Yingli Green Energy Q2 Earnings Call Transcript

123jump.com Staff
07 Oct, 2008
New York City

The vertically integrated PV product manufacturer quarterly revenues rose 120.5% to $289.7 million. Net quarterly income surged 227.6% to $30.2 million. Earnings per share were 23 cents in the quarter. The company estimates net revenues between $1,053 million and $1,106 million for fiscal 2008.

Yingli Green Energy Holding Co., Ltd. ((YGE))
Q2 2008 Earnings Call Transcript
August 6, 2008 8:00 a.m. ET

Executives

Tip Fleming – Investor Relations
Miao Liansheng - Chairman & Chief Executive Officer
Brian Li – Chief Financial Officer

Analysts

Jesse Pichel - Piper Jaffray & Co
Daniel Ries - Collins Stewart
Vishal Shah - Lehman Brothers
Cheryl Tang - Goldman Sachs & Co.
Kim-Chong Tan – UBS
Lu Yeung - Merrill Lynch
Sam Dubinsky – Oppenheimer
Rob Stone - Cohen & Company
Bert Charles – Simmons & Company
Grava Mia – Credit Suisse
John Hardy – American Technology Research Inc.

Presentation

Operator

Good day ladies and gentlemen and welcome to the second quarter 2008 financial results conference call. My name is Nakita (ph) and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of today’s conference at which time you may press “*1”to participate. If at any time during the call you require assistance key “*0” and a coordinator will be happy to assist you. As a reminder, this conference is being recorded. I would now like to introduce your host for today''s call, Mr. Tip Fleming from Christensen. Please proceed sir.

Tip Fleming

Thank you operator, and thank you everyone for joining today''s call. On the call today from Yingli are Mr. Miao Liansheng, Chairman and Chief Executive Officer; Mr. Brian Li, Chief Financial Officer; Ms. Miao Qing, IR Director and Mr. Robert Petrina, Business Development Manager in US.

A few hours ago Yingli issued their earnings release. Hopefully you all had a chance to take a look at it by now. The press release can be found on the Company''s website at www.yinglisolar.com. The call today will feature a short presentation from Mr. Miao covering business and operational developments, Brian Li will follow with a discussion of the Company''s financial performance, and after that the presenters will open the floor to questions from the audience.

Before beginning, the management would like to remind the audience this presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act 1934, as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as ‘will’, ‘expects’, ‘anticipates’, ‘future’, ‘intends’, ‘plans’, ‘believes’, ‘estimates’ and similar statements. Such statements are based on 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 these and other risks, uncertainties or factors is included in Yingli Green Energy''s filings at the US Securities and Exchange Commission.

Yingli does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise except as required under applicable law.

I would now like to turn the call over to Mr. Miao. Please begin.

Miao Liansheng - Chairman & Chief Executive Officer

(Interpreted)

Good morning everyone and thank you for joining us for Yingli Green Energy''s second quarter 2008 conference call.

The issue of cutting CO2 emissions attracted great attention and strong support at the recent G8 meeting. Furthermore, market demand continues to pick up as more and more countries consider feed-in tariff policies.

Second quarter 2008 was another strong quarter for Yingli Green Energy. This can be contributed to the continued rapid growth of PV industry and the tireless contribution from our entire staff. Total PV module shipment increased to 68.2 MW in the second quarter which is an increase of 13.6 MW from last quarter. Revenues throughout the second quarter were $289.7 million which was an increase of 24.6% from last quarter.

Now I will share with you some operating highlights from the second quarter. While we have been further developing our relationships with our customers in major PV markets such as Germany and Spain and also (inaudible) in our ability to further diversify our sales network in new, growing PV markets in the second quarter of 2008. These new growing PV markets include Korea, Italy, France, Belgium, the United States and China. According to our newly revised shipment guidance for 2008, the majority of our second half estimated output has been locked up with sales contracts.

On the polysilicon procurement side, while we have further solidified our collaborative relationships with existing suppliers, we have also developed new relationships with additional suppliers, such as DC Chemical. In the past quarters, as of today, nearly all of our 2008 polysilicon needs have been secured by contracts.

