Yingli Green Energy Holding Co. Ltd. (NYSE:YGE)
Q4 2011 Earnings Call
February 29, 2012 08:00 am ET
Arthur Chen - Director, Legal Affairs
Miao Liansheng - Chairman & CEO
Darren Thompson - Managing Director, Yingli Green Energy, Europe
Robert Petrina - Managing Director, Yingli Green Energy Americas
Bryan Li - Executive Director & CFO
Satya Kumar - Credit Suisse
Lu Yeung - UBS
Philip Shen - Roth Capital
Timothy Arcuri - Citigroup
Mahesh Sanganeria - RBC Capital
Aaron Chew - Maxim Group
Hari Chandra - Auriga
Hello, ladies and gentlemen my name is [Edwin Yang] and I will be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited fourth quarter and full-year 2011 financial results conference call. All lines have been placed on mute to prevent background noise. After today’s presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you’d like to ask a question.
And now I would like to transfer the call to the host for today's call, Arthur Chen, Director of Legal Affairs of Yingli Green Energy. Arthur please proceed. Thank you.
Thank you, operator and thank you everyone for joining us today for Yingli's fourth quarter and full-year 2011 financial results conference call. The fourth quarter and full-year 2011 earnings release was issued earlier today and available on the company's website at www.yinglisolar.com. We have already provided supplemental presentation for today's earnings call, which can also be found on our IR website. I hope you all had a chance to review it by now.
On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Executive Director and Chief Financial Officer; Mr. Wang Yiyu, Chief Strategy Officer; Ms. Yin Tong, Financial Controller; Mr. Darren Thompson, Managing Director of Yingli Green Energy, Europe; Mr. Robert Petrina, Managing Director of Yingli Green Energy Americas.
The call today will feature a presentation from Mr. Miao, covering business and operational developments. Mr. Thompson and Mr. Petrina will talk about the developments of the European and emerging markets respectively. And then Mr. Li will take you through a discussion of the company's financial performance. After that, we will open the floor to questions from the audience.
Before beginning, Yingli Green Energy's management team would like to remind the audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipates, future, intends, plans, believes, estimates, and similar phrases.
Such statements are based upon management's current expectation and current market and operational conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy's control which may cause Yingli Green Energy's actual results, performance or achievements to differ materially from those in the forward-looking statements.
Further information regarding this and other risks uncertainties or factors is included in Yingli Green Energy's filings with the US Securities and Exchange Commission. Yingli Green Energy does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required under applicable law.
I'd now like to turn the call over to Mr. Miao Liansheng. Please begin.
Hello, everyone. Thank you for joining us today. The PV industry experienced tremendous supply demand imbalance through the value chain in 2011 which was exacerbated by incentive adjustments in major solar markets and austerity measures in Europe. Yingli Green Energy is successful in navigating and intensify its competition by achieving full-year 2011 module shipments of 1404 megawatts representing a volume increase 51% over 2010.
This increase was attributable to all the strong [brand], differentiated market channels and end market diversification. While our module shipment volume in the fourth quarter was down from the previous quarter which strengthened our position in major markets such as Germany, China and in the US.
From our inception in 1998, we have cultivated relationships with a broad group of high-quality customers and have established a strong strategic partnerships with many of them. Our customer base further expanded as we added over 100 new customers to our portfolio in 2011.
Furthermore, we’ve worked tirelessly to enhance our global sales and aftersale service network. As of today, we have nine overseas subsidiaries covering major solar markets in Europe, Americas and Asia. The R&D and after-sales service tenders in Spain and the US have enabled us to provide broader and timely service to our customers in Europe and the Americas.
As one of the solar pioneers, Germany is a strong foundation for the establishment and growth of leading solar EPC and distribution companies that now operate across Europe and globally. In January, we entered in to a sales agreement with IBC SOLAR AG to supply up to 200 megawatts of modules through 2012. The enhanced co-operation with IBC demonstrated our customers’ confidence in our continued growth potential in Europe and a high degree of brand recognition for Yingli Solar.
Beyond our continued commitment in Germany, we plan to deploy more resources in other European markets. These efforts include strengthening local sales and services teams and implementing targeted promotion activity that of introducing Yingli Solar brand to more customers.
Additionally, we will continue to utilize the customers’ broad and strong project development channels to promote our products in non-European markets.
China market achieved significant growth in 2011 and has become one of the most promising emerging markets. The strong performance is attributable to the boom in the utility segment driven by the fitting charge and a steady growth in the rooftop segments under the Golden Sun program. Based on our commitment the committee strategic layout in broad sales networks, our sales to China increased to 22% of total revenues in 2011 compared to only 6% a year ago. We have reallocated our domestic sales force and implemented different strategic strategies to better adjust demands from the utility segment in Western China and rooftop segment in Eastern China. We will continue to provide our customers with full service that covers projects planning, technical support and talent training to improve our brand loyalty and establish Yingli Solar as a brand of choice. So with the cooperation with our customers we are on track to further improve our leading position in China.
