Emeren Group Ltd (SOL) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 ReneSola Limited earnings conference call. My name is Erica and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll be facilitating a question and answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Derek Mitchell, ReneSola Investor Relations consultant from Ogilvy Financial. You may proceed, sir.

Thank you. Hello, everyone, and welcome to ReneSola's third quarter 2008 earnings conference call.

The Company's third quarter 2008 earnings results were released earlier today and are available on the Company's website, as well as on newswire services. You can follow along with today's call by downloading a short slide presentation, which can also be found on ReneSola's website at www.renesola.com.

With me today from ReneSola are Mr. Xianshou Li, Chief Executive Officer, and Mr. Charles Bai, Chief Financial Officer. Charles will be discussing the financial and business results and both Company representatives will be available to answer your questions during the Q&A session that follows.

Before we continue, please note that today's discussion will continue forward-looking statements made under the Safe Harbor Provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the Company's registration statement on Form F1 and other documents filed with the US Securities and Exchange Commission. ReneSola does not assume any obligation to update any forward-looking statements except as required under applicable law.

Before I turn the call over to Charles, please be reminded that, unless otherwise noted, all figures mentioned during this conference call are in US dollars. It's now my pleasure to introduce Mr. Charles Bai, CFO of ReneSola. Charles.

Thank you, Derek. And thank you, everyone, for participating in today's earnings call. You will find that our presentation begins on page three, with the financial and the business highlights for the third quarter.

Our third quarter 2008 results were released earlier today and I'm pleased to announce that ReneSola enjoyed another excellent quarter, with strong top and bottom line growth. I will quickly run through the financial highlights for the third quarter and then provide recent business and industry update.

Please turn to slide four of our presentation, to see our financial highlights for the quarter. Net revenues for the third quarter of 2008 were $215.8m, an increase of 25.5% sequentially and 197.4% year over year. The increase in the third quarter revenues was primarily attributable to an increase in output from our expanded production capacity and an increase in wafer ASPs.

Third quarter 2008 gross profit was $45.8m, a 19.2% increase sequentially and 190.4% year over year. The gross margin for the third quarter 2008 was 21.2%, compared to 22.4% in the second quarter. The decrease in gross margin was primarily attributable to an increase in feedstock costs, higher non-raw-material related production costs due to higher inflation and a write-down of approximately $5.3m on the value of certain raw materials.

Operating profit in the third quarter was $36.9m, an increase of 20.8% sequentially and 174.6% year over year. The operating margin was 17.1% in the third quarter, compared to 17.8% in the second quarter.

Total operating expenses in Q3 increased to $8.9m from $7.9m in Q2.

Earnings before income tax, minority interests and equity in earnings of investee for the third quarter were $37.9m, a 34.6% increase sequentially and 217.7% increase year over year.

Finance costs increased by 19% sequentially, reflecting higher interest rates. Finance costs as a percentage of net revenue decreased from 1.6% in the second quarter to 1.5% in the third quarter. The third quarter foreign exchange loss was approximately $1.2m, compared to a foreign exchange loss of $800,000 in the second quarter of 2008 due to the significant depreciation of the euro.

We recognized a tax expense of $5.5m in Q3, compared to a tax expense of $4.8m in Q2.

In the third quarter of 2008, we recognized the income in an amount of $5.2m from our equity investment in our 49% owned polysilicon manufacturing joint venture in Henan Province.

Net profit during the third quarter of 2008 increased to -- I'm sorry, increased 38.9% sequentially and 153.5% year over year to $32.4m.

Now, please turn to page six of our presentation. Looking at our third quarter business highlights, we continue to see strong demand and stable pricing for our products. Total wafer shipments in the third quarter were 102.9 megawatts, consisting of 70.2 megawatts of wafer sales and 32.7 megawatts of wafers under tolling arrangements. Out of wafer shipments of 102.9 megawatts, 52 megawatts were mono wafers and the remaining 50.9 megawatts were multi wafers.

Average wafer ASPs increased from $2.60 per watt in Q2 to $2.73 per watt in Q3.

Although our gross margins decreased slightly quarter over quarter, due mostly to higher feedstock costs, higher non-raw-material related production costs from higher inflation and a raw material write-down of approximately $5.3m, our continual focus on product and process innovation offset some of the margin pressures. We made good progress in our cost-cutting measures and capacity expansion plans during the quarter, resulting in increased operating efficiencies.

