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

Q2 2012 Results Earnings Call

August 29, 2012 8:00 AM ET

Executives

Arthur Chen - Director, Legal Affairs

Miao Liansheng - Chairman and CEO

Bryan Li - Executive Director and CFO

Wang Yiyu - Chief Strategy Officer

Miao Qing - Director, Investor Relations

Darren Thompson - Managing Director, Yingli Green Energy, Europe

Robert Petrina - Managing Director, Yingli Green Energy Americas

Analysts

Vishal Shah - Deutsche Bank

Satya Kumar - Credit Suisse

Amir Rozwadowski - Barclays Capital

Dan Ries - CapRok Capital

Kelly Dougherty - Macquarie

Timothy Lam - Citigroup

Colin Rusch - Thinkequity

Gloria Ho - HSBC

Ben Schuman - Pacific Crest

Aaron Chew - Maxim Group

Operator

Hello, ladies and gentlemen. This is [Yokoyama]. I'll be the operator for this conference call. I would like to welcome everyone to Yingli Green Energy Holding Company Limited Second 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 would like to transfer the call to the host for today’s call, Arthur Chen, Director of Legal Affairs of Yingli Green Energy. Arthur, please proceed.

Arthur Chen

Thank you, Operator. And thank you everyone for joining us today for Yingli’s second quarter 2012 financial results conference call. The second 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 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 terminology 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 those 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 turn the call over to Mr. Miao Liansheng. Please begin.

Miao Liansheng

Welcome to our call everyone. Thank you for joining us today. In the second quarter, we increased module shipment volumes by 13.7% over the previous quarter and achieved a gross margin of 4.6%. We managed to keep our growing momentum despite the significant pressure from the feed-in-tariff adjustment in Germany, the ongoing anti-dumping and countervailing duty investigations in the U.S. and continued excessive module supply.

Our shipment volume results in the first half of the year have exceeded our expectations. Based on public information, we have become the global leader as measured by module shipment volumes among all module manufacturers. We expect to maintain this leadership in the second half of this year.

In Europe, we successfully navigated the policy uncertainty and benefited from the pull-in demand before feed-in-tariff adjustments in Germany. Due to the expiration of the cash grant program, the U.S. market experienced substantial demand by all segments in the first quarter. Total installation volumes nearly doubled the first quarter of 2011. In the second quarter, the U.S. market continued to show solid demand across all segments.

Demand gradually increased in the second quarter as the installation of utility scale projects in northwestern China and the Golden Sun Program have accelerated. Importantly, we expect to see a significant increase of demand in the second half of this year, especially from September to November. By leveraging our strategic planning, solid customer base and broad sales networks in our domestic market, we’re confident to achieve our shipment targets in China this year.

In addition to our aforementioned market share gains, we have continued to drive costs down throughout our value chain by making consistent technical improvements. For example, enhanced ingot casting techniques have contributed to the improvement of wafer quality and subsequently drive higher cell efficiency.

In order to foster sulfur innovative thinking among our employees, we will host The First Technology Innovation Exposition at our Baoding headquarters in November to showcase the innovative technology improvements by our employees in all manufacturing divisions. Through this exposition and constant focus on improving our products and our processes, we aim to create and maintain an atmosphere that will encourage and reward innovation.

As market competition continues to intensify and inefficient models lacking a competitive advantage are revealed, we have seen an increase in finger pointing and the emergence of trade disputes.

As you are all aware, late last year the U.S. government initiated the anti-dumping and countervailing duty investigations on PV cells originated from China. It is also possible that the European Union will carry out an antidumping investigation on Chinese modules in the near future.

The solar industry is global and complex, and will be substantially and negatively affected by an increase in unwarranted trade protectionism. We all know that in such cases there are no winners but rather immeasurable damage and regression from our fundamental goal of making solar a cost effective energy source available to all.

We will continue to work closely with our friends and partners to protect the industry as we are at a critical point that will determine its long-term success. We will continue to invest in research and development initiatives that aim to provide our customers with top performing quality products.

We also firmly hold the position that high standards of corporate governance are the foundation on which we safeguard our shareholders’ best interests and uphold the long-term value of our company.

We do not shrink our corporate governance responsibilities and adhere to strict organizational processes that assure our strict compliance with applicable laws and regulations.

We have maintained a stable management team since our IPO in 2007 due to a culture of trust based on a shared vision upheld by a diverse number of professional managers and independent directors.

By adopting effective management systems that cover aspects such as risk management, internal controls and investment decisions, we have successfully minimized potential corporate risk and ensured sustainable and responsible growth. Furthermore, according to SEC rules and best practice of corporate governance, we have consistently improved our transparency through active and fair disclosure of information.

At present, there are power trading is taking place at our Baoding Headquarters, attended by representatives of State Grid, several generating -- electricity generating companies, and state and local government officials from NDRC and Energy Administration. So unfortunately, I’ll not be able to attend the Q&A section. But I trust our CFO, Mr. Bryan Li and our CSO, Mr. Wang Yiyu will be able to answer the questions.