On the research and development front, we have further improved our yield rate and so efficiency. This is primarily due to our scientifically driven R&D strategy. First, we monitor the latest technological developments, and the PV industry is now R&D centered to ensure that we stay on top of the most cutting edge technology.

Second, we devote a large R&D team to each stage of our production process. By integrating our R&D team within our production team we can make sure that innovations are effectively implemented at each stage of the production process.

In terms of our capacity, we have already started initial and small-scale production of polysilicon ingots, wafers, PV cells and PV modules from our latest 200 MW expansion plan in late June 2008, and we are expecting to reach a total capacity of 400 MW in late 2008 and 600 MW towards the middle of 2009. Equipment is being regularly delivered on time and in line with our installation schedule.

Based on our strong performance this quarter and our current outlook, we have raised our shipments in the revenue guidance. Our CFO, Brian, will provide the details later.

As I mentioned before, I believe we could not have had this achievement without the contributions from our entire staff and the support from both upstream and downstream partners. In another 20 days we will celebrate the tenth anniversary of our Company, so on behalf of the entire management team, I sincerely thank you all for your contribution and support.

And last we would like to give our best wishes to Beijing 2008 Olympics.

And now here is Brian Li, our CFO

Brian Li

Thank you Mr. Miao and good morning to the participants starting from the US, and good afternoon to the participants starting from the Europe and a good evening to the participants starting from Asia Pacific.

And as Mr. Miao just mentioned, we had a very good quarter. Our net revenues this quarter were RMB1,987 million, or $289.7 million, up 24.6% from last quarter and 120.5% from the same quarter last year. Our average sales price for PV modules reached a $4.20 per watt this quarter, up from $4.11 last quarter. Total PV module shipments increased to 68.2 MW from 54.6 MW last quarter.

The increase in revenues and shipments was primarily due to the continued growth in market demand for PV modules and higher output at our existing facilities. We were able to raise our output by making incremental improvements in capacity utilization and operating efficiencies at every stage along the value chain and by implementing improvements developed through effective research and development efforts.

Full production of 180-micron wafers throughout the quarter, higher yields resulted by reduced breakage rates and achievements in increasing cell conversion efficiency rates.

Our gross margin was 25.8% this quarter compared to 24.6% last quarter and 22.7% in the same quarter last year. The increase was a result of the cost reduction achieved through R&D efforts at every single stage of our vertically integrated manufacturing process.

Operating expenses this quarter were RMB116.1 million or $16.9 million compared to RMB109.6 million last quarter and RMB57.2 million in the same quarter last year. Operating expenses as a percentage of net revenue were 5.8% in the second quarter of 2008 which was a decrease from 6.9% in the last quarter. The decrease can be largely attributed to economics of scale.

Operating income this quarter was RMB395.7 million or $57.7 million, a significant increase of 40% from last quarter and 168.1% from same quarter last year.

The operating margin increased to 19.9% this quarter from 17.7% last quarter and 16.4% in the same quarter last year. The increase was primarily due to the higher gross margin and lower operating expenses as a percentage of net revenue.

We had a foreign currency exchange loss of RMB68.2 million or $9.9 million this quarter, which compares to a gain of RMB66.3 million last quarter and a loss of RMB17.5 million in the same quarter last year. The foreign currency exchange loss this quarter was primarily due to the appreciation of the RMB against the Euro and the US dollar, which resulted in a loss upon the revaluation at the end of the quarter of accounts receivable and raw material prepayments partially offset by a gain from the revaluation of short-term borrowings. The foreign currency exchange gain in the first quarter of 2008 was primarily due to the appreciation of the Euro against the RMB, which resulted in a gain upon the revaluation of accounts receivables and a raw material prepayment at the end of the quarter.

Our reported net income for the second quarter was RMB207.2 million, or $30.2 million, which decreased by 3.7% from the first quarter of 2008 and increased about 227.6% from the same quarter last year. The sequential decrease was primarily due to the impact of the foreign exchange loss, fully diluted earnings per ordinary share, and per ADS were RMB1.6, or $0.23, in the second quarter of 2008, compared to RMB1.73 in the first quarter of 2008.

I would also like to walk you through some of our non-GAAP numbers. Please refer to your earning release for a full explanation and a reconciliation of these non-GAAP numbers.

