to continue in the first half of 2012. However, with the suite of initiatives that we are implementing, unrivaled channels to market, our leading brand and our committed team I have no doubt that Suntech will emerge from this cycle in a stronger position. Now, more than ever, customers are turning to the bankable leaders.

I will now turn the call over to our CFO David King for a review of the financials.

David King

Thank you, Andrew. Please turn to page 10 for the discussion of Q3 financial results. Today I’ll refer to GAAP numbers except for Q2 2011 where I will refer to non-GAAP numbers excluding the impact of one-time charges. This comparison gives a better indication of our normal operations and you can find a reconciliation with our GAAP numbers at the end of our press release. As I walk through the financials I will also provide specific information about our initiatives to improve production efficiency, reduce operating expense, improve working capital, minimize CAPEX spending; and our plan for our capital structure.

Our revenue increased 9% year-over-year to $810 million. Sequentially, revenue was down 3% due to declines in average selling prices. Approximately 97% of the revenue was generated from PV module sales. Cost of goods sold was $702 million in Q3 2011. This included a $20 million inventory provision which had a 2.5% impact on our gross margin. Gross profit was $108 million and gross margin was 13.3% in Q3 2011, which was at the high end of our guided range of 11% to 13%. This compares to gross profit of $133 million and gross margin up 17.9% in Q3 2010.

Poly silicone and non-silicone conversion costs decreased from $0.76 per watt in Q2 to $0.74 per watt in Q3. Given that we used better quality non-silicone materials as many of our competitors, this non-silicone conversion cost is in line with the best-in-class companies in the industry. The non-silicone conversion costs may increase slightly in Q4 as we reduce utilization so that we can book down inventory towards the end of the year.

Operating expenses in Q3 was $124 million. This includes a $17.5 million provision related to a German court ruling on November 16 that stated Suntech Power Japan Corp., formerly known as MSP Japan, had breached a solar sales supply contract of [Q cells]. Suntech Japan is currently reviewing the judgment and will file an appeal.

This compares to operating expenses of $17.5 million in Q3 2010 and non-GAAP operating expenses of $8.4 million in Q2 2011. The sequential increase in OPEX was mainly due to the $6 million increase in bad debt provision, $5 million in additional sales and marketing expenses, and approximately $2 million in severance charges. As we mentioned earlier in the month we are speeding up the restructuring of our business and targeting to reduce operating expenses by at least 20% in 2012. We will do this be reducing non-core marketing and R&D initiatives, and streamlining our personnel. As a result we expect around $10 million of severance charges in the second half of 2011.

Loss from operations in Q3 2011 was $16 million. This compares to income from operations of $63 million in Q3 2010 and non-GAAP income from operation of $42 million in Q2 2011. Please turn to page 11.

Net interest expense was $36 million, of which $10 million was non-cash. This compares to net interest expense of $23 million in Q3 2010 and $33 million in Q2 2011. Turning to FX, the foreign exchange gain or loss reflects translation of the value of assets and liabilities denominated in foreign currency from period to period. The majority of our Euro exposure is due to Euro-denominated accounts receivable as a result of the high volatility of the Euro-to-US-dollar exchange rate, especially in September. We realized a foreign exchange translation loss of $56 million in Q3 2011. This FX translation loss was mostly non-cash.

Net other expense mainly reflects currency hedging gains or losses. For Q3 2011 net other expenses were $10 million compared for a $74 million expense in Q3 2010. As a result we realized a total net FX-related loss of around $67 million in Q3 2011. Please note that many of these hedges were put in place in the last two years when US dollar to Euro exchange rate was below 1.3. Both of these hedge contracts are coming to maturity due in the last two quarters, and during the last quarter we have put in place a number of new hedges and higher rates. For Q4, our (inaudible) rates will be 1.39 and our average for the first half of 2012 is about 1.4. Assuming the Euro does not rebound above 1.4, this should lead to a hedging gain in Q4 2011.

Tax expense was $0.5 million in Q3 2011 compared to a $3 million tax benefit in Q3 2010, and a tax expense of $16.8 million in Q3 of 2011. The sequential decline in tax expense was mainly related to lower taxable income. Net loss was $116 million or $0.54 per diluted ADS in Q3 2011 compared to net income of $33 million or $0.18 per diluted ADS in Q3 2010.