Arthur Chen

Mr. Miao is currently dialing from a different location, so we understand there is some quality may not be quite well, so we will post the CEO transcript through PR newswire for the reference.

Now Mr. Miao would like to hand over the call to Mr. Darren Thompson and Mr. Robert Petrina. Darren, please begin.

Darren Thompson

Thank you, Mr. Miao, and also good morning, everyone. In Europe market demand in Q2 continued with the momentum that it builds up through Q1. We were able to capture leading market share of this demand that contributed close to three quarters of Yingli’s global revenue in Q2.

Our success demonstrates the attractiveness of our value proportion, brand reputation, our strong partnerships and the quality of our highly motivated employees. The demand side is largely driven by pull-ins from Germany, giving EEG uncertainty that lined associates in feed-in-tariff cuts and high channel inventory turnover during Q1.

The rest of Europe made a solid contribution of nearly one-fifth of global revenues, recognizing the disproportion would be higher when taking into account cross border flow of goods shipped to German addresses.

Our ability to capture this demand was further enhance with the acquisition of new customers, expansion of brand share within our existing customer base and winning a several projects with the fulfillment of the 35 megawatt Perleberg project in Germany a particular highlight. The declining gene pool of bankable suppliers will also have made a contribution to winning new business as customers and investors cheery pick suppliers.

We have saw the softening of demand in Q3 from the high experience during Q2 in Germany as a result of Q1 and Q2 pull-ins combined with the lower productivity of Europe traditional vacation period.

Recent press speculation of additional feed-in-traffic adjustments is a result of installations in the first half of the year, reaching the upper target of the EEG growth corridor may act as a short-term catalyst.

Compared to the steep curve experienced through 2011 on the first half of 2012, ASPs remained under pressure and began to stabilize as a result of system prices to facilitate motivating economic returns and the rational limits of margin compression balance with bankability.

It goes without saying that the anti-dumping complaint filed at the EU commission late in July cuts the shatter of the Europe solar industry along the whole value chain. We are well-prepared to aggressively defend ourself if the commission decides to initiate an investigation. We are convinced but many upstream and downstream players in Europe, by the introduction of trade protectionism instruments would not be in the interest of the European Union.

In addition, such actions would significantly delay the onset of sustainable solar electricity market free of government support. We take this opportunity to sincerely thank our customers and suppliers for their wavering support even at this early stage of potential proceedings. We remain confident that the case for affordable solar energy will win out.

Solar incentive programs remained under pressure in other markets, while we continue to see opportunities in the U.K., Turkey, Eastern Europe, markets like Ukraine that is committed to reduce an external dependency on gas and nuclear fuel supplies.

Our recent signing of an exclusive partnership agreement with Ledico, one of the leading solar distributors and project developers provides us with access to a smooth growing market in Israel.

We remain optimistic that Europe will remain a significant market for Yingli, given the rapid reduction in the cost of solar deployment, electricity price inflation, country energy dependence level and 2020 climate targets.

I’ll now pass the call over to Robert. Thank you.

Robert Petrina

Thank you, Darren, and good morning everyone in the U.S. After tremendous strength and demand in the first quarter and some part driven by the expiration of the cash grant program, the U.S. market in the second quarter continued its upward trajectory albeit at a more measure taste.

As in previous quarters we continue to acquire new customers and continue to see the vast majority of our high quality customer’s growth their share across the commercial residential markets, as well as the utility markets. Distribution channels remained crowded as traditional channel that provide valuable long-term stability [Europe] being bypassed for short-term gain to competitive forces.

Building on the pull-in effect associated with the expiration of the 1603 Treasury Grant in the first quarter we are seeing predictable and significant demand as these projects are built and the additional modules are required. This was always one of the key secondary benefits of the pull-in effect of the first quarter and we are pleased to see the market reflect those expectations.

Continuing with the activity in the first quarter, we remained that fast in our defense against the imposition of CVD/AD duties, we believe that free trade and open markets have necessary more than ever to drive global demand growth for the solar industry. Any action if need to disrupt that process are simply turning back the clock on the years of progress.

Our efforts in driving demand in new markets continues to track with expectations and we are cautiously optimistic that few localization, exchange of best practices and partnering with well-positioned local firms, demand will begin to accelerate given the highly competitive system of economics.

Everyday we focus on how we can do things better, quicker, and more efficiently and cost effectively for our customers. To that end we held joint ventures in San Francisco, the grand opening of our R&D facility in San Francisco containing some of the most advanced equipment out there.

Building on the trust we’ve already established with our customers the tremendous opportunity to continue to differentiate ourselves and remain the supplier of choice for projects of all sizes. In a highly competitive market, Yingli has proven to be able -- to be a stabling committed partner to all customers large and small.

Thank you. And now Bryan will walk you through the company’s financial performance.