On the supply chain management front, through diversifying our supplier base, establishing long-term strategic partnerships with high profile suppliers and implementing the vendor managed inventory program for the domestic suppliers, we were able to bring down not only material costs but also working capital requirements. Furthermore, we are constructing a unified procurement platform for all of our manufacturing facilities to better realize economics of scale.
In addition to decreased the material cost we have continued to drive down the marginal cost through higher selling efficiencies and higher yields. By continuously optimizing our manufacturing process the average conversion efficiencies for multi-crystalline and Panda sales have reached 17% and 19% respectively.
On the manufacturing capacity fronts we are on track to add another 750 megawatts manufacturing capacity in Haikou, Tianjin, Hengshui and Baoding in 2012. These new capacities are expected to start to release in the first quarter and third quarter respectively. By the end of this year we expect our total manufacturing capacity to reach 2450 megawatts.
We are optimistic that as the cost of solar PV decreasing we will see a tremendous increase in PV applications globally as solar electricity has become more affordable. We believe that industry consolidation brings more opportunities and challenges to companies with technology and top leadership, scale and breadth. We are confident to continue to gain market share by delivering 2.4 to 2.5 ingots of PV modules in 2012.
Now Darren Thompson and Robert Petrina will talk more about the European and U.S. markets, thank you.
Thank you, Mr. Miao and Arthur. Q4 began with signs of increased installation activity in Europe’s biggest market Germany, as a result of the [transition] in production in 2012 and end-users delaying purchase decision in Q3 to profit from any ASP pressure. This created incremental demand from end users in Q4 and also enabled distributors and system integrators to work with inventory carried forward from Q3.
The mild weather until we end the 2011 supported a record good connection volume in Germany during the final months of the year, further deepened by bill completion of larger plant and the end of year rally for smaller systems.
The full year 2011 revenue shipments to Germany were below 50% to the approximately a third of its volume down for other European countries continuing Yingli’s trend of reduced dependency on the Germany market. Italy also continue to contribute significantly to demand in Europe through the year-end, showing return of solar market confidence following a slow start to the year, as a result of government solar incentive review announced in March.
Other European markets remained subdued but steady, given several unplanned incentive revisions, particularly certain decisions by the U.K. government to bring forward the solar incentive reduction by over three months. This decision was overturned after a judicial review, although uncertainty had already had a negative impact on the U.K. solar project pipeline.
Customers carried low inventory level in to 2012 and as a result of EEG uncertainty in January, there was an uptick in demand and was looking firm in contrary to the historical season of demand in Germany.
The announcement of a revised EEG removes some uncertainty but of course places additional pressures on Yingli and on customers to deliver economically attractive systems to end users.
This will be mitigated to some extent by existing turnkey projects having a grace period to get connected by the end of June.
The challenge in Germany is balanced against the large increases in consumer electricity prices during 2011 that are being seen in many European countries. These high electricity prices combined with regions of high sun hours brings forward the point in time of which solar can compete on a rooftop driven by cell consumption and PPA type business model.
I’ll now hand over to Robert. Thank you.
Thank you, Darren. Following up on an otherwise solid Q3, the US market showed solid growth as a number of utility and commercial scale projects begin installation. While distribution continued to be challenged by shifting models and continued albeit subdued price declines, it’s clear that the worst had passed as far as master inventory with new market expectations.
Based on installations, the Yingli led the California Solar Initiative market in 2011 with approximately 50 megawatts of Yingli panels installed in CSI territory and overall, our split among the adjustable market segments was 40% utility, 50% commercial/institutional and 10% residential.
We continued to grow our relationships with existing customers as well as become the supplier of choice to a substantial new set of customers.
Our Panda product reached significant traction by being selected for an eight plus megawatt institutional installation and in Q4, Panda was more than 25% of our sales in megawatts shipped to the US market.
The expiration of the [cash branch] manifested itself in a predictable way as customers across all segments positioned themselves to ensure they were complying with the relevant rules around Safe Harboring the 2012 and beyond projects.
This resulted in tremendous activity at the end of the quarter, similar to the phenomenon experienced at the end of 2010. This translates in a solid Q1 order book, with firm Q1 deliveries as well as significant opportunities to provide the supplementary product to those Safe Harbor projects.
In South America, we continued to see success with the addition of nearly 10 customers where the market is still highly fragmented and nascent, the increased activity is a positive signal and we’re optimistic that it’s poised for significant growth in the near future.
In 2011, the US market grew in line with expectations and we achieved our targets in the region. We are constantly optimistic that 2012 will continue along the same path, however facing a number of unpredictable decisions such as AD/CVD investigation.
