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Executives

Rory Macpherson – Director of Investor Relations

Dr. Zhengrong Shi – Chairman and Chief Executive Officer

Andrew Beebe – Chief Commercial Officer

David King – Chief Financial Officer

Analysts

Susie Min – Deutsche Bank

Brandon Heiken – Credit Suisse

Ming Xu – Jefferies

Timothy Arcuri – Citigroup

James Medvedeff – Cowen & Company

Pranab Sarmah – Daiwa Capital

Chris Kovacs – Robert Baird

Marina Shvartsman – Macquarie

Brian Gamble – Simmons & Company

Aaron Chew – Maxim Group

Suntech Power Holdings Co., Ltd. (STP) Q1 2012 Earnings Conference Call May 23, 2012 8:00 AM ET

Operator

Thank you for standing by, and welcome to the First Quarter 2012 Suntech Power Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) Please be advised that this conference is being recorded today, May 23, 2012.

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

Rory Macpherson

Hello everyone and welcome to Suntech's first quarter 2012 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 U.S. Private Securities Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, Suntech's future results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our earnings release issued today and our SEC filings. Suntech does not undertake any obligation to update any forward-looking statement 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 our website after this call. Please note that all figures mentioned during the call are in U.S. dollars unless otherwise specified.

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

Dr. Zhengrong Shi

Hello and 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 the market share in 2012.

Please turn to page 4. In the first quarter, our shipments were slightly better than expected declining 27% sequentially compared to our projection of 30% decline, excluding the impact of provisions for the U.S. anti-dumping and countervailing duties. We also met our gross margin targets and continued to rollout product innovations that improve ease of installation, deliver greater performance, and a cost savings to our customers.

I will discuss our initiatives to reduce cost in more detail shortly. During the quarter, we continued to position Suntech’s unparalleled global sales network to benefit from the policy changes and the change we are seeing in end markets. Andrew Beebe will give you some more color about demand dynamics in the first quarter and where we are seeing strength in the second quarter and the year.

Before I go on, I would like to comment on the U.S. Department of Commerce division to impose countervailing duties and anti-dumping tariffs of over 34% on Suntech solar cells produced in China. These tariffs do not take into account the global interdependence of solar industrial supply chain and are not justified by that. For example, Thailand was selected as the surrogate country to determine the normal value of solar products, even though Thailand has no major solar manufacturing and does not provide reasonable comparison to China. Regardless of the final outcome due to Suntech’s global sourcing channels, no products that we manufacture in the U.S. or ship to the U.S. today are subject to these tariffs. Still this entire process has damaged the American solar industry and makes it harder for solar to compete against fossil fuels. We stand with a vast majority of companies in the global solar industry in our position to trade barriers, which is the top market brief inefficiency, raise products and make solar less competitive. We will continue to work with our global peers and partners up and down the value chain to try to avoid escalation of trade changes. We are looking forward to resolving this matter in the coming months and we hope the whole industry can now get back to the extremely important mission of delivering cost effective solar energy.

Now, turning back to the first quarter results. Operationally, we sustained our focus on working capital management and cash preservation. We shifted to the maximum production to reduce inventory and make further progress on collection efforts. The result of this disciplined working capital management was a $65 million reduction of accounts receivable and inventories.

Although, we recognized GAAP loss of $133 million in the first quarter, which included some one-time charges that David will discuss. We will reduce our organic operating expenses and contained our operating cash used to $30 million. During the quarter, we reduced our total production cost by 6% sequentially. While we are making progress, we have identified key areas to accelerate cost reduction through the remainder of the year. We currently target module cost of goods sold of between $0.90 and $0.95 per watt in the second quarter, around $0.80 in the third quarter and less than $0.75 by the end of the year.

We are confident that we can achieve these targets while maintaining Suntech's product superiority and the premium quality. We will outline a few of our cost down initiatives now. Please turn to page 5. First, we are in a process of consolidating our wafer operations to concentrate production our most efficient manufacturing lines. We will further reduce our wafer processing cost through improved solar recycling to reduce wafer breakage and a lower consumable cost. In total, we expect to produce approximately 1.2 gigawatt of wafers internally in 2012.

And we now expect our end of year wafer processing cost to be $0.15 per watt from $0.22 per watt previously. Our second key area of cost reduction through product innovation, Suntech global wafer channel development infrastructure is one of the strongest in solar industry and we are utilizing their capability to improve product performance and cut cost. For example, we have increased the power output of our solar panel. So, we are shifting to our in-house developed Pluto, quasi-mono and selective emitter technologies.

Our most powerful module for large commercial and ground-mount solar project is now rated up to 310 watt compared to 280 watt two years ago. In 2012, we will continue to upgrade our production line to drive up efficiency and performance. We are also listening to our customers and are redesigning the module to improve ease of installation and a reduced shipping cost. Yesterday, we announced the introduction of a new slim frame, which led to a lighter and a more compact product without compromising power output or durability.