Bryan Li

Thanks, Robert. And welcome everyone to our second quarter earning conference call today. This quarter our modular shipment reached another historical high, saw an increase of 13.7% over the previous quarter.

The incremental shipment volume clearly illustrates our capabilities of gaining market share in the challenging conditions and leveraging our deep knowledge of the market trend, effective implementation of our global sales strategies and competitive advantages in brand, cost and customer services.

However, the augmented shipment volume failed to contribute to revenue increase due to industry-wide decline of module ASP. Our total net revenues slightly decreased from US$500 million in the first quarter to US$488.5 million.

On the cost side, we reduced US$0.08 per watt from the polysilicon side as we gradually walk through our high cost inventory and purchased the more on the slow markets. In addition, our commitment to the optimization of manufacturing techniques and the improvement of operating efficiencies continued to bring us benefits in the second quarter.

Our non-polysilicon cost decreased moderately from US$0.57 to US$0.55. The decline of module ASP outpaced our cost reductions, resulting in a gross margin of 4.6% in this quarter.

Operating expenses of US$73.7 million compared to US$60.3 million in first quarter. The increase of operating expenses was primarily attributable to the increase of selling expense due to the growth of module shipments and a significant rise of free charge. Operating loss was US$51.4 million in this quarter and operating margin was negative 10.5%.

In early May we successfully issued RMB1.5 billion denominated unsecured medium-term notes to enhance our working capital and to repay partially backlog of higher interest rates. Consequently, interest expenses increased from US$32.1 million in first quarter to US$36.1 million in the second quarter.

Foreign currency exchange loss was US$28.9 million, compared to a foreign currency exchange gain of US$4.2 million in the first quarter. Given a net euro denominated asset position in the second quarter, the foreign currency exchange loss was mainly resulted from the depreciation of euro against the RMB.

Income tax benefit was US$16.1 million, compared to income tax benefit of US$1.8 million in the first quarter, which was a result of a deferred tax benefit recognized in connection with the net losses incurred in the quarter.

Ultimately, on a GAAP basis net loss in the second quarter was US$90.2 million and loss per ordinary share and per ADS was US$0.58. On a non-GAAP basis, net loss was US$86.8 million and the loss per ordinary share and per ADS was US$0.55.

Now let’s move to our balance sheet. We believe that healthy balance sheet is the foundation for us to weather the industry headwinds and we have been firmly committing to optimize it.

As of June 30, 2012, our cash and restricted cash increased by US$207.8 million to US$882.5. While working capital balance increased from negative US$14.5 million as of the end of first quarter to positive US$148.1 million at the end of second quarter.

We have also implemented a most stringent management mechanism to minimize account receivable risk. At the end of second quarter, our account receivables decreased slightly from US$531.7 million to US$505.7 million. We manage it moderately in improved days sales outstanding from 96 days in the first quarter to 93 days in the second quarter.

Accounts payable increased from US$629.3 million to US$686.7 million and days payable outstanding increased by 10 days to 133 days. Due to the challenging market conditions, our inventories increased by approximately US$85.5 million to US$601.5 million. In order to further utilize our working capital, we are managing our utilization rate accordingly in the second half in order to improve our inventory carrying costs.

As of June 30, 2012 we had approximately US$603.7 million in unutilized short-term lines of credit and US$486.5 million committed long-term facility that can be drawn down in the near future.

This demonstrate not only the financial institution recognition of Yingli’s prudent track record and solid market position, but also illustrates their strong confidence in the long-term growth potential of the PV industry.

This brings us to our guidance for the third quarter and the fiscal year of 2012. For the second half of this year, although we expect a significant increase of demand in China and continued solid demand in U.S. we absorbed a softening of demand in Germany as a result of first quarter and second quarter pull-ins combined with the lower productivity of Europe’s traditional vacation period.

As a result, we expect our module shipment volumes in the third quarter to decline by approximately 15% over the second quarter. However, we believe that we will maintain our leading positions in Q3 in most peer companies as measured by module shipment volumes.

Based on the current market and operating conditions, and the continued headwinds in the second half of this year, we will also like to adjust our shipment guidance for full year of 2012 from 2.4 to 2.5 gigawatts to 2.1 to 2.3 gigawatts, representing an increase of approximately 31% to 37% from 2011.

For non-polysilicon costs, we are on track to reach our target of below $US0.50 per watt by the end of this year. We also expect to achieve more cost savings from the polysilicon side, as we watch our high cost inventories and benefit from the low cost polysilicon purchased from the spot market.

We expect that our gross margin in the third quarter to be at low single-digit percentage. However, we expect to see gradual improvements in margins since Q4 of 2012, attributable to the anticipated slowdown of module price decline and achievement of further cost reductions.

Now, I will like to open the call to the questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Excuse me, your first question comes from the line of Vishal Shah from Deutsche Bank. Please ask the question, sir?

Vishal Shah - Deutsche Bank

Yeah. Hi. Thanks for taking my question. So I wanted to just understand your expectations for second half demand from China. Can you talk about how many megawatts you expect to ship in the Chinese market in the second half and what do you think the overall market will be? Thank you.

