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Suntech Power Holdings Co., Ltd. (NYSE:STP)

Q4 2011 Earnings Call

March 8, 2012 8:00 AM ET

Executives

Rory MacPherson – Director, IR

Zhengrong Shi – Chairman and CEO

Andrew Beebe – Chief Commercial Officer

David King – CFO

Analysts

Jesse Pichel – Jefferies

Vishal Shah – Deutsche Bank

Lu Yeung – UBS

Satya Kumar – Credit Suisse

James Medvedeff – Cowen & Company

Christine – Daiwa Capital

Ahmar Zaman – Piper Jaffray

Aaron Chew – Maxim Group

Hari Chandra – Auriga

Brian Gamble – Simmons & Co

David Epstein – CRT Capital

Gloria Ho – HSBC

Michael Dimler – UBS

Monica Shrivastava – HSBC

Sanjay Shrestha – Lazard Capital Markets

Operator

Thank you for standing by and welcome to the Suntech Power Holdings Fourth Quarter full year 2011 earnings conference call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session during which if you wish to ask a question, (operator’s instructions). Please limit yourself to one question at a time with the follow-up. Please stand by since this conference is being recorded today March 08, 2012.

I would now like to hand the conference over to your speaker for today Mr. Rory MacPherson, Director of Investor Relations. Thank you. Please go ahead.

Rory MacPherson

Hello, everyone, and welcome to Suntech’s Fourth Quarter and full year 2011 Earnings Conference Call. My name is Rory MacPherson, Suntech’s Director of Investor Relations. On the call today, Dr. Zhengrong Shi, Suntech’s Chairman and CEO, will give an overview of our performance and operational initiatives. Andrew Beebe, our Chief Commercial Officer, will discuss sales and markets. And David King, our Chief Financial Officer, will discuss our financial performance.

During the call, we will make certain forward-looking statements in an effort to assist you in understanding the company and its results. The forward-looking statements will be made under the Safe Harbor provisions of the 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 information and data during this conference call, we have provided a set of PowerPoint slides for your reference. This presentation is posted on the main page of the Investor Relations section of our website.

We have allocated one hour for the conference call and will endeavor to field as many questions as possible within that timeframe. Please limit questions to one question per person and one follow-up. This conference call is being recorded and the webcast replay will also be available on the Investor relations section of Suntech’s website. Please make 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.

Zhengrong Shi

Hello and I thank you for joining us. Today I will discuss some of the highlights of the quarter and outline our plans to improve our competitiveness and market share in 2012. Please turn to page 4. In the fourth quarter, our customers continued to demonstrate their preference to work with global supplies that are dedicated to delivering higher performance and a superior-quality solar panel. With strong demand across multiple regions, we feed it our shipment guidance and make our gross profit target. We also made a significant progress on a number of key initiatives to optimize our operations.

Fourth quarter shipments declined by approximately 10% from the third quarter of 2011. This result is significantly better than our guidance for 20% decline, and primarily due to strong demand ahead of feed-in tariff changes in Europe and the expiration of the cash grant policy in the US

For the full-year 2011, we shipped 2.1GW, which is 33% higher than our 2010 shipments. According to IMS Research, we increased our market share and retained our position as the world’s largest supplier of solar module for the second year running.

Operationally, we succeeded in implementing a number of the initiatives that we discussed on our last quarterly call. We proactively managed utilization in the fourth quarter to reduce excess inventory on hand and prepared for seasonally lower shipment volume in the first quarter of 2012.

We also managed customer relationships to reduce our outstanding accounts receivables. The result of this disciplined working capital management was a $419 million reduction of accounts receivable and inventory. This lead to an improvement in our cash and a restricted cash position to $709 million and a reduction of net debt by $207 million. In this challenging market environment, we believe that financial and operational discipline is vital to a sustainable business.

Please turn to Page 5. As planned, we maintain our capacity at 2.4GW for sale and module production and 1.6GW for wafer production. We intend to hold our manufacturing capacity until we see the amount of sustainability exceed 600MW per quarter.

During the fourth quarter, we continued to move down the cost curve as we saved 7% from total production cost. Driving down production cost is our top priority in 2012 and we are continuing to implement a range of initiatives to achieve this. These include narrowing our product offerings, reviewing materials and the components used in production, optimizing supply and relationships to favor lowest cost, best quality supplies and our retooling production lines to improve converging efficiency.

With these initiatives, we are confident that we can achieve $0.65 per watt non-silicon processing cost or lower to convert Polysilicon into a module by the end of this year without compromising quality or performance. Technology is important part of this effort. In 2011, we successfully commercialized first generation Bluetooth technology and we’re the first TV company to distribute high efficiency cost mono solar panel in large scale. Both products were commercialized by our 400 strong R&D team and supported through partnership with some of the best solar research institutions in the world.

Through the development of Pluto technology we have identified lower-cost messes to upgrade our existing equipment and achieve converging efficiencies similar to (inaudible). In 2012 where we utilized a limited CapEx budget to progressively retool our production lines and increase product performance and power output. In this highly competitive environment, customers prefer to buy the most efficient modules solar as they are cost competitive.

This is a trend which should work in Suntech’s favor in 2012. I’m also pleased to report that second-generation proto-technology is making excellent progress. We recently achieved a 20.3 converging efficiency utilizing a standard P type mono-crystalline silicon PV cell. We are confident that Suntech’s in-house ability to generate and commercialize the latest PV technologies will enable us to drive innovation and remain ahead of the technology curve.

