Suntech Power Holdings Co., Ltd. Q2 2008 Earnings Call Transcript

| About: Suntech Power (STP)

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

Q2 2008 Earnings Call

August 20, 2008 8.00 am ET

Executives

Rory Macpherson - Investor Relations Manager

Dr. Zhengrong Shi - Chairman of the Board, Chief Executive Officer

Dr. Stuart R. Wenham - Chief Technical Officer

Amy Yi Zhang - Chief Financial Officer, Director

Steven Chan - Chief Strategy Officer

Boxun Zhang - Financial Controller

Analysts

Jonathan Hoopes – ThinkEquity

Sanjay Shrestha - Lazard Capital Markets

Brian Gamble - Simmons and Company

Mehdi Hosseini - FBR

Rob Stone - Cowen and Company

Paul Clegg - Jefferies & Company, Inc.

Lu Yeung - Merrill Lynch

Michael Carboy - Signal Hill Group

Adam Krop - Ardour Capital

Vishal Shah - Lehman Brothers

Angello Chan - Credit Suisse

Charles Yonts - CLSA

Jeff Osborne - Thomas Weisel Partners

Paul Leming - Soleil Securities.

Pavel Molchanov - Raymond James

Brian Yerger - Jesup & Lamont

Cheryl Tang - Goldman Sachs

Operator

Welcome to Suntech’s second quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today’s conference, Rory Macpherson, Suntech’s Director of Investor Relations.

Rory Macpherson

Welcome to Suntech’s second quarter 2008 earnings conference call. My name is Rory Macpherson, Suntech’s Investor Relations Director. From Suntech on the call today will be Dr. Zhengrong Shi, Suntech’s Chairman and CEO; Stuart Wenham, our Chief Technology Officer; and Amy Zhang, our Chief Financial Officer. Steven Chan, Suntech’s Chief Strategy Officer and Boxun Zhang, Suntech’s Director of Business and Financial Analysis will also participate in the Q&A following Dr. Shi’s closing remarks.

Before we continue, during this conference call we will make certain forward-looking statements in an effort to assist you in understanding the company and its results. Forward-looking statements will be made under the Safe Harbor provisions of the U.S. Private Securities Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, Suntech’s future results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our earnings release issued today and our SEC filings. Suntech does not undertake any obligation to update any forward-looking statements except as required under principle law.

As a reminder, this conference call is being recorded and a webcast of management’s prepared remarks will be available on the Investor Relations section of Suntech’s website after this call. Also, please make note that all figures mentioned during this conference call are in U.S. dollars.

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

Dr. Zhengrong Shi

We had a strong second quarter with total net revenues growing 51% year-over-year to $480.2 million. Over $40 million above the top end of our guidance, the impressive revenue performance was due to higher shipments on back of internal capacity expansion and a greater silicon supply. We also increase margins due to stronger pricing under the appreciating year.

Non-GAAP EPS increased to $0.41 per diluted ADS due to our stronger performance in the first two quarters of this year and higher projections for the second half, we are raising our full year revenue guidance to range of $2.05 billion to $2.15 billion and our PV product shipment target to approximately 550 megawatt. Today our PV overview of the demand and we have seeing in our key markets and highlight the achievements we’ve made in expanding our world-class production facilities and securing reasonably for our silicon to meet our future production needs.

Suntech’s dedication to quality and our participation in numerous high profile projects has helped building a leading global brand and as strong brand equity with customers. In addition, over the past year we have substantially broadened our international reach through new sales offices in San Francisco, Germany, Spain, South Korea and Australia. In total we now have offices in seven countries around the world and are planning additional offices in Greece, Italy and Switzweland.

This has significantly enhanced our ability to provide on the growing support of our customers. It also means that we have the people and the infrastructure in place to rapidly adapt to the market changes. Our sales channels strategy leverages our strong look on knowledge and is tailored to suite individual market conditions. Our key channels in corporate a leading International Distributor Network, direct project sales relations with multiple utilities and growing dealer network in the U.S. our flexibility to adopt and a switch between these channels enables us to react quickly to change market conditions and minimize risk of countries specific policy changes.

During the second quarter, our European sales continued to thrive was approximately 26% of the revenue generated in Germany, 44% in Spain and a significant taxing in Italy and France. In the second half of 2008, we will continue our strong sales of momentum and build our positions in the emerging markets. Sales to Spain were still be significant in the second half of 2008, and while the situation in 2009 has not be clarified, we are very positive about the long-term growth capitalistics of Spain.

Substantial solar infrastructure is in place, there was a plan in sunlight and many utilities are heavily involved in the renewals. With relatively high costs of grid electricity, high solar radiation and a strong subsidies structure, Italy is fit to become one of the leading solar markets in 2009. One indication of this is our two year agreement with subsidiary of Enel, Italy’s largest power utility. With Italy’s tiered subsidy we expect residential roof top, commercial roof top, ground-mounted system and BIPV all will have place in Italy’s solar markets.

Germany continues to be a committed and growing solar adopter and we are seeing strong demand in 2009 primarily for the roof top market. In the U.S. we now have 25 companies in our dealer network and it is growing steadily. This enables us to access the residential roof top market, which is relatively unaffected by changes in the U.S. investments tax credits.

The commercial market however is dependent on the ITC expansion. We expect that segment to slow until there is clarity on that front. In Asia, South Korea remains a key market and Australian’s demand for solar is on the rise. In addition there are some indications that Japan may reintroduce our solar subsidy. This would be excellent news for Suntech. As we are well positioned to lavish our MSK sales channels and quickly penetrate that market.

We are also continuing to see growing demand for BIPV in France and Italy where there are higher subsidies for integrated solutions. At Intersolar in Munich June we introduced our Just Roof, Light Thru and a QuikSnap, BIPV products from our MSK Solar Design Line to the European markets and now we are already gaining attraction.