Miao Qing

Thank you, Vishal. And for the second half and roughly the shipment as a percentage of total revenue shipped over to China market will be approximately 30% and for more colors I will hand over to Yiyu. So, Yiyu, can you take the question?

Wang Yiyu

Roughly, we shipped around the 30% of our total output in the second half to China. The China market slowdown little bit in the first half given the larger pick in second half and we think it will be a rebound. We expect that the whole year we’ll reach at least the 4 gigawatts for China market.

Vishal Shah - Deutsche Bank

And if I can just follow-up on one more, what do you think your inventory levels are in terms of megawatts for -- in the second quarter and can you give me some more color on what percentage of your inventory is in finished goods and work in progress? Thank you.

Bryan Li

Thanks. Approximately, 60% of our inventories are the finished goods and it’s slightly above 10% of the raw materials and the others are the work in progress. Thank you.

Operator

Thank you, Mr. Shah for your question. Your next question, please hold on. Your next question comes from the line of Mr. Satya Kumar from Credit Suisse. Please ask the question, sir?

Satya Kumar - Credit Suisse

Yeah. Hi. Thank you for taking my question. I was wondering what the utilization rate, do you plan to run for the second half. If I pick your shipment guidance for Q3 that works out to about 80% utilization, but if you want to lower the inventories then your utilization go lower. So what utilization rates do you plan to run in the second half and what impact will it have on the non-silicon cost per watt?

Bryan Li

Thank you, Satya for your questions. And for the third quarter of this year, we plan based on the current market situation and our best estimate of the shipment orders for the third quarter, we plan to utilize 80% to 85% of our capacities in the third quarter. And then this -- the utilization will gradually improve in the fourth quarter to 85% to 90% and depending on the market rebound. And then in terms of the non-poly processing costs and we see there is a US$0.04 to US$0.05 per watt and reduction quarter-over-quarter in Q3 and Q4.

Satya Kumar - Credit Suisse

Even with the lower utilization rates, the non-silicon cost can decrease?

Bryan Li

Yeah. Yeah. That is our -- that is our target. And also -- there is a one thing I will like to remind you is, if there is a -- and if we run utilization below the nominal utilization, we’ll also consider and there will be a partial depreciation in connection with those other assets will be classified in the SG&A instead of the costs.

Satya Kumar - Credit Suisse

Okay. And then you talked a little bit about the investigation in Europe, what’s the end time of the timeline and the next steps that investors should watch for some assessing, whether Europe will move in the direction of having import duties?

Darren Thompson

Darren, I’ll take that question.

Arthur Chen

Darren?

Darren Thompson

Yeah. I’ll take the question. So, basically, if an initiation is going to be brought into play by EU Commission, it has to be done within 45 days upon filing, so that would roughly make it around the 7th or 8th of September.

The next step in the process is basically, potentially the provision of -- for initial provisions for anti-dumping which is nine months after the initiation. But the final decision will be made 15 months after initiation, which would take it into December 2013, plus the typical timeline of the process.

Satya Kumar - Credit Suisse

Got it. Thank you.

Operator

Thanks for the question. Your next question comes from the line of Mr. Amir Rozwadowski. Please ask the question.

Amir Rozwadowski - Barclays Capital

Thank you very much folks for taking the question. There’s been a lot of discussions around the trajectory of ASPs, and you yourself mentioned that that can continues to be an area of challenge in terms of managing, sort of on the gradual reduction in ASPs. I was wondering, if could give us a little bit color on where you expect to see ASPs to stabilize, and when and at what level that could be, that would be helpful?

Bryan Li

Thank you, Amir for your questions. And we currently, based on order conditions we have and our best estimates, we currently forecast the ASP breakdown under the mid-teen percentage from Q2 to Q3 and a high single-digit reduction -- decline from Q3 to Q4.

And then, we think and based on the economics of the underlying project -- solar project returns and we see the price -- the exit price for this year and it should be a sustainable price to support an organic growth of the market demands and despite of the feed-in-tariff.

Amir Rozwadowski - Barclays Capital

In terms of looking forward beyond just 2012, do you expect 2013 for ASP reductions to flat line here or do you expect that to continue to edge lower? I’m just trying to understand, how sort of the slope of the trajectory should be at least based on your current expectations?

Bryan Li

Okay. Thanks. In all of U.S. and if you are in U.S., the current expected price and when we exit this year and it has already turned on the lights of [green paradise] in many countries in European lands and many states in across the U.S. and Japan and many South Asia countries. And so the pricing itself has already been sustainable and always out of feed-in-tariffs. So that has drawn a bottom -- that has drawn to a floor for the further ASP declines.

And while -- when -- while, the global market demands and that’s what -- the pull-in and grow gradually in next year as the [green paradise] has been turning off and we see the demand will be increasing quarter-over-quarter since next year. So that will help to not only support a sustainable level of ASP, but also it will give a little upsides on the ASP given the -- due through the imbalance between the supply and demand.

