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Yingli Green Energy Holding Company Ltd. (NYSE:YGE)

Q1 2012 Earnings Results Conference

May 30, 2012 08:00 am ET

Executives

Miao Liansheng - Chairman & CEO

Zongwei (Bryan) Li - Executive Director & CFO

Darren Thompson - Managing Director, Yingli Green Energy, Europe

Robert Petrina - Managing Director, Yingli Green Energy Americas

Zhuo Arthur Chen - Director, Legal Affairs

Yiyu Wang - Chief Strategy Officer

Miao Qing - Director, Investor Relations

Analysts

Susie Min - Deutsche Bank

Satya Kumar - Credit Suisse

Timothy Arcuri - Citigroup

Noah Kaye - ThinkEquity

Richard Grasfeder - RBC Capital Markets

Jesse Pichel - Jefferies & Company, Inc

Amy Song - The Goldman Sachs group Inc

Mark Bachman - Avian Securities, LLC

Pranab Sarmah - Daiwa Capital Markets

Kelly Dougherty - Macquarie Research Equities

Operator

Hello, ladies and gentlemen, this is Susan. I will be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited First Quarter 2012 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After today’s presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you’d like to ask a question.

Now I’d like to transfer the call to the host for today’s call, Arthur Chen, Director of Legal Affairs of Yingli Green Energy. Arthur please proceed.

Arthur Chen

Thank you, operator and thank you everyone for joining us today for Yingli’s first quarter 2012 financial results conference call. The first quarter 2012 earnings release was issued earlier today and available on the Company’s website at www.yinglisolar.com. We have already provided a supplemental presentation for today’s earnings call, which can also be found on our IR website. I hope you all had a chance to review it by now.

On the call today from Yingli Green Energy are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Bryan Li, Executive Director and Chief Financial Officer; Mr. Wang Yiyu, Chief Strategy Officer; Ms. Miao Qing, Director of Investor Relations; Mr. Darren Thompson, Managing Director of Yingli Green Energy, Europe; Mr. Robert Petrina, Managing Director of Yingli Green Energy Americas.

The call today will feature a presentation from Mr. Miao, covering business and operational developments. Mr. Thompson and Mr. Petrina will talk about the developments of the European and American markets respectively. And then Mr. Li will take you through a discussion of the Company’s financial performance. After that, we will open the floor to questions from the audience.

Before beginning, Yingli Green Energy’s management team would like to remind the audience that this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipate, future, intends, plans, believes, estimates, and similar phrases.

Such statements are based upon management’s current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Yingli Green Energy’s control which may cause Yingli Green Energy’s actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding this and other risks, uncertainties, or factors is included in Yingli Green Energy’s filings with the U.S. Securities and Exchange Commission. Yingli Green Energy does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise except as required under applicable law.

I'd now like to return the call over to Mr. Miao Liansheng. Please begin.

Miao Liansheng

Hello, everyone. Thank you for joining us today. In the first quarter as we stayed committed to existing market and expanded further its new and emerging market, our PV module shipments reached a new historical high, with a increase of 44.4% over the previous quarter.

During the first quarter, module price had continuously driving down by a series of negative factors, such as excessive module supply, subsidy adjustment in Europe and AD/CVD investigations in U.S. Despite of continuously downgrade – downward module price, we maintained overall gross margin at 7.8% by leveraging our notable cost reduction efforts in premium brand.

We experienced exceptionally strong demand in Germany and in the U.S. in the first quarter. These two countries accounted for approximately 80% of our total revenues. Our remarkable sales performance was partially benefited from our R&D and after sales service center in Madrid, Spain, which has enabled us to provide customers with more efficient and comprehensive services.

China market after the installation rush in the second half of 2011, entered an adjustment period. In earlier 2012, majority utility companies were mainly busy with connecting their completed projects to grid and planning for new projects. In recent two months we have actively involved in the bidding for mainly ground mounted projects. We expect that China – we expected the demand in China market to surge in second and third quarter as the constructions of utility scale will gradually begin in Western China.

Earlier this month the China government announced a total of 1,709 megawatts Golden Sun Program for 2012, while the number was only 689 megawatts in 2011. In addition, we expect promising demand from the public and family use-sector, especially independent off-grid systems in remote area may be also encouraged by the Chinese government.