The new dimensions make the panel lighter and easier to handle and allow for more efficient packaging that can reduce total storage and the shipment cost by up to 25%. In addition, while the majority of our silicon and wafers contract are priced and adjusted relative to the spot market. We are currently working with one or two supplies to renegotiate previously signed long-term supply agreements. While they represent a small proportion of our total silicon and wafer procurement, we are determined to address these issues now. We have taken some provisions for expenses that we expect to incur related to renegotiation in the first quarter and expect to that this will save $0.02 to $0.03 a watt from second quarter out.

With these cost reduction initiatives and a clear roadmap in place, we are confident that we can achieve $0.60 a watt of better silicon to module conversion cost and less than $0.75 watt all-in module cost of goods sold by the end of the year. This is $0.10 below our previously stated targets.

Looking at the current competitive dynamics, we are pleased to see that customers continue to differentiate between panel supply and willing to pay more for quality product that would deliver long-term low risk power production. In all of our markets Suntech is recognized at the bankable solar brand that provides exceptional performance and unparallel customer support, while we are very focused on the reducing cost. We are continue to invest in our technology and our partnership to distinguish Suntech from our peers In the second quarter, we have seen demand growth in all of our markets and are targeting more than 20% sequential growth in shipments.

We will now turn the call over to Andrew Beebe, Suntech Chief Commercial Officer to outline where this growth is occurring. Andrew?

Andrew Beebe

Thank you, Dr. Shi. Please turn to page 6. During the first quarter, we continue to position Suntech to benefit from the shifts across global markets. In Europe our close relationships with value added reseller partners are ensuring that Suntech maintains strong presence as demand shifts from the ground to the roof. In the Americas, our teams are building on Suntech’s leading track record as the number one provider of solar panels and the strength of Suntech’s brand and value proposition. Along with our first mover advantages cementing our penetration into emerging markets in Oceania, Asia, Africa and Middle East, which we expect will drive ongoing growth in the solar industry.

First quarter shipments came in 27% lower than our first quarter shipments but ahead of the – fourth quarter shipments, but ahead of our projections in the 30% decline. As we noted in our last earnings calls, the sequential decrease in shipments was primarily due to the limited inventory on hand early in the quarter and plan reduction in our production level over the Chinese New Year.

Please turn to page 7. 44% of revenues were generated in the European markets and approximately 34% were generated in the Americas and 22% were generated from markets in the rest of the world.

Let me give you some color about the key regions and markets, turning to page 8. First, Europe, as we have noted over – for over a year, there continues to be clear policy trend that supports roof-top installations over ground-mounted systems in many European markets. We are now finally seeing that the transition – finally seeing the transition occur with revised solar policies in Germany, Italy and the UK set to be implemented in 2012.

In light of this trend, Suntech has continued to proactively invest within our partnerships with key value-added resellers across Europe, which have strong channels to roof-top market. Our clear and consistent go-to-market strategy and outstanding local support in local languages sets Suntech apart in the European market. We estimate that through strong relationships with our partners, we will be able to address over 80% of the distribution market in Europe. Demand in Germany were strong – was stronger than expected in the first quarter as implementation of the new feed-in-tariff structure was delayed until July for residential and commercial systems and October for ground-mounted systems.

While there is a possibility that there will be further revisions to this policy, we are proceeding on the basis that the current version will be implemented. Based on the new tariff and the potential for self consumption, investment returns on residential and commercial solar systems should drive substantial ongoing demand in these market segments. In many ways, we are witnessing the transition to the grid parity market in Germany as solar tariffs for below retail rates for homes and businesses.

In Italy…

Rory Macpherson

Hello Andrew, can you hold for one second. This is Rory here. Can you speak a little bit closer to the microphone?

Andrew Beebe

Sure, sorry. Is that better?

Rory Macpherson

Yes, thanks.

Andrew Beebe

In Italy, demand is similarly strong as the implementation of the fifth solar energy bill is likely to be delayed until the second half of the year, while cost of capital and access to financing continues to be a challenge for development of large systems Suntech is well-positioned in the rooftop market and has lower financing requirements. With greater solar radiation and a higher retail electricity rate in Germany, the Italian market is also well on the path to grid parity.

Turning now to the Americas, as Dr. Shi noted, we were disappointed about the preliminary decision to impose anti-dumping and countervailing duties on our China manufactured sales in the U.S. Nevertheless, we have prepared for this outcome and we could now ensure that we will continue to deliver product to our customers in the U.S. with minimum impact from tariffs. We do anticipate a slight increase in price in the U.S. due to shifts in the global supply chain.

During the first quarter, we continued to supply the 150 megawatt AC Mesquite 1 project in Arizona. We have been working seamlessly together with our partners, Zachry and Sempra, and all parties are extremely pleased with the progress to-date. Our ability to coordinate shipments from our Arizona manufacturing facility and provide project management support has served to demonstrate Suntech’s differentiated capabilities in the U.S. market, and it has served as an excellent reference project for other utility solar bids around the world. There is still a strong pipeline of projects that successfully applied for the cash grant before the end of 2011. In addition, the sharp reduction in price over the last 12 months has expanded returns for developers with PPAs in hand and we expect this to drive demand in the commercial and utility segments for the remainder of the year.

In the residential and commercial sectors, Suntech continues to be recognized as the high-quality and performance option. These market segments are still relatively untapped right now across the country, and with dramatic reductions in the cost of solar energy over the past few years, we are confident that distributed solar will play a more prominent in the U.S. in the near future.