In 2009 our key markets are likely to be Germany, Italy, Spain, France and other European countries, South Korea and the U.S. and now we have five more demand in the pipeline that we intend to supply, and it stands we have already signed over 200 megawatt of fixed price, fixed volume of sales contract with strong pricing for 2009. We are now in the process of finalizing approximately 500 megawatt of additional sales contracts and expect to complete these by the end of the third quarter.

Suntech also has superior technology balanced with low cost production and our efforts to build our production base are well on track. We added 120 megawatt of PV cell production capacity during the quarter and are on track to reach one-gigawatt capacity by the end of 2008.

According to our equipment delivery schedules the bulk of this ramp should occur in the fourth quarter. We also have an advance plan in place to reach our target of 1.4 gigawatt production capacity by year end 2009 and 2-gigawatt by year end 2010.

During last quarter’s conference call I mention that we are building a dedicated PV module production and the logistic facility, which is located in Wuxi. This building is now complete and we are currently moving equipment. This facility will be almost fully automated using technology and the equipment that has being designed and developed by the recently acquired KSL Kuttler, inline with our dedication to quality production this new production process should improve product uniformity and enable us to reduce record breakage rate and the production costs even further.

Stuart will update you on our Thin-Film and our Pluto initiatives shortly. Now, let’s look at our silicon status. Earlier this year we raised funds through our convertible note offering. Since then we have leveraged this funds to pursue strategic investments and a high volume of contract that’s strengthen the long term cost structure of our business model.

In May, we acquired a minority stake in Shunda, one of the China’s leading manufacturers of solar wafers and announced definitive thirteen-year silicon wafer supply agreement for 7-gigawatt. Shunda are in the final stages of completing their first phase polysilicon facility and a plant that initiates trial production within weeks.

We recently completed the final round of our $100 million investment in Nitol Solar. The rest on the capital injection by IFC a member of the World Bank Group validates our view of Nitol as one of the best position in the polysilicon producers. We have already received sample quantities of polysilicon from Nitol and are well please with the quality.

During the second quarter, we also signed two silicon wafer contracts with two well respected European companies, WACKER SCHOTT and PV Crystalox Solar. This contract provide for 220 megawatt and 250 megawatt respectively over the next five years. Today we’re also pleased to announce two new silicon deals. Firstly, we recently finalized 18% investment in Glory Silicon and have signed a contract for silicon wafers from 2009 to 2012.

Glory Silicon is one of Suntech’s long-term silicon wafer partners with similarly aggressive growth past. Currently we have a 300 megawatt of wafer capacity and target to reach 1.5-gigawatt in 2010. Secondly, we have a new agreement with ReneSola to purchase approximately 1.5-gigawatt of silicon wafers over nine-year period beginning in 2008. This provides for additional supply of silicon wafers this year and replaces wafers contracted for 2009 to 2011 in the contract we signed in October 2007.

Due to this contract we believe that we have one of the most robust silicon pipelines in the industry and have secured over 900 megawatt of attractively priced silicon for 2009. In addition this contracts all have a steep declining cost curves, which will enables Suntech to improve our cost competitiveness and accelerates our past to great parity.

We are confident that our balance of superior technology with low cost production, strong silicon procurement pipeline, expanding international sales channels, broad product portfolio and the well regarded brand should enable us to expand our market position across the globe next year and built great market share over the long-term.

I will now turn to the call over to our Chief Technology Officer, Dr. Stuart Wenham for some more detail remarks about our technology developments. Stuart

Dr. Stuart Wenham

During the second quarter we achieved a significant milestone with our Pluto technology, through the initiation of an evaluation phase involving its implementation onto the first of our production lines. This facilitates evaluating the Pluto technology and associated manufacturing equipment on the small scale commercial production line. We are already consistently producing high efficiency Pluto sales and modules. We’ve monocrystalline Pluto sales achieving over 18% conversion efficiency and multicrystalline Pluto sales achieving close to 17% efficiency.

This is an important development for Suntech particularly because of the increased performance is achieved without increasing the average cost of production per waver. Increasing conversion efficiency is one of the key elements of our cost reduction program. In addition because Pluto can be applied to different grades of silicon it gives Suntech considerable flexibility with regard to products and applications.

In terms of the ramp we are on schedule to complete our evaluation phase by the end of Q3 and then ramp our production line to 30 megawatts capacity during Q4. During 2009 we plan to gradually grow our Pluto onto a portion of our newly installed capacity. The actual ramp rate will depend on the ongoing success of the evaluation phase and the speed of equipment supply. We will provide more information on this in our Q3 earnings release

Pluto’s solar panels are designed to fully confirm to IEC, TUV, CU and UL standards with the corresponding tests for these certifications currently in progress. The timeline for actually selling Pluto base products into our key markets is based on these certifications, which we expect will allow us to sell Pluto modules in early 2009.

On our thin film technology, the construction of our new thin film production R&D and manufacturing facility in Shanghai remains on track. We expect to be receiving and installing equipment within the next couple of months and to begin trial production by year end.

I will now turn the call over to our CFO Amy Zhang, for our second quarter financial review. Thank you, Amy.

Amy Yi Zhang

I’ll provide some color on certain results for the second quarter of 2008. I’ll discuss some tax performance focusing principally our non-GAAP numbers that we believe give a clearer picture of the operating dynamics of the company. Specifically, non-GAAP measures exclude $4.3 million of share-based compensation expenses, $1.8 million of net income impact related to the purchase price allocation for the MSK and KSL Kuttler acquisitions. We can find a reconciliation of these measures in the financial tables at the end our earnings press release issued today.

Net revenue for the second quarter was $480.2 million, 51.3% higher than the year ago period. Our standard PV module business accounted for 93.1% of total revenues in the second quarter of 2008, compared to 99.6% in the first quarter of 2008. The sequential increase of net revenues was mainly due to the increase to sales volume and to a lesser extent the increased average selling price of our PV modules.