I adjusted the non-GAAP basis which excludes share based compensation and an amortization of intangible assets arising from purchase price allocation in connection with a series of acquisition -- of acquired interest in Baoding Tianwei Yingli New Energy Resources Company Limited, which is our principal operating subsidiary.

The net income was RMB234.5 million or $34.2 million in the second quarter of 2008, down 4.7% sequentially. Adjusted and non-GAAP fully diluted earnings per ordinary share, and per ADS, were RMB1.81 or $0.26 this quarter, compared to RMB1.9 last quarter.
Now a quick review of our balance sheet.

As of June 30, 2008, Yingli Green Energy had RMB674.7 million, or $98.4 million in cash and RMB3,335.8 million, or $486.3 million in working capital, compared to RMB564.3 million in cash and RMB3,511.9 million in working capital as of March 31, 2008.

Days sales outstanding was reduced to 47 days in the second quarter of 2008 from 66 days in the first quarter of 2008, primarily due to better payment structure for the execution of sales contracts and strengthened internal controls over accounts receivable collection.

Looking forward, based on the current market and operating conditions, estimated production capacity and forecasted customer demands, we revised up our expected PV module shipments and the net revenue targets for the full year 2008, as follows.

PV module shipments are expected to be approximately 270 megawatts to 280 megawatts, which represents an 89.5% to 96.5% increase compared to 2007. This compares to the Company''s previous guidance of 255 megawatts to 265 megawatts.

Net revenues are expected to be approximately $1,053 million to $1,106 million, which represents an 89.2% to 98.7% increase compared to 2007. This compares to the Company''s previous guidance of $969 million to $1,020 million.

Now I would like to give some indicative targets and expectations for the third quarter of 2008, based on the current market and the operation conditions.

Estimated production capacity expansion and the forecasts of the customer demand. First, for the third quarter of 2008, we expect the average selling price to slightly decline from the first half of 2008 level, as we are expanding strategically to the new markets.

Second, we expect that there will be a slight increase in the planned cost of polysilicon from the third quarter of 2008, mainly attributable to increase the virgin polysilicon mixture percentage for the benefit of higher production output.

Therefore, we expect that the gross margin in the third quarter of 2008 would likely be in the range of approximately 22% to 23%, and that the gross margin for the full year of 2008 will likely be close to the level of 2007.

That concludes our prepared remarks. Now we would like -- we would be happy to take your questions.

Question-and-Answer-Session

Operator

Ladies and gentlemen, if you would like to ask a question press “*1”. If you would like to withdraw from the queue press “*2”. Questions will be taken in the order received. Press “*1” to begin and please stand by for your first question.

Our first question comes from the line of Jesse Pichel of Piper Jaffray. Please proceed.

Jesse Pichel - Piper Jaffray & Co.

Good evening. Congratulations on your ten year anniversary and very strong operating results. My first question is, could you tell us what the polysilicon cost per kilo was in the quarter?

Brian Li

Now we can''t tell you exact the number, but the blended array of the polysilicon industry in the second quarter of this year is -- has only slight increase from the first quarter of this year.

Jesse Pichel - Piper Jaffray & Co.

And based upon your contracts, when do you think that blended cost will start to come down?

Brian Li

We currently expect the polysilicon cost will start to move down in the fourth quarter of this year.

Jesse Pichel - Piper Jaffray & Co.

And could you discuss ''09 a bit and tell us what percent of your 2009 expected production is contracted? And is that -- and how much of that is at a fixed price or a known price?

Miao Liansheng

(Interpreted)

In 2009, we continue to see a very robust demand in this year and for the (inaudible) geographic, it will be further diversified. We will still remain a kind of leading position in those current markets like France and Germany, but we also will expand to the new growing markets. And the orders actually right now we receive has been far beyond on our output capability, but for the price, we haven''t been fixed yet because we want to see a better price trend and a visibility in later this year.

Jesse Pichel - Piper Jaffray & Co.

Does Chairman Miao think that his blended poly cost or the module ASP will fall faster? Which one will fall faster, the blended poly cost or the module ASP, and why?