We will fully utilize our domestic sales and service networks to bid for the projects and target to provide more customers with Yingli modules. We expect approximately 30% of our revenue to come from Chinese customers this year, by leveraging our solid customer relations and pioneer position in China.

With the rapidly declining cost of electricity from solar systems, we’re more and more countries and regions to promote solar applications. In order to support our worldwide expansion we have enhanced our investment in sales network development. Recently, we established our wholly owned subsidiary in Japan. We believe our local sales and a service team will facilitate us to penetrate further in the Japanese market. We are also in process of setting up subsidiaries in Austria and Morocco for more business opportunities.

We have market of intensified competition, product differentiation is one of the key factors to attract customers in light of gradual shift of demand to roof-top segment in European markets. In 2010, we officially launched the high cell efficiency PANDA module, which has been highly recognized by our customers. We believe this new type of module will be widely used in roof-top as it’s been the benefit of taking less space and high cell efficiency. Recently we have added high cell efficiency multicrystalline modules to our product portfolio. We expect the new module to gain wide recognition from our customers due to its good price and performance ratio and excellent quality.

Meanwhile we have also accept – accelerated adoption of new materials and new manufacturing techniques to further reduce our cost. Our material production lines we improved with the average cell efficiency of our multicrystalline by 0.2% to adopting new materials in printing process.

In addition, we manage to produce polysilicon ingot of 600 kilograms and 800 kilograms in our Tianjin facility. These large ingots have significantly reduced the unit energy consumption.

In early May we worked with China Development Bank and have successfully issued RMB 1.5 billion denominated medium-term notes. This successful issuance strengthened our cash position, optimized our borrowing structure, and reduced our financing cost. What’s more the issuance demonstrated investors growing confidence in our long-term growth.

Now Darren Thompson and Robert Petrina will talk about the European and U.S. markets. Thanks.

Darren Thompson

Thank you, Mr. Miao. As reported in Februarys call, the uptick in demand that we experienced in Germany early Q1, supported by other European demand translated into solid quarterly performance in Q1.

Three factors driving our results was the pull forward in demand as a result of EEG uncertainty in Germany, low channel inventory levels entering into Q1, and our ability to deliver a compelling value proposition to loyal customer base. Demand momentum in Germany shows no sign of abating in Q2, given the end of June deadline on securing of a 35 megawatts supply contract project Perleberg, with one of our long-term partners, is evidence of our capability to catch an attractive share of this demand.

Uncertainty still clouds visibility for H2 in Germany, given planned EEG changes. However, the push back by the Bundesrat at announced mediation process is an encouraging signal that we could seek upward revision of EEG conditions, particularly, benefiting the commercial roof-top segments. We anticipate clarification on the EEG by the end of June.

Other European markets remained relatively slow in Q1 versus Germany, excluding Greece, where we’re successful in bidding several large projects with our local partners. Uncertainty prevails in Italy with the ongoing discussions on the 5th Conto Energia, whilst in the U.K. the government has announce a package of incentives with a visibility out to 2015, which will encourage investments and create conditions for more stable market demand.

We are positioning ourselves to access new Eastern Mediterranean markets, which is Turkey, with ample solar resources, electricity demand growth and supporting government policy plus also exploring opportunities in North Africa. With the increase in sophistication of the customers revolving business models and these new market opportunities, we continue to invest in deepening and broadening our European team by recruiting specialist talent in functions such as business development and operations.

We continue to leverage our FC Bayern’s sponsorship property through integration with our brand and product marketing campaigns, particularly, given the exciting close to the season of both German and European levels. The investment is paying off in terms of brand awareness, opening doors to new business opportunities, and also positively influencing point-of-sale decision making downstream.

Last but not least, speculation continues to circulate regarding a potential anti-dumping filing in Brussels. We believe that common sense will prevail given the affordability of solar, which is fundamental to the substitution of traditional carbon-intensive generation. However, in the event of any filing we are well prepared to defend ourselves and remain fully committed to Europe.

Now I will pass the call over to Robert. Thank you.

Robert Petrina

Thank you, Darren. Despite the noise and disruptions created by the beginning of this CVD/AD investigation, the U.S. market proved to be resilient enough to show substantial strength throughout the first quarter.