In the rest of world, significant policy developments in Japan, China, and Saudi Arabia are reflective of a growing government support across the globe. With ongoing opposition to the resumption of nuclear energy production, it is clear that solar will play a much more important role empowering Japan. We have invested heavily in building our team there for the past six years and we are now the number one foreign solar brand in Japan. The recently announced feed-in tariffs for commercial rooftop and ground-mount systems will stimulate rapid growth in that market.

The Chinese market is also set to expand rapidly in 2012. We expect that the Golden Sun program will support 1.7 gigawatts of installations and the national feed-in tariff over 3 gigawatts mostly in the second half of the year. Suntech will continue to build our track record in Japan by selectively participating in project bids and developing a portfolio of projects utilizing equity investment from Suntech and our partners.

While pricing is currently challenging in this market, we expect that it will improve as customers come to realize the long-term benefit of investing in durable, high-performance solar products. We are also increasingly excited by the potential of the solar markets in Saudi Arabia. Recently, the Saudi government announced a plan to build 41 gigawatts of photovoltaics and concentrated solar over the next 20 years. We don’t expect to see orders here until 2013, but it is the major turning point for solar in the Middle East. Suntech is already well-positioned in the region due to our track record of supplying the (indiscernible) project and other high profile solar systems. The Australian, Israeli, and Thai markets continue to drive demand in 2012 and we expect the South African market to kickoff later this year.

Moving on to pricing, ASPs declined around 10% from the fourth quarter, slightly better than our projection of a low-teen price reduction. In the second quarter of 2012, we expect pricing to continue to decline by a further 10%. While the sequential price decline is substantial, we are seeing a flattening in the price curve that is also evident in the price trends of other Tier 1 companies.

Customers are clearly demonstrating a preference to buy the high-quality and bankable – high-quality products and bankable companies with long-term business models and Suntech is a beneficiary of this trend. Our strategy is to offer a differentiated high-quality and high-performance product above our peers enabling Suntech to maintain a price premium in all of our markets.

Turning to the demand outlook, with ongoing strength in key European markets and demand building in the Americas, we expect shipments to increase by over 20% sequentially in the second quarter. We expect the third quarter to provide further growth opportunities, primarily in China, Japan, and the U.S. and see the peak demand quarter for the year which is in line with historical experience. So, we are well on our track record to hit – on our track to hit the full year shipment target range of 2.1 to 2.5 gigawatts.

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 the first quarter, we continued to streamline our operations and set a platform for long-term growth. First quarter revenue decreased by 53% year-over-year to $410 million, sequentially revenue was down 35% due to a 27% decrease in shipment and a 10% decline in average selling prices. Approximately, 97% of the revenue was generated from PV module sales.

Gross profit was $2 million and gross margin was 0.6% in the first quarter of 2012. This was impacted by an accounting provision for the preliminary US countervailing and anti-dumping duties of $19 million, equivalent to 4.7% of gross margin. Excluding this provision, we would have achieved the high-end of our gross margin target range of 3% to 6%. Please note that we will not need to pay the full countervailing and anti-dumping tariffs in cash. While the tariffs are still preliminary, we plan to close the bond that we will require a deposit of only 10% of the preliminary tariffs. Due to our global sourcing channels, we expect to have minimal impact on the tariffs in the future quarters. With relatively low utilization in the first quarter, poly to module non-silicon conversion cost was $0.74 per watt. As Dr. Shi mentioned, we have a clear roadmap to reduce cost every quarter. We are targeting $0.60 per watt or better for poly to module conversion cost and under $0.75 per watt all in module cost of goods sold by the end of the year.

Operating expenses in the first quarter were $122 million. This was above our projection for a couple reasons. First, it included a $21 million of expenses due to lower utilization of production facilities. Second, it had $7 million of bad debt provision, and $18 million provision for prepayments to certain suppliers as we take steps to renegotiate the few remaining high price supply contracts in our portfolio. Excluding these provisions, our organic OpEx was $76 million in the first quarter compared to organic OpEx of $88 million in the fourth quarter. The significant improvement in organic OpEx was due to the efforts to streamline our business of the past two quarters. In the second quarter, with higher shipments, we do not expect to incur underutilization charges and expect to have operating expenses of around $80 million, which reflect sequential increases in warranty and freight costs along with higher shipments. This is in line with our prior guidance.

Please turn to page 10. Loss from operations was $109 million. This compares to income from operations of $95 million in the first quarter of 2011. Net interest expense was $32 million compared to a $30 million in the first quarter of 2011. Net interest expense in the first quarter of 2012 included $12 million in non-cash expenses of which $9 million was related to the convertible note issue in 2008. Foreign exchange translation gain in the first quarter was $6 million compared to a gain of $30 million in the year ago period. Net other gain was $23 million compared with net other expenses of $57 million in the year ago period. Net other gain in the first quarter of 2012 included $16 million of gains related to foreign currency hedging activities, and $6 million of gains related to the repurchase of our convertible note issued in 2008.