Miao Liansheng

(Interpreted)

It''s a little bit hard to say right now actually because a lot of -- I mean, our new polysilicon plants will be only put into production and given by the extension plant of existing polysilicon manufacturers. So we say that there will be definitely some great trend of the polysilicon price, but the ASP trend will be also in a downgrade trend, so that''s what I can comment on these questions. Thanks.

Jesse Pichel - Piper Jaffray & Co.

Okay. Thank you very much.

Miao Liansheng

(Interpreted)

Okay. Thank you.

Jesse Pichel - Piper Jaffray & Co.

Thank you.

Operator

Ladies and gentlemen, as a courtesy please limit yourselves to two questions. Now we’ll return to the queue.

Our next question comes from the line of Dan Ries of Collins Stewart. Please proceed.

Daniel Ries - Collins Stewart

Hi. Great quarter. It seems like you''ve got nearly 20% more production out of largely the same facilities that you had in the first quarter. I was wondering if you could clarify a little bit, did you get any -- you said that some new lines came on in late June, was that some of the extra production seen in the quarter.

Brian Li

Yes, there''s a small number of the modules released from the new 200 MW capacity and as always, we are spending a lot of efforts on the R&D initiatives at every single stage along the value chain, such as the 180-micron wafers and increase the yield at every single stage along the chain, increase the cell conversion efficiency rates. So all of those efforts give us the ability to yield more output on the -- over the existing facilities. So that -- also those efforts also give us upsides on the existing efforts, but the output for these quarters is coming from -- it''s coming from the capacity around the existing manufacturing facilities, and also there''s a small number of the PV modules coming off from the new 200 MW capacities. And on top of that, we also shorten the shipping time at the end of this quarter, so that also give us leverage on the shipment volume in this quarter.

Daniel Ries - Collins Stewart

Okay. So taking into account some production from those new lines, and some improvement in the shipping time at the end of the quarter, would it be safe to say that you''re operating 20% above name plate capacity at this point? And, if that is the case, are the new lines that you''re adding in late -- the second half of this year and then again in early 2009, are they on the original basis or have they taken into account the improvements that you''ve been able to get over time?

Brian Li

I won''t say 20% upside on the -- over the existing facilities and as we produced in the first quarter, we had 55 MW production output in the first quarter. So it''s almost -- it''s about 10% over the existing facilities. And we are targeting internally to maintain this similar performance as we did in the first quarter, and give upside, and then gradually increase the capacity over the existing facilities by putting more efforts through the R&D initiatives.

Daniel Ries - Collins Stewart

Okay. One last quick one. The 47 days of accounts receivable is a big improvement certainly versus last quarter as well as if we go back even to the December or September quarter. Is that the new level we should think about going forward, or do you think that that -- will it bounce around a little bit, could it trend back to 60 days, or do you think you can keep it at 50 days or so?

Brian Li

Yes, 47 days it''s very good for this quarter. As we are expanding our capacity and expanding fastly to the new markets and the emerging markets, so we are targeting internally to maintain the DSO within the range of 50 to 55 days.

Daniel Ries - Collins Stewart

Okay, great. Well, thank you very much.

Brian Li

Thank you.

Operator

Our next question comes from the line of Vishal Shah of Lehman Brothers. Please proceed.

Vishal Shah - Lehman Brothers

Yes, thanks for taking my question. Congratulations on a good quarter. My question is on your guidance, your revenue guidance. If I take the upper end of the revenue guidance and take your shipments guidance, I get a full year ASP of $3.95 per watt. So that would imply your second ASP should decline significantly. So I just want to understand what your pricing trends are looking like in the second half of this year and also 2009?

Brian Li

For the second half of this year, and we are ramping up the new 200 MW capacities, and also the foreign exchange rates between Euro and RMB and the US dollar and RMB are fluctuating from time to time. So when we are making our internal estimates, we are making -- we outperform our estimate based on a conservative basis.

Vishal Shah - Lehman Brothers

Okay. So what kind of price deductions are you seeing in your contracted work supply for 2008, and also for the first half of 2009?

Brian Li

For the second half of 2008, and as Mr. Miao commented, we have substantially contracted out of our manufacturing capacity in the second half. So we have made better visibility on the pricing level.