Our regular fulfillment run rate business grew with the acquisition of new customers and our existing customers increase in market share across both the commercial and residential market. Similar to Europe, it also benefited from lean channel inventories coming out of 2011. Overall, the U.S. market has met its expectations and appears well on its way to be among the top three global markets in 2012.

In the first quarter, we also benefited from the pull in effect associated with the expiration of the 1603 Treasury Grant Program. Building on Yingli's growing reputation for exceptional quality, trust building approach and tireless service, we were the supplier of choice for the grant portion for some of the U.S.’s most visible projects. The benefits conferred by supplying these projects are not limited to the Q1 transactions, but rather position us for significant volumes as these projects get built over the allotted timeframe.

Throughout this period, we expanded financial and human resources and tremendous human energy to defend ourselves vigorously against the allegations raised in the CVD/AD investigation. The aggregate preliminary tariffs are substantial, but we will continue to aggressively defend ourselves and remain optimistic that we will persevere in the final determination.

The overwhelming majority of the U.S. solar industry supports access to affordable solar energy and fair market trade. We're grateful to the tens of thousands of U.S. solar installers, developers, manufacturers and suppliers who share our position and seek the same goals. But as the global company reflects those supply chain we have established alternative fulfillment channels that will give our customers uninterrupted access to our high quality products.

In South America we continue to build on last year’s success and recently announced our partnership with Light ESCO, EDF Consultoria, and the State of Rio de Janeiro to bring solar power to Brazil’s highest-profile football stadium, Estadio do Maracana. As the global renewal energy sponsor for the 2014 FIFA World Cup, Yingli is committed to helping Brazil and FIFA make it the greenest FIFA World Cup in History. This historical project will provide a roadmap for Brazil and the green world to join and leave a lasting sustainable legacy powered by solar energy.

In the middle-east our growing presence in the region has positioned us well for the recently launched program in the Kingdom of Saudi Arabia and surrounding Gulf Coast countries. Solar PV has reached the turning point around the world and where better can solar be deployed than in areas with tremendous solar resources, quickly growing power consumption and historical bastions of power expertise.

With this, I’ll pass it on to Bryan to provide the financials of the company. Thank you.

Zongwei (Bryan) Li

Thanks, Robert. Welcome everyone to our earning conference call today. In spite of the tough market situation and the seasonal impact, in the first quarter, our module shipment increased significantly by 44.4% from the previous quarter and reached new historical high.

Based on current market situation and the forecast of the customer demand, we expect our shipments for the second quarter of 2012 to increase by approximately 15% from last quarter. The anticipated increase will be driven mainly by the solid demand in existing markets such as Germany, quick pick up in major markets such as China and accelerated development in the new markets.

Our total net revenue increased about 22.6% to $500 million in first quarter, a result attributable to the remarkable increase in module shipments and it was partially offset by the continuants of the decline in the module ASP.

Cost reduction continued to be one of our priorities and has enabled us to stay competitive. Net off provisions, our overall mono & multi polysilicon cost per watt declined from US$0.33 in the previous quarter to US$0.26 due to the availability of the low cost polysilicon on the spot markets and our continuous efforts our renegotiation with the contract price with our existing suppliers.

More notably our overall mono & multi non-polysilicon cost per watt was further reduced from US$0.64 in fourth quarter of 2011 to US$0.57 in first quarter of 2012. The catalysts for non-polysilicon cost reduction are the continuously declined auxiliary material price and to a larger extent for the improvement of sale efficiencies from the adoption of new materials and new manufacturing techniques.

We expect our non-polysilicon cost per watt to further decline to $0.55 in second quarter and continue to come down to $0.50 when we exit this year. Despite of the intensified market competition and the negative impacts from the preliminary anti-dumping and countervailing duties or AD/CVD tariffs imposed by the U.S. government we successfully leveraged our competitive cost structure to generate gross profits of $38.9 million representing an overall gross margin of 7.8%.

Excluding the provision recognized our first quarter overall gross margin – gross profit was US$56 million and our gross margin of PV modules would be 11.5%. Provisions that recognize in the first quarter included a non-cash inventory provision of US$3.4 million and a provision of preliminary AD/CVD duties of US$13.7 million.