Turning to some of the key balance sheet items on pages 12 and 13, our cash and cash equivalents totaled $458 million compared to $946 million as of September 30, 2010. The primary use of cash during the quarter were CAPEX and repayment on the current portion of a long-term loan. Inventory was $696 million as of September 30, 2011, compared with $447 million as of September 30, 2010. The increase in inventory was mainly due to higher seasonal activity in preparation to reduce utilization in Q4 2011 and Q1 2012.

Accounts receivables totaled $785 million as of September 30, 2011, compared with $444 million as of September 30, 2010 and $863 million as of June 30, 2011. The sequential decrease in accounts receivables was mainly related to an increased focus on collection efforts in Q3 2011. As a result, DSO decreased to 87 days from 93 days in Q2 2011. Accounts payable increased from $395 million as of September 30, 2010 to $632 million at the end of Q3 2011. First, we are a bigger company. In addition, as our customers are requesting longer payment terms our suppliers have also agreed to extend their terms to reflect market reality. Third, in Q4 2011 the majority of the shipments have occurred in the beginning of the quarter rather than at the end of the quarter. As I mentioned previously, we also plan to slow down production in late Q4. This will give us a better opportunity to work down inventories and collect accounts receivables, which will help us achieve a working capital improvement of $200 million by the end of the year.

Net debt increased from $781 million at the end of Q3 2010 to $1.9 billion at the end of Q3 2011. This is one business area that I am determined to focus on in the next year. We already have a number of initiatives underway which include continuing to roll over our short-term credit facilities, expanding the maturity of our credit facilities through a syndicated loan, and monetizing certain assets such as GSF. None of these initiatives will be short-term fixes, however we do anticipate significant progress in the next six to nine months and we will keep you apprised of any developments.

Before I move on to the cash flow I would like to point out that we are currently in the process of assessing potential impairment of (inaudible), intentional assets and certain investments. This is mainly related to the significant drop in our stock price recently. We expect the assessment process to take two to three months, and depending on the outcome we may record impairment charges. These charges, if made, will be non-cash accounting charges.

Please turn to page 14. Now, looking at cash flow, the major non-cash items in Q3 include share-based compensation of $3.3 million, depreciation and amortization of $36.7 million, non-cash interest expense of $10.3 million and inventory provision of $20.2 million. In Q3 2011 cash used in operations was $27 million compared to cash provided by operations of $267 million in Q3 2010. The cash provided by operations in the year-ago period was mainly due to the operating profit and increased payables.

Total CAPEX for the quarter was $81 million which was related mainly to the expansion of our wafer facilities. Full-year CAPEX for 2011 is expected to be approximately $400 million compared to previous guidance of $340 million to $360 million. Q4 CAPEX will mainly be for final payments related to the expansion of our wafer facilities. We will maintain wafer capacity as 1.6 GW, silicone module production capacity at 2.4 GW.

As we noted in our press announcement, we will halt capacity expansion in 2012 and switch to a maintenance CAPEX only. As a result, we currently anticipate CAPEX will be in the range of $100 million to $150 million in 2012.

Now, turning to guidance on page 15. Due to softer than expected year-end demand in Europe and APMEA we expect PV shipments to decrease by more than 20% sequentially in Q4. In light of the excessive price competition we are seeing in the marketplace, gross margin is expected to be in the range of 9% to 11%. For the full year we have reduced our shipment target to 2 GW from 2.2 GW. We’ve also adjusted our full-year revenue guidance to $3 billion to 3.1 billion, and our full-year non-GAAP gross margin to the range of 11% to 13%.

Turning to our FX projection on page 16, we currently expect an FX translation gain in the range of $1 million to $5 million in Q4 based on the current exchange rate of $1.35 US dollars to the Euro. Every €0.01 appreciation of the Euro will increase approximately $3 million and vice versa. We also expect a gain from our hedging transaction in Q4. Please note this is an estimate.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) And our first question comes from the line of Satya Kumar of Credit Suisse. Please proceed.

Satya Kumar – Credit Suisse

Yeah, thanks for taking my question. Dr. Shi and Andrew, I was wondering what type of visibility you’re having at the moment for Q1. Obviously your Q4 is benefitting a lot from the shipment increase into the US. How should we think about what your shipment volumes trend into Q1 and what you think the industry volumes will do in Q1?