From what we have been seeing, we believe the average sales price in the second half will have a slight decrease from the first half level, and for the first half of next year, and we have already received the purchase orders and the letter of intent which will cover 100% of our manufacturing capacity in next year, but we have not yet fixed pricing for those contracts and our plan is to start a pricing talk and fix the price for a majority of products in late third quarter and fourth quarter. Thank you.

Vishal Shah - Lehman Brothers

Okay, great. And there''s one other question on conversion efficiency. What was it during the quarter, and what are your plans for the end of the year?

Miao Liansheng

(Interpreted)

The current conversion efficiency rate here was 15.63% and by the end of the year, we will still remind what we said earlier, it will be reached to 15%.

Vishal Shah - Lehman Brothers

Thank you very much.

Brian Li

Thank you.

Operator

Our next question comes from the line of Cheryl Tang of Goldman Sachs. Please proceed.

Cheryl Tang - Goldman Sachs & Co.

Hi. Thank you for taking my questions. There are two questions. The first is a follow-up question for capacity expansion. What we should expect capacity available for Q3 and Q4 before the completion of 200 capacity expansion?

And my second question is what is the breakdown in raw material in Q2 between raw material and non raw materials? Thank you.

Brian Li

Thanks for the questions. And for the first questions, as to the capacity ramp up plan in the second half, we are -- I would like to remind you, for the capacity ramp up, it''s a lengthy process. So the capacity won''t reach to full capacity in one day.

It will -- there is a progress, and for the capacity to gradually reach the full capacity starting from the beginning through the completion date.

So our internal target is to gradually reach the full capacity somewhere in late October or November. So that is to answer your first questions.

As to the second questions, and for the component of the poly silicon costs during two quarters, we''re not aware of significant change between these two quarters.

Cheryl Tang - Goldman Sachs & Co.

What is the percentage between the raw material and non raw material?

Brian Li

For the poly, for the poly costs, it''s about 70% to 75%.

Cheryl Tang - Goldman Sachs & Co.

Okay. And for the remaining it is non raw material right?

Brian Li

Yes. The remaining are the non-polysilicon costs, plus the warranty and the logistics and the insurance costs.

Cheryl Tang - Goldman Sachs & Co.

Okay. Thank you.

Brian Li

Thank you.

Operator

Our next question comes from the line of Kim-Chong of UBS. Please proceed.

Kim-Chong Tan – UBS

Hi. Good evening. Congratulations on a good quarter. My question is the contract that you''ve signed with Conergy for 50 MW in 2009, has the price been fixed?

Miao Liansheng

(Interpreted)

I mean, for the contract, it''s almost fixed and the quantities delivered quantity in 2009, but then we also operate a timing which is, by the end of this year we will negotiate a price for the delivery of next year. Thanks.
Brian Li

And to further supplement Mr. Miao''s explanation, and although we have now your fixed price with Conergy and the other important customers, from our initial pricing talk with those customers, we see the pricing reduction level in next year is close to 10%.

Kim-Chong Tan – UBS

Do you see your models being sold into the Germany kind of -- the (inaudible) market, which has a much lower feed-in tariff?

Miao Liansheng

(Interpreted)

Okay, you always -- I mean annual feed-in tariff equation year-over-year in Germany, but we still can say that there is a very strong demand from there.

As I mentioned earlier, that we will fully diversify our market shares where we will have more broad sales networks in the next years. So, for the South European countries, we will have approximately 30%, and with North European countries, we have about 40%, and of the remaining, 30% will go to those new emerging countries like United States, China and some other areas.

Kim-Chong Tan – UBS

Thank you. On the -- what you mentioned just now in terms of the ASP decline by about 10% going from this year to next year, can I understand is that your average expectation and your average -- of your average price of about $4 this year?

Brian Li

As we are just passed the six months of this year, so we can''t comment on -- really comment on the exact number of the ASP. But generally speaking, that would be our expectation for this year.

Kim-Chong Tan – UBS

Okay. Thank you.

Brian Li

Thank you.

Operator

Our next question comes from the line of Lu Yeung of Merrill Lynch. Please proceed.

Lu Yeung - Merrill Lynch

Thanks for taking my questions. Obviously your cash has improved quite a bit. I just want to get a sense how would you spend in the second half of this year in terms of CapEx and silicon prepayments?