Amir Rozwadowski - Barclays Capital

Great. Thank you very much for the incremental color.

Bryan Li

Thank you.

Operator

Thank you for the question. Your next question comes from the line of Mr. Dan Ries from CapRok Capital. Please ask the question.

Dan Ries - CapRok Capital

Hi. Darren, I believe in your comments you used to phrase something like declining gene pool of -- gene pool of acceptable module vendors. I wonder if you could elaborate on that a bit in terms of what you are seeing, is there truly a filling of the supply ranks at this point and is it just European vendors or is it some of the second tier Chinese? And when do you expect to see some benefit from that if that occurs?

Darren Thompson

Okay. Hi, Dan. Well, basically, what we’ve been seeing is some of the new customers that we brought on board during Q2 that we are seeing the benefits till now. In the second half of the year they’ve deliberately come to Yingli because they have concerns on bankability on to Tier 2 and Tier 3 suppliers.

So there is some pretty hard evidence that there are concerns regarding the bankability of some suppliers probably because of the levels of ASP and that they are getting to and their balance sheets, so that’s a clear indicator. And obviously, we see the benefits of that now and I assume we’ll see the benefit of that as we move forward into the future.

Dan Ries - CapRok Capital

I guess by the benefits you are seeing now I think is primarily volume. Do you think at some point it will be in margin as well?

Darren Thompson

I think really the -- in terms where prices are now, we still have declining feed-in-tariffs in Germany, which basically to ensure you still have attractive IRRs. You will need to track gently down with those specific feed-in-tariffs to continue motivating the purchase.

So it’s a combination of the two. It’s the combination of providing attractive returns on systems balanced by ensuring you don’t go too far in order that you have issues with your bankability.

Dan Ries - CapRok Capital

Okay. Maybe I could take a one quick question. The operating expenses rose about 20% sequentially with all categories rising, but selling expenses rose the most, 30%. You mentioned freight. Did freight rise by something like 30% or whether there is certain other factors going on?

Bryan Li

The increase of selling expense and although, we saw two folds and one is the increase of freight charge from the second quarter -- from the first quarter to second quarter, which is largely exceeding 30%. And the second reason is the increased shipment units from the first quarter to second quarter, which is also attributable to an increase of selling expenses.

Dan Ries - CapRok Capital

Thank you.

Operator

Thank you very much. Your next question comes from the line of Kelly Dougherty from Macquarie. Please ask your question.

Kelly Dougherty - Macquarie

Hi, Bryan. Just a quick follow-up on that. Is there really be a dollar amount per quarter that we can think of as a third estimate for OPEX?

Bryan Li

I think in the third quarter and the fourth quarter and for general and administrative expenses and R&D, I think it will go slightly down sequentially quarter-over-quarter that could be $1 million to $2 million down in Q3 and Q4. And in terms of the shipping -- selling expenses and that that was largely linking to the fluctuation of the shipment volumes and the free charge. And I see in the third quarters and the free charge has start coming down from the second quarter’s level. And considering the lower shipment volume in Q3 comparing to Q4, I think that will also bring down the selling expenses from Q2’s level to Q3’s level.

Kelly Dougherty - Macquarie

Okay. Great. Thanks. And then we heard a lot of peers talking about moving downstream and just wonder what Yingli’s philosophy is there and if you are going to compete downstream outside of China, just -- what kind of unique selling point you bring to the market when you’re going up against companies like maybe First Solar or SunPower?

Miao Qing

So you can take this question for player. Robert, can you give more information? Thank you.

Robert Petrina

Yeah. Thanks for the question. I think we definitely today already would be more active to involving downstream. So this will help a lot to not only bring multiples in this volume as a panel supply but equates more solid partnership with downstream customers.

So for example, we have already started to looking at potential higher quality pipeline in China to be -- have potentially develop since end of this year until next one or two years.

In other markets, we started to find more flexible way to work with downstream customers especially during the project development stage to share the risk and also been rewarded together to accentuate our revenue stream. Fundamentally, I would like to say we will be more active in this area.

Darren Thompson

Let me comment. I’ll supplement your answer here. I think you’ve covered very well. I mean, I think we first were looking at lot of different models and already as warranties have done more complex and there is more requirements on us. We’ve already, I think, we’ve been rather active in that front. So Sun obviously has changed for large projects in the America’s market quite substantially over the last two years.

I think we’re already fairly well downstream in that regard. I think we just provided compelling high deposition and compare some of the other folks out there. So I think we’re moving slowly and trying to make sure that we’re moving along the lines of how we do things and stand behind all the comments that we make.

Kelly Dougherty - Macquarie

So just the phrase I heard exactly it’s more than…

Darren Thompson

As a measurement.

Kelly Dougherty - Macquarie

Okay. Just if I heard correctly I think you are looking to partner with your customers rather than move full on downstream where I have to go onto the Yingli balance sheet or is that the way to classify it?