In total, we shipped over 400MW of high-efficiency products in 2011 and in 2012 we are on track to ship over 800MW. In 2011, we also took another important step forward in corporate social responsibility as we were the first China based solar company to launch a bilingual social responsibility report. And now our commitment to the environment was underscored by Suntech becoming the first solar company to receive the 2011 gigantean prize for pioneering role in reducing carbon emissions and leading efforts in the fields, in the fight against climate change. CSR is increasingly becoming a prerequisite for our global customers, and we are proud to be a leader in this area.

Now I would like to share our perspective on the near-term industry outlook.

Over the past decade, the solar industry has boomed despite it being hammered by continue shortages of key materials and components. 2012 weighted the first year, weighing all the materials and components used to mix solar modules where the readily available at the price is close to the cost of production. This represents both a challenge and an opportunity. The challenge is profitability, as excess capacity in the global industry has pushed in the international solar companies to sell at our own sustainable pricing levels in effort generate cash and maintain viability.

Modules are not sustainable at current levels, and we expect that as a weaker players exit the industry, prices will rationalize and a large efficient module producers to generate a low-teen gross margin. Suntech is well prepared to use this transition period to drive down costs and to expand our customer relationships.

The positive outcome of this environment is that it provides solar with a clear opportunity to demonstrate its potential and cost competitiveness not just with retail electricity rate, but also with competing energy generation technologies. We expect these will catalyze energy policy makers globally to increase the level of solar in the energy blueprints. Suntech will help drive this evolution of the energy industry.

I will turn now turn the call over to Andrew Beebe, Suntech’s Chief Commercial Officer. Andrew?

Andrew Beebe

Thank you, Dr. Shi. Please turn to Page 7. 2011 was an important year for Suntech’s position as a global leader. We continued to implement our strategy of diversifying our sales network across old and new markets. Including our regional headquarters in Switzerland and San Francisco we now have 17 national offices around the world. We reached 2.1GW of shipments successfully strengthening our leadership position in every single region.

In addition to supplying some of the highest quality panels in the industry, we continue to invest in our customer service capabilities and build on our foundation as a leading global brand. This was recognized in the EuPD independent survey of installers and end-customers in Germany, France and Italy that selected Suntech as the first China-based company to receive the top PV brand award. Brand position, global reach and technology leadership are more important than ever before in this challenging market environment.

Now let’s look at the numbers. In a hotly contested market, stronger pull-through in Europe and the US ahead of policy changes combined with customer preference for Tier 1 PV products enabled us to outperform our shipment projections for the fourth quarter and for the full year.

Shipments from the fourth quarter declined 10% sequentially significantly better than our projection of a 20% decline. Our regional sales strategy and global network supported a typically diversified revenue split in the fourth quarter. 38% of revenues were generated from European markets, approximately 43% came from the Americas and 19% were generated from markets in the rest of world.

Let me now give you some color about the key regions in markets. Turning to Page 7, first Europe, despite distributors’ reluctance to build inventory in a deflationary price environment, impending feed-in tariff cost in 2012 spurred strong installations in the fourth quarter.

Germany was as usual the most European market as total system registrations climbed to approximately 4GW in the fourth quarter, well ahead of expectations. We believe this significant volume is facilitated by a combination of new orders and stock reduction, as distributors cleared inventory ahead of the typical seasonal weakness in the first quarter of 2012.

The high number of registrations in Germany triggered a reworking of the solar policy and the government has moved to accelerate the feed-in tariff reduction in 2012 with the goal of supporting a 2.5GW to 3.5GW market.

While the new policy will lead to the near-term contraction of the German market, we believe there are two positive outcomes there. First, the new policy will support the ongoing shift from ground-mounted projects to roof-top systems, a transition that we have discussed on these calls for some time. Roof-top system owners are increasingly brand conscious, so this trend clearly favors global brands such as Suntech.

Second, the new feed-in tariff levels take us beyond the milestone of grid parity with retail electricity rates. Combined with the lower cost of solar, this change will catalyze capitalize a new segment of demand that is driven by self-consumption, as customers love to avoid higher retail rates. This is in fact the grid parity transition that we have been preparing for for some time.

Many of our European customers are already designing strategies to capitalize on this new trend. Highly trained solar professionals are shifting from solar farms to selling direct to homeowners in Germany, and innovative leasing models are thriving in places like the UK and Belgium, the Netherlands and other Northern European regions. This type of innovation will blossom as the grid parity market takes shape in the coming quarters.

Turning now to the Americas, the exploration of the 1603 cash ramp subsidy in the US market drove significant growth in the fourth quarter. Our well established sales position as a market leader in North America help to facilitate higher shipments. Our 50MW module manufacturing facility in Arizona has also supported our improving market position and is currently doubling as a logistics hub for the Sempra 150MW AZ project we are building on the same state.

We expect projects that have qualified for the gas grant will provide continued momentum in the US market particularly in the first half of 2012. In aggregate, we expect that US solar market will grow to over 3GW in 2012 from around 2GW in 2011. The market size of course has a potential to be impacted by the outcome of the partition to imposed tariffs on China-made solar cells.

We continue to provide extraordinary transparency to the US government as we share thousands upon thousands of pages of documentation related to that case. Ironically this case was initiated by SolarWorld, the joint company who has avoided providing any information regarding the extraordinary amount of subsidies they have received from Germany, United States and Government in the Middle East.