We reduced our silicon consumption rate to 6.1 grams per watt in Q3, from 6.24 grams per watt in Q2, by reducing crop and kerf losses and minimizing scrap use during our production process.

As a result of increasing costs of many of our consumable materials and spare parts sourced in China, our processing cost increased to $0.43 per watt during the quarter, compared to $0.39 in Q2.

Please turn to slide number eight, for a look at our production update.

Regarding our capacity expansion, as of our recent trading update, we completed and commissioned 35 megawatts of monocrystalline ingot and wafer capacity and 110 megawatts of multicrystalline ingot and wafer capacity on schedule. We now have annualized monocrystalline ingot production capacity of 325 megawatts and annualized multicrystalline ingot production capacity of 270 megawatts. We expect an additional 50 megawatts of multicrystalline furnaces to be delivered in Q4, which will bring us to our full year capacity expansion target of 645 megawatts in annualized ingot production capacity.

For a look at the current market conditions, please turn to page nine of our presentation.

The third quarter momentum carried through the first month of Q4 and we saw strong results in October. However, since the beginning of November, the headwind in the macroeconomic environment has begun to affect the industry. Although fundamentals remain strong, industry demand has been impacted by a variety of factors including seasonality, euro depreciation and credit market tightness.

For ReneSola, although we benefit from a lack of direct exposure to many of the negative macroeconomic factors, our business is being affected. While our international business remains stable, ASP has been under increasing pressure in recent weeks and polysilicon prices have significantly declined in China, which will translate to a lower cost base for our wafer production.

Some of our customers in China have not fulfilled their contractual obligations for scheduled wafer purchases in the last couple of weeks and we expect to work out solutions with these customers in the near future.

As part of our strategy to deal with the negative impact from weakening demand from our customers in China, we have strengthened our efforts to increase sales to international markets, through further diversifying our customer base in these markets.

Given a significant proportion of our sales are currently contracted with customers in China, the combination of these factors, as mentioned, is likely to have a negative impact on our operating and financial results, both in terms of our budgeted output and gross margin for the fourth quarter of 2008 into the first quarter of 2009, despite our stable international business.

As we look more closely at our feedstock cost project output and expansion plan in 2009, it is critical for us to remain conscious of the short-term challenges that exist within the sector and our competitive position in the sector in the long run. We will continue to focus on streamlining of our operations, improving productivity and implementing strict cost controls, while working to achieve further technological improvements to position our company to address the current market correction and for continued long-term success.

While we will continue to closely monitor market dynamics, we have been working with some of equipment suppliers to push back some of our CapEx originally planned for the fourth quarter of 2008 and the first half of 2009 into the second half of the year in 2009, in order to conserve sufficient cash in our war chest. The postponement of CapEx spending will ensure that we commission new production in line with increases in demand, once we are over this short-term hiccup.

On feedstock costs, a significant proportion of our long-term silicon supply contracts are based on market price and we should benefit from this with silicon costs continuing to fall. However, we are currently under pressure on inventory costs. As high inventory costs will jeopardize profitability and competitiveness, we may take steps to further write down some of our raw material inventory in the fourth quarter, if poly prices continue to fall.

We believe implementation of these measures will help minimize our potential negative exposure and will enhance our leadership in the industry in 2009 and beyond.

We are confident that current challenges in the industry are temporary and the mid to long-term prospects remain strong, particularly as lower production costs and ASPs along the solar value chain should significantly increase demand and lessen the industry reliance on government subsidies. Current challenges facing the industry create opportunities for ReneSola to capitalize on its robust business model to become even more competitive in the industry as we continue to prudently manage our business to ensure continued profitability and productivity in 2009 and beyond.

As stated in the press release, the Company's cash position remains healthy and our funding availability is further strengthened by the additional credit facilities from ICBC and the Agriculture Bank of China, two of China's largest banks. With the new credit lines, combined with our existing credit facilities, we now enjoy credit lines of approximately CNY2.8b in aggregate. Liquidity preservation remains one of our top priorities in this environment, and our healthy cash position and strong balance sheet provide us with the foundation to ensure our continued future success.

Moving to page 10 of our presentation, and our guidance. We've anticipated the impact of the current industry environment on our operating and financial results for the Q4. We have been working on executing the measures stated earlier. We maintain our full year output and revenue estimates for 2008. Annual production capacity is expected to be in the range of 340 megawatts to 350 megawatts, and the annual net revenues are expected to be in the range of $640m to $670m.