Non-GAAP gross margin was 24.7% in the second quarter compared to 22.5% in the first quarter 2008. The gross improvement was mainly due to an increase in the average selling price driven by strong demand for Suntech’s solar products and appreciation in the euro versus the U.S. dollar.

Total share-based compensation expenses were $4.3 million of this amount, $1.5 million was recognized as cost of revenues, $0.3 million as selling expenses, $0.8 million as R&D and $1.7 million as G&A expenses.

On the non-GAAP basis, operating expenses increased from $31 million in the first quarter of 2008 to $33.9 million which is 7.1% of total net revenues in the second quarter of 2008. The sequential increase in the operating expenses was primarily due to an additional administrative expense incurred at the newly acquired Kuttler operations in Germany and Shunda China.

Non-GAAP income from operations for the second quarter was $84.4 million an increase of 33.1% year-over-year, non-GAAP operating margins was 17.6% in the second quarter compared to 15.4% in the first quarter of 2008. Net interest expenses was $5.2 million in the second quarter of 2008 compared to net interest expenses of $4 million in the first quarter of 2008, sequential increase in the net interest expenses was mainly due to an increase in the interest expense associated with our $575 million convertible notes offering in March 2008.

The interest charge connected with this convert was minimal in Q1 2008 as we only accrued 20 days interest during that period. The net interest expense increase was also due to the increased short-term borrowing balance.

Foreign currency exchange gain was $2.5 million in the second quarter of 2008, compared to a foreign exchange gain of $2.9 million in the first quarter of 2008. The foreign currency exchange gains in the second quarter of 2008 was primarily due to the appreciation of the RMB and euro versus the U.S. dollar coupled with an increase in euro denominated sales.

Net other expenses increased from $0.8 million in the first quarter of 2008 to $6.3 million in the second quarter of 2008. The increase was mainly due the mark-to-market validation losses associated with foreign currency derivatives instruments. In order to hedge our foreign exchange exposures we entered into euro and U.S. dollar and U.S. dollar and RMB forward contracts, covering various periods from July 2008 to March 2010. At the end of Q2 our forward contracts was subject to temporary mark-to-market losses because of the US dollar depreciation significantly against all major currencies.

In order to avoid these mark-to-market fluctuations relative to the hedging in the future we planed to adopt cash flow hedge accounting starting from 2009. By doing so all the mark-to-market valuation gains and losses on our hedged contracts will be recorded in the accumulated other comprehensive income or loss account on the balance sheet and transferred to our income statement when these hedged contracts and associated transactions become mature.

Non-GAAP net income was $71.3 million or US $0.41 per diluted ADS in the second quarter an increased of 46% year-over-year. Capital expenditures which were primarily related to production capacity expansion and the construction of Suntech’s new PV cell and PV module production facilities total $73.2 million in the second quarter and depreciation and amortization expenses were $9.8 million.

Moving on to our balance sheet, as of June 30, 2008 we had cash and cash equivalents of $605.2 million, compared to $1 billion at March 31, 2008. The decrease of cash and cash equivalents was mainly due to cash payments for investments in upstream strategic partners, prepayments to suppliers and capital expenditures for plant capacity expansions.

As a result the related balance sheet items including intangible assets, good will, investment in affiliates, and the amount to you from related parties reflected a sequential increase. Inventory totaled $182.6 million at June 30, 2008 compared to $178.3 million at March 31. Inventory turnover days reduced slightly from 48 days to 46 days sequentially. Accounts receivable decreased from $271.4 million as of March 31, 2008 to $218.9 million as of June 30, 2008.

DSO days were reduced from 57 days in the first quarter of 2008 to 41 days in the second quarter of 2008 due to joint efforts of sales production and incomes credit control. Now turning to our guidance based on current operating conditions, we expect revenues for the third quarter of 2008 to be in the range of $570 million to $580 million. GAAP consolidated gross margin in the third quarter of 2008 is expected to be in the range of 22% to 23%.

Due to robust demand coupled with strong execution, we have raised full year 2008 revenue guidance from a range of $1.9 billion to $2.1 billion to a range of $2.05 billion to $2.15 billion. We have also increased our full-year 08 PV production shipment target from 530 megawatts to approximately 550 megawatts. We target to reach 1-gigawatt of installed PV cell production capacity by year end 2008.

With that I’ll now turn the call back to Dr. Shi for some closing remarks before we go to the Q-and-A.

Dr. Zhengrong Shi

I have a few updates with regard to recent management appointments. First, I would like to express our appreciation to Graham Artes for his outstanding contributions as Chief Operating Officer of Suntech since 2005. We have appointed Graham to the position of Managing Director of KSL-Kuttler and Suntech’s Corporate Vice President of Engineering.

Graham came to Suntech from the KSL Kuttler where he was Director of Manufacturing. So, this transition will enable Graham to leverage his 30 years experience in manufacturing operations to lead the ongoing automation of Suntech’s production lines. Suntech has been extremely successful in attracting and retaining the best of the best in solar PV and the global business management. We are pleased to welcome several new additions to our senior management team.

Mr. Johnson Chiang has assumed the role of Chief Operating Officer. He brings many years of experience in business development, manufacturing and supply chain management for Foxconn Technology Group and Solectron Corporation. He is an excellent addition to our team. I am also pleased to welcome Mr. Robin Chen as General Manager of our thin film plant in Shanghai and Mr. Philip Yue, Vice President of Value Chain Development.

That concludes our prepared remarks for today. At this time we will now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Jonathan Hoopes from ThinkEquity.