For second quarter we expect our overall gross margin to be mid-to-high single-digit percentage.

Walking through the bottom line, our operating expenses declined to US$60.3 million in the first quarter of 2012 from US$73.3 million excluded non-cash charges in the previous quarters. The 17.7% decrease in operating expenses was primarily attributable to our stringent cost control efforts.

Operating loss was US$21.4 million and operating margin was negative 4.3%, materially improved from a negative operating margin of 15% in the previous quarters, primarily because we recognized the reduced level of capitalized interest expense as that related to construction in progress was transferred into fixed asset in the first quarter. Our interest expense increased by 11% to US$32.1 million in the first quarter.

To a larger extent, the slightly expanded borrowings also accounted for the increase of interest expenses. On the other hand, the weighted average interest rate decreased from 6.77% to 6.23% in the first quarter mainly attributable to a larger scale of utilization of pre-finance. Given a net euro asset position in the end of the first quarter the appreciation of euro against the RMB resulted in a foreign currency exchange gain of US$4.2 million.

Our first quarter net loss was US$45 million, which included US$13.7 million AD/CVD duties provision and loss per ordinary share was US$0.29. On an adjusted non-GAAP basis, if we add back the non-cash items including these quarters, including share based composition of US$1.5 million, amortization of intangible assets of US$1.9 million and inventory provision of US$3.4 million and a non-cash interest expense of [US$200,000], our net loss will be US$38 million and the loss per ordinary share and per ADS will be US$0.24.

Now let’s turn on to our balance sheet. Our cash, cash equivalent and restricted cash decreased to US$674.7 million as of March 31, 2012 from US$891.9 million as of December 31, 2011. While working capital was improved from negative US$33.6 million to negative US$14.5 million.

As a result of our record high shipment volumes, in the first quarter our accounts receivable increased to US$531.7 million as of March 31, 2012 from US$383.2 million as of December 31, 2011 representing 22.6% increase of sales and an extension of days our sales outstanding to 96 days from 85 days in the previous quarter.

Accounts payable rose to US$629.3 million as of March 31, 2012 from US$473 million as of December 31, 2011. This payable outstanding increased to 123 days from 108 days in previous quarter. As of today, we have approximately US$789.8 million being utilized as short-term lines of credit and US$593.9 million committed as long-term facilities that can be brought down in the future. In order to optimize our debt structure, in the first quarter we increased our long-term borrowings by US$123.1 million and reduced our short-term borrowings by US$41.9 million.

In early May, we successfully issued RMB 1.5 billion denominated medium term notes among the RMB 1.5 billion RMB 300 million there a term of five years at a fixed interest rate of 5.78% while the remaining RMB 1.2 billion bare a term of a year at a fixed interest rate of 6.01%. We believe that successful notes issuance will further optimize our debt structure, reduce our financing cost and expansion in our cash position.

In summary we are confident to achieve a steady and healthy growth through being committed to cost control, optimizing our balance sheet and balancing market share and profitability.

Now I’d like to open the call to the questions. Operator?

Question-and-Answer Session

Operator

The question-and-answer session will begin now. (Operator Instructions) Your first question comes from the line of Vishal Shah with Deutsche Bank.

Susie Min - Deutsche Bank

Hi. This is Susie Min calling on behalf of Vishal Shah. Thanks for taking my question. What kind of pricing premiums are you seeing for your PANDA modules and how do you plan to continue selling these high efficiency products in the U.S. if you have to buy the cells from Taiwan that has different cost structures compared to yours?

Qing Miao

Okay. Let me take up two minutes to translate your question. [Foreign Language] and Robert can you take the second part of the question. Thank you.

Robert Petrina

Yeah, I’ll take the second part of the question; this is Robert, I mean, this is unfortunately the side effects of the AD/CVD investigation that it will make them difficult in terms of the introduction of PANDA due to the fact the cell manufacturers in China but as I mentioned in my opening remarks we’re working on having alternative solution for that as well, it just that the immediate result of that, those products can only come in under the current preliminary duties.

Zongwei (Bryan) Li

For the PANDA price we can charge around at least 10% price premium compared to the standard multi products.

Susie Min - Deutsche Bank

Okay, great. Thank you.