While we are maintaining our 2008 outlook, we do not believe it would be prudent to provide guidance for 2009 at this time, given the limited short-term visibility brought about by the current industry environment and highly volatile global financial situation.

As we look ahead to the end of 2008 and 2009, there are sure to be many challenges within the industry. We believe that many of these challenges will be short lived. And while we will continue to prudently manage our business to ensure our long-term competitiveness, we're excited about opportunities that will also come about in 2009. Although the industry is experiencing short-term challenges, the long-term effect should help lead to lower costs for solar power and rapidly increasing demand by customers.

The expansion of the eight year US investments Tax Credit also sends a strong signal that demand in the US is poised to increase and the country should begin to assume a greater role in solar power consumption. Some other countries have also stepped up their fiscal support to solar power consumption. For example, French government announced yesterday that they will provide a 20 year feed-in tariff to increase installed capacity from 50 megawatts in 2007 to 5,400 megawatts in 2020.

At this time, we're happy to take your questions. Operator.

(Operator Instructions). And your first question comes from the line of Sanjay Shrestha of Lazard Capital Markets. You may proceed.

Great, thank you. Good evening, guys. Good quarter. A couple of quick questions. When you were talking about some of the non-material related costs that are impacting your gross margin in Q3, are you talking about the ramp-up costs because you're aggressively adding capacity during the quarter? Is that just what you're referring to or was there anything else other than that?

No, this is essentially related to the consumables during our wafer production process.

Okay, okay, okay. All right. Now, in terms of the guidance here for the full year, you're still talking about 340 to 350 megawatt of shipment and that implies about, call it, 120 megawatt in Q4. What are we thinking in terms of the tolling business versus the wafer sales? And how much of that is already accounted for by the end customers at this point in time? And what do you think is going to be the level of ASP reduction that we might see from Q3 to Q4? Hello?

Sorry, Sanjay. Yes. We -- the guidance we have is in terms of output. It's 340 to 350 megawatts, as you mentioned. But when you look at the total accumulated output from the first three quarters, actually our -- we can hit a target of the annual -- low end of our annual output guidance, about approximately 100 megawatts.

Got it.

We do expect that the tolling production should be increased to approximately 50% of this should be in tolling and the remaining to be on wafer cells.

Got it. And that's probably in line with your strategy of increasing the international sales and that's why the tolling business is going up?

That's correct.

Okay. Great. One other -- two more quick questions, if I may. So, in terms of the postponement of the CapEx planned for next year, which by the way is the right thing to do given the environment we're in, so do you have any existing prepayments that you have to make for that? Or all those prepayments have already been made and that's why your cash flow from investing activities was as negative as it was during Q3, so there is no more commitment left?

Well, actually, most of the equipment contracted for 2009 have been either prepaid or usually (inaudible). Okay? And however, we still have a portion of equipment which we have not made the payment yet. And currently, we are renegotiating with the equipment suppliers to find a solution to push back the CapEx planned towards the second half of 2009.

Got it. Got it. One last question, then, guys. In terms of that inventory build in Q3, a two-part question. What is the average cost of that and is there a chance that we might see some meaningful write-down on that, given the reduction in the -- ongoing reduction in the poly prices? And two, what's the mix of it? How much of that is raw material versus the finished goods?

The inventory average cost we have right now is about $280 per kilo. And we -- obviously there's a combination of different things in the inventory. I'll give the number here. The -- hold on a sec. We have approximately 850 tons in raw material and the remaining is the consumables and WIP and finished goods. And finished goods is relatively small.

It's pretty small, okay. Okay, so all right. That's terrific. I'll hop back in the queue. Thanks a lot, guys.

Yes. Thanks, Sanjay.

Your next question comes from the line of Jesse Pichel from Piper Jaffray. You may proceed.

Hi, good evening. Also congratulations on a strong quarter. Going to that poly question, your poly cost in Q3 was about $280. How will that trend in Q4 and Q1, at this point?

Thanks, Jesse. I refer this question to Mr. Li.

Thank you.

Are you talking about the spot poly or are you talking about input cost?

Input cost. Or maybe first confirm, is that what you mentioned before, $280 a kilo, is that your input cost?

Yes. Our input cost is $280 per kilo in Q3. And Mr. Li just said that we expect the cost is going to come down in Q4, to be in a range about $260 per kilo.

But is that because that's your average cost in your inventory or is that the price at which you're buying poly? It looks like spot poly prices are between $200 and $250.