The US Department of Commerce will make its preliminary determination for the counter bailing duties section at this case on March 19 and the anti dumping portion of the case on May 16. Regardless of the outcome, we remain committed to the US market and to finding the most effective ways to serve our growing and very loyal customer base.

Sales markets in the rest of the world generated 19% of revenues in the fourth quarter. Demand was primarily driven by the Chinese, Japanese and Indian markets. Looking at the Chinese market, we are very pleased to see the momentum behind solar policy development there. Chinese National Energy Administration announced that the solar targets will be increased to 15GW by 2015 and 50, 5-0, by 2020. This implies at least 5GW of annualized solar demand until 2020.

Israel, Thailand, South Africa and Australia round out the other key markets for us outside of Europe and the Americas. Moving onto pricing, AST’s declined around 10% from the third quarter slightly better than our projection of a low teen price reduction. Obviously the substantial drop we continue to maintain and modest price premium above our core competitors in the crystalline space. This premium is primarily due to the quality and performance of Suntech’s modules compared to our peers and our commitment to customer service in all regions of the globe.

In the first quarter of 2012, we expect pricing to continue to decline by a low teen percentage. However we are pleased to see signs of price stabilization. The price polysilicon has fallen since the beginning of the year and we expect this to translate into firmer pricing for modules.

Turning to the demand outlook, most markets in the first quarter are showing the typical signs of New Year seasonality with two exceptions, first, there has been stronger than expected demand full from Germany as customers rush to complete systems registered in the fourth quarter and secured the terror before the policy is adjusted.

Second, we have continued to see strength in the US market from customers that rushing to complete projects supported by the cash grant. However it has been difficult for us to capitalize on these opportunities in Q1 as both had relatively short windows. In fact the German market has slowed significantly since the government published a draft of the proposal at policy.

And due to our successful efforts to reduced inventory and higher than expected shipments in the fourth quarter combined with the lower production level of our Chinese New Year, we had limited product to respond to all of the customer’s request and as a result we expect shipments to decline by about 30% in the first quarter of 2012.

Turning to Slide 8, looking at global demand for the full year 2012, we anticipate growth in the US, China, Japan and India to roughly offset declines in the European market. Due to our strong challenge to market, our strong geographic diversification and our industry-leading position, we believe we will grow our shipments to between 2.1GW and 2.5GW in 2012.

I will now turn the call over to David King, our Chief Financial Officer.

David King

Thank you, Andrew. Please turn to Page 9. In our presentation we will have – we have included non-GAAP numbers for the third quarter of 2011, the full year of 2010 and the full-year of 2011. The non-GAAP numbers exclude the impact of one-time charges and give a better indication of our normal operations. You can find a reconciliation with our GAAP numbers at the end of the press release.

Fourth-quarter revenue decreased by 33% year-over-year to $629 million. Sequentially, revenue was down 22% due to a 10% decline in shipments and a 10% decline in average selling prices. Approximately 94% of the revenue was generated from PV module sales. Gross profit was $62 million and gross margin was 9.9% in the fourth quarter of 2011, which was at the midpoint of our guidance range of 9% to 11%. This compares to gross profit of $164 million and a gross margin of 17.4% in the fourth quarter of 2010.

Poly to module non-silicon conversion cost was 74% per watt in the fourth quarter. With the lower utilization in the first quarter of 2012, we expect now silicon cost to remain at a similar level. Going forward, we expect high utilization from the second quarter onwards will improved cost efficiency, and we are still on track to hit our year-end target of $0.55 per watt.

Operating expense in the fourth quarter was $115 million. This included a $19 million charge of – related to the underutilization of facilities. Excluding these charges, our organic OpEx was $96 million, in the fourth quarter. This compares to $74 million in the fourth quarter of 2010. We expect that we will incur a similar amount of underutilization charges in the first quarter of 2012. Excluding underutilization charges, we are committed to achieving our OpEx target of $80 million per quarter and to expect to reach that level by the second quarter.

Turning to Page 10. As we noted in the pre-announcement, we recently completed an impairment assessment that was triggered by challenging solar market conditions and a significant reduction in our market capitalization in the third quarter of 2011. As a result, third quarter OpEx was $613 million, which was impacted by $500 million of non-cash impairments and provisions.

This included $407 million impairments of goodwill in tangible assets, a $55 million impairment of fixed assets, an $18 million provision of ongoing litigation, and a $21 million provision for prepayments to Nitol Solar and Shunda Holings. Excluding these impairments, non-GAAP operating expense for the third quarter of 2011 was under $30 million. Sequentially, excluding the underutilization charge, OpEx decreased approximately 17%.

As part of impairment assessment, we also incurred a $40 million impairment of our investment in Nitol Solar, which was recorded certain other expenses; and a $48 million impairment of our investment in Shunda, which was recorded under equity in earnings of affiliate in the third quarter of 2011.

Please turn to Page 11. Loss from operations in the fourth quarter of 2011 was $52 million. This compares to income from operations of $19 million in the fourth quarter of 2010, the non-GAAP loss from operations of $5 million in the third quarter of 2011.

Due to the volatility of euro to the US dollar exchange rate, we realized the foreign exchange translation loss of $23 million in the fourth quarter of 2011. This was mostly non-cash.

Gains from hedging activities was $15 million, which is represented as other income in our income statement. As a result, we realized a net FX-related loss of about $8 million in the fourth quarter of 2011. This compares to a net FX-related loss of $3 million in the year-ago period and a net FX-related loss of $67 million in the third quarter of 2011.