Darren Thompson

I think that’s one way to look at it. Sorry, the point here that we are quite flexible on the way to move to downstream but main thing we are looking at is how to balance all the perspectives like risk reward relationship with customer in some specific market plus also the impact to the balance sheet.

Kelly Dougherty - Macquarie

Great. Thanks very much.

Bryan Li

I think we are making it, balance the position based on the cash flow situation and if you just touch strategy and move. So it’s not a simple position and we’re balancing all the factors into our consideration and are making a better position for the companies in the current situation.

Kelly Dougherty - Macquarie

Great. Thank you.

Bryan Li

Thank you.

Operator

Your next question comes from the line of Mr. Timothy Lam from Citigroup. Please ask you question.

Timothy Lam - Citigroup

Thank you for taking my question. My question is regarding the China demand, company mentions earlier that it sees possibly of over 4 gigawatts in demand. My question is what is the IR metric under the Golden Sun or the solar tariff of 1 MMBtu kilowatt hour and as company is partnered with some system players to develop some of the projects in the second half and what kind of market share does company sees in terms of the China market?

Miao Qing

You can take the…

Bryan Li

The first is…

Timothy Lam - Citigroup

Yeah. Yeah.

Bryan Li

The first is currently for the IR. We are -- because we didn’t directly invest in a project at this moment. So this information just gives you some general background. The large project, it should be able to under 1B, feed-in-tariff should be able to reach 7% to 8%, maybe slightly below 7% or slightly above 8%, depends on the different project. Golden Sun could be higher, even close to 10%.

And so the second half of this year, we won’t directly invest in too much projects except for some roofing in Golden Sun on our own factory. Regarding to our markets in China, we expected the second half we should ship around 30% of our total output and for the whole year maybe roughly 20% of our total output, it goes to China. So it would be roughly the marketed share, as you know it’s, probably should be roughly 12% to maybe 13%, 14%.

Timothy Lam - Citigroup

The next question, just to follow up is, I noticed that you have disclosed about PANDA product. Could you give us some highlight about what kind of percentage of shipments are for PANDA products in the first half and the second half of this year? Thanks a lot.

Miao Qing

Sir, can you just repeat your question because we didn’t hear it clearly?

Timothy Lam - Citigroup

Sure. The question is the percentage of shipments that you have done for the PANDA products in the first half and what do you see for the second half?

Bryan Li

In the first half, we shipped roughly 120 megawatts of PANDA modules. And in the second half, we planned to maintain the similar level.

Timothy Lam - Citigroup

Thank you very much.

Operator

Thank you for the question. Your next question comes from the line of Mr. Colin Rusch from Thinkequity. Please ask your question.

Colin Rusch - Thinkequity

Thanks so much. Can you guys talk about demand in the South American, Africa and then capital requirements for some of these projects and what are you seeing at this point?

Robert Petrina

Thanks for the question. Now, we see some more number of active project in South Africa and the government is going to announce further around planning very soon. So we actually complete with some of our European project in order to be involving South Africa.

For the South America, the market started. The volume is not very significant. However, we have been involved in several project which -- including [Halo] and also one particular project in Chile which is our development result in feed-in-tariff program.

The Japan market will also start to grow more fast in the second half after the -- from most of your project and the feed-in-tariff will be started. So the other part in Africa like North Africa is not yet a very big market.

Colin Rusch - Thinkequity

Right. And then just, kind of, from a high level, I mean if you look at single-digit gross margins and $70 million of operating expense, about 35 plus and interest expense. How do you think about our return to profitability? Is there a pathway that you guys have in mind? How should we think about that?

Bryan Li

Yeah. I think, for the second half of the year and the whole industry will continue to undergo consolidation and to push to the completion of the consolidation. So during that periods and for Yingli’s where we are, we want to do this. We want to balance the market expansion and the cost control and also the cash control and debtors to make -- optimize this issue for the companies, for the futures.

So in terms of the gross margins and I think in Q3, we guided a low-single digit percent in the third quarter and in the fourth quarter, that will gradually improved to a slightly higher than Q3 could be in the single digit or in the high single digit depending on the stabilization of the markets.

And for the number below the line, you will see pressures in the third quarter and fourth quarter. But for our cash flow standpoints, we have -- we currently forecasted a positive operating cash flow starting from the fourth quarter of this year which will bring the company to a healthy operational stage.

And once the consolidation is moving to the ends and that Yingli will be best positioned amongst all the peer companies towards a much larger and a much bigger markets.

Colin Rusch - Thinkequity

Great. Thanks a lot.

Bryan Li

Thank you.

Operator

The next question comes from the line of Ms. Gloria Ho from HSBC. Please ask your question.

Gloria Ho - HSBC

Hi. Thank you for taking my questions. So I see that is you have dropped a bit more than the other players who have reported. So may I know if this is the strategy of securing the volume growth and will this continue in the second half of the year?