Yes, this is the average cost for Q4.

So, it's the average cost. Well, what is the last in cost for Q4? In other words, what are you buying it for?

Current spot is about $200 per kilo (multiple speakers).

$200 a kilo.

Yes.

So then, would it make sense then to write off, mark down your inventory down to that $200 level, the LIFO liquidation type of method, and then you'll be able to lower your ASPs then and maintain a pretty good margin?

Yes. Well, as I said earlier, that if the poly cost continues to fall, obviously we will consider to write down some of the raw material inventory for this quarter. But the visibility of where the poly cost is going to go is lacking. So we're monitoring the situation (inaudible). We'll make decision later on.

You had a JV income from your poly JV in Henan. Could you give us some of the details behind that? How much poly did they make and what were the revenues and the profits there?

Hold on a sec. Let me double check. Right, so just to translate.

(Interpreted). Henan is a JV project for ReneSola. In the third quarter, the output production from Henan was about 60 tons. And the investment income recognized from this JV was about $5m for the third quarter.

Did you say the first quarter they made 60 tons or the Q3 they made it?

Third quarter 2008, 3Q '08.

3Q '08.

That's right.

And what is the outlook for fourth quarter '08, for this plant?

(Interpreted). Okay. Fourth quarter, the production out of the Henan JV, we're looking at between 60 to 90 tons for fourth quarter. And the actual investment income recognized will be comparable to that of third quarter 2008.

Okay. So, Charles, are you using some of this poly internally and can that lower your average poly cost down further, below what spot is trading for, at $200?

Well, we have been doing this many months, since the JV is operational, and it's really helped bring down the average raw material cost. As you can see, our raw material cost was constantly lower than the spot and that was a contributor from the JV.

How much of it do you get - 49% of it or at cost or some transfer price?

Well, we actually amended our investment agreement in June, [when I remember] of the situation there. And we -- as a result of that amendment, we are actually paying the spot market price for the JV to the delivery of the poly to us.

You're paying spot from the JV that you own?

That's right. But the trade-off is that we actually shorten the investment period from 30 years to three years. And also, our -- the option obligation is reduced from 90% to a minimum of 55%. We believe this is a strategic good move for us, given where the poly cost will be in the future and probably newer technology, fast polysilicon production, will (inaudible). So we believe we made a good decision.

Right. Thank you very much.

Thanks, Jesse.

Your next question comes from the line of Lu Yeung from Merrill Lynch. You may proceed.

Hi, Charles. Hi, Mr. Li. Can you update us on what you're doing with your poly suppliers? Are you renegotiating some of the prices with them?

And also, one question will be what kind of margin pressure that you see from the tolling business?

And third will be what will be your plan for the polysilicon ramp for next year?

(Interpreted). First of all, as you know, we have a contract with Yongxiang. The pricing mechanism is 90% of spot price. So, actually, the procurement cost from us will be pegged to spot market price.

Right. And for the contract with Daquan we signed at $200 per kilo and for now [optimum] price is still at around this level in the spot market. So if spot price continues to fall, we do not exclude the possibility to renegotiate the contract price with Daquan.

Right. With regards to the margin on tolling business, according with the client, the [tolling] ASP will be seeing some margin pressure but we don't see it as a significant margin erosion in the coming quarter.

Originally, we're planning for 3,000 tons of poly production in Sichuan and, as Charles just mentioned, we have pushed back some of the CapEx plan. And initially, we're going to focus on the first 1,500 tons first, so just jump to -- in short, our poly production for next year will be less than what we previously expected internally.

Okay. Thank you very much.

Thanks, Lu.

Your next question comes from the line of Sam Dubinsky from Oppenheimer. You may proceed.

Hi, guys. Just a couple of quick questions. In terms of the inventory -- potential inventory charge for next quarter, what could the effect be on gross margin, if you can maybe just quantify that?

Sam, I think at this moment it will be difficult for us to go to the impact on the gross margin because the decision has not been made whether we want to do inventory write-down. It depends really on the market poly price, where it goes.

Okay. And then maybe, in terms of your lower CapEx plans for next year, I know you said it's going to impact your internal poly ramp a little bit. Could you maybe just discuss the linearity of your capacity expansion for next year and also how much internal poly you expect at this point versus previous guidance?