We may continue to repurchase these convertible notes from time to time with available free cash. Tax expense in the first quarter of 2012 was $6 million, compared to a tax expense of $6 million in the first quarter of 2011. The tax expense in the first quarter of 2012 was related to profit generated by certain subsidiaries in China that are subject to independent tax assessment. Equity in loss of affiliates was $5 million compared to gain of $0.4 million in the first quarter of 2011.

Net loss was $133 million or $0.74 per diluted ADS in the first quarter of 2012, compared to net income of $32 million or $0.17 per diluted ADS in the first quarter of 2011. Turning to some of the key balance sheet items on pages 11 and 12, our cash – the restricted cash declined by 6% from $664 million in the first quarter to $709 million at the end of fourth quarter of 2011. We continue to maintain a healthy cash position to support our operations.

We reduced from $550 million at the end of the first quarter of 2011 to $508 million at the end of first quarter and reduced accounts receivable from $760 million to $410 million over the same period. Due to the lower shipment volume in the first quarter of 2012, days sales outstanding increased to 90 days from 73 days in the first quarter of 2011. Net debt was roughly $1.6 billion at the end of first quarter of 2012, almost the same level after the first quarter of 2011 – fourth quarter of 2011.

Now looking at cash flow, due to stringent working capital management. Cash used in operation was contained to $13 million in the first quarter of 2012 compared to $135 million in the years ago period. In 2012, we will continue to focus on cash and working capital management.

CapEx for the quarter was $23 million compared to $129 million in the year ago period. As we mentioned previously, we are restricting our CapEx in 2012 to payments for already levered equipment and services and technology upgrades. The target range is $120 million to $150 million this year and we will certainly aim at the bottom end of this range.

Turning to other guidance on page 14. In the second quarter of 2012, we expect shipments to increase by over 20% sequentially as demand improves in all of our key markets. Gross margin is expected to be in the range of 3% to 6%. For the first quarter of 2012, we maintained our shipment guidance of 2.1 gigawatt to 2.5 gigawatt.

Moving to FX projection on page 15. Based on exchange rate of $1.28 to the euro, we expect hedging gains to roughly offset the FX translation loss. For every cent appreciation to the euro, we expect a net FX gain of approximately $3 million and vice versa.

We are making progress on the monetization of investment in the GFX and currently in discussion with multiple potential buyers. We intend to diverse this investment and we'll keep you apprised of any progress. We also continue to work with our banking partners to further improve our balance sheet. To sum up, with the GAAP loss – while the GAAP loss in the first quarter is larger than what we would have liked. We minimized cash burn through the stringent working capital management and we are continuing to implement the initiative that will streamline Suntech and improve our financial position. Most critically, we have a clear cost down roadmap that will ensure, we continue to have one of the most competitive product offerings in the 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 Vishal Shah of Deutsche Bank.

Susie Min – Deutsche Bank

Hi, this is Susie Min asking the question for Vishal Shah. Thanks for taking my question. You just alluded to it earlier that you are working with your banking partners to improve your balance sheet. And I was wondering some of your peers have been able to successfully raise funds in the local debt market? What are your plans to address your short-term debt? Are you planning to tap the local markets and then I have a follow-up question.

David King

We are – this is David. We are actively pursuing the same avenue at this point.

Susie Min – Deutsche Bank

Okay. And then what are your expectations about market share and your market share in China and the U.S. this year? How much do you expect to sell there?

Andrew Beebe

Yeah, this is Andrew. I think in the U.S. we plan to continue to hold our number one position. We were probably 21% or 22% last year. And I think we’ll see that grow some this year. And in China, we will increase the percentage of our revenue that comes from the Chinese market overall as a percentage of our total revenue, but I don’t think we have a specific market share target for China. We are looking for a rationalized market in China, where there is a focus not just on lowest cost, but also on the high-quality and LCOE-focused offerings.

Susie Min – Deutsche Bank

Okay. Is that still in line with the 300, 400 megawatt number that you mentioned last quarter?

Andrew Beebe

Yeah. I think we’ll see our target in line or above that, yeah.

Susie Min – Deutsche Bank

Okay, great. Thank you.

Operator

Next question comes from the line of Satya Kumar of Credit Suisse.

Brandon Heiken – Credit Suisse

This is Brandon Heiken speaking on behalf of Satya Kumar. Thanks for the question. You mentioned the CapEx guidance in 2012 of $120 million to $150 million. What are your thoughts on operating cash flow for the rest of the year?

David King

We are aiming at the slightly positive cash flow for the year.

Brandon Heiken – Credit Suisse

Okay, great. And you mentioned that the accounts payable were a bit higher, are there – has there been changes in the credit terms with your customers?

David King

Yeah, I think this is a part of the industry dynamics and we have long-term partners willing to work with us to go through these difficult times, and this is consistent with the industry as a whole.

Brandon Heiken – Credit Suisse

Okay, thank you.

Operator

Your next question comes from the line of Jesse Pichel of Jefferies.

Ming Xu – Jefferies

Hey, this is Ming Xu for Jesse. Good evening gentlemen, very nice job on cash management. Can you give us some color on your megawatts shipment miss? Is this a production issue or demand issue? I assume the Chinese New Year holidays have already been building to your guidance?