We are pleased to improve on our FX net management and expect to the half reduced volatility going forward. As we incurred a net loss of fourth quarter we realized a tax benefit of $90 million in the fourth quarter 2011. This compares to $29 million tax expense in the year ago period, tax benefit of $50 million in the third quarter 2011.

In the fourth quarter of 2011 we recorded $58 million loss in equity and earnings equity of affiliates which was mainly related to a decrease in the fair value of our investment in the global solar fund. But this decline in valuation was attributable to an adjustment of the valid average cost of capital used in the valuation of solar projects and a shared transfer from Suntech to the manager of general partner of GSF to settle now owing under a previously a Greek power incentive plan. Post the share transfer Suntech equity stake in the GSF declined from 86% to 79%.

Net loss was $137 million or $0.70 per diluted ADS in the fourth quarter of 2011, compared to net income of $358 million or $0.83 per diluted ADS in the fourth quarter of 2010. The net income in the fourth quarter of 2010 included $250 million increase in the fair value of GSF.

Turning to some key balance sheet item on Pages 12 and 13, our cash and restrict cash increased to $709 million in the fourth quarter, compared to $568 million at the end of third quarter of 2011. This increase was due to stringent working capital management in the fourth quarter.

We reduced inventory from $696 million at the end of third quarter to $570 million at the end of fourth quarter, and reduced accounts receivable from $785 million to $475 million over the same period. This less was a significant reduction in our day sales outstanding from 87 days in the third quarter of 2011 to 68 days in the fourth quarter.

The working capital improvement in the fourth quarter enabled us to reduce net debt by $207 million from $1.8 billion at the end of third quarter of 2011 to $1.6 billion at the end of fourth quarter 2011.

Now, please turn to Page 14. Looking at cash flow; due to the strong working capital management, we generated $240 million of cash from operations in the fourth quarter of 2011. This compares to $308 million of cash used in the operation in the year-ago period. In 2012, we will continue to focus on cash and working capital management. CapEx for the quarter was $38 million, which takes full-year 2011 CapEx to $367 million, this is lower than our previous guidance of $400 million.

In 2012, we will focus on maintenance and equipment upgrades to improve product performance, so we currently anticipate CapEx will be in the range of $120 million to $150 million this year. Looking at briefly at our full year 2011 results on Pages 15 and 16, total net revenues increased 8% to $3.15 billion, due to 33% increase in shipment. Gross profit was €387 million and gross margin was 12% compared to $543 million and 19% respectively in 2010.

The non-GAAP net loss in 2011 excluding one-time charges was $182 million or $1.07 per diluted ADS compared to non-GAAP net income of $401 million or $2.21 per diluted ADS in 2010. Despite net loss, we are pleased to have generated $80 million of operating cash flow in 2011.

Turning to guidance on Page 17, in the first quarter 2012 due to inventory control and seasonal weakness, we expect shipment to decline by approximately 30% sequentially. Gross margin is expected to be in a range of 3% to 6%. For the full year 2012, we expect shipment to be in the range of 2.1GW to 2.5GW.

Moving to our FX projection on Page 18, based on exchange rate of $1.30 USD to euro, we do not any expect any FX transaction gain or loss in the first quarter. For everyone $0.01 depreciation of the euro, we will have a gain of approximately $2.5 million or vice versa. We also expect a gain of around $5 million from the hedging transactions in the first quarter of 2012. Please note this is an estimate.

To sum up, we are pleased with our achievements in the fourth quarter that sent around a significant reduction in accounts receivable and inventory, an increase in our cash position and reduction of net debt. It is clear however that 2012 will continue to be a challenging market as multiple governments adjust solar policies and competition remains strong.

In this environment, we will continue to reduce our production cost and streamline our operations, actively explore options in capital markets and work with our banking partners to further improve our balance sheet. With these measures, I am confident that Suntech will be a sustainable platform to address ongoing growth of the solar industry.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sanjay Shrestha of Lazard Capital Markets. Your line is open. Sanjay, your line is open.

Operator

That question has been withdrawn. You next question comes from the line of Jesse Pichel of Jeffery.

Jesse Pichel – Jefferies

Yes, good day. Dr. Shi, have you seen any cell module capacity rationalize in China? I think what’s worrying investors is that uncompetitive suppliers can continue to operate a cash breakeven for a very long time just like Suntech is today.

Zhengrong Shi

Well, what we have been told and through some survey in China for Tier-2 and Tier-3 manufactures, more than 50% has been reduced their production volume; and if we look at bidding process in the recent China market, you will also see number the participation actually has been reduced at this time.

Jesse Pichel – Jefferies

Canadian Solar yesterday targeted a $0.55 to $0.60 a watt all-in cost in anticipation of the $20 a kilo poly price. How do you feel about the target? And then what are your targets for cost?

Zhengrong Shi

Certainly a very ambitious target. And as we said earlier, we are also putting a lot of effort to reducing our manufacturing cost, without compromising the quality of product. That’s why as you see, we have been able to maintain a premium price in the market. And of course, we’ve been evaluating various alternative materials and what we found is some of the materials our peer companies are using have not yet passed our internal quality audit. So I think, we – for solar product we’re talking 25 years or even longer lifetime, I think, is important to reduce cost but we shouldn’t compromise the quality for the risk of its longevity issue.

Jesse Pichel – Jefferies

My final question is on the finance side. Have you bought back any of your convertible bond and wouldn’t that make a good investment now and plus you could book a gain if you bought back that convert?