With that, I’ll hand over the call to Mr. Bryan Li.
Thank you, Robert. Hello and thanks everyone for joining us today. I’ll now take just a few minutes to summarize our fourth quarter and a full-year 2011 financial results. Later on, I’ll provide guidance for the first quarter and the full-year 2012.
You may also refer to the supplementary presentation on our website.
As Mr. Miao mentioned, the PV industry experienced a tremendous pressure in 2011. Looking at fourth quarter of 2011, our module shipment declined by 29.8% over the third quarter and then in GAAP gross margin of PV module in the fourth quarter was 12.7%. For full year 2011, our module shipments increased by 51.1% from 2010 to 1.6 gigawatts. Non-GAAP gross margin for PV modules was 20.6% and then non-GAAP diluted EPS was $0.76.
Now let’s start to go through the details of the financial performance in the fourth quarter. Total revenue were RMB 2.6 billion equivalent to $408 million compared to RMB 4.3 billion in Q3. The decrease quarter-over-quarter was due to the decline in both average selling price and shipment volume.
Gross profit was RMB 77.3 million, equivalent to $12.3 million compared to RMB 458.5 million in Q3. Overall gross margin was 3% compared to 10.8% in Q3. The decrease in gross margin was primarily due to the decline of the average selling price and to a lesser extent, a non-cash inventory provision of RMB 211.2 million, equivalent to $33.6 million.
Excluding this cash inventory provision, our gross margin of PV modules would be 12.7%. The decrease in gross margin was partially offset by the continuous initiative to reduce the module costs. Excluding the non-cash inventory provision, our blended polysilicon cost for module decreased to $0.33 from $0.37 per watt in Q3. Our blended non-silicon cost for multi and mono PV modules was reduced to $0.64 from $0.66 per watt in Q3.
Operating expenses were RMB 3.9 billion, equivalent to $613.5 million. In this quarter, due to the challenging solar market conditions, we recognized an impairment of long-lived assets of Fine Silicon of RMB 2.3 billion, equivalent to $361.5 million and an impairment of goodwill of RMB 273.4 million, equivalent to $43.4 million.
The impairment of long-lived assets of Fine Silicon was to reflect less than expected profit-generating ability of Fine Silicon’s assets due to a short decline in the spot-market price of polysilicon. The goodwill subject to the impairment was originated from the historical acquisition of equity interests in ‘06, ‘07 and ‘08 in Tianwei Yingli, an operating subsidiary of the company.
Furthermore, we recognized a provision of RMB 851.7 million, equivalent to $135.3 million on our inventory purchase commitment under long-term polysilicon supply contracts as a result of continuing decline in the polysilicon purchase price.
We have been negotiating with our suppliers on the prices under those long-term contracts. Should the actual purchase prices upon delivery be revised down in the future, the provision would be reversed to the extent of the amount recovered.
Excluding the non-cash charge mentioned above, operating expenses would be RMB 461.4 million, equivalent to $73.3 million compared to RMB 464.1 million in Q3. Operating expenses as a percentage of total net revenue will be 18% compared to 10.9% in Q3.
Our operating loss was RMB 3.8 billion, equivalent to $601.2 million; amount compared to RMB 5.5 million in Q3. Excluding non-cash charge operating loss would be RMB 172.8 million, equivalent to $27.5 million and operating margin would be negative 6.7%. Interest expense was RMB 102 million, equivalent to $28.9 million compared to RMB 156.4 million in Q3.
As of December 31 of 2011, we had an aggregate of RMB 14.2 billion equivalent to $2.3 billion borrowings compared to RMB 13.8 billion as of September 30, 2011. The weighted average interest rate for the debt outstanding in Q4 was 6.77% compared to 6.19% in Q3. Foreign exchange loss was RMB 134 million, equivalent to $21.3 million compared to RMB 153.2 million in Q3.
Income tax benefit was RMB 249.3 million equivalent $39.6 million compared to RMB of 34.4 million in Q3. The income tax benefit was mainly because of a deferred tax benefit recognized in connection with the net losses incurred in this quarter. As a result of the factors discussed above, net loss was RMB 3.8 billion, equivalent to $599.4 million compared to RMB 180.5 million in Q3.
Loss per ordinary share and per ADS was RMB 24.37 equivalent to $3.87 compared to RMB 1.14 in Q3. On an adjusted non-GAAP basis, net loss was RMB 126.5 million, equivalent to $20.1 million compared to net income of RMB 142.7 million in Q3. Adjusted non-GAAP loss per ordinary share and per ADS was RMB 0.92 [RMB 0.82] equivalent to the $0.30 [$0.13] compared to RMB 0.89 in Q3.