Andrew Beebe

Sure, I’ll give this a shot and then turn it over to Dr. Shi. I should state on Q4 as well we’re seeing strong pickup now finally, late from Europe so it’s not just a US story in Q4. In Q1 I would say we expect flat to down. I mean we’ll have to wait and see but we are as I mentioned seeing seasonality there, expecting seasonality and then also expecting a real change in Italy and Germany. The good news about Germany is that the IRRs have become so strong now even with the price decline. I was there a couple of weeks ago and sat down with many of our customers, and they were actually all quite bullish on a strong 2012 despite the change because of the price reductions and the fact that I think they’ve had now a good six months to internalize this expected change in January.

Satya Kumar – Credit Suisse

Okay. And then quickly on your cost per watt, I was wondering if you could quantify where your cost per watt might be. I know you said it’ll increase due to the underutilization. And as a follow-up to that, one of your competitors yesterday reported a massive decline in their cost per watt from $0.73 to $0.65. I was wondering why there is such a big discrepancy in cost per watt between different companies. And we do hear that material suppliers are lowering their prices, so I know you’ve given a target cost reduction of $0.65 by the end of next year but I was just wondering if you could put into some perspective why there’s such a big deviation between the relative cost per watt of different companies.

Dr. Zhengrong Shi

Okay, and let me give you some color. I think there are variations in cost of materials and components we use, so we believe we use the best quality of materials and components in our modular products. So that’s why Suntech has been constantly in capturing our brand name and the quality and performance and in product premiums. So we also have quite dramatic activity in reducing our manufacturing costs, so as the market’s already shown with time I think the cost gap is narrowed down very quickly.

Operator

Our next question comes from the line of Jesse Pichel with Jefferies. Please proceed.

Jesse Pichel – Jefferies & Company

Hi, good morning. We understand that China Development Bank may be trying to consolidate and de-risk its loans by consolidating the industry. Do they have any power to do this and could you comment on the potential of this happening with other Chinese banks?

Dr. Zhengrong Shi

It’s news to me. This is the first time I’ve heard of it, and I don’t think the Bank will lead (inaudible) consolidation which I haven’t seen anything like this happening in China.

Jesse Pichel – Jefferies & Company

Could you comment on if you have any debt covenants that could be triggered by your pending write off of assets?

David King

We don’t have any covenants that will impact the potential impairment or vice versa, and most of our loans are short-term loans and one-year roll over so it’s really assets or covenant light, if I can put it that way.

Jesse Pichel – Jefferies & Company

And finally, can you give us a little bit more color on the potential monetization of GSF and how you’re thinking about the payoff of your convertible bonds due a year from March? Thank you very much.

Dr. Zhengrong Shi

Yes, I can answer the first part of your question and David can give you an update about our financial plan. We are in the process of monetizing GSF and we’ll know it will probably take some time with due diligence and a deal structure and so on. I think we should be able to give you some update within six to nine months.

David King

And there’s a correlation between GSF monetization and CB buyback, and I will not comment too much on our CB repurchase plans in the shorter term.

Jesse Pichel – Jefferies & Company

Thank you very much.

Operator

And our next question comes from the line of Sanjay Shrestha with Lazard Capital. Please proceed.

Sanjay Shrestha – Lazard Capital Markets

Thank you. First question, Dr. Shi, on the outlook for the year and demand in China: given that this is going to end at about 2 GW this year, what’s sort of your expectation, low end and the high end, in terms of what that number could be for 2012?

Dr. Zhengrong Shi

Andrew, do you want to answer that?

Andrew Beebe

Yeah, sure. I was on the low end previously and I think it was the high end that Dr. Shi was predicting, so you should probably hear from both of us because he was right about 2011. But we’re looking at 3 GW plus for next year and I think it’s probably in a range of 3 GW to 4 GW. Dr. Shi?

Dr. Zhengrong Shi

Yes, I think I will not be surprised if I see a number above 4 GW next year.

Sanjay Shrestha – Lazard Capital Markets

Great. One quick follow-up from me, then – I guess this is for both of you guys. So given your cost reduction going back to another earlier question where Dr. Shi you talked about your costs, non-silicone costs is higher than some of your peer/competitors because you use better material, has that led to still a sustained price premium especially in Q3 given how bad the market was? And do you expect that price premium to continue to offset that delta; and what are your long-term cost per watt targets especially given where the poly is and looks like where it’s going, especially in the second half of last year?