Zhengrong Shi

Our first priority is to make sure all operational requirements are met. And when we have – if you will, spare cash, we will engage some repurchasing, but so far the amount is very immaterial.

Jesse Pichel – Jefferies

Thank you gentlemen.

Operator

Our next question comes from the line of Vishal Shah of Deutsche Bank.

Vishal Shah – Deutsche Bank

Hi, thanks for taking my question. Dr. Shi, can you talk about the China market opportunity. What percentage of your volumes in 2012 will be to China?

Zhengrong Shi

Okay. Giving the various support programming channels such as Golden Sunshine, FiT and so on and also more and more people realize the importance of PV, power, and project development. I would see the – this year the China market will get around 4GW to 5GW.

Vishal Shah – Deutsche Bank

How many megawatts do you expect to sell into China?

Zhengrong Shi

Probably about 300MW to 400MW and for us we are very much focused on quality customer, so – that is more important than as this moment than the market share.

Vishal Shah – Deutsche Bank

That’s great and then you said $0.65 of non-silicon cost target by the end of the year, can you remind me what their cost was in Q4 and also what do you think Q1 will look like?

David King

In Q4, was about $0.74 and we expect Q1 will be similar $0.74 – of course I mean for Q1 because on the utilization of manufacturing, so this has added some additional cost on (Inaudible).

Operator

Your next question comes from the line of Lu Yeung of UBS.

Lu Yeung – UBS

Thank you taking my question, I have a question for David. How should we think about your working capital management in the first quarter and should we expect a profits operating cash flow going forward?

David King

We continue to dimension by optimal level working capital management – but realistically we did a great job in Q4 and for Q1 I expect – accounts receivable continue to be measured down somewhat and but inventory as we ramp up for the end of Q1 and in Q2 and we – the inventory level will be little higher so I expect the – offset charter in Q1.

Operator

The next question comes from the line of Satya Kumar of Credit Suisse.

Satya Kumar – Credit Suisse

Yeah, hi, thanks for taking my question. I was wondering if you can give some clarity on what type of materials you are referring to which you said was possibly being compromised as mostly appears. And secondly given what we are seeing happen in Germany and US, how do you think about shipments overall percent take as well as to these geographies in the second quarter?

Zhengrong Shi

I will take the first question and Andrew will answer the second question. Yeah, I think the reliability on module very much determined by is non-silicon material such as back sheet, EVA, junction box, this really determine the permissivity of the module into the protection moisture. So I think is easily – manufacturing cost is relatively higher than it appears. We can identify very clear where the gap is, due to what material. So that’s why like as a faith is important to reduce a cost, but we shouldn’t compromise the quantity, that’s why some takes of our brand stand for.

Andrew Beebe

And can you repeat the market question, please?

Operator

One moment please.

Satya Kumar – Credit Suisse

The Q2 markets that we are seeing across the globe are going to basically grow in each segment in Europe and the Americas. We have pent-up demand from Q1 and despite the changes that we are seeing in Germany, our customers are continuing to prioritize us over other vendors in terms of the ranking of the products that it’s going to take. So we see growth in Q2, Q3 and Q4 versus Q1.

Operator

The next question comes from the line of James Medvedeff of Cowen & Co.

James Medvedeff – Cowen & Company

Good evening. Are you able to say how much of your revenue came from that other line – systems integration and other revenue?

David King

Yeah, this is David, I will take it. 94% in the fourth quarter revenue came from our modules.

James Medvedeff – Cowen & Company

Okay.

Zhengrong Shi

And (inaudible) came from something else.

James Medvedeff – Cowen & Company

Okay. And will you – to the extent you are purchasing wafers in the quarter, can you share what your average cost of those might be?

Zhengrong Shi

Yes okay, David do you want to take it?

David King

No you take it Dr. Shi.

Zhengrong Shi

Okay. Yes, we manufacture wafers about 50% internally and 50% on the purchase. And so for Q2, our, sorry for Q1 our branded wafer cost probably be somewhere around $0.40 mark.

James Medvedeff – Cowen & Company

That’s for Q1?

Zhengrong Shi

Yes.

James Medvedeff – Cowen & Company

And what about Q4?

Zhengrong Shi

Our Q4 total is about around $0.50.

James Medvedeff – Cowen & Company

Okay. Just one more and then I will get back in the queue. You discussed – at a higher level you discussed sort of a normalized gross margin for the industry in the – I believe you said low teens.

Zhengrong Shi

Yeah.

James Medvedeff – Cowen & Company

When do you see that sort of coming into being, how long until we get through this consolidation period and we get back to sort of a normalized gross margin environment in your opinion?

Zhengrong Shi

Two to three quarters.

James Medvedeff – Cowen & Company

Two to three quarters? Okay, thank you.

Zhengrong Shi

Yeah.

Operator

The next question comes from the line of Pranab Sarmah of Daiwa Capital Markets.

Christine – Daiwa Capital

Got two questions. This is Christine for Pranab. Just a question on the – second generation for Q2011 like, what is that like and what would that be like in for 2012 and if possible where is the price premium right now?

Zhengrong Shi

Yes, we shipped – in 2011 we shipped about 120MW Pluto and, as I just said in my presentation, during the commercialization of this Pluto technology we found there is relatively simple way to implement the features of Pluto sales in the production line. So – and as we realized that we actually will ship more in high efficiency modules than we expected in the last year 2011. So for example, the cast mono, we shipped lot of volume in 2011 and in this year we plan to ship over 800MW of high power output in modules.