Jonathan Hoopes – ThinkEquity

Dr. Shi you mentioned in your prepared remarks that you have 200 megawatts of fixed price, fixed quantity contracts signed at strong pricing and that you’re finalizing another half of the gigawatt during the September quarter. Can you provide some more detail around what you do mean by strong? Specifically, for full year 2009, is module pricing looking to drop in the 10% to 15% range or do you see it falling more or less than that and how much of these contracts are denominated in which currency; euro, US dollar or RMB?

Dr. Zhengrong Shi

First of all yes, this 200 megawatt plus contract has been signed with fixed price and volume and another additional filing is at the final stage of signing and if you look at price actually we see that some of the contracts vary with different countries. Some are fairly flattish as to this year’s contract; some is slightly chopped, say around 5%. Actually we haven’t seen anything beyond that yet at this moment in the both euro currency and also in US dollars.

Jonathan Hoopes – ThinkEquity

As a follow-up, if you could comment on what level of price decline your business model can handle before you see an adverse effect on your gross margins based on the costs components for your new silicon contracts?

Dr. Zhengrong Shi

We answer this now or latter? Yes I think Amy, maybe you can take this question.

Amy Yi Zhang

Regarding the costs going forward, I think in regard to delivery of silicon from more and more long-term contracts, Silicon costs especially as a percentage of total costs of goods sold will be coming down and I think for the average purchase price going forward I think at least we are looking at a 20% down in the coming year; that’s just what we can share with you at that moment.

Also regarding the other manufacturing costs, which is a non-silicon cost; we are also having a very solid cost on roadmap in place in the coming five years. We definitely have input a lot of efforts because of our skill and purchasing power going up, partnership with other raw materials and upstream vendors to bring down the other material costs significantly as well. As what we said, 5% year-over-year at fully loaded rates which include other raw material, labor, overhead and the depreciation?

Operator

Your next question will come from the line of Sanjay Shrestha from Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets

When you guys talk about a lot of this new demand coming, 500-megawatt additional sales contract, the pricing terms still better and you’ve got this Spain market dynamics and a lot of noise in the market and the module prices might actually end up getting really significantly down in 2009 and you guys just aren’t seeing that; can you help us to understand, where is that incremental demand and that strong pricing that’s materializing from?

Dr. Zhengrong Shi

Well as I said earlier, you look at Italy market, France market they’re getting very, very strong and we sort of can imagine the Italian market next year will be in the similar situation as the Spain market this year, okay. Of course there is some uncertainty about the Spanish market, but again we believe the unit has a cap debt 300 megawatt or 500 megawatt, but still I mean with additional increase from other markets, we don’t see it as a big deal and also like France and Greece and Checzlovakia and Korea there’s a full increase of demand and in Japan we reintroduced the subsidy and all this put together, I mean like we have signed the half contract like already in hand and we’re very close to close further contracts, so that all indicates the market is fairly strong.

Sanjay Shrestha - Lazard Capital Markets

So, when we talk about the 900 megawatts of silicon well below 20% versus ’08, how much of that is coming from Asia Silicon, Shunda and Nitol, for you guys?

Dr. Zhengrong Shi

Among the orders the long-term contract we signed, per year I think 30% to 40 % of this contracts came from Korean expansion. So, this 900 megawatt is already justified with possible delays in order of this new Korean expansion.

Sanjay Shrestha - Lazard Capital Markets

Are you guys still participating or had planned to participate in the spot market in the second half of ’08, which might end up giving you an incremental upside to the megawatt shipment, than to issue these rates right now?

Dr. Zhengrong Shi

We are already upgraded.

Sanjay Shrestha - Lazard Capital Markets

I understand that, but do you have any plans to participate in the spot market in the second half of ’08, because you guys were thinking you’re not going to participate in the spot market given your rational…

Dr. Zhengrong Shi

If our capacity is ramping up or is in time and -- we’ll see, we’ll do the best we can.

Operator

Your next question will come from the line of Brian Gamble from Simmons Company.

Brian Gamble - Simmons and Company

I just had a quick question on the ramp up, you mentioned that a dissemination last quarter that you’d see a consistent ramp up on the capacity side as we go to the final three quarters and if you take down our run rate your just a little light of that in the second quarter, what should we expect for 2009 on that regard? You mentioned your adding 400 megawatts of capacity over ’09. So, we think about that in the same type of fashion; is that going to be spread out over the year or we should we think that that’s going to be a little bit backend loaded, as 2008 is coming through.

Dr. Zhengrong Shi

Its backend loaded.

Brian Gamble - Simmons and Company

Any type of percentages on that Dr. Shi; are we’re talking 60:40 or are we talking 80:20?

Dr. Zhengrong Shi

We material will be loaded say from July.

Brian Gamble - Simmons and Company

And then a follow-up to that, if you could just go over, I guess you’ve given some detail on what types of markets you’re looking at for 2009 as to what’s strong and how you’re seeing that. That breakout of Spain and Germany for the quarter; 44% for Spain, you mentioned that’s still going to be strong in the second half; any type of percentage you want to put on 2009 as you are exposed to the Spanish market given the light that you already saw in 200 megawatts and are in negotiations for 500 or more?

Dr. Zhengrong Shi

For the second half, the sales to Spain is still fairly strong and because of the reason, the first half in the shipment to Spain is higher we intend not to allocate more volume to their market due to some time commitments. So, for the second half I think our shipment to Stampalia jumped from say around 40% to slightly below 30% and what fell to other countries like Germany and other countries where it’ll be in proportional increase. So for the next year it’s hard for me to give you the exact percentage of our sales to Spain, but one thing I can tell you, we’re already signed an appreciable number of contracts with Spanish customers.

Operator

Your next question will come from the line of Mehdi Hosseini from FBR.

Mehdi Hosseini - FBR

Dr. Shi, when you look at the next year and you’re rather positive commentary regarding demand, can you please help me to understand what is your expectation for gigawatt of demand for geographies in Europe other than Spain; you mentioned a couple of countries. What do you expect the total demand would be and then in terms of the demand growth year-over-year basis in 2009, how do you compare that to the supply growth?