Brian Li

And as to the CapEx plan and we are planning to -- we are planning for this year to spend close to $250 million to $300 million to fund our new capacities and up to now, and we have spent about 35% to 45% of the total CapEx budget.

Lu Yeung - Merrill Lynch

What about prepayments?

Brian Li

And for the prepayments, given our expectation on the supply and demand situation on the polysilicon in this year and we have -- the prepayment pattern has been switched from the previous prepayment for the long term contract to the prepayments for the short term contracts. So we -- nowadays we only -- we pay the prepayments a few months in advance before the polysilicon would arrive.

Lu Yeung - Merrill Lynch

So would you expect to generate a positive operating cash flow in the second half in each quarter?

Brian Li

For the second half, we internally expect to reach the breakeven point on the operating cash flow by the end of this year.

Lu Yeung - Merrill Lynch

Thank you. Congratulations on the quarter.

Brian Li

Thank you.

Operator

Our next question comes from the line of Sam Dubinsky of Oppenheimer. Please proceed.

Sam Dubinsky – Oppenheimer

Hey guys, just a couple of quick questions. It seems like this quarter you posted really good upside on the megawatt shipment front. If I look at your increased guidance for the year in 2H, it seems like you''re actually not increasing your megawatt shipment guidance that much for the back half of the year. Is that just conservatism or is that related to poly supply? And then I have a follow-up question.

Brian Li

It''s not a poly concerns and we have already secured approximately 90% of the total poly needs for this year based on our internal targets. So, polysilicon is not a concern for our capacity guidance.

And for the second half, the new capacity will be coming from the new 200 MW lines. As I commented earlier, the ramp-up process is a lumpy process and we are working hard internally to accelerate a construction and installation schedule and -- but as to the guidance and we believe our guidance is achievable.

Sam Dubinsky – Oppenheimer

Okay. So basically you guys are being conservative and upside is driven by production ramps, whether that''s faster or not? Is that correct?

Brian Li

Yes, I would think so.

Sam Dubinsky – Oppenheimer

Okay. And then on the currency front, it seems like your currency has been pretty volatile, some quarters up a lot and obviously this quarter it was down a lot. How should we think about that going forward and how do you hedge this currency risk? Maybe just comment on how we should model that?

Brian Li

Yes. I think as to the foreign exchange gain and loss, as we are a Chinese company and have our manufacturing facility within China, so our functional currency has to be in RMB, the Chinese currency. So that won''t be so -- in -- at the end of every quarter, we have to evaluate all the assets -- all the current assets and the current liabilities denominated in foreign currencies from the original currency to RMB. So the foreign exchange gain and loss is -- will always be there.

And us -- the -- internally, what we are doing to release this pressure is to balance the foreign currency assets against the foreign currency liability to reach a natural hedging pattern. We believe this is the best way to help the company get away from the foreign exchange fluctuation. And besides that, we are also planning to look into the hedging proposals between the Euro and the US dollar to get -- to make our operating performance more stable in the following quarters.

Sam Dubinsky – Oppenheimer

Okay. And then my last question is, can you maybe just break out your solar backlog for 2009 by geography of where your customers are selling these modules into?

Brian Li

As Mr. Miao commented earlier, we are -- we''re targeting to add, okay, about 30% of ''09''s capacity to South European countries and 40% to Germany, Belgium, and the remaining 30% to the rest of the world. These expectations are coming from the order we have received and also that was based on our strategic deployments in next year, and the year onwards.

Sam Dubinsky – Oppenheimer

Okay. Sorry about that, I missed that last part. Thank you very much.

Brian Li

Thank you.

Operator

Our next question comes from the line of Rob Stone of Cohen & Company. Please proceed.

Rob Stone - Cohen & Company

Good evening. Congratulations on the strong results.

Brian Li

Thank you.

Rob Stone - Cohen & Company

I wonder if you could just provide a little more color on your expectations for the China market, the next couple of years, not necessarily your specific level of shipments but how you see the market developing?