Andrew Beebe

I’ll take the price premium and Dr. Shi can take the COGS or cost side. I think we should be very, very clear here. A year ago at the Investor Day in New York we talked about this coming transition to an oversupply world but a focus on bankability. I think in large part that was theory a year ago and it is a very cold, hard reality today for customers around the world. They are more than ever focused on not just bankable product which can result in higher cost of goods sold, but bankable companies that are focused and committed to solar.

Suntech is solar – we do nothing else. We don’t make flat panel displays and sort of decided to get into solar because the margins looked fat two years ago. Our customers are very, very focused on companies whose warranties are going to matter over 25 years. And so the price premium is not just about superior materials. The fact is, we used DuPont EVA, we use [GPP] back sheets, we use double layers of EVA when other people use single layers. And those things truly result in long-term reliability and resilience of the product.

And I think a couple of years ago this was sort of a theoretical sell but today it’s a very, very real part of the sales process. And I think our customers have proven with their wallets and also with their public statements that they’re willing to pay a modest, just a modest single-digit percentage premium over our customers for those two factors: because we have bankable product and because we have a bankable company, somebody that they can rely on. And we expect that to persist next year.

Dr. Zhengrong Shi

I think we definitely need to continue to reduce costs, and on the other hand we can’t or shouldn’t lack in the quality. So we have a lot of development activities going on at this moment to reduce non-silicone price and cost without sacrificing any of our quality, and I would say maybe in the nexxt18 months if the silicon price stays at the current level I would say module manufacturing companies will get to $0.80 per watt.

Sanjay Shrestha – Lazard Capital Markets

Okay, great. One final question from me then, guys. So when you’re talking about decreasing your OPEX by 20% there was a lot of one-time items here during 2011, so how should we think about it? What do you see as a base number on a quarterly basis and what is that 20% reduction? And even with that 20% reduction it sounds like that number is still going to be somewhere around $320 million a year. I mean isn’t there room for that number to be potentially lower than that?

David King

Yes, we believe so but our first goal is to move toward $320 million in the near-term. And what we try to look at is we do believe there is a potential to rebound in the second half, and we want to position ourselves to capture the rebound. And if we don’t see that we will do more.

Sanjay Shrestha – Lazard Capital Markets

Okay. Sorry, guys – one final question going back to Andrew’s bankability point. I hear you on that, Andrew, that the whole bankability thing is important. But if that holds so true why did we see such a big precipitous decline in prices as your folks were really paying attention to the long-term warrant and all that sort of stuff, given where the IRs were? What was so unique about it in Q3 and Q4? Was it something as simple as (inaudible) in the channel or was it something as simple as the credit situation in Europe; or did something structurally change in this industry that it’s all about price and nothing else matters?

Andrew Beebe

Let me take you back in time to the Analyst Day December of last year – I know you were there. The ASPs and actually the volume that we talked about then are not going to be that far off on the year where we end up, so I don’t think this price decline was… It’s interesting: the price decline was not that different than what we projected for the year but the rate at which it happened toward the end of the year was quite different. We had a number of unexpected things throughout the year like Italy in March, etc., but what we have seen is during a period of sort of a cycle of price decline where you guys and we and others in the media talk about these sort of pending changes, it really does cause a change in behavior because game theory sets in and people try to figure out how long they should wait before making a purchase decision.

So it has been interesting. In Germany we see incredible IRRs and people still waiting on the sidelines. Some of that is macroeconomic conditions but some of it is just sort of looking for the bottom. And so what I would say to answer the question: it’s not a seismic shift in the industry. It’s a transitional period to this new floor in pricing, and there will be a new floor. We think we’re seeing it right now; perhaps in the next quarter it dips down to the basement but then comes back up to the floor, and I think that’s all very, very related to the price of poly silicone which I think we all see finding its floor over the next quarter.

Operator

(Operator instructions.) And our next question comes from the line of James Medvedev with firm, Cowen & Company. Please proceed.

James Medvedev – Cowen & Company

Good evening. I believe you just said that you see poly finding a floor over the course of the next say three months – you said the next quarter. What sort of a price are you seeing in the market today for poly?

Dr. Zhengrong Shi

At this moment the poly price in the market is probably around $30 per kg.

James Medvedev – Cowen & Company

And are you able to buy poly at $30 or are you still using poly that was in inventory?

Dr. Zhengrong Shi

Of course we have some poly in inventory and we also buy poly from market.

James Medvedev – Cowen & Company

But again, on contract or at spot?

Dr. Zhengrong Shi

Both, because our long-term contract is only 50% of our consumption.