Dr. Zhengrong Shi

I think answering your first question is, I think in the next year you look at the global demand we believe is in the scenario of probably around 6 to 8 gigawatt of origin and if you look at European market and I think all market that we grew requires significantly, but have the exceptional, and for example we’re pretty sure Italy’s market next will be over 1-gigawatts and German market that will be more than 2-gigawatts and France market, Greece market plus other European market is probably will be in the more than 500 to 1-gigawatt again.

So, I think in the European market we are still very, very strong as far as we understand. Of course have Korea, Japan we’ve come back to the game and Italy and other so that’s why the number, at this moment from all communications with customers and other third-party information that we believe next year’s global market ownership should be around 6-gigawatt to 8-gigawatt.

Mehdi Hosseini - FBR

And so that would give what 25% to 20% year-over-year growth?

Dr. Zhengrong Shi

This year, we are not quite sure yet the total shipments this year, according to projection it’s probably around 4 plus gigawatts…

Mehdi Hosseini - FBR

Don’t you think overall supply would grow at 2X, the demand growth rate?

Dr. Zhengrong Shi

You mean the silicon supply?

Mehdi Hosseini - FBR

No, rather module supply?

Dr. Zhengrong Shi

We grow with demand, right.

Mehdi Hosseini - FBR

I’m talking about the industry wide?

Dr. Zhengrong Shi

Could you repeat the question again?

Mehdi Hosseini - FBR

What is you expectation for industry wide module supply growth?

Dr. Zhengrong Shi

I think next year like module supply growth will be also quite strong and there are a lot of announcements about the expansion. So, I think next year the module grows, the capacity probably be matched to the market demand. I know there is a worry in the market, there is over supply issue, but we don’t think the over supply will occur in 2009.

Mehdi Hosseini - FBR

If I may, just one follow up regarding thin film, you mention that the equipment will be delivered over the next couple of months. What should we expect in terms of thin film shipment next year, do you think that’s going to be more than just a couple of megawatt?

Dr. Zhengrong Shi

It seems we have a shipment next year, probably will be around 1 gig plus shipments that’s what we..

Mehdi Hosseini - FBR

No I am sorry for thin film.

Dr. Zhengrong Shi

Yes, thin film yes. No for Suntech, no for Suntech next year probably we are talking 15 to 20-megawatts. So, 20 megawatts yes…

Mehdi Hosseini – FBR

And this is mono, sorry this is single …

Dr. Zhengrong Shi

Single based…

Mehdi Hosseini – FBR

Is that single junction or is that tandem.

Dr. Zhengrong Shi

Probably it was a single junction.

Operator

Your next question will come from the line of Rob Stone from Cowen and Company.

Rob Stone - Cowen and Company

I wonder if you could comment on a relative basis what the ASP change was in the second quarter versus the first quarter and describe your outlook for the second half, for example you have gross margin guidance coming down in the third quarter, or are it on higher cost?

Dr. Stuart Wenham

Rob actually, as we indicated before most of contracts actually you will find in a price determined for the whole year, and for Q3 we actually we don’t see our ASP actually in full, appreciably compared to Q2. So, the reason we give 22% to 23% in GPV margin is because about 60% of contract was singed in euro currency in Q2 and in Q3, so we justify the possible appreciation of U.S. dollars, so that’s the reason.

Rob Stone - Cowen and Company

So it’s really a currency impact potentially. Can you say approximately how much your production was or module production in the second quarter?

Dr. Zhengrong Shi

Well Rob, as we indicated before because now the income has been quite complicated, so we stopped giving formation about the production volume.

Rob Stone - Cowen and Company

With respect to the 15 to 20-megawatts of thin film production you mentioned for next year, how should we think about that being spread over the year, when will production start to ramp up?

Dr. Zhengrong Shi

Let’s say 60% to 70% will be shipped in the second half.

Operator

Your next question will come from the line of Paul Clegg from Jefferies.

Paul Clegg - Jefferies & Company, Inc.

Congratulations on the quarter. Question about wafer pricing in the second quarter in the past you’ve given your wafer price, can you talk about what that was in the quarter and where you it trending and then how much of your second path poly pricing is still subject to spot type rate.

Amy Yi Zhang

As what we’ve said for various reasons especially around the competitiveness side, we don’t actually give planted average ATP anymore, but I would say 40 unit price per wafer if they relatively stable and flat compared to Q1 for what we have already realized in Q2, also the small peak in Q1. We haven’t seeing currently the trend fulfilled. So I think it will stay relatively flattish in Q3 as well regarding the unit price U.S. dollar per piece of wafer.

Paul Clegg - Jefferies & Company, Inc.

As a follow up what was the balance sheet accounts label due from the related parties. Can you explain what that was related to?

Amy Yi Zhang

The amount due from related parties is actually related to the, first of all the reclassification of our advanced payment to the previous so called independent suppliers, but now in Q2 they have become not independent and they have become an affiliate to Suntech for example Shunda and Glory that’s why we made around $30 million, $32 million of reclassification in Q2 versus Q1 and adjusted that from the advanced to suppliers to the amount due from related parties and plus the new advanced payment paid to the affiliated entities as Suntech upstream partner.

Paul Clegg - Jefferies & Company, Inc.

So, the real change was just about $32 million

Amy Yi Zhang

Yes

Amy Yi Zhang

No, the reclassification is $32 million and the balance I think the moment is 250, right, so minus that 32 around to 220 is related to the new prepayment made to these affiliated partners.

Operator

Your next question will come from the line of Lu Yeung from Merrill Lynch

Lu Yeung - Merrill Lynch

Just want to ask that you’ve indicated the wafer cost will be coming down to 20% next year and your ASP for modules didn’t really drop a lot. So, in terms of your margin will you be using your margin buffer next year to increase your spot exposure and to maximize your share gain next year in 2009?