Operator

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

Satya Kumar - Credit Suisse

I was wondering how we should think about stabilization of the gross margins, obviously shipments are up 44% in Q1 and up another 15%, but you’re sort of guiding gross margins down in Q2. Could you talk a little bit about the moving parts between the ASP changes you expect for Q2 to the silicon and non-silicon cost reductions in Q2?

Robert Petrina

Yeah, sure. And based on our current expectation and we expect for the non-polysilicon processing cost and we will be able to drive that cost down to somewhere close to $0.50 by the end of this year and then that would make the [add in] cost for module production to somewhere as close or slightly above US$0.60 per watt. So considering the pricing, the pricing potential at the end of this year, so we will be expecting the gross margin well actually this year it should be spending above 10% to 15%.

Satya Kumar - Credit Suisse

So for Q2 could you give any color on how much change you expect in pricing?

Robert Petrina

Yeah, we currently see close to 15% decline on the ASP from the first quarter to second quarter, well we also see slightly above 15% cost reduction we can make from the first quarter to second quarter.

Satya Kumar - Credit Suisse

Got it. And China you mentioned would be 30% of your shipment goal, it seems like that’s unchanged from your previous outlook, is that correct? And what type of linearity and pricing do you expect in the China market? Thanks.

Miao Liansheng

(Interpreted) The Chinese market and it has slight change on our will and compared to the last year and we think that it might be – that the revenue from the Chinese market might be increased a little bit, will be roughly 20% to 30% of this year and as we said in – in my previous speech and the Chinese market, the PV module selling will be 10% lower than the international price. Thank you.

Operator

Your next question comes from the line of Timothy Arcuri with Citi.

Timothy Arcuri - Citigroup

Hi, thanks. Can you talk about the U.S. market, we heard that some developers in the U.S. have stopped project development for a couple of months through the end of December having the – tending, getting cheaper cells from Taiwan. So can you talk about the trajectory of the U.S. market and weather or not we see a pause in that market during the third quarter? Thanks.

Robert Petrina

Hi Tim, this is Robert. I don’t think we see a pause, I don’t think there is a process that can be start or stop in such a way nor do our customers really believe that the expectations on pricing are such that there’ll be a dramatic change, I think its pretty clear where we're now and where the settling points will be. So I think we communicate consistently and we see that there’s trend demand building in the U.S. market is quite resilient. I mean, this has been a hiccup that we’re dealing with and ultimately I think business goes forward as usual and I think that’s the most important thing and everybody is working together to that end which is also very key.

Operator

Your next question comes from the line of Colin Rusch with ThinkEquity.

Noah Kaye - ThinkEquity

Good morning. It’s Noah Kaye in for Colin. Just following up on your comment before; you said you were looking at a couple of different options for bringing PANDA to the U.S. Would one of those options possibly be a joint venture. And an unrelated question, can you talk a little bit about the demand that you’re seeing in Central and South America? Thanks so much.

Robert Petrina

Yeah, I think we won’t elaborate too much on what we’re doing on that front for competitive reasons, but our goal is to be able to have our best products and the most innovative products in the market that we serve and that’s our goal.

In terms of the demand we’re seeing in South America, its been a very sustained and increased growth and increase over the past year and half and we’re seeing significant activity in places like Mexico, certainly in the Caribbean, Puerto Rico place where we have the actual largest power plant in the region and we’re seeing a lot of activity in Brazil and Peru and Chile and as the new economics filter through and people begin to realize the fact that in many of these regions we’ve reached grid parity and certainly in all occasions where we’re competing with diesel, its becoming a very compelling option.

So it’s still certainly not the size of the projects we’re doing in Europe or the U.S. or in China, but very quickly coming up that curve, so we’re quite pleased with how things are going. So we can go more into that later.

Noah Kaye - ThinkEquity

Thank you so much.

Operator

Your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

Richard Grasfeder - RBC Capital Markets

Yeah, it’s Richard Grasfeder in for Mahesh. Can you guys go over some of the puts and takes to exceeding your guidance, module shipment guidance for the year, you know you got off the year with a strong start, you only need 10% growth quarter-over-quarter in Q3 and Q4. What to get to the high-end of your guidance, how much of this is just being conservative and can you talk a little bit about the puts and takes of that?