And secondly, I want to know like based on the guidance, so do you mean the model ASP will go down as well as like $0.60 about the end of this year?

Miao Qing

Could you just repeat?

Darren Thompson

I think that the -- for the first question regarding our sales strategy on the volume, I think that we have been always -- we're always planning to the volume and the pricing and also to maximize our brand name impact on when we quoted potentially and averagely we can sell high to the market compared to the second in terms of price.

So I think regarding to your question on the average ASP compared to other competitor, I think because we fully disclosed our geographic market. We are fully diversified with the whole market. It’s really not easy to compare if we don’t have the apple-to-apple frequency here.

Regarding to the second half pricing as Bryan mentioned, we expect that the pricing will be chopped roughly mid double digit in the third quarter and roughly high single digit end of Q4.

Gloria Ho - HSBC

So that makes it close to $0.60. Hello, did you also mention like a –

Miao Qing

Yeah continue.

Gloria Ho - HSBC

Yeah. I mean, did you also mention like the non-silicon cost will go down to $0.45 in the third Q and it had cash up significantly.

Darren Thompson

Sorry. We can’t hear you clearly. Your voice was broken. Could you repeat your question if you don’t mind.

Gloria Ho - HSBC

Yeah. Sure. Did you mentioned like the non-silicon cost will be like down $0.45 in the third quarter, I didn’t catch the answer just now so.

Darren Thompson

Okay. Sure. Sure. And so we answered earlier. And we currently -- we forecast U.S. $0.04 to U.S. $0.05 per watt. And polysilicon costs decline sequentially quarter-over-quarter from the second quarters. So that we are applying the blended non-polysilicon processing costs down below $0.50 and where we’re actually this year.

Gloria Ho - HSBC

Okay. May I also know like what does the polysilicon external pressure patterns like in the second quarter and do you have the roadmap for like the silicon costs reduction towards the end of the year?

Darren Thompson

Yeah. We -- based on the current pressure pattern and we believe that the blended polysilicon cost will be down, that will -- it will be down below $30 per kilograms in Q4 of this year.

Gloria Ho - HSBC

Okay. Thank you. So I actually like whereas like a -- news this morning, it’s about like a 100 megawatts in the extension project in Qinghai. So is there a timeframe for this project and manual involvement of new projects. Is it just nearly supply of modules or any other way?

Darren Thompson

Yiyu, do you want to take these questions?

Wang Yiyu

I can’t catch question. Well, which project are you talking about?

Gloria Ho - HSBC

Well, there is a 100 megawatts utilization in Qinghai, so I read from release this morning. So I wonder if there is a timeframe to this and what’s the involvement of Yingli in the project?

Wang Yiyu

In which country, sorry I alluded?

Gloria Ho - HSBC

In Qinghai.

Miao Qing

It’s a province actually and did you mean that’s the total project sign -- 100 megawatts.

Gloria Ho - HSBC

Yeah. The 100 megawatt.

Wang Yiyu

Yeah. We actually have several projects in Qinghai area and…

Gloria Ho - HSBC

Okay.

Wang Yiyu

Everything goes smoothly. Its part of the China market. We’re talking about it. This is just part of the pipeline. It’s not a like the kind of very unique project in China that we supply kind of and also actually in the following round of bidding.

Gloria Ho - HSBC

Okay. So you won’t be picking like in throughout the EPC, so it’s clearly like supply the modules side?

Wang Yiyu

Yeah. We just supply module, yeah.

Gloria Ho - HSBC

Okay. Okay. Thank you.

Wang Yiyu

So, maybe just one last question it’s possible. So I mean clearly European anti-dumping, so what is I mean you see something like in the U.S. So we’re seeing quite high anti-dumping of AD/CVD. So do you have the solution ready in response to this potential now the European to manage, its quite big globally?

Miao Qing

Okay. Arthur Chen, the legal counsel will take this question first one.

Arthur Chen

I’m sorry can you repeat the question. I didn’t catch the last part of this.

Gloria Ho - HSBC

Yeah. I mean do you have this version already, I mean just in case say Europe will also impose CVD or anti-dumping duty like in the U.S. So have you got any thoughts, say will you set up regional factors or something like that?

Arthur Chen

Well, currently we just heard there was a complaint there, it how can there been initiation of the case. If the case is initiated as Darren just explained. The timeframe will be up to 15 months for final determination of any tariff to be imposed on logic’s. So its due to early to talk about any -- not any impact of the market position in our regard, but all we can say at the moment is we will rigorously defend our position and we are confident that we are not dumping at all and it is legal and subsidized. So we will try to make our case in front of the European Commission and fully cooperate in the process center, hopefully the result could turnout to be good.

Gloria Ho - HSBC

Okay. I see. Thank you very much. I’m very grateful for all the answers. Thanks.

Operator

Thank you very much. Yeah. Your next question comes from the line Mr. Ben Schuman. Please ask your question.