Dr. Zhengrong Shi

Andrew, do you want to answer the question?

Andrew Beebe

Yeah, sure. Hey, Ming Xu, this – it wasn’t a miss, I mean, we came in a little bit better than our forecast, so…

Ming Xu – Jefferies

I thought your megawatt shipment was higher than what actually you deliver?

Dr. Zhengrong Shi

You mean our capacity?

Andrew Beebe

Yeah, we guided a 30% reduction in shipments and we ended up with about a 27% reduction.

Ming Xu – Jefferies

Okay. So – and so my next question is on the U.S. anti-dumping case, so this case has been on the headlines since last fall, and the result is hardly a surprise for anyone. So, I am just curious why Suntech still decide to ship large volumes to the U.S. without using (indiscernible) sales, and this should have been easy $0.11 pre-tax earnings saving?

Andrew Beebe

Yeah, sure this is Andrew. We made a transition to globally sourced cells, not just Taiwan, but the globally sourced cells timely as quickly as was we thought was prudent from a product standpoint. So, we are now every 10 product that we ship to the U.S. is shipped with globally sourced cells and will not have tariffs applied to it, but because of the critical circumstances, distance going so far back, it’s basically clawing back to a period before we had non-Chinese cells involved in a products. But from this point forward, there are no products going to the U.S. that will have any tariffs applied to them.

Ming Xu – Jefferies

It’s great to hear that.

David King

Yes, and this is David. I will say this is an accounting provision and the final decision is yet to come.

Ming Xu – Jefferies

Correct.

David King

And the accounting charge may get reversed at the final decision level.

Ming Xu – Jefferies

Okay. So if you use a different cell like if you switch out your cell supplier. Do you need to get a different UL certification?

Dr. Zhengrong Shi

We are having – I have value fit to having global supply chain for quite a number of years so, we have module fabrication in place long time ago.

Ming Xu – Jefferies

Okay, great. Alright, thank you very much.

Operator

Next question comes from the line of Timothy Arcuri of Citigroup.

Timothy Arcuri – Citigroup

Hi, Zhengrong Shi. I was going to ask to give you an update on the sale of the Italian projects from DSF?

Dr. Zhengrong Shi

Yes, as I briefly mentioned in my prepared remarks we with the sales is active right now and we have coupled – more than a couple of potential buyers that are interested in the – in this Italian spinning asset and so, that’s all I can comment right now is the sales process is ongoing.

Timothy Arcuri – Citigroup

I guess may be just a follow-up, but the outstanding capital commitment is to GSF, I believe its $150 million.

Dr. Zhengrong Shi

No, this is – first that’s much smaller than that and there is no further plan to build out in Italy right now.

Timothy Arcuri – Citigroup

Okay, thanks.

Operator

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

James Medvedeff – Cowen & Company

Good evening. Can you hear me?

Dr. Zhengrong Shi

Yeah.

David King

Yep.

James Medvedeff – Cowen & Company

Okay. Couple of operational questions. How many internal wafers did you produce in the quarter?

Dr. Zhengrong Shi

Something about 120 megawatts.

James Medvedeff – Cowen & Company

Okay. So, the rest of these modules was produced with external wafers. And how much were you paying for external wafers in the quarter?

Dr. Zhengrong Shi

The quarter probably is around $0.30 per watt.

James Medvedeff – Cowen & Company

How is that looking for Q2?

Dr. Zhengrong Shi

Sorry, Q2 is around $0.30 per watt and I think Q1 was about $0.34.

James Medvedeff – Cowen & Company

Okay, thanks. So if internal wafer capacity is about 400 megawatts a quarter, right, you have 1.6 gigawatts. So, why did you produce only 120 megawatts or is it cheaper to buy them in the market than produced them yourselves?

Dr. Zhengrong Shi

Well, we have some mono capacity and there is a most capacity so, in the first quarter, the product mix in the non-match to our internal capacity.

James Medvedeff – Cowen & Company

I see. Okay and sticking with those kinds of questions, how much are you paying for poly these days?

Dr. Zhengrong Shi

Poly price?

James Medvedeff – Cowen & Company

Yes.

Dr. Zhengrong Shi

You mean spot market or internal?

James Medvedeff – Cowen & Company

Well, just what was your average cost of poly in the quarter and what are you seeing in the spot market, what might we expect for Q2?

Dr. Zhengrong Shi

Okay. In a quarter, it was around $30 per kilogram and the spot market this moment is probably about $20 to $24 per kilogram.

James Medvedeff – Cowen & Company

So your average cost of poly in the quarter was $30.

Dr. Zhengrong Shi

Yes.

James Medvedeff – Cowen & Company

Okay. And then one – just one bigger picture question. When you talk about demand driven production, what sort of lead time are you allowing for that. If – I’m asking because you were a little bit short of inventory coming into the quarter and that’s what – that’s one of the reason that shipment?

Dr. Zhengrong Shi

Sure, we are probably talking about giving the ocean time about 30 days, I think from factory for order of 45 days.

Andrew Beebe

I would just add that the transition of demand really took place over the course of the quarter and we’re in that position now but we were not in the beginning of the quarter.