Qing Miao

Sorry, is that your question over module shipment outlook in the second half of this year?

Richard Grasfeder - RBC Capital Markets

Well, I am just trying to understand the puts and takes to what your shipments are going to be in the second half to get to your full-year guidance the high-end the 2.5 gigawatts you only need 10% quarter-over-quarter growth in September and December. I am just trying to understand how much of maintaining your guidance is just being conservative and what's going to impact that going forward?

Qing Miao

Okay and I think Darren and Robert can you each give us slightly kind of – can you each just talk about of your own market and then Bryan will give the summary. Thank you.

Darren Thompson

Hi. It’s Darren. Thanks. So, basically in terms of Europe in terms of the second half of the year there’s obviously uncertainty surrounding the EEG in Germany. So we've been pretty prudent that focusing on the existing announced EEG relatively that tends to upside there. There’s obviously a lot of appetite for inventory in Europe moving into Q3 as well given the additional uncertainty for example in Italy.

And of course we’ve had significant go forward into Q1 and Q2 because of the EEG uncertainty, and that’s been balanced by new markets like the U.K. where there seems to be sustainability on the recent announcement roughly a 1 gigawatt corridor for 2015 annually plus any watt business, new business opportunities in the Eastern Mediterranean and North Africa. The emergence of PPA business models in Europe and existing markets and of course continuous rising electricity prices.

So we’re balancing some of the retarders of growth with the drivers for growth and that’s where we’re in terms of our guidance moving forward.

Robert Petrina

And just to complement that from the Americas perspective, as we look every year and plan for the year, we look at the segments that we serve from large scale utility projects to the commercial institutional ones as well as the residential distribution channels and make sure that the targets we set are straight goals but certainly achievable and we’re on our way to do that certainly over the course of 2012 we expect Yingli Americas to be somewhere around 15% with the overall business as we look at it, so …

Richard Grasfeder - RBC Capital Markets

Thank you.

Zongwei (Bryan) Li

Yeah, in summary we currently expect the – we want to reaffirm our annual guidance issued previously of 2.4 gigawatts to 2.5 gigawatts. We have been more than 1.1 gigawatts in the first half and then in the second half we will expect it to shift 1.3 gigawatts to 1.4 gigawatts and we are confident in delivering the targets we have been given to the markets and we’re also aiming the high-end of the range. Thank you.

Operator

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

Jesse Pichel - Jefferies & Company, Inc

Hi, good evening everyone the whole Yingli team. Two part question, first for Bryan. Bryan, following up on Satya’s question, what gross margins do you target for the second quarter and does that include CVD/AD duties.

And my second part of the question is for the chairman, chairman Miao overall will China let some of the insolvent solar company’s sale or will it take customers to realize that the warrantees on these products mean nothing, and will it take customers switching to companies like you and some of your better balancing peers to win share? Thank you.

Zongwei (Bryan) Li

Well, thank you Jesse, and let me take the first part of the questions, and we currently expect and for ASP and cost, cost on production in the second quarter we will be able to down mid-teen percentage from the first quarter’s level and we currently expect mid-tier high-single digit percentage for gross margins from the – in the second quarter. And now I would like to have Mr. Miao to take the second question.

Miao Liansheng

We think that those Chinese companies – those Chinese projects and especially those investors will take these factors as a big concern and will take into serious consideration. But during the past two months and we have bidded over 200 megawatts of projects and we’re gaining more and more market share from Chinese market. Last year it was only 20% of – in our total sales and this year it will be increased to 25% to 30%. But all I can say is just wait, we will guarantee and a promise the warranty with delivery will be true warranty and will not be the company some other company situation. Thank you.

Jesse Pichel - Jefferies & Company, Inc

Bryan as a follow-up that mid to high single-digit gross margin does that include dumping duties?

Zongwei (Bryan) Li

No, it won’t. We don’t expect that we will be charged AD/CVD for the U.S. market share in the second quarter.

Jesse Pichel - Jefferies & Company, Inc

That’s great. Thank you very much, team.

Zongwei (Bryan) Li

Thank you.

Miao Qing

Thank you.

Operator

Your next question comes from the line of Amy Song with Goldman Sachs.