Dr. Zhengrong Shi

Well I think, at this moment as we just indicated we already like the long-term contract, we are already, reached 900 megawatts. I think we believe next year there would be many more new silicon manufactures and we will start to supply silicon in the market. So I think we still in the position, that is more and more supplies comes to us to negotiate this new contract and I think with time all this new contract condition will get better and better. So we maybe not necessary to purchase silicon from market and we will see. We have lot of flexibilities here.

Lu Yeung - Merrill Lynch

I see, so one more follow-up. In the second half of ’08, waiver cost you preciously indicated you have more demand than you can satisfy in the second half and you raised your full year guidance. Should we think about that you have actually higher confidence in your product silicon supplier in the second half, which give you the confidence in raise full year guidance this time.

Dr. Zhengrong Shi

Yes, all these raised guidance is backed up with our silicon supply.

Lu Yeung - Merrill Lynch

Maybe, could you give us some more details on it or is it from some new supplier or excess in supplier?

Dr. Zhengrong Shi

As like as earlier, because some of the partners they have started to turn on the reactors in the second half. Okay they already start to produce silicon, so that’s why we can’t get additional silicon from them for the second half.

Operator

Your next question will come from the line of Michael Carboy from Signal Hill.

Michael Carboy - Signal Hill Group

Stuart or Dr. Shi I would like you to comment on this question, that is given the price your improved cost structure and the improving technologies. Do you see the achievement of grid parity coming perhaps, any sooner than you might have say a year ago?

Dr. Stuart Wenham

Well I suppose we’ve been expecting the improvements form the Pluto technology for sometime now. So it was already been factoring in the fact that we will get the improved performance at round about the same cost. So I think in terms of when we reach grid parity I think we have already probably made allowance for that in terms of prediction we’ve been making over the last 12 months or so.

Michael Carboy - Signal Hill Group

I see you are not really any acceleration in that. Is that correct?

Dr. Zhengrong Shi

I think our Pluto technologies is fully tamped up, like now for a new added capacity is they are all compatible to Pluto technology and when new equipment supply can match, it can all maybe fulfill this process expansion, I think we still believe grid parity can be achieved within next three to five years.

Michael Carboy - Signal Hill Group

And then Stuart you’d commented on the dealing with some potential bottlenecks on the equipment supply for ramping Pluto, could I ask you to elaborate on that please?

Dr. Stuart Wenham

With the evaluation price we’ve been backed upon, the technology facility itself is looking very good it’s achieving all its milestone and performance targets, so the actual Pluto technology is achieving the efficiencies and the durability that we’d hoped for from the pilot production experience. What that tells us is that the new equipment that we’ve had developed for our full scale production line, its doing the job well in terms of making the technology the way it has to be made.

So, really the evaluation phase from our prospective now is all about evaluating the equipment not the technology in large scale production. So we’re very confident that the Pluto technology will perform as expected and as dedicate. So with regard to the equipment itself, there is a range of issues that are being evaluated during this evaluation size in particular we are looking at automation issues as we go to large pieces of equipment and also the throughput issues and just evaluating the reliability of the equipment and the repeatability, the processed etc, and the yields and the like.

So at the end of the this quarter and in fact when we have our Q3 earnings release we will give you quite bit more information then on what we’ve learned and experience through the development of the equipment and the use of that equipment in large scale production and then we will be in a much better position to be able to I guess give you accurate information in terms of our ramp up next year or with the Pluto technology.

So with regard to the production of the equipment we are using Kuttler our new company to manufacture some of the equipment and that’s working our very well, so we’ll have that under control. So, we are not too worried about bottlenecks there and the other unique equipment that’s being designed manufacturer to our specification. We have several manufactures that are in a position to be our suppliers with that equipment. I mean certainly they will be a period of time needed to be scale up as we iterate the design and optimize the design of that equipment, but in the longer term we are not expecting any bottleneck issues.

Operator

Your next question will come from the line of Adam Krop from Ardour Capital.

Adam Krop - Ardour Capital

Good evening, thanks for taking my question. My first question is on your spot poly in 2Q. What percentage of your polysilicon came from the spot market in the second quarter?

Amy Yi Zhang

It’s going to be 45% in the second half of ‘08.

Adam Krop - Ardour Capital

Second quarter?

Amy Yi Zhang

Second quarter is the same.

Adam Krop - Ardour Capital

Second quarter is same, okay and then on your non poly costs in the quarter, can you comment on the trends you saw there?

Amy Yi Zhang

The non-silicon cost, we are talking about at fully loaded grids which include all the other raw materials needed for showing module production and also depreciation, labor, overhead and consumptions. It’s fully loaded, including provisions on the breakage and also the appreciation of different currencies against US dollar, its $0.70 per watt in Q2 and according to our plan we have a very solid execution tool in place to bring it down by 5% year-over-year and fix that at around U.S. $0.50 to watt.

Adam Krop - Ardour Capital

Okay, thank you that helps, and just one follow-up on the technology, can you comment on your poly silicon usage for its grams per watt and the Pluto technology, the upcoming Pluto technology versus the current technology?

Dr. Stuart Wenham

Well, we are able to use exactly the same wafers in the Pluto technology in fact the Pluto technology is very flexible in terms of being able to use pretty much any type of wafer that he industry is able to produce. So, we have a lot of flexibility there, but in terms of the dimensions of the wafers, we are using wafers that have the same thickness, Pluto is what we currently use with the out stream screen printed technology. However, in the future, we expect to be able to manufacture Pluto with actually thinner wafers than as you used with the screen printing technology, because there is less contact between the actual equipment and the wafer itself, so less pressure less forces existed on the wafer during the manufacturing process.