For full year 2011, total net revenue were RMB 14.68 billion equivalent to $2.3 billion, an increase of 17.4% from RMB 12.5 billion in 2010. PV module shipment was 1.6 gigawatts reflecting an increase of 51.1% from 2010.
The contribution from increased total shipment volume was partially offset by the decline of average selling price of modules compared to 2010. Gross profit was RMB 2.4 billion, equivalent to $389.2 million compared to RMB 4.2 billion in 2010.
Overall, gross margin was 16.7% compared to 33.2% in 2010. In Q3 and Q4 of 2011, we made non-cash inventory provision of RMB 258.6 million and RMB 211.2 million respectively. Gross margin of PV modules excluding the non-cash inventory provision was 20.6% for the full year of 2011.
Operating expense was RMB 5.1 billion equivalent to $817.4 million compared to RMB 1.4 billion in 2010. The significant year-over-year increase in operating expenses reflected a non-cash impairment of long-lived assets relating to Fine Silicon and non-cash impairment of goodwill relating to the goodwill originated from the historical acquisitions of equity interest in Tianwei Yingli and a non-cash provision on our inventory purchase commitments made in Q4 as discussed above.
Excluding those non-cash charges, operating expenses in 2011 would be RMB 1.7 billion, equivalent to $277.2 million. The increase in operating expenses in 2011 was mainly caused by increased investment in research and development and increased scale of our business.
High efficiency module is becoming more and more attractive for private investors as roof-top system segment has been enjoying a fast development speed. In the second half of 2011, we initiated the second phase of project PANDA. The highest cell conversion efficiency rate has reached was 19.7% in 2011 and we targeted to reach 21% in 2012.
Operating expenses as a percentage of net revenue were 35.1% compared to 11% in 2010. Excluding the non-cash charge, operating expenses as a percentage of total net revenue would be 11.9%.
Interest expenses was RMB 626.7 million, equivalent to $99.6 million compared to RMB 438 million in 2010. The interest expense included a non-cash interest expense of RMB 23.5 million, equivalent to $3.7 million compared to non-cash interest expense including additional accounting charge upon conversion of convertible notes of RMB 131.5 million in 2010. But the non-cash interest expense was primarily related to certain financial instruments issued in 2009.
After excluding the non-cash interest expense, interest expense would be RMB 603.3 million, equivalent to $95.8 million compared to RMB 306.5 million in 2010. The year-over-year increase was primarily attributable to the expanded scale of borrowings. The weighted average interest rate was 6.33% compared to 6.37% in 2010.
Foreign currency exchange loss was RMB 190.5 million, equivalent to $30.3 million compared to $338.2 million in 2010. Income tax benefits was RMB 133.4 million equivalent to $21.2 million compared to income tax expenses of RMB 333.5 million in 2010. And the net loss was RMB 3.2 billion equivalent to $509.8 million. Loss per ordinary share and per ADS was RMB 20.46 equivalent to $3.25. On an adjusted and net GAAP basis, net income was RMB 773.7 million equivalent to $122.9 million. Adjusted and GAAP diluted earnings per ordinary share and per ADS was RMB 4.81 equivalent to $0.76.
Now a quick review of our balance sheet. As of December 31, 2011 we had RMB 5.6 billion equivalent to $891.9 million in cash and restricted cash compared to RMB 5.9 billion as of September 30, 2011. As of December 31, 2011 our accounts receivables were RMB 2.4 billion equivalent to $283.2 million compared to RMB 3.3 billion as of September 30, 2011.
As of December 31, accounts payable were RMB 3 billion and compared to RMB 3.6 billion as of September 30, 2011. And as of today we have approximately RMB 7.1 billion in unutilized or short-term lines of credit and RMB 4.8 billion committed to long-term facilities that can be drawn down in the near future.
As of December 31, we had to repurchase approximately 5.6 million of outstanding ADS from the open market for a total consideration of $19.6 million under the share repurchase program announced in September 2011. Additionally, in January in 2012 Trustbridge Partners II, L.P. converted a principal of $14.6 million in senior secured and convertible notes due 2012. As such Trustbridge completed the conversion of all the convertible notes that they had held. The convertible notes were issued pursuant to a previously announced a note purchase agreement entered into between the company and Trustbridge back to January 2009. As a result, in January 2012 the company issued an aggregate of 3.6 million ordinary shares to Trustbridge.
Now I would like to discuss the outlook for our first quarters and full-year 2012. For the first quarter of 2012, we expect our module shipments to increase by approximately 30% over Q4 2011 and the gross margin to be approximately 10%. For full year 2012, based on current market and operating conditions, estimated production capacity and forecasted customer demand we expect our PV module shipment volume to be in the estimated range of 2.4 gigawatts to 2.5 gigawatts, which represents an increase of 49.6% to 55.9% compared to full-year 2011.