James Medvedev – Cowen & Company

Okay. How much internal wafers did you produce internally this quarter?

Dr. Zhengrong Shi

I would say this quarter probably about 300 megawatts.

James Medvedev – Cowen & Company

Okay. And then if you take the conversion costs, can you break those down between wafer to cell and cell to module?

Dr. Zhengrong Shi

I think at this moment we don’t provide a breakdown number.

Operator

And our next question comes from the line of Dan Ries with Collins Stewart. Please proceed.

Dan Ries – Collins Stewart

Hi, thanks for taking the question. I think Dr. Shi said that he wouldn’t be overly surprised if China rose to over 4 GW next year which could be as much as a fifth of the total market. I was wondering what portion of your sales do you think could come from China next year or Asia in general, and how do the margins on China’s sales at this point compare to say the European average?

Andrew Beebe

We’ve been in China, in the China market with a sales team for some time, a very successful sales team as we see from last quarter; and we’re bullish on our position there for next year. I guess what I would say is we’ve also been cautious on deals to cherry-pick deals that we felt were great partners on the customer side, bankable partners and strong gross margins. We’re going to continue that philosophy and that approach to the market next year, and thus while we plan to grow with the market we don’t have any specific market share objective.

It’s more about meeting our profitability and margin objectives globally. But I would say safely that it is going to grow, the China percentage will grow not versus Q3 which was particularly high, but versus the annual average for 2011. And the broader answer to your question is you’ll see a continued migration as a percentage away from Europe. But every one of our regions – the Americas, Europe and rest of world – will all grow on an absolute basis, so I don’t want to suggest that we’re shifting our focus or our intention away from Europe. We’re seeing growth everywhere but as a percentage of revenue and as a rate of growth you’ll see a higher rate of growth in the Asia-Pacific, Middle East and Africa and in the Americas market.

Dan Ries – Collins Stewart

Thank you.

Operator

(Operator instructions.) And our next question comes from the line of Kelly Dougherty with Macquarie. Please proceed.

Kelly Dougherty – Macquarie Research

Hi gentlemen. Thanks for taking the question. I’m just wondering if you can give us an idea of when you actually think you’ll see the current spot prices for poly and wafer reflected in the cost structure, where you’ll be through the inventory and really be able to enjoy the benefits of what we’re seeing right now?

David King

Can you repeat the question, please?

Kelly Dougherty – Macquarie Research

Just wondering when we start to see the current spot prices for poly and wafer reflected in your cost structure, so once you’re through kind of the overhang of inventory?

Dr. Zhengrong Shi

Yeah, it probably will be about the consumption of…. It’ll be delayed probably about two months.

Kelly Dougherty – Macquarie Research

So you’re saying by the time we get into Q1 we should really start to see current spot prices in your financials.

Dr. Zhengrong Shi

If the spot price stays this way.

Kelly Dougherty – Macquarie Research

Right, okay thanks. And I know visibility is still pretty limited a few months out, but just wondering if you have any thoughts on market share targets or overall market size for 2012 just to kind of get a sense of how you think things may look from a shipment perspective for next year?

Andrew Beebe

Sure. I mean we’re not going to do full-year guidance for next year right now but we think the whole market overall, it’ll be interesting to see exactly where we close out but greater than what we had projected in December of last year for sure, for this year; and we think next year will be up but only slightly. And we expect our growth to be slightly greater than market.

Kelly Dougherty – Macquarie Research

Great, thanks very much.

Operator

And our next question comes from the line of [Bichal] Shaw with Deutsche Bank. Please proceed.

[Bichel] Shaw – Deutsche Bank

Yeah, hi, thanks for taking my question. Dr. Shi, I just wanted to touch upon your balance sheet. If you look at your net debt, overall debt position, over the last three quarters your debt has remained relatively constant at $2.4 billion but over the last year your debt was increasing significantly. In other words, you were able to receive short-term loans from your banks. And if you look at the cash position on the other hand, it’s going down significantly from around $800 million in Q1 to less than $500 million currently. So I was wondering if you’re able to receive or if you’re able to renew your short-term debt going forward or you have to repay some of the debt to your banks. And then if you look at your operating cash flow throughout the year so far you’re not going to make any money in this environment. I was wondering what your operating cash flow position is going to be next year when you’re spending $100 million of CAPEX. Thank you.