So, we expect that to allow as to actually use thinner wafers in the future, which would therefore equate to less grams per watt, also of course the higher performance, producing round about 10% more power per unit area, also requires to therefore roughly a reduction in grams per watt around about 10%. So, we should see some significant improvements in particular metric going towards that technology.

Adam Krop - Ardour Capital

To give you a more specific number, at this moment probably around seven gram per watt and where is the Pluto technology, you chop that by 10%, so it would be less than 6 gram per watt.

Operator

Your next question will come from the line of Vishal Shah from Lehman Brothers.

Vishal Shah - Lehman Brothers

Question on Spain Dr. Shi, you mentioned that about 30% of your second half shipments will be going to Spain. If I probably look at the Spanish market especially as customers need to ramp to produce projects before the September deadline, when do you think you should start to see a slowdown in the Spanish market and your production capacity is also increasing in the second half. So, your guidance would suggest that your shipments to Spain would be rather to be flat for the second half?

Dr. Zhengrong Shi

Certainly, as I said shipment to Spanish market for the second half percentage wise is slightly reduced compared to the first quarter. I think this is indeed a fraction of that installation deadline, even though but still the customers are quite active over that. If you look at this year’s total pipeline in our production which we could produce this year, we can not fulfill the demand, so that’s way we do the best we can to increase about 20-megawatt production this year to fulfill our customer requirement.

Vishal Shah - Lehman Brothers

Do you think that there is any potential inventory build happening in the Spanish market?

Dr. Zhengrong Shi

Not, I don’t think so.

Vishal Shah - Lehman Brothers

And then on your 200-megawatts of shipments that you’re sighed for 2009 and 500-megawatts you’re negotiating, what percentage of that would be to the Spanish market?

Dr. Zhengrong Shi

I will say, for what we have signed, close to half of them is from the Spanish market.

Vishal Shah - Lehman Brothers

About 50% of the 200-megawatts are from the Spanish market?

Dr. Zhengrong Shi

Yes.

Operator

Your next question will come from the line of Angello Chan from Credit Suisse.

Angello Chan - Credit Suisse

I have a question about your minority stake investments, can you update us on the amount you have invested in these minority stakes speaking and also the equity stakes that you have taken in theses investments?

Amy Yi Zhang

Angello, can you please repeat your question again. I didn’t hear you very clearly just now.

Angello Chan - Credit Suisse

The question is can you tell us the amount of money that you have invested in the company’s stakes that take for example in the (Inaudible) and also the percentage ownership that you have with these investments?

Amy Yi Zhang

I think its all minority share holding position for example for Shunda it’s less than 16% shareholding position and Glory 18% and for the Nitol it’s also around 10% or 11% and for the Hoku it’s all the same. I think around 10%, 12% so if you are talking about the total amount, are you asking about the total amount invested or paid for such investment in Q2 or just the percentage.

Angello Chan - Credit Suisse

Well the percentage as well as the dollar amount.

Amy Yi Zhang

For the percentage as well as dollar amount..

Angello Chan - Credit Suisse

You give me 12 percentages for four investments.

Amy Yi Zhang

Yes it’s for Shunda and 15.82% it’s around a $100 million and for Glory 18%, $22 million and for Nitol and I think it’s relatively (Inaudible) we just say a total of 100 million for the rest including Nitol, Hoku etc.,

Angello Chan - Credit Suisse

Any other ones apart from these four?

Amy Yi Zhang

Just these

Angello Chan - Credit Suisse

Are you contracted to pay more to these four companies.

Amy Yi Zhang

That’s what I said; we have got some prepayments apart from the investment in to Shunda and Glory, which has been recognized at the amount due from the affiliates or related parties.

Angello Chan - Credit Suisse

Apart from prepayments, in order for you to complete taking up these equity I think have you mentioned. Is Suntech obligated to make additional payments in the future?

Amy Yi Zhang

No.

Angello Chan - Credit Suisse

So we are looking at about $220 million for four of them. You mentioned a $100 million for Shunda, 22 for Glory and about 100 Nitol and Hoku right.

Amy Yi Zhang

Yeah.

Angello Chan - Credit Suisse

We are looking at 220 for the four of them.

Operator

Your next question will come from the line of Charles Yonts from CLSA

Charles Yonts - CLSA

Quickly, could you just give us some color on the ramp up at Asian Silicon and Shunda?

Dr. Zhengrong Shi

Okay. Asia silicon we believe there also very close to fire up their reactors within weeks and Shunda seamless situation and Asia silicon already started the second phase and second phase will be additional 2500 tons and we believe will be due production maybe in around Q3 next year. Shunda the second phase is about to start again will be an additional 2500 tons polysilicon and also we believe it will be around September next year that we’ll start to fire up that reactor.

Charles Yonts - CLSA

And I’ve just one more when you come back to Japan, I mean given your position there, I imagine you might have some more insight into what the governments thinking about with there new subsidiary that should start in 2009, could you give us any idea of what your feeling is for Japans market next year? Thank you.

Dr. Zhengrong Shi

Japanese government has realized the importance of growing Japan market again. The Prime Minister and the Minister of MIMT that has indicated in several occasions, in the second half of this year above this renewed subsidy in Japanese market, so at this moment it is hard for me to give you the accurate volume for next year, but I think the minimum will be around 300 megawatt, the upside could be up to 700 or even gigawatts is possible there many number being talked this moment, but I guess maybe in the next quarter, in our release we will be able to give you a better color.

Operator

Your next question will come from the line of Jeff Osborne from Thomas Weisel Partners

Jeff Osborne - Thomas Weisel Partners

Congratulations on a strong result, I just had two clarifications for Amy most of my questions have been answered. Amy in your prepared remarks did you comment that unit shipments were up to a greater percentage than ASP increases for the quarter just trying to get a sense of how we can measure your progress towards the 550-megawatts for the year?