Operator

And your next question comes from the line of Pranab Sarmah of Daiwa Capital. Please limit yourself to one question and then you may reenter the queue by pressing star one again.

Pranab Sarmah – Daiwa Capital

Hi thank you for taking my questions. My question is on your second guidance for 2012 you’re guiding for 2.1 to 2.5 which is midpoint is 2.3 that implies like second half you have to do at least 1.5 gigawatt assuming whatever the guidance you’ve given on the Q2. How comfortable are you getting 1.5 gigawatt of shipment on second half of 2012 and from which market you’re expecting that?

Andrew Beebe

Hi this is Andrew, I mean we gave a range from 2.1 to 2.5 we are very comfortable with the range. If you look historically we traditionally shipped 60% of our volume in the second half and to answer the question of where this is going to come from. We’re seeing surprising level of strength in the Europe market. So, I think we, there is some room for upside in Europe but we have been mainly focused on growth markets like United States, Japan and different aspects – different areas of the rest of world region.

Pranab Sarmah – Daiwa Capital

Okay. And my next question is do you have to take anymore provisions from anti-dumping in second quarter or it has already done measured in the first quarter? Thank you.

Unidentified Company Speaker

This timing provision had to do with the temporary assessment of critical circumstances, which in obvious likely to be reduced at the final decision and for the second quarter it will be close to minimal.

Operator

And your next question comes from the line of Chris Kovacs of Robert Baird.

Chris Kovacs – Robert Baird

Hi, thank you for taking my question. Can you maybe comment on some of the capacity reductions that you see in China and some of your competitors there? And then maybe give your thoughts on some of your US competitors SunPower and First Solar who made decisions to rationalize their capacity?

Dr. Zhengrong Shi

Yeah. In China, certainly there is a lot in idle capacity here. And currently as we know is oversupply situation and every player has to optimize their cost structure and always minimize spend structure. So, I think production and rationalization is very reasonable. I think most companies are doing that here in China.

Chris Kovacs – Robert Baird

Have you guys considered doing that yourself?

Dr. Zhengrong Shi

Yes, we are doing that – for example I was just stating that we have been focused on our wafer most efficient the wafer manufacture line in to reduce the cost – further reduce the cost.

Operator

And your next question comes from the line of Kelly Dougherty of Macquarie.

Marina Shvartsman – Macquarie

Yeah, hi, this is Marina Shvartsman on behalf of Kelly Dougherty. You mentioned in the call that you are now expecting to get to $0.60 overall for year end processing costs. One of the competitors just reported a massive improvement in processing cost of $0.58 and target below $0.50 by the end of the year. Are you guys doing things differently or just the (indiscernible) materials you are using relative to them? Within that blended number how much more does it cost for you guys to produce your high efficiency product? Thanks.

Dr. Zhengrong Shi

Yes, like we focus very much on the quality of the product. We have very clear roadmap initiative to achieve this target cost and mainly like by innovation so, as I just mentioned, we already shipped 310 watt panel IPV. This probably is highest power output rating panel in market. We have plan to ship total 800 megawatt high performance modules based on Suntech’s proprietary technology such as Pluto, quasi-mono and selective emitter technology. And the reason Suntech has been able to achieve premium price for solar is because of our quality. So, we are very strict with our material selection to make sure what would reduce the cost. And we don’t compromise on quality. The $0.70 per watt or better is all in cost of goods sold. So, we believe if we reach this target or lower before the timeline, we will be very competitive in the market.

Marina Shvartsman – Macquarie

Got it. Thank you. It’s primarily the material and the quality. I have one question on the tariff. Do you have sense for whether this scope of the tariff ruling can be broadened before the final ruling? Right now the workaround is pretty manageable. So are you guys concerned that there might be changes to the scope that make it more difficult?

Andrew Bebee

Yeah, this is Andrew. I think in the last ruling from the department of commerce, they were crystal clear in their statement about potential expansion of scope and it was requested that would be expanded to include modules and the department of commerce made very, very clear that was not going be part of the scope. We don’t see the scope changing it all.

Marina Shvartsman – Macquarie

Got it, thank you.

Unidentified Company Speaker

Operator?

Operator

Yes.

Unidentified Company Speaker

Next question.

Operator

The next question comes from the line of Colin Rusch of ThinkEquity. Sir, your line is open.

Unidentified Analyst

Hi, gentlemen. (indiscernible) for Colin. So, we understand these charts are only preliminary. What are you hearing from the China government on a potent to response? And specifically, is there any indications that there maybe some financial supports to companies to manage this transition?

Dr. Zhengrong Shi

In the last few days, we heard a lot from our statement from DOC of China and they opposed greatly to this preliminary ruling. So, I think Chinese government probably will have to talk to some retaliation or something, so – but as I said it’s too early and the final ruling will be out in November.

Unidentified Analyst

And what kind of conversations have you had with the government about supports or managing this time of confusion. When are they willing to help you?

Dr. Zhengrong Shi

Well, no governments like (indiscernible) barrier, but I think the government will fight from their point of view. And from industrial point of view, we have the (indiscernible) government to give us more favorable market policy to really support domestic PV market growth in China.