Now I would like to open the call to the questions. Operator
Thank you. (Operator Instructions) Your first question comes from the line of Jesse Pichel from Jefferies. Please ask the question.
Hey this is [Min Chu] for Jesse. Good evening Chairman Miao and Bryan and team. My first question is related to your 2012 guidance and then I have a follow-up question. So despite weak outlook of global PV market in 2012, you guided to a quite impressive more than 50% volume growth. So what are the pricing and margin assumptions behind the shipment target. Can you give us more color on your target growth rating, your key markets including Germany, China and US?
And as we discussed in the prepared remarks, we expect to hit 2.4 gigawatts to 2.5 gigawatts, shipment expectation for the full year of 2012 and the pricing environment, we see and we currently expect there will be missing percentage, a decrease on ASP from Q4 to Q1 2012. And then down slightly quarter over quarter towards the end of the year.
And from the volume perspective and we have pretty confidence to achieve the guidance we have discussed. And currently for the shipment across the quarters and we expect a 30% plus up from Q4 to Q1 and mid-teen percentage up from Q1 to Q2, and then as we will expect a high 20s percentage up from Q2 to Q3 as the additional capacity coming online in the third quarter and then it will go flat or slightly up here from Q3 to Q4.
So talking about the capacity expansion, for the 750 capacity expansion, can you breakdown how much that will be standard multi versus high efficiency mono or multi and how much CapEx have you planned for that and how much has already been spent?
Yeah sure and we actually started those projects and during 2011 and in the different quarters and according to our construction schedules and for the new capacity and we expect roughly 25% will be coming online in the first quarter of this year and which is now and 75% will be coming online from the beginning of Q3 and currently from our expectation and for the majority of the 750, and it will be multicrystalline modules and we have already spent more than 50% of the CapEx in 2011 and there would be less than 50% of the CapEx and continue to be spent in 2012.
And for the 50% that’s still going to be the spent, how much of that?
$350 million to $400 million.
Your next question comes from the line of Satya Kumar from Credit Suisse. Please ask the question.
Satya Kumar - Credit Suisse
Yeah hi, thanks for taking my question. There was one thing Robert, if you could talk about, how big do you think the US market will be for Yingli in 2012 and how do you are factoring in the uncertainty you think about the outlook for 2012?
I think with respect to how we view the US market in 2012, I think 2011 was on track with all expectations in terms what finally I believe was installed in the US market. We believe that 2012 will continue to grow and the market I think will have a range of somewhere between 2.5 to potentially as high as 3.5 gigawatts. Our target market share in the US has been double digit. So we spoke last year around being somewhere between 12% and 15%.
We continue to have them in our sites. It is very difficult to draw on these specific estimation at this moment with respect what is happening in the CVD/AD investigation. For us what we believe is that it causes short-term uncertainties in the US market, but in the long run I think we are definitely committed to the market. So we are actively evaluating several possible solutions to ensure that our long-term commitment to the US customer is solid and like I said in the short term it’s disruptive and in the long term I think it will be fine.
Satya Kumar - Credit Suisse
As a quick follow up to that, if I take a look at what’s happening in Germany and with the current expectation in the markets, it would decline to maybe 3 or 4 gigawatts and if I assume that your market share grows at the same rate in 2012 in Germany like it did in 2011 and after that what you are saying you will do in China and thus US, you would need to increase the volumes in the other geographies outside of the three regions by a factor of 4 and 250 megawatts to a gigawatt. So I was wondering at a high level, can we talk about how you are developing the trade channels outside of these three major regions?
So I was thinking in 2012 we believe our exposure to Germany should be, maybe it should maintain roughly the same level in 2011 roughly close to 25% of our total output and we expect that we can roughly sell 15% through the rest of Europe and we can increase our market share in China significantly representing roughly 35% of our total output. Then in US we expect that we can sell roughly over 400 megawatts, which is roughly 20% of our total output and remaining roughly 5 and 30 plus percent is the rest of the world.
Thank you. The next question comes from the line of (inaudible) from UBS. Please ask the question.
Lu Yeung - UBS
Yes, follow-up to the US question, have you guys looked at options or trying to maybe outsourcing to partners outside of China, establish your manufacturing base in US and if you do maybe you share with us some of the cost premiums of doing that compared to manufacturing in-house in China.
We are not going to elaborate on how much we have investigated and done and as said before, we've actively evaluated a lot of different possible solutions, as solutions exist and since we are committed to the US market. So I don't think it’s appropriate to really go into the details on the call.
Lu Yeung - UBS
Also on the China demand there have been quite a bit of installation completed in the fourth quarter last year ahead of these things have been (inaudible). I just want to see what kind of demand you are seeing in first quarter where there will be any weather conditions impact or seasonality impact on China demand?.