Miao Liansheng

(Interpreted)

The China market, the (inaudible) really depends on which type of systems you are going to install and in which area. And from next year, this -- it will be started with -- to bring the electricity to rural areas, that will stop to -- the electricity supply to 23 million populations without access to the electricity and I don''t see a very huge demand from China market in next two years.

Rob Stone - Cohen & Company

Okay. I wonder if you could provide your grams per watt in the latest quarter, and any comment on where you might target that level of silicon usage next year.

Brian Li

Our current level of the polysilicon usage per watt is already below seven grams per watt. And our target is to further reduce by another 2% to 3% by the end of this year.

Rob Stone - Cohen & Company

2% to 3% lower by the end of this year, and would you expect to continue that progress next year?

Brian Li

Yes, for next year, we are anticipating another 3% to 4%.

Rob Stone - Cohen & Company

Okay. A final question if I may. What is it that is delaying setting prices for next year? Is it customers or is Yingli waiting to see something change, perhaps finalizing the tariffs in Spain, or direction on the US market? Is there something that you''re waiting for?

Miao Liansheng

(Interpreted)

It''s our preference to now to fix the price right now because start from a couple of years ago, like two years ago, we had the fallout to fix now we''re priced for the delivery of next year in the later previous year.

Rob Stone - Cohen & Company

Okay. Thank you.

Miao Liansheng

Thank you.

Operator

Our next question comes from the line of Bert Charles (ph) of Simmons & Company. Please proceed.

Bert Charles – Simmons & Company

Hi. Good evening and congratulations on a great quarter. I guess just on the R&D front, following up. On the grams per watt below seven grams, do you have a processing cost now -- an updated processing cost at that level?

Brian Li

Yes, our processing cost is also one of the lowest in this industry and --

Bert Charles – Simmons & Company

Sure.

Brian Li

That was -- that is to support our seven grams per watt data.

Bert Charles – Simmons & Company

Okay, and is there an actual -- a dollar amount that you can give out on that right now?

Brian Li

Excluding the warranty reserve and the shipping logistic and the insurance charge, it''s below US $0.80 per watt.

Bert Charles – Simmons & Company

Okay. Below $0.80. Okay, great. And then secondly, you mentioned that your contracts for the rest of this year and some of 2009 have already been contracted. Could you let me get deeper into Spain a little more and first pricing trends in the second half of this year and 2009, what are you seeing in Spain right now? Are you seeing that there is a decrease in the ASP specifically in Spain over other countries, or what''s your perception of that trend right now?

Brian Li

First of all, in the second half of this year, no, we don''t expect to ship more -- to ship a significant percentage to Spain market. Based on our -- based on the orders we have received, it will be small numbers for the modules to be shipped to Spain market in the second half of this year. And then as to the pricing with the Spanish customers and we -- the pricing level in the second half we say will have slight decrease from the first half level.

Bert Charles – Simmons & Company

Okay. And then on 2009, are you seeing any pricing trends there?

Brian Li

For 2009, as Mr. Miao commented earlier, we have not yet fixed a price with the Spain -- with the Spanish customers. But again, as the -- as we are extending fastly to the emerging markets, and our strategic deployment for the market share in next year, and will be -- there will be Germany and Belgium of 40% and 30% to South European countries. So we don''t expect that Spain will have much impact to our company next year.

Bert Charles – Simmons & Company

Okay. Wonderful. Thank you for taking my questions. Congratulations again.

Operator

Our next question is a follow-up from the line of Vishal Shah of Lehman Brothers. Please proceed.

Vishal Shah - Lehman Brothers

Yes, thank you very much. Can you just comment a little bit on the 2009 volumes that you''ve contracted so far? I''m sorry if I missed that part, if you had mentioned it earlier.

Brian Li

For 2009 and we have not yet -- we -- the LOI and the purchase order we have already received has well covered expected manufacturing capacity for next year, but up to now, we have not yet signed a fixed pricing contract with the customers and we will do that in late third quarter and early fourth quarter.

Vishal Shah - Lehman Brothers

So the LOIs, the volumes that you''ve received, you said expected 600 MW of capacity, is that what you are looking at right now, or are you looking at further expansion beyond the second half of -- from the second half of ''09?