Amy Song - The Goldman Sachs group Inc

Hi. I just have a follow-up question on the previous comments of second quarter gross margin. If you don’t take any consideration on the AD/CVD duty what that mean as you probably import a cell from somewhere else. So what that means in terms of incremental cost structure to you? Does that include in a $0.50 or $0.55 for the second quarter or just something else you haven’t had on top of it?

Zhuo Arthur Chen

This is Zhuo, I think you are right, we can find a sale supply source outside China, which can be subject to three or say no impact from the current CVD and the AD issue. But for the pricing I think given outside China there is still enough cell supply resources much larger than expect the U.S. market of what you see, so I think the pricing will be at a very reasonable range, could be very slightly higher than our internal cost, which we will still bring very reasonable margin for our sales in U.S. for the second half of this year.

Amy Song - The Goldman Sachs group Inc

Okay. Thank you. So, what will be the blended and non-silicon cost for that array? Can you give us a numerical figure?

Zongwei (Bryan) Li

Yeah, we – for the second quarter we will – I will expect the blended array of polysilicon slightly above 30, considering all the opening inventory effect.

Amy Song - The Goldman Sachs group Inc

So for other non-cash inventory provision, are you expecting more going forward or that’s it?

Zongwei (Bryan) Li

No, I don’t expect the provision will recur in the second quarter and also for the non-polysilicon, I’m expecting the cost down to US$0.50 when we exit this year. For the blended array of polysilicon, when we exit this year should be somewhere sub 30 per kilogram. Thank you.

Amy Song - The Goldman Sachs group Inc

30? Okay.

Zongwei (Bryan) Li

Yeah, 30.

Amy Song - The Goldman Sachs group Inc

Thank you.

Zongwei (Bryan) Li

Sub 30.

Amy Song - The Goldman Sachs group Inc

Okay, sub 30.

Zongwei (Bryan) Li

Yeah, 30.

Operator

Your next question comes from the line of Mark Bachman with Avian Securities.

Mark Bachman - Avian Securities, LLC

Thanks all for taking my question. I would like to hear from both Darren and Rob on this. When you're talking about penetrating new markets, are either of you seeing any success in unsubsidized markets? In other words, can either of you document any markets that are actually going through set use of mandates to implement solar solutions rather than trying to grow through the use of subsidies?

Yiyu Wang

Hi. This is Yiyu. I think currently – yeah, sorry this is Yiyu. I think you’re right. Currently what we’ve been seeing more and more downstream developers and the investors are seeking a kind of feed-in tariff in this market because likely in those Mediterranean countries with good sunshine and also South America actually a pipeline we see now is very large announced for some South European country given the current retail utility price versus the feed-in tariff.

The government announced has created a enough premium to allow more and more investor to selling the electricity in Europe through kind of direct PPA business model with utility company or a bit – in direct investors. Also we see more and more chance for self-use consumption business model in families in Europe and given the retail utility price for residential market is even much higher than the average utilities price. So, as utilities kind of business model has already started and we’re now in a negotiation with several existing partners looking for these kinds of projects, the most quick can happen is through the Q3, Q4 this year.

Mark Bachman - Avian Securities, LLC

So Rob and Darren I was hoping for more specific kind of types of examples here. There hasn’t been a demand curve that haven’t been drawn in the past five years. There hasn’t been vertical when so-called module prices reach US$1 ASP and we’re well below that now. So, where are these markets that you think that you can penetrate or that you’re penetrating right now without the use of subsidies anymore, and whether or not if people are just adopting solar solutions or whether not if there are just mandates out there pushing it, where are specific examples of where you’re growing without the use of subsidies?

Robert Petrina

So, I mean, I’ll give you a couple of different answers on this Mark. So, we’re seeing significant activity in places like Mexico, like Brazil, like Chile, like Peru places where you’ve seen both projects that are the larger central station utilities project as well as distributor generation projects as well. And in places like Brazil, where you have actually significantly higher energy prices and most people think at the retail level solar that works.