I think in Q1 our exposure to China market is now, given the winter period is below 10% roughly of our total outputs. So in Q1 actually given the current Germany [filling] times have changed there will be very significant impairment in Germany around the projects. However, we have already started talks with a lot of Germany customers given our main major customer portfolio in Germany cover the (inaudible) industrial ratio. That’s why I think in the Q1 we can still two generate very strong demand from Germany. Roughly close to 50% of our total output is to Germany.
Lu Yeung - UBS
Sorry, I was trying to say what kind of demand trend you’ve seen in China?
Lu Yeung - UBS
In the first quarter?
Lu Yeung - UBS
Below 10 and would you expect a very significant increase in the second quarter onwards or how should if we think about that?
Of course as usual the China markets the peak season is always in the Q2 and Q3. If we are talking about in percentage-wise maybe over 85% to 90% volume will be of China market will be completed in this two quarters.
Lu Yeung - UBS
How does the pricing in China compare to other parts in the market?
Okay. For the China market I think the pricing is slightly below the European market but I think given the RMB appreciation and the lower transportation cost, I think could be slightly around 5% to 8% lower than the European overseas sales.
Thank you. The next question comes from the line of Vishal Shah from Deutsche Bank. Please ask the question.
Hi this is (inaudible) for Vishal Shah. I just wanted to get your take on how long it is going to take for you to get to roughly spot pricing on your polysilicon cost. It seems like it still fairly high in the quarter?
We think, the fourth quarter probably is the last quarter for the price away from the spot market price. And for the trend we are seeing in the first quarter and we believe the poly cost, we are still getting to the spot market price. And I currently expect and the blended rate of polysilicon in the first quarter ’12 were well below $40 level. And will be somewhere in between 35 to 40 and then this trend will continue and are coming down in a quarter-over-quarter and towards the $30 level when we exit this year.
Okay. Obviously other producers were posting very strong fourth quarters. You are posting the opposite in the first quarter relative to other guidance. Can you talk about what led to some of the down fourth quarter and some of the factors leading to the first quarter?
Can you repeat your questions? Sorry. I can’t hear your voice.
Sure. Relative to other competitors of yours who posted strong fourth quarter that you had a down fourth quarter, can you talk about some of the factors that led to that and what you expect for price declines in the first quarter and some of the price outlook for the full-year of 2012?
I think, our first quarter is in line with our usual expectation. I don’t see a very, it’s not a surprise to us and in Q1 as I mentioned, we’ve been already started to turn the inventory to European through the year-end, which support us, enough volume, spot above to catch up with those demand in Germany and also we have some revenue deferred from Q4 to Q1, which is because from that accounting perspective, we currently recognize revenue when the (inaudible).
And in terms of the ASP trend in the first quarter, as we commented earlier and that we currently expect a mid-teen percentage down from Q4 level and then down slightly in Q2, Q3, and then Q4. And I think, further to the explanation, in Q4 and there are a few revenue cut-off issue due to the timing difference arising from the logistic arrangements and also we have to explain the value to you earlier we have changed a few deals based on our evaluation on the credit risk for some of the customers.
We decided to change the criteria for the recognition of title of the goods from the delivery to the cash collection and in order to reduce that risk of the cash collection in the future. So all of those arrangements have that pretty down sides to our Q4 shipment volumes but those timing difference and the impact on those arrangements would be added back in the first quarter of this year.
Our next question comes from the line of Philip Shen from Roth Capital. Please ask your question.
Philip Shen - Roth Capital
Hi thanks for taking my question. In the Q4 period I think you shipped about 70 megawatts to the US. What percent import with Yingli or a Yingli subsidiary listed as the importer of record?
I think for the shipment after December should be imported by our US subsidiary, which is not significant compared to the whole Q4 amount.
Philip Shen - Roth Capital
So what you are saying you are going forward you expect less than what you had in December. Is that right?
I think in Q1 as I mentioned in the US it will be roughly 20% to 25% of our Q1 output we sell to US market.
Philip Shen - Roth Capital
My question is, of the 20% what do you expect to list or you ship as being the importer of record, meaning I am trying to understand what the potential exposure you might have to the CVD/AD to these?
I think the Q1 majority is we inputted through our US subsidiaries.
Philip Shen - Roth Capital
And then we saw Trina in Q4 take a $3.3 million provision for countervailing duties; is there a reason why you didn’t take one in Q4 and do you expect to take some going forward?
I think currently the CBD has not been effective announced until this moment, and we don’t have any inputs that we needed to be cleared after they predict the period which is 19th of March, that's why we don't think we should accrue any CBD at this moment.
Thank you. Your next question comes from the line of Timothy Arcuri from Citigroup. Please ask the question.