Christine – Daiwa Capital

Yeah, thanks. I guess that’s probably first year what would that be like roughly in instrument terms?

Zhengrong Shi

Sorry, first quarter?

Christine – Daiwa Capital

What would that be like, yeah, first quarter.

Zhengrong Shi

First quarter, I think we shipped probably around 100MW to 120MW in high efficiency power.

Christine – Daiwa Capital

100 to 120, right.

Zhengrong Shi

Yeah, yeah.

Christine – Daiwa Capital

Yeah, thanks, thanks. That’s helpful. So just a quick follow up on the – do you see any workflows in consulting of EU following the US filing an Anti-Dumping case on solar panels as well like, is that – would expect to make any provision for that our potential duties?

Zhengrong Shi

I’m sorry. I think your question was will Europe follow suit and the US efforts around duties, is that your question?

Christine – Daiwa Capital

Yes, following the US would you see the near-term possibility of EU filing Anti-Dumping case as well and would you expect to make any provision on your P&L anywhere soon?

Zhengrong Shi

We do expect, that is a possibility that Europe will follow the US actions.

Christine – Daiwa Capital

Yeah, thanks. So do you expect to make any provision, I mean, on your P&L that actualize?

Zhengrong Shi

We, at this point do not have enough data point to make accounting judgment on how much to grow and how likely it’s going to happen.

Christine – Daiwa Capital

Okay cool, thanks. That’s helpful.

Operator

And your next question comes from the line of Ahmar Zaman of Piper Jaffray.

Ahmar Zaman – Piper Jaffray

Hi, Dr. Shi and team. I have two questions. One is regarding your GSF fair value in the fourth quarter. Can you elaborate on the fair value and your – and update on your megawatts of project pipeline? Thank you.

David King

Yes, this is David. I will answer that. We talk about the valuation adjustment into fourth quarter and currently we are on our balance sheet filed roughly about $400 million. And the rough – more than execute, they actually completed construction about 145MW and connected substantially all of it. And your question two?

Ahmar Zaman – Piper Jaffray

Okay. My second question is regarding, you mentioned that your CapEx for this year of $120 million to $150 million will be mostly focusing on the equipment upgrades, is that because you are also trying to upgrade your wafer furnaces to make (inaudible) monotype wafers?

David King

Most will be at the production level. We substantially completed our wafering expansion in 2011 – in the amount of 120 to 150 we do have some and – payments we did it to our wafers – wafering operation but most of the upgrades and efficiency for upgrades will be a dollar still at margin level.

Operator

Your next question comes from the line of Aaron Chew of Maxim Group.

Aaron Chew – Maxim Group

Good evening guys. Thanks so much for the question. Two quick ones for me. First just can you may be shed a little bit more light on how you are going to hit your targets on the nonsilicon cost by 4Q. Just it seems you are virtually flat throughout the second half of the last year and you are forecasting to remain flat in 1Q. Just curious exactly what changes in 2Q or 3Q and how do you expect actually to pace on a quarterly basis and I assume just to clarify that the 65. What target assumes a 100% utilization. Is that correct, and then finally I was wondering if you can may be...

David King

We would be around 80% utilization.

Aaron Chew – Maxim Group

So the target assumes 80% by yearend.

David King

Yes, yes.

Aaron Chew – Maxim Group

Okay and does that mean you are expecting a big step down in 2Q, 3Q or is it just something that really doesn’t hit till the final quarter of the year?

David King

Yes as I said we are evaluating many alternative materials and efficiencies going up. I think all of this will contribute to the reduction of non silicon cost.

Operator

And your next question comes from the line of Hari Chandra of Auriga.

Hari Chandra – Auriga

Thank you. This is in terms of the shipment guidance that you’ve given, it seems to be conservative compared to your peer group, is it that you’re being prudent or is that the competition is gaining – going to gain market share this year?

Zhengrong Shi

We like to thank for being prudent and we’ll find out in 12 months but what I would say is in December of 2010, we had forecasted projections around what was going to happen in 2011. And I think we were pretty close to those expectations by the year end despite some wild fluctuations. So our expectation is that we can meet this range and we’re doing based not on sort of mad rush for gaining market share at any price but instead looking for quality customers in the same way that our customers look for quality in what they buy.

Hari Chandra – Auriga

And my second question is on China policy. In terms of the installation or in terms of the target for 2015 and 2020 that delayed or declined, but do you see the scope for those numbers to move up as we go through the year because of demand of location that you are seeing in Germany and Europe and second question, second portion of that is in terms of – from a supply side standpoint what is happening in terms of the bank lending to the solar PV sector and has it tightened and also in terms of capacity rationalization. You did talk a lot Tier 2 and Tier 3 actually already in reducing production levels but you do not see the impact of all of that in terms of price stabilization at the module level?

Zhengrong Shi

Yes, I think – so you have three questions, okay. The first question I think in China, I think usually as you can see historically the planning certainly for the last two or three years, the planning has been behind the reality. So, the market has moved much faster than planning, so. And certainly now, according to official announcement, by 2020 you will be 50GW. I mean, if the market continue to behave this way, I will say this number will move up. Okay.

Secondly, for solar project, major commercial banks in China has been very supportive to provide project financing. And third question, there is consolidation going on in terms a lot of factories, they are actually proposed, are not operating, especially some new ones they’ve bought equipment and installed and they haven’t turned on the machine yet. So I think about probably about two to three quarters and people will realize cannot believe any more. So I think the price is certainly we are back on track.