The bottlenecks are getting the investment community, the folks that make these projects happen comfortable, and that’s what I think is the delay between our expectations of the sort of hockey stick growth once we reach the proverbial grid parity and that is happening as we speak, I mean, look, you go to conferences in these different regions and nobody talks about incentives or feed in tariffs. They talk about policy frameworks that can enable the point of solar in a way that’s efficient with not significant cost – soft cost incurred, but in terms of concrete projects, I think we will be able to provide some details on that at a subsequent call that, that we can go through the details. They are small projects, but there are some very substantial ones in the queue so.

Mark Bachman - Avian Securities, LLC

And Darren is there anything from you in either, the European, African, Middle East, anything out that way?

Qing Miao

I’m sorry, we do have a lot of analyst in the queue – in the question queue, so can we turn to the next question. Thank you.

Operator

Your next question comes from the line of Pranab Sarmah with Daiwa Capital.

Pranab Sarmah - Daiwa Capital Markets

Hi there. Thank you for taking my question. My first question is on what would be your operating expenses on second quarter and going forward for 3Q and 4Q of this year? And secondly could you give little bit of update on the solar farm project, how much project you have on your hand and in U.S. and China what will be our exit strategy from those solar farm project whenever you’re completing those projects?

Zongwei (Bryan) Li

Let me take the first questions regarding the OpEx. We have been successfully reduced 17% for the OpEx from the first quarter to the second quarters – from Q4 to Q1. And then for the second quarter, we see for the G&A expenses and R&D expenses as a combination and we will continue to maintain the similar level or slightly below the first quarter’s level.

And for the selling expenses, roughly 50% of the selling expenses are the fixed costs and the other 50% are the variable costs, which will be in relation to the volume of the shipments. So, we will expect for the fixed part we will continue to cut down the cost and as we made in the first quarter before the variable parts and that will be fluctuating with the shipment volume we’re targeting in the second quarter. Thank you.

Pranab Sarmah - Daiwa Capital Markets

Thank you.

Qing Miao

We can only answer one question for every analyst. So, next question please.

Operator

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

Kelly Dougherty - Macquarie Research Equities

Hi. I just want to follow-up on China a bit, you mentioned the 30% of your revenue this year, just wondering how that translates into a shipment perspective? How much of your shipments did you allocate to China this year and what did terms look like especially payment terms of these projects and when do you think you will be able to actually make a profit on what you sell in China?

Miao Liansheng

I think in China if you talk on megawatt percentage it will be slightly below, sorry, less than 13%. Actually in China the pricing is lower than how we’re exporting outside China, but given RMB appreciation, we still have some margin on that. And regarding to the payment term, because the China projects are split between not only larger ground project bidding, but also Golden Sun and other kind of projects. Actually, (indiscernible) the risk for larger ground project could be slightly longer than the normal routine payment terms we offer to export customers, but given the credibility of those utility companies there is no risk at all. But for the Golden Sun and other project the (indiscernible) this is just as average as we sell to exports, I mean, for the – overseas customers.

Kelly Dougherty - Macquarie Research Equities

So just a quick clarification, sorry, you said that you’re actually making some money on projects or modules you sell into China. Do you use significantly different materials, do you – how – some of the numbers we’re hearing about Chinese ASP, just wondering how that happened and I assume you’re just saying that from a gross perspective?

Miao Liansheng

I think all the products are at the same standard qualified by, certified by the TUV, we use the same material. I think in China actually we can saving some – maybe we can save slightly from the package because it’s a lot to take that at least [one month through] vessel, but we can transport it through vehicles or trains which maybe can save us slight money but all immaterial and the other costs should be almost the same as we export to U.S., I mean, U.S. and Europe.

Kelly Dougherty - Macquarie Research Equities

Okay. And then can you just tell me about your poly costs in the first quarter? How much you produced internally and at what costs, and then may be for the rest of the year how we should think about that?

Qing Miao

Sorry Kelly, we have already answered two questions and probably we can have private talk afterwards and any other analysts are welcome to answer – ask this question. Thank you.

Operator

And that concludes our call today. Now I’d like to transfer the call back to Ms. Miao Qing for closing remarks.

Qing Miao

Sorry, [because] Mr. Miao and Bryan have another conference call (indiscernible) business. So we need to conclude the call earlier today and any of you want to have more questions, then you are welcome to contact Brian, myself or anyone else from Investor Relations. Thank you for joining us today. Bye, bye.

Operator

This does conclude today’s conference call. You may now disconnect.

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