Timothy Arcuri - Citigroup
I have two, first of all, if I look at your 2012 shipments into China, it sounds like you are going to ship maybe 900 megawatts, 850 megawatts to 900 megawatts something like that. And I am wondering, what do you think your share will be of the total market in 2012 in China and maybe what your targeted share is?
And then secondly, well I had a follow-up.
I think for China market, we expected that it would be close to 5 gigawatts for the market and based on our guidance our total output of ship represents around 15 to 17 of the total China market compared to 2011 would be the reasonable target.
Timothy Arcuri - Citigroup
And then Bryan, is there a reason, if I compare your property, plant and equivalent balance, if I compare PP&E even excluding the write down and I compare that kind of on a per megawatts basis relative to you know peers like Trina; its still significantly higher; is there some reason, are your assets funded maybe worth more than you know someone like Trina’s are; is there a reason why there should be that much of a difference? Thanks.
Yeah, I think that is because of the different business models and we’re always pursuing a very good integrated business model and which makes and we every time – and the capacity of each of the part along the value chain is the same. And for Trina, I think they are not doing 100% vertical integration business model and they have the capacity of delta between the weaker capacity and the module capacity.
And the wafer equipments typically it takes 50% of the total CapEx of a vertical integrated facility, so that’s why it was a -- the PP&E value of Trina is below Yingli’s level.
But I think the trade off for that strategy is ready and we gained better control of the supply management and also we have a better upside potentials on the margin upsides when the market stabilize.
Thank you. Your next question comes from the line of Mahesh Sanganeria from RBC Capital. Please ask the question.
Mahesh Sanganeria - RBC Capital
Just want to re-visit Germany again, if you can just talk about any or full year shipment guidance, how much variability can come from Germany? What I want to understand is that Germany was, total installation is three, five, or seven, what will be variation to your total guidance for 2012?
For 2012, we believe the Germany market will be slightly down given and from a historical figure, Germany is not significant around projects actually on the other side is significantly around the including residential and the industry. So that’s prudent we expected our total output in megawatts should be flat in 2011 compared to 2012 which represents roughly close to 25% of our total 2012 output.
Mahesh Sanganeria - RBC Capital
And then another, just some clarification on the write down for purchase commitment; can you explain that why is that non-cash is a purchase commitment charge you took that’s a non-cash charge?
That was because of the current contract price of the long-term contracts are higher than the spot market price. And although, and we are negotiating with the, with those long-term contract suppliers to adjust the purchase price to close to the spot market price. And in the past few quarters and we have successfully negotiated with the suppliers and adjust on the purchase price upon the delivery close to the spot market price.
However, as the contract price paid on the legal contract is still maintained unchanged, and un-amended and so from prudent sake, and so we decided to provide a provision for the long-term commitments under those supply contract. If the future, if we continue the negotiation with the suppliers and then successfully manage the purchase price down to the spot market price like we did in the past few quarters, we should be able to reverse back the loss we provided to the extent it’s recovered.
Mahesh Sanganeria - RBC Capital
So, you will report a gain in the, if you are able to adjust your contract, you will report a non-cash gain of the same amount of 130 million or so in the following next three to four quarters?
Yes. If our actual purchase price is below the contract price, is below the stated contract price and then we will report a non-cash gain.
Thank you. Your next question comes from the line of Aaron Chew from Maxim Group. Please ask the questions.
Aaron Chew - Maxim Group
I wonder if I could just clarify a few things on the poly side. First, just in terms of fourth quarter, I am right in calculating that from an income statement perspective you booked poly probably around 50 bucks? And then I just want to clarify Bryan your comments earlier about $35 to $40 poly in 1Q drifting towards $30 in the Q4, do you mean on a procurement basis or you mean as it’s the income statement as is actually book i.e. incorporating inventory cost? And just a quick follow-up is, I wonder if you could may be break down the inventory provision in terms of how it broke down in terms of poly and in modules? Thanks.
As we discussed earlier, in the first quarter we expect the blended rate of polysilicon were down below $40, it should be somewhere in between $35 to $40 per kilo. That will be blended area of polysilicon and which will be reflected directly in the cost of production instead of a procurement cost. And then this decreasing trend will continue quarter-over-quarter and towards the $30 level when we exit this year, so that’s number one.
And then your second question is regarding the inventory provision; we have evaluated the odd of the inventory as of December 31 of 2011 and to determine the value of the inventory comparing to the market price as well as the status of the inventory and it provided a RMB 211 million inventory provision and which we think is necessary to reasonably reflect the inventory costs as of December 31st.
Aaron Chew - Maxim Group
Okay that's helpful and Bryan, I could have just one really quick follow-up, are you able to just highlight how much of your production in 4Q used your internal poly production, maybe on a metric ton or percent basis you know you could give just a rough range.
Yeah, that's roughly I think roughly 10% to 15%.