Amy Yi Zhang

Again like what we had indicated before, we don’t talk about ASP or shift output any more. I think it will still be inline with our 40 versus 50 mid between first half and second half of ’08.

Jeff Osborne - Thomas Weisel Partners

I thought you had said in your prepared remarks, the revenue growth was mainly attributed to unit volume increase as you added capacity into our lesser extent ASP increases. Also could you just provide some clarity on the convert accounting, are we adding back some interest income from the convert to get the EPS because we were calculating $0.35 per EPS?

Amy Yi Zhang

We have adopted the treasury accounting for the calculation of the convert with the EPS calculation and with the interest recognized in Q2 we need to added back to the total value of the original convertible bond and that’s also in order to avoid the double account for the value.

Jeff Osborne - Thomas Weisel Partners

Is that about $4 million or so?

Amy Yi Zhang

Yes, $4.2.

Jeff Osborne - Thomas Weisel Partners

$4.2, thank you.

Operator

Your next question will come from the line of Paul Leming from Soleil Securities.

Paul Leming - Soleil Securities.

I wanted to ask a question about the affiliated company. Can you give us some sense of what percentage of your raw material supply in 2009 you believe will come from expansion of Glory, Asia’s Silicon Shunda etc.,

Dr. Zhengrong Shi

So, your question, and let me repeat the question. Your question you want to know the percentage of our silicon in ’09 will come from affiliated supplies. I would say, is not a quite significant, I think at this moment I would say around 20% to 30%.

Paul Leming - Soleil Securities.

And that’s the number for 2009?

Dr. Zhengrong Shi

Yes.

Paul Leming - Soleil Securities.

And does that take out any double accounting in that some of the Asia or Shunda’s production, but considerably go to Glory to be converted in the wafers?

Dr. Zhengrong Shi

No.

Paul Leming - Soleil Securities.

And if I could just ask as a follow-up question, I’d heard some reports on of an explosion and fired one of the new polysilicon producers in China and not one of your affiliated companies, but I’m just wondering if you heard of any reports …

Dr. Zhengrong Shi

No, I haven’t heard any rumors like that.

Operator

Your next question will come from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov - Raymond James

First on your vertical integration, you have had a lot of initiatives to expand your footprint in the silicon arena. What are your recent steps to expand your footprint in the downstream of the value chain?

Dr. Stuart Wenham

Okay that’s very interesting question, and as we know we already have very flexible sales strategy and a channel to the market, which give us a lot of flexibility to adjust to different market segments, and we believe we are the mode of gigawatt supply very soon. So we need to avoid to competed with customers and also we are looking way to add value to our custom and make them more competitive in the market and we believe to have a downstream EPC company, which is only one or many ways to secure downstream and we already have very strong, system integration business in China and so the small scale, I know we can get these small scale, but we can’t get any a lot of experience and many projects. So that’s the way we stand this movement.

Pavel Molchanov - Raymond James

And as a follow-up you have mentioned in the past that you are considering building a production plant in either the U.S. or Australia if the political landscape is appropriate for that. Do you see any movement towards making a decision on that?

Dr. Zhengrong Shi

When US give a very specific ITC or subsidy program, we will revisit to that situations.

Operator

Your next question will come from the line of Brian Yerger from Jesup & Lamont.

Brian Yerger - Jesup & Lamont

Most of my questions have been answered. So I’ll just ask a general question about the Chinese market. There is a report earlier this week about the Chinese Government looking at feed in tariff of a couple of projects. I was wondering if you could provide any color on your outlook for the Chinese market over the next couple of years or do you think we’re still looking further out for the large scale deployment of solar?

Dr. Zhengrong Shi

Certainly, Chinese Government has been moved in this regard and I think I announced to you before towards late December last year NDRC announced there would be demonstrate a project over 10 megawatts each in seven Western States and I think some on this project is already started bidding process. So, also recently our state agreed, States Power Company and also National Power Companies already in visit to various PV companies just try to understand the business, understand the Grid-Connected technology and so, I think many indications indicated China government will provide some fitting tariff sometime next year.

Operator

Your next question will come from the line of Cheryl Tang from Goldman Sachs.

Cheryl Tang - Goldman Sachs

The question is for fiscal ’08, in terms of CapEx, what is the schedule to CapEx for the second half ’08 as well as for ’09?

Amy Yi Zhang

For the ’08, I think as what I said for the total spending on the cash side. I think it’s going to be from the second half around $120 million to $150 million for the second half for the CapEx for 400 megawatt expansion of capacity, by the end of ’08 we’re going to get to 1-gigawatt capacity and for ’09 as what we’ve said was by end of ’09 we are getting to 1.4 gigawatt. So, it’s another 400 megawatt new capacity to be added.

Cheryl Tang - Goldman Sachs

My next question is, on the Asia Silicon at Shunda. In terms of the second and third capacity expansion, what is the investment required for that? Who will provide financing for the project?

Dr. Zhengrong Shi

Okay, I think for those companies we probably talk about $100 million to $120 million total investment for the second phase expansion and I believe there already have the investors, and also loss. So, so far we haven’t seen any cash from our shareholders.

Cheryl Tang - Goldman Sachs

My last question is for Glory capacity expansion. How should we expect the capacity coming out next year?

Dr. Zhengrong Shi

Next year?

Cheryl Tang - Goldman Sachs

Yes.

Dr. Zhengrong Shi

I think at this moment we had 300 megawatts, I think next year that probably, because of 2010 the capacity will reaching 1.5 gigawatts. So, we believe next year’s capacity probably, it should be around 700 megawatts to 800 megawatts.

Operator

We are at the end of the conference call.

Dr. Zhengrong Shi

Thank you for joining us today. If you have any further questions, please do not hesitate to contact any of our Investor Relationship representatives. Thank you, have a nice day.

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