Operator

Your next question comes from the line of Chris Cowen of Robert W. Baird.

Unidentified Analyst

Hi. Chris here for Ben. Could you talk about pricing in China, first? And then David, would you just update us on your view on the balance sheet and what you could do there to strengthen the balance sheet and when we should look at there for timing there? And then my final question is on GSF. What’s the status of monetizing those projects can we ever see that? And I’ll be back in queue. Thanks.

Zhengrong Shi

Certainly in China, the module price has been very competitive at this moment. So, you’re probably talking around RMB5.5 to RMB6 range per watt, David?

David King

Yes. We – first I think the working capital management is still key focus on cash is king in our pricing and in our credit terms. And GSF is also on top of the list. I think that will provide liquidity and to support the future growth. And as I mentioned in previous costs, we are also talking to banks and in terms of extending the maturity of our loan, so we provide some stability to our balance sheet.

And we are also explored some both international and domestic capital market options to provide stability to our balance sheets. And in terms of status of GSF, we have target to top two, four investment banks. And we have provide access for them to do due diligence on GSF and I think this mark, we’re going to down select one or two investment banks and I think process of monetizing GSF will take up to six months to transact and our aim is to maximize return on our investment.

Zhengrong Shi

Next question, operator?

Operator

Your next question comes from the line of Brian Gamble of Simmons & Co.

Brian Gamble – Simmons & Co

Good evening, this is actually calling in for Brian. First question is on operating expenses, I know that you gave the target for $80 million run rate by Q2. How do you think you are going to be able to keep that? Where are the operating costs savings is going to help?

Zhengrong Shi

I’m sorry, I didn’t totally hear your question.

Brian Gamble – Simmons & Co

I was wondering about your operating costs, I was wondering where you think you’re going to be able to get the operating cost savings from the current rate of $124 million over $115 million in Q4?

Zhengrong Shi

Right, first that includes a (inaudible) utilization of about $90 million, okay.

Brian Gamble – Simmons & Co

Right, excluding that Q1?

David King

Q1, I expect to be a similar amount but if you strip that out we already in 90 some million and to (inaudible) and have high level utilization and as we – I am confident that we will move towards $80 million range in terms of OpEx.

Brian Gamble – Simmons & Co

Great, thank you. And looking forward, obviously there is a lot of uncertainty in Germany, what do you think the aggregate size of the German market could be in 2012?

David King

As we said it – likely the aggregate size of the German market in 2012 looks in the 2.5 to 3.5 range. It would be probably towards the upper end of that range.

Brian Gamble – Simmons & Co

Great. And what do you think perhaps the Japanese market could be especially with the new subsidies being announced there?

David King

Yeah, I mean the subsidies will be announced, we expect in April and implemented starting in July and they will have an impact in growing the commercial rooftop market, but these markets take a while to mature. So while we were pleased with the growth last year to above a GW we would expect something in the sort of 1.7, 1.8 range this year. There is upside there depending on the timing of those announcements.

Operator

Your next question comes from the line of David Epstein of CRT Capital.

David Epstein – CRT Capital

Asked and answered, thank you.

Operator

Your next question comes from the line of Gloria Ho of HSBC.

Gloria Ho – HSBC

Hi. Thank you for taking my question. I just want to know whether you have any plans and target to bring down net debt for 2012, and also where do we see the module ASP towards the third quarter and fourth quarter of this year.

Zhengrong Shi

The first question is trying to bring debt, I answer this question – similar question earlier. One is to continue to focus on cash and working capital, again, number two is GSF and the other is capital market options to stabilize our balance sheet.

Gloria Ho – HSBC

Any target, I mean in terms of numbers?

Zhengrong Shi

We – the target for the year end?

Gloria Ho – HSBC

Yeah, yeah, that’s right.

David King

Yeah, we plan to reduce by $100 million to $200 million range.

Gloria Ho – HSBC

Okay. So the next question is about ASP. I mean whether you see that towards third quarter or fourth quarter of this year?

David King

Yeah. I mean, if you are asking for guidance in ASPs in Q3 and Q4, we are not giving that guidance and I think there is enough uncertainty in the market that it’s a wait and see. But would you certainly see a lot of costs starting to ascent out flatly and that’s having a positive impact in the near term on ASP slotting out.

Gloria Ho – HSBC

Okay. Can you also add some colors to like to increase of P&A expense and selling expense, I mean during the year, I mean when compared to 2010.

Zhengrong Shi

Hi, I have problem hearing you.

Operator

Your next question comes from the line of Michael Dimler of UBS.

Michael Dimler – UBS

Yeah, so I’m wondering if you could give any kind of color like you are giving a pretty low gross margin number for the fourth – first quarter and I wonder if that we can read into much lower gross margins over the full year or if you expect to still be on track around the 10% to 12% range?

Zhengrong Shi

As Andrew mentioned, it’s still early to tell this market dynamics. And we do see some possible rebounding in the second half as the industry is going through some consolidation. So it remains to be seen, but we – whatever guidance we give it to you in a short time, we aim to gain it.

Michael Dimler – UBS

And I just wanted to get in terms of the working capital reduction, I know you addressed the – said that the first and second quarters look to be a working capital increase, which would obviously be a net cash outflow, what about the back half of the year, I mean would you expect that to come in again? I mean, would you expect to finish 2012 up cash from working capital or is it too early to tell?