David King

This is David. I think we are confident that we are making all efforts to make sure that in the next three months to get through all these rollovers; and the next step will be putting together a group of banks that have been supporting us for quite some time and make a syndicate out of them, and that’s what I mentioned earlier. You are right – we do not expect to be profitable on an accounting basis in the first half of next year, but we will strive to be cash flow positive the first half next year. And as I mentioned earlier, if we continue the path and we do not see improvement and pickup in the second half of the year we will do more.

For the moment we still believe that our people are the best asset we have and we would like to balance between people and costs. While we don’t see a second half rebound we will do more as I mentioned earlier.

[Bichel] Shaw – Deutsche Bank

Thank you. Just to follow up, is there any way you can reduce your maintenance CAPEX levels next year from $100 million to less than that? And then what is your cash OPEX currently? Thank you.

David King

Cash OPEX will be about 80% of what we have now; I would say 70% to 80%, and we will do everything we can to depress the range of CAPEX we just provided you for next year.

Operator

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

Colin Rusch – ThinkEquity

Thanks so much, gentlemen. Just a follow-up on [Bichel’s] question. You’ve talked an awful lot about the bankability. How intertwined are your discussions on project finance with your potential revolver and are you getting any pushback on the kind of persistent net debt position from a bankability standpoint?

Andrew Beebe

You mean from our project development customers?

Colin Rusch – ThinkEquity

No, from actual banks in terms of folk that are financing the projects that are using Suntech modules. And if you can actually give a little bit of granularity on a country-by-country basis or region-by-region basis.

Andrew Beebe

Well, the answer is the same globally. We’re getting no pushback from bank supporters of large-scale projects. I think as with everyone these days they’re asking a lot of questions and making sure that all the details line up but they’re quite happy with the answers. I mean look – we’ve got 5 GW of installed capacity out there. We have a fantastic track record on the durability of the products, and that’s ultimately when you look into that and insurance backups on the warranty, etc., these are all questions that before all the challenges of the industry over the last couple of quarters, we were answering back with Sempra and many others, Siemens and others. When we’ve had those types of customer over the last couple of years they’ve asked all those types of due diligence questions in advance of funding projects, so nothing’s changed that much in terms of that level of scrutiny and we were ready with the answers.

Colin Rusch – ThinkEquity

Great. And then just one specific on markets, looking at the Middle East and Northern Africa, as you look into 2012 and 2013 how elastic can that market be and how important can it be to Suntech from a demand perspective?

Andrew Beebe

The Middle East has been a very strong market for us. I think we’re number one in market share in Israel and certainly we have been very focused on United Arab Emirates and Saudi, and now Jordan and other areas in the Middle East. It can be elastic and I think Saudi is probably the most elastic or sort of biggest upside range that we’re seeing in the Middle East. Israel is going to be strong and ongoing and this market is transforming to allow more utility scale which we’re very happy about. I think in North Africa we have a lot of hope but not a lot of expectation in terms of upside there over the next six to twelve months. I think in 2013, certainly there are some very, very exciting long-term, large-scale opportunities particularly as that region moves from a solar thermal focus like all other regions are in different phases of moving from, to more of a PV-focused industry.

Operator

And our next question comes from the line of Brian Gamble With Simmons & Company. Please proceed.

Brian Gamble – Simmons & Company

Hi guys. Quickly, David, I was hoping you might be able to give us a preliminary range for how big you think the goodwill impairment charge could be.

David King

We are currently going through the exercise. All the asset amounts, goodwill intangibles, they’re all clearly stated in our balance sheets and we are going through this intent exercise right now and again, it will take two to three months. I don’t want to speculate and preempt the professional people doing this so again, what I want to emphasize is we will take this opportunity to look at what we have and this will be a non-cash charge as I mentioned earlier.

Brian Gamble – Simmons & Company

Sure, great. And then Dr. Shi and Andrew, maybe you could give us a little bit of your perspectives on the US market from the subsidy side, the cash grant options and ITC/ICC obviously up in the air right now. They’ve always been extended in the past, obviously not the ICC – that’s more recent – but what do you expect moving forward with budget discussions ongoing? What have you heard from your customers or from Washington specifically?

Andrew Beebe

Sure. We’re working hard with [SEAH] where we hold a Chair position to focus Congress’ attention on finding a vehicle for the extension of the cash grant and we remain optimistic. And I guess what I would say is that the industry would benefit greatly from an extension of the cash grant and I think it’s a more effective deployment of capital by the government, because you have fewer bank transactions – no offense – in the process. But I do think that we will thrive either way and certainly everybody is prepared and capable of going back to an ITC-based world. In the US, I think this is the year that the US really came out and proved that it’s a resilient and diverse marketplace. We’re well over 1 GW and we’re going to see markets around the country thriving whether it’s a cash grant or an ITC-based environment.