Ben Schuman - Pacific Crest

Great. Thanks. Can you just tell us in dollar terms, how much of the Q2 sales expense was freight?

Miao Qing

How much -- so you mean how much -- how much sales revenue in U.S. dollar, is that your question?

Ben Schuman - Pacific Crest

No. How much was freight of the sales expense? What was the freight expense in dollar terms?

Miao Qing

Okay. Okay. Hold on second.

Bryan Li

There is a roughly -- that’s roughly, I think it’s roughly 60% -- of the 50% of the freight expense are the free charge.

Ben Schuman - Pacific Crest

50%.

Bryan Li

On a free charge and insurance.

Ben Schuman - Pacific Crest

Okay. And then…

Bryan Li

That’s no, no, no. That’s free charge and insurance and warranty costs.

Ben Schuman - Pacific Crest

Okay. Great. And then can you tell us what the CapEx was in the quarter, maybe I missed that and how we can think about maintenance CapEx going forward assuming no more expansions for a while?

Bryan Li

Yeah. We have already stopped the order of new expansions and it seems it’s like a half of last year. And what we have done in the first half is to complete order ongoing expansion projects and we started from the first half of last year.

And for the remaining CapEx towards the completion and probably in the second half of this year, I’ll say that there is approximately -- approximate U.S. $60 million to U.S. $70 million per quarters and that is to complete order ongoing projects. And for the maintenance cost it’s not material, so roughly U.S. $10 million, U.S. $15 million.

Ben Schuman - Pacific Crest

Okay. And then just one more if I may, you said poly costs could take the year around $30 a kilogram, I think a lot of the competitors are significantly lower than that in the low 20s. How do you I guess expect to beat this rebound or this consolidation when you are carrying that extra costs burden of maybe $0.04, $0.05 per watts not having more expensive poly?

Bryan Li

Yeah. And I said I commented earlier, I said the when we are actually at 2012 and the blended costs and our top polysilicon were down below $30, its not part of $30, it’s below, it’s $20 -- it’s $20 something. And we blended down the polysilicon through the spot market purchase and which is currently at $21, $22. And so through the continuous purchase of the spot market poly in the next two quarters that will gradually breakdown the blended cost of polysilicon.

Ben Schuman - Pacific Crest

Okay. Great. Thanks.

Bryan Li

Thanks.

Operator

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

Aaron Chew - Maxim Group

Hey. Good evening, gentlemen. Thanks so much for the question. Wondering if you guys can maybe touch a little bit more, I apologize in events that the Chairman mentioned is but I really couldn’t hear what he said. On the prospects for I would tell you towards tariff on the part of China so polysilicon imports into China?

Specifically wondering first off, if you have any insights into the prospects of this actually following through sometimes by the end of September and maybe more importantly if you could just discuss how you think this will impact pricing and most importantly your sourcing strategy in operations. Any color would be helpful? Thanks.

Wang Yiyu

Well, with regard to the anti-dumping case on the poly import through China. First of all, I think the company’s position has been way of posing this case and we actually are communicating our position to the MOFCOM. And hopefully I think it’s our inner influence in which efforts from our peer companies, we’ll try to like bring this case to amicable result.

So I mean once again its too early to estimates an inactive impact on us. But all we can talk about is that we actually we have already worked with our lawyers to formulate a way that might potentially mitigate to limited any inactive impact on the pricing of poly import. Even, if there is a carry and post on poly import to China.

Aaron Chew - Maxim Group

If I can just take it from a different way or ask you to take it from a different way, do you expect to just given the supply-demand dynamics to have to eat any potential tariff just because you need to import decent amount of your poly or do you think that’s its feasible that you could switch a good amount of your sourcing just to China?

Wang Yiyu

Well, there are more options done that. If you dig in to that legal framework of how the target will be imposed and if there are any safe harbor to sell forth of importation, you will find out that there is actually ways keep importing from the same supplier -- poly suppliers without paying any tariff. This is feasible in their current Chinese legal framework. We are confident that we will find the ways to avoid any additional tariff.

Aaron Chew - Maxim Group

Okay. Excellent. Also real quick questions of buying if I may, did you mention what operating cash flow was in the quarter, is it negative 40, 50, am I doing the math right?

Wang Yiyu

You mean for this quarter, for the second quarter?

Aaron Chew - Maxim Group

Yeah. 2Q, for second quarter 2012 operating cash flow.

Wang Yiyu

Yeah. Second quarter is inactive. The second quarter -- what’s second quarter, in fact third quarter will continue to be inactive.

Bryan Li

The second quarter I think it’s roughly U.S. $40 million.

Aaron Chew - Maxim Group

Okay. Excellent. Thanks, guys.

Bryan Li

Thank you.

Operator

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

Miao Qing

Thanks, everyone for participating in today’s conference call. Meet me. I couldn’t attend to the Q&A session sorry for that. And for the CEO script we will post online and that it will get easier for you to checkout. Any questions please contact IR department. And thanks a lot. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thanks for participating. You may now all disconnect.

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