Unidentified Analyst

Sure. And lastly can you talk a little bit more detail about some of the key points of your clear cost reduction roadmap, and specifically what kind of process technology changes you are anticipating in the timeframe? Thank you so much.

Dr. Zhengrong Shi

Sure. As I said, the roadmap involves innovation which – what we are doing will come to simplify the Pluto technology and to improve the efficiency without adding cost. So, I’ll reduce the manufacturing cost of Pluto and now we are rolling out more volume of quasi-mono product, so, basically, the performance of the module output or the over 6% compared to our conventional module output. So, this is the innovation. Secondly, we are working very hard to introduce some settle-out material with normally maintain or improve the quality of the product and also reduce the cost. And totally, we are negotiating with our supplies to reduce cost of the material. So, I think that with all of the initiatives we should be able to reach our cost target.

Operator

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

Brian Gamble – Simmons & Company

Everybody kind of wanted to get your thoughts on a couple of factors. One, overall market size in China have been reading things about significant improvements there, and then I also wanted to touch on your thoughts on some of the developing markets. You mentioned a couple of it you expected to manifest itself sales over the next few months or potentially a year or so. When you look at those markets and may be you could walk through the strategy that we are going to consume other guys employing in those non-subsidy markets and being able to develop pipelines that really make sense. Do you think those sorts of projections are possible or do you think the continuation within your existing markets within the subsidy markets particularly Europe and the rooftop movement that is a more sustainable two or three year sort of plan?

Andrew Beebe

This is Andrew. I think let me take them separately because we look at them differently, but in the developing markets I should state that, I think a lot of people have been talking about this as the sort of route to the future for solar and we agree, we as you know on these calls, we've been talking for couple of years about our focus in those new developing countries. We have great track records in places like Thailand and now India and certainly Israel and the Middle East and others that are smaller, but definitely consistent market.

I think new markets like Saudi Arabia where we've been working with couple of years are going to light up and become a little more I guess more rationale markets, South Africa has invested a huge amount in building out their system, their approach, their regulation and we think that's going to be a stable in high growth market for the next couple of years. But those markets will just continue to come online. I would just say that we are not ignoring extraordinary markets across Europe and the Americas where we see consistent growth from the past and simply just a transition from schemes based on feed-in-tariffs toward much more parity or self consumption markets.

So, we are excited about those developing countries, but we are also excited about the markets that we've been very consistent in for a long period of time. China is different. It’s a subsidized market and it's very, very new and we are seeing a lot of growth there in utility scale and we expect to see a lot of growth in the large commercial rooftop as well and we are committed to it obviously and very excited about it. But we are working with regulators and with leaders in the industry to make sure that the consumers of those products and the electricity are very focused on lifetime cost of energy and the long-term viability of these power plants, their transmission etcetera. So, we think it's going to take a policy in regulatory investment in China as well.

Brian Gamble – Simmons & Company

And just a quick follow-up, Andrew, you mentioned the potential upside to the 300 to 400 megawatts that you expect to do into China this year. What is an upside or more importantly maybe what could you do next year?

Andrew Beebe

Yes, there are just a huge number of deals being signed up across China. And so I think given this strong rush anyone who is at the show in Shanghai last week saw just the extraordinary strength and excitement of the market right now. So, I think you just have to characterize it as a broad range in terms of upside and then question marks in our mind about exactly when those deals gets fulfilled in terms of actually building out and turning on. And then next year, I think we are going to see ongoing growth, I mean the numbers that everyone has heard from the regulators and government are certainly lining up with what we've seen which are extraordinary growth rates going to 10 gigawatts per year. So, we would expect to play a bigger and bigger role as that market becomes more and more focus on quality and LCOE.

Brian Gamble – Simmons & Company

Thank you.

Operator

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

Unidentified Analyst

Everyone, this is Karen calling in for Ahmar. Thanks for taking my question. I have two quick ones. My first one is regarding your higher efficiency product rollout this year. You mentioned out of our shipment guidance, 800 megawatt will be the higher efficiency products. What is the breakdown between the quasi-mono, selective emitter and the Pluto products and then I have another one?

Dr. Zhengrong Shi

Yes, quasi-mono probably be around 400 megawatt and the rest will be selective emitter and Pluto product.

Unidentified Analyst

Okay. And regarding your quasi-mono products, are you mostly using in-house quasi-mono wafers and have you already upgraded your wafer equipment a 100%?

Dr. Zhengrong Shi

Yes, yes 100% quasi-mono.

Unidentified Analyst

So you - will you also be purchasing quasi-mono wafers externally?

Dr. Zhengrong Shi

Small portion, yes.

Unidentified Analyst

Okay. And then my last question is can you help me clarify the module cost breakdown for the first quarter, and your target by year end, the breakdown between non-silicon versus the poly cost?

Dr. Zhengrong Shi

Yes. For the first quarter, as I just said there is several factors contributed slightly high cost than we expected such as low utilization rates and inventory issues. And these are the major and also some inventory issue including material and also finished goods. So, for the second quarter, we expect fully loaded COGS range from $0.90 to $0.95, and before end of the year try to get up to $0.75 or lower fully-loaded COGS per watt. So, our manufacturing cost definitely will be lower than this, because this also included some like inventory and provision and so on. So, our – now wafer – non-silicon processing cost will be below $0.60 per watt.