Brian Li

For next year, and we will -- we''ll be running the 400 MW capacity at the beginning of 2009. And on top of the 400 MW capacity, and the last 200 MW capacity, the new capacity -- the new 200 MW capacity will start to ramp at the beginning of 2009. And we expect the new 200 MW capacity will gradually reach the full capacity in the second quarter of next year. So by the end of second quarter next year, we shall have a total manufacturing capacity of 600 MW.

Vishal Shah - Lehman Brothers

Okay, great. And then just one other question on Spain. What were your shipments in the second quarter to Spain?

Brian Li

It''s insignificant, it''s well below 15% -- one five.

Vishal Shah - Lehman Brothers

Do you know -- that''s in the second half right? What about second quarter?

Brian Li

Second half. Yes.

Vishal Shah - Lehman Brothers

What about the second quarter?

Brian Li

For the second quarter, it''s almost double to the third quarter.

Vishal Shah - Lehman Brothers

Almost double to?

Brian Li

To the second half''s expectation.

Vishal Shah - Lehman Brothers

Okay. So more than 30%?

Brian Li

It''s close to that.

Vishal Shah - Lehman Brothers

Okay, great. And in Spain, the 15% shipments in the second half, are you seeing -- I''m sure the pricing is lower than the first half, is the pricing substantially lower from the first half levels or is it still down only slightly?

Brian Li

Slight decrease.

Vishal Shah - Lehman Brothers

Slight decrease from the first half? In Spain?

Brian Li

In Spain.

Vishal Shah - Lehman Brothers

Okay, great. Thank you very much.

Brian Li

Thank you.

Female Speaker

Excuse me, we will take two more questions then we will finish today''s call. Thanks.

Operator

Our next question comes from the line of Grava Mia (ph) of Credit Suisse. Please proceed.

Grava Mia – Credit Suisse

Yes hi, thanks for taking my question. There have been talks in Europe recently that few projects out there in Spain have not been able to deliver as much power as which was promised and as a result we have been hearing that few project finances has started going back to cell manufacturers and module manufacturers to ask for warranties and -- so have you also noticed this trend? Has anyone from Europe project financing team approached you to ask for your warranties?

Miao Liansheng

(Interpreted)

We do not have any such problems from our customers.

Grava Mia – Credit Suisse

All right. Thank you very much.

Operator

Our final question comes from the line of John Hardy of Amtech Research. Please proceed.

John Hardy – American Technology Research Inc.

Hey, good evening everyone, thanks for taking my call. In the answer to a previous question, it seemed like you took up your CapEx guidance for ''08 a little bit, I think you had $250 million to $270 million previously and the answer to the question from $250 million to $300 million. I was wondering if, given that increase, you''re still comfortable with cash and credit lines to ramp capacity through at 600 MW or if you think you''ll need to see some additional financing to get to those targets?

Brian Li

Yes, we''re still comfortable with the financing. As we discussed in the first quarter on the call and for the upcoming 400 MW -- for the upcoming 200 MW new projects, it''s already a self-financed project. So we are not worried about the financing.

John Hardy – American Technology Research Inc.

Great, thank you. And then, the increase in short term debt in the quarter, where is the majority of that -- those credit lines coming from? Is that from domestic Chinese banks or --?

Brian Li

Both. It''s coming from the domestic Chinese banks including the largest policy bank in China, and it''s all -- we also get new credit lines from the foreign banks.

John Hardy – American Technology Research Inc.

Great. And then one more quick question, I don''t know if you''ve answered this in any previous answers but I think that on the last call, you gave production expectations for ''09 at 560 to 570. I was wondering if you''d be willing to update that at this time?

Brian Li

We are now in -- only in the second quarter of ''08 so we''re not going to make comment on 2009''s production -- output forecast.

John Hardy – American Technology Research Inc.

Got it. Thank you very much. Congratulations on the quarter.

Brian Li

Thank you.

Operator

This concludes our Q&A session; I will now turn the conference over to management for closing remarks.

Tip Fleming

Thank you again everyone for joining the call today. If you have any additional questions, please feel free to comment back to us or the management team directly. Thank you and goodbye.

Female Speaker

Okay, goodbye.

Brian Li

Thank you

Operator

Thank you for your participation in today''s conference. This concludes the presentation, you may disconnect at this time. Have a great day.