Your next question comes from the line of Ahmar Zaman from Piper Jaffray. Please ask a question.
This is Karen calling on behalf of Ahmar. I just have a question on your shipment guidance for 2012. Out of your 2.4 and 2.5 gigawatts, how much have you already secured orders and then I have a follow up.
I think for this guidance, at this moment we've receive a lot of intentionally and but volumes given the China market has not significantly started. So we haven't secured a lot of smooth and legal binding contract. However given our customer base in Germany, China and the US market we believe this target should be reasonable compared to what we have achieved in the regional market.
I’ll provide a little bit color on the demand in Europe. Yes obviously we have most of our customers around what we call framework contracts in terms of the volume they are planning to take through this year. Obviously the German market is pretty fluid at the moment and they still are awaiting various decisions to be made. But judging by the either contract we announced recently for upto 200 megawatts through the IBC is giving an indication of the confidence that our customers have in light of the fact that we have very high electricity prices in some countries in Europe with high (inaudible) and we certainly see more PPA type business models being accelerated in Europe which will bring out some of the demand in Europe versus its driven volume.
And just to conclude in the US as I mentioned in the earlier questions I mean I think we feel pretty confident in the demand profile in 2012 and expect that is going to be solid growth for 2011.
And given the significant increase in the number of new customers and you mentioned that in the fourth quarter you recognized some of the revenues in the first quarter, do you think that will likely happen again?
I think the customer numbers in those mature markets will be reasonably increased for those new markets especially like China we always just see at least more than 50% potential customers have a potential pipeline in different areas. I think for the new market will be significantly increase, but for those existing markets like Germany we expected the volume in many from those existing and slightly increased customer in numbers.
Thank you. Your next question comes from the line of Hari Chandra from Auriga. Please ask the question.
Hari Chandra - Auriga
Do you have an update on the non-silicon cost structure update?
We have achieved $0.64 per watts for the non-polysilicon in Q4. And we expect that it will be down to $0.64 in the first quarter and then that will be $0.01 to $0.02 down quarter-over-quarter. When we add to this year and I am expecting the non-polysilicon cost will be somewhere close to $0.56 to $0.58.
Hari Chandra - Auriga
And where do you see from your approach the global demand in 2012 and in that context you talked about supply-demand imbalance. So with your addition of new capacity, do you see, you are contributing to it or do you think you are side stepping it and somebody else should get out of the way in terms of the capacity, the excess capacity that is out there?
I think switch is on ’11, and actually the supply has been already shrink a lot and I believe a lot of companies has been either ceased or paused the expansion, and therefore you can see the majority players take the main market share around globally. And from the 2012 perspective, we believe such kind of trend will continue and the supply and over demand will be still there in 2012, but it will be getting less stressed compared to 2011.
Thank you. Your next question comes from the line of [Dan Ruiz] from Independent Research. Please ask your question.
I guess my question is really for Darren. I was wondering if you could give us any color on your customers and Germany’s reaction so far to the earlier than expected feed in tariff cut will [initiated] at the end of the March 9th date will ultimately be the date of the cut? If you think the residential market is still relatively buyable after that cut and how will that compares to some of the commercial ground systems?
Well, I think, there is going to be a number of factors that, you know, obviously the tug of war at the moment going on at the political levels within the cabinet meeting today. We’re getting signals that date of 9th of March may slip back a few weeks, which would also support the market in Germany in Q1.
However, we also have to remember that there is a grace period for projects, now understanding at the moment, having lawyers read through the 58 page documents so far is being released on the draft law. It is preliminary permit, the projects of both 10 megawatts will be able to continue until the middle of the year, but we will basically get the new feed in tariffs whereas projects that are actually being have a final permit, they can continue till the end of June, but basically with the old feed in tariff.
So that will ensure some carry-through of volumes through the year, until the middle of the year. On that a number of the German customers are obviously with resale electricity prices in Germany being at EUR 0.23 excluding the VAT; it actually makes some more sense economically to have a PPA kind of agreements or self usage, self consumption will get better system economics.
So they take time to bring those new models in play and also that the German customer base given they have grown very strong on the back of the incentive program in general obviously engage in other markets in Europe rapidly expanding to markets outside of Europe and South America, Southeast Asia and also into Africa.
Just a quick follow-up, it sounds like the actual shipments to Germany that stayed in Germany were point to about 30% of the total shipments for the fourth quarter; will it be similar 30% in 1Q 2012 or would it be down a bit?
In 1Q it’s higher than the 30% and it would be slightly down the remaining of three quarters.
And that concludes our call today. And now I would like to hand the call back to Mr. Arthur Chen for closing remarks.
If you have any additional questions please feel free to contact Bryan, myself or anyone else from our Investor Relations team. Thank you and good bye.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.
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