Operator

Your next question comes from the line of Hari Chandra of Auriga.

Rory Macpherson

Hello.

Operator

Your line is open. The question has been withdrawn. Your next question comes from the line of Gordon Johnson of Axiom Capital.

Unidentified Analyst

Hi this is (indiscernible) for Gordon Johnson. I have three questions. So, this quarter you have operating cash flow…

Rory Macpherson

Can you speak up please?

Unidentified Analyst

Hi I have three questions. So, first is, your operating cash flow and free cash flow were negative first quarter, and you have a debt coming…

Rory Macpherson

Can you speak up a little bit more please?

Unidentified Analyst

Hello, can you hear me right?

Rory Macpherson

Yeah, that’s better.

Unidentified Analyst

Hello, can you hear me?

Dr. Zhengrong Shi

Yeah.

Unidentified Analyst

I have three questions. So, the first one is on your operating cash flow and the free cash flow are coming back with $575 million convertible due next year. Should we worry about your liquidity positioning, and if not, what give you confidence that liquidity won’t be a issue? And next around – the second one is your cost. Hello?

Dr. Zhengrong Shi

Yes go on.

Unidentified Analyst

First one – the second one is your cost. The Trina just reported cost per watt, conversion cost per watt at $0.58 per watt, and your cost per watt is still as high as $0.74 per watt in the first quarter. How will you compete if they are able to undercut you on cost per watt? And the third one is – the last one is really on GCF, it appears that your equity affiliate earning line negative, is that a provision against GCF, and what’s really happening, hello…

Dr. Zhengrong Shi

Yes go on. If you can…

Unidentified Analyst

So, what’s happening and also is the earnings from GCF still determined by a discount cash flow model, and is this fair to assume that your discount cash flow assumption has been adjusted and what cost adjustment? Thank you.

David King

Well, I couldn’t clear all your questions. But I’ll try to answer it to the extent I can. One is you mentioned first of all operating cash flow and outstanding convertible notes and as I mentioned earlier, I mean we target free cash flow to be as neutral as possible and clearly our CB will require a different strategy, which are actively working on. And as I mentioned on the call earlier it was no longer 575, it’s close to 540 and we will continue to deploy and assessing various strategy in the next month to deal with this upcoming CB maturity. And in terms of cost of (indiscernible) I will get Dr. Shi to answer that question. But on the GSF, I couldn’t clearly hear your question, but it’s pretty much a variation issue and we probably don’t need to – we don’t need to comment on the variation issue because we have the process ongoing right now.

Dr. Zhengrong Shi

Regarding cost, I just discussed that. We have a clear roadmap and initiative to achieve the target and actually in Q1 we also made a lot of progress, because of lower utilization rate and now capacity some of this progress was not yet able to reflect in our numbers. So, as I said, we have three innovations, technology, product design, and also introduced a new material and improve our operating efficiency. So we believe we should be able to reach fully loaded COGS $0.75 per watt for the end of the year. And…

Unidentified Analyst

Alright.

Dr. Zhengrong Shi

Yes.

Unidentified Company Speaker

Next question. Operator?

Operator

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

Aaron Chew – Maxim Group

Good evening, gentlemen. I appreciate the question. Wondering if you could just maybe provide a little color around your assumptions and outlook for really the balance of the year with regard to both profitability and cash flow? I know you didn’t touch on that much on the call, but Dr. Shi has made some comments I think in the press or at least some other interviews about striving for profitability by year end, and I believe Mr. King also made some comments about shooting for cash flow. I’m assuming its operating cash flow positive by year end. So, with cost – with your blended cost coming down about $0.75 per watt, just wondering what you’re assuming behind those profitability and cash flow breakeven targets with regard to both pricing and OpEx, it would be really helpful? Thanks very much guys.

Dr. Zhengrong Shi

Okay. I will answer the first question and David will answer your second cash flow question and when I commented on the question about the profitability of the photovoltaic industry as a whole. So, I just generally commented the profitability allowing the whole supply chain, for example, the polysilicon, ingot wafer, cell module. So, I did not talk in particularly which company or Suntech or whatever. So, because yeah, at this moment the whole supply chain is at loss or breakeven point. So, I think for the industry to come back to profitability, at least need to be 6 to 12 months away.

Aaron Chew – Maxim Group

Okay, that’s helpful. Thank you Dr. Shi.

David King

If I can benchmark what we did last year and if you notice that we actually turned cash flow positive towards the end of the year. And expect – there is a similarity last year too, there's a cost, the price was up 30% from the beginning of the year to the end of the year. And so if you profiled that similarly, you will see that what we have this year different is that we have a clear cost down roadmap. And so we would like to achieve cash flow from operation positively, and to the extent we can cover some of our CapEx.

Operator

At this time we reached the allotted time for questions. I would like to turn the conference back over to CEO, Dr. Shi for closing remarks.

Dr. Zhengrong Shi

Yeah, thank you everyone for attending the call. And if you have further questions, please talk to Rory, David, or myself and – in the next day or beyond. Have a nice day. Thank you.

Operator

Thank you for participating in today's conference. You may now disconnect.

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