Zhengrong Shi

What I mentioned earlier was not a Q1 negative. I was trying to imply the offset of increase in inventory and decrease in AR in Q1. And I think, as you know, in Q3 and Q4 while business actually saw an increase and it has tendency to use working capital, but our goal again is to make sure that we balance between the growth and the cash. So we will try to maintain a neutral position in the second half.

Operator

Question comes from the line of (inaudible) of Raymond James.

Unidentified Analyst

Yeah, thanks very much. A lot of speculation in recent months about a government enforced consolidation in the Chinese PV industry particularly among the Tier 1 and Tier 2 players. From your discussions in Beijing, do you know of any concrete plans to forceful consolidate the industry?

Zhengrong Shi

From government point of view, certainly want to overall to streamline the PV industry in China. I think you have to be in the process of – have to be a market process not forceful process.

Unidentified Analyst

Okay, appreciate it.

Operator

Your next question comes from the line of Monica Shrivastava of HSBC.

Monica Shrivastava – HSBC

Hello.

Zhengrong Shi

Yeah, hello.

Monica Shrivastava – HSBC

Hi, I wanted to ask you two questions. The first was about the geographical sales. Can you give us a color about how they will move in 2012 for Europe and other markets?

Zhengrong Shi

Sure, it’s been a multiyear process for us to migrate away from the European concentration and we continue to do that very successfully. And I think in 2012 it may not be as pronounced but you’ll see a significant migration, future growth coming from regions outside of Europe. And putting a slight point on it, the Asia-Pacific region will grow significantly with China essentially replacing the volume of Germany and in the US we expect significant growth as well.

Monica Shrivastava – HSBC

Also one more question. Could you explain the increase in G&A expense and the selling expense as compared to 2010 which is increased by around $100 million during the year?

Zhengrong Shi

I’m sorry.

Monica Shrivastava – HSBC

Could you explain the increase of G&A expense and selling expense which is increased by more than $100 million each during the last one year.

Zhengrong Shi

During what, I’m sorry.

David King

The last year.

Monica Shrivastava – HSBC

During the last year G&A expenses and selling expenses, general and administrative expenses and selling expenses.

Zhengrong Shi

For the whole year?

Monica Shrivastava – HSBC

Yeah, yeah. Like it’s increased by more than $100 million each as compared to 2010 and 2011, so just wanted to know why it has increased so much.

David King

Right, on the – first there was a freight cost, $25 million in freight cost increase because of the volume and also as we acquire and the remaining percentage of (inaudible) we also have amortization included and which we didn’t have that before. And we also conservative in our bad debt provision and also it includes, as I mentioned earlier, the fourth quarter we had $19 million of idle capacity or underutilization, so it’s a whole list of things I can – I will be glad to provide you more details offline.

Operator

And your next question comes from the line of Sanjay Shrestha of Lazard Capital Markets.

Sanjay Shrestha – Lazard Capital Markets

Thank you, sorry about that earlier, guys. Dr. Shi, question to you. So you mentioned that there is not a chance of some type of a government-induced consolidation in China, but you guys are focused on quality and everybody else seems to be focused on cost and potentially market share gain in China. As long as that continues and government sort of supports bunch of these players in China, will anyone make money in this industry?

Zhengrong Shi

That’s exactly right. I mean if you only book some market share without any profitability you know how can you make money, so for Suntech we booked some quantity not just in terms of quality product also quality customer, okay. Certainly we also put all our effort to reduce the cost. So I think if (inaudible) keep in this way I don’t think anybody can make money along the supply chain. So that’s why I say it’s not sustainable.

Sanjay Shrestha – Lazard Capital Markets

Okay. So then given that you are one of the first companies in world in China and pretty strong relationship with the government backing from the government all that sort of stuff, how is it possible that some of the smaller players in the industry are talking about them already receiving wafers at below $0.30 a watt and your blended cost is still $0.40 and what’s the dynamics that’s unfolding here especially in the domestic market from the supply and the relationship standpoint? Are they just completely comprising on quality and it’s going to come back to bite them or what’s happening here?

Zhengrong Shi

The wafer price before $0.30 per watt, do they make any money?. So I believe this is temporarily and last year SP reduction along the supply chain, especially in the upstream poly silicon and wafer plus the price has been dropped quite significantly, it is like sponge although water has been squeezed out within few quarters. So reduction relies on innovation. Innovation takes time to happen. We sort of give up all the reserve innovation in the last few years within few quarters, so that’s why I think the price at it moment is not profitable as the whole supply chain. So I think the price has to be stabilized and continue cost down we require some time to happen.

Sanjay Shrestha – Lazard Capital Markets

Okay, but those are kind of point, Dr. Shi. Unless there is some sort of government intervention and continued support in China, doesn’t seem like you are actually -?

David King

Certainly we have a support in the top tier companies especially in the top rank company like Suntech and but not in terms as you say like some forceful is basically provide supporter like in terms of...

Sanjay Shrestha – Lazard Capital Markets

Bank facility and things like that?

David King

Banks will do support Suntech because they are believing adding our position, but again bear in mind in China is democratic country, may not believe it and, by truth, and the bank also is very market based. Thank you.

Operator

At this time we have reached the allotted time for our Q&A session. I would like to turn the call back over to Dr. Shi for closing comments.

Zhengrong Shi

Thank you all for attending the call today and if you have further questions, please call us and after the call and have a nice day. Thank you.

Operator

Thank you for participating in today’s conference, you may now disconnect.

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