Brian Gamble – Simmons & Company

Okay, thanks Andrew.

Operator

And our next question comes from the line of Aaron Chu with Maxim Group. Please proceed.

Aaron Chu – Maxim Group

Hi, good evening – thanks for the question. Two quick ones if I can: first, can you highlight what your external wafer costs were in Q3 and how you see them hitting Q4? And my follow-up is just I wonder if you can maybe comment on your capital allocation strategy headed into next year and how you are thinking about balancing priorities between dealing with working cap and CAPEX; and potentially repurchasing some of the converts given their trading bill of $0.50 on the dollar heading into the 2013 maturity? Thanks.

Dr. Zhengrong Shi

Yeah, maybe I can take the first part on the wafer price. I think in Q3 I think market price, brand name market price was probably around $0.53 per watt, so if we look at the market price in Q4 as I said it is around $0.40 or below $0.40 per watt.

Aaron Chu – Maxim Group

But just to clarify, that’s the market price or that’s how it will actually hit your income statement?

Dr. Zhengrong Shi

This is the market price.

Aaron Chu – Maxim Group

Okay, but in terms of just adjusting for whatever higher cost inventory, is it something like high-$0.40’s or mid-$0.40’s you think is fair?

Dr. Zhengrong Shi

I would say $0.40 in Q4 would be around $0.45.

Aaron Chu – Maxim Group

Okay, excellent, thank you. And on a possible opportunistic buyback next year on the debt?

David King

Yeah, I think I mentioned a bit earlier that the short-term plan of repurchase, we do not know too much about that at this point. We do realize the potential undertaking is profitable.

Operator

And our next question comes from the line of Pranab Sarmah with Daiwa. Please proceed.

Pranab Sarmah – Daiwa Institute of Research

Hi, thank you for taking my question. David, could you elaborate again on what is your quarterly OPEX you’ll be looking at for 2012? And how much can you cut down that OPEX on a quarterly basis in 2012?

David King

Yeah, stripping out one-time events as we mentioned earlier, it’ll be $75 million to $80 million a quarter on average.

Pranab Sarmah – Daiwa Institute of Research

Got it. The second question, Dr. Shi, there’s a lot of questions going around regarding potential M&A between you and other companies. Could you elaborate? Like if you have to choose a partner at some point, what type of parameters will you be looking at?

Dr. Zhengrong Shi

Well, I think at this moment the customers very much prefer bankable supplies, so I think Suntech’s in a good position as demonstrated by our figures. So we are increasing our market share and our [consult] of the market. So I think it’s very important for us to work well and collaborate with our suppliers, and it’s most important to further expand our market shares and leverage our branding and the advantages of being a bankable product and our cost advantages to fully expand our channel.

Operator

And our next question comes from the line of Nitin Kumar with Nomura. Please proceed.

Nitin Kumar – Nomura

Yeah, hi, thanks for the time. I just want to understand. You’re speaking about releasing $200 million from the working capital. If you have to remove, you will be getting accounts receivables, you will be reducing inventory but that implies your utilizations in Q4 need to be severely down from where they were in Q3. Is that the right way to think about it?

David King

Yes. We mentioned we’ll slow down production late in Q4 and a good part of Q1, and we will start to improve our AR balance and a much bigger part of the $200 million will come from inventory reduction.

Nitin Kumar – Nomura

So just to go forward, at the end of Q4 how much high-cost inventory will you still probably be holding or rather what’s the current target plans?

David King

Yeah, if you notice what we have done is every quarter we adjust our inventory to market. We provide provisions to inventory unlike some of our peers where they will do big chunky quarter sands things. And so I don’t expect to have a large provision of inventory at the end of Q4. And our guidance actually reflected inclusion of inventory provision.

Nitin Kumar – Nomura

I understand. Great, thanks a lot.

Operator

Ladies and gentlemen, in the interest of time this does conclude our question-and-answer session today. I would now like to turn the call back over to Dr. Shi for closing remarks.

Dr. Zhengrong Shi

Thank you for joining us, and if you have further questions please contact Rory, our Investor Relations Director or David or myself, and have a nice day! Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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