Yes. Just following on what Mr. Li said earlier, that we postponed the 1,500 tons of polysilicon production capacity towards the later part of the 2009. And the output from the 1,500 tons for the full year 2009 is expected to be around 750 tons.

Okay. And then, in terms of your linearity of your capacity expansion for next year?

Well, the capacity expansion right now, we will still look at the different scenarios here. Obviously, we have not decided to reduce our capacity target. By the end of 2009, we still maintain the target of 1 gigawatt. But essentially, it is pushing back towards the later part of the next year.

I'll just give you the [gratitude] of the reduction, of pushing back of the CapEx, for example. The Q4, the original plan or budget was $160m. In the revised figure, right now, we're only paying $120m instead of $160m. Now, going forward in the second quarter -- in the first quarter 2009, original plan is to be -- first half, I'm sorry, first half of 2009 is about $160m. Right now, we actually budget about $70m.

Okay. And then, could you maybe just disclose how much of your 2009 output so far is contracted and -- or based on your internal forecast?

Currently, we have about 65% of our planned output. The low end of it's 640, 650 megawatts in 2009 contracted out, which is about 365 megawatts.

Okay. And is this pricing being renegotiated with clients right now or is this firm pricing?

The pricing actually is firm, but in a certain contract there is a carve-out where the renegotiation of contract will be triggered once the benchmark is triggered.

Could you maybe just disclose, for now, what the price degradation you're expecting for 2009 is, based on current assumptions?

I'll refer this question to Mr. Li.

(Interpreted). You're referring to polysilicon price outlook for next year?

Yes, I'm referring to your wafer pricing so far, with the contracts that you have committed. What type of ASP declines, of that 65% that's committed?

(Interpreted). Our contracted wafer per watt pricing for next year, averaged out, is around $2.30 per watt.

Okay. And that's firm, that's not supposed to be lowered or that could be lowered based on the market environment, correct?

(Interpreted). Actually, it is possible that we and our customer could go into negotiation on the wafer price on contracted that we just provided you, $2.30 per watt. But what we believe is that there's a great price elasticity of demand. So if wafer price continued to fall, then the market demand will continue to proliferate in the long run and that should act as a good buffer in terms of pricing erosion trend.

Okay. And my last question is, just for 2009, what percentage do you expect for tolling for now, of your output, of your contracted output?

(Interpreted). We are still reiterating our target. About 150 megawatts will be tolling in 2009.

Okay. Thank you.

Thanks, Sam.

Your next question comes from the line of Titus Menzies from Libertas Capital. You may proceed.

Good morning, gentlemen. Thank you for taking my call. I have a couple of questions just to run by you. Firstly, in terms of the current production rate and in terms of outlook for next year, how much -- what would you say will be your utilization rate going through into Q4, as you see current demand slowing down, and into the first half of next year in terms of production as a percentage of sales?

(Interpreted). For a standalone, this month, so far, our utilization rate is still maintained at above 70%. Actually, we are still maintaining a relatively optimistic view on next year, based on price elasticity of the demand. Each notch, as the pricing of (inaudible) falls, there will be further demand proliferation to be triggered. So, we're still optimistic.

Okay. I guess the question then is, in terms of your end customer, your -- obviously there's news out in the press regarding France looking to deploy up to 300 megawatts of photovoltaic modules between now and 2011. In terms of your customers, what's the exposure to the French utility base? Do you have that visibility at all?

No, we don't. The French government initiative is only announced yesterday and we don't have direct information as to what are our total exposures to French market.

Okay. Then I guess the next question is in terms -- just in terms of your guidance for Q4, obviously, in terms of sales, you're looking for between -- you're looking to give guidance probably of $640m to $670m and that moves to roughly about $140m, $145m for Q4 itself. In terms of the erosion, or your sequential erosion in the sales, how much of that is a result of just wafer outputs being cut, or ASPs coming down?

(Interpreted). Right. In terms of the decline of revenue in the fourth quarter, to categorize it, about 20% of the impact will come from ASP decline and the rest will come from the fact that we are currently negotiating -- renegotiating some of the contracts to be fulfilled by our customers. We're still trying to nail those down and that will impact our production for fourth quarter.

Okay. So will that mean that, in terms of Q4 numbers, if you're renegotiating, that means the numbers -- your guidance for $140m basically is the bottom end of range, so it could be -- when the prices of the contracts are finalized between now and delivery, it could be materially higher than that?

Well, actually, in the first three quarters, the total cumulative sales is about $512m. And we provided guidance in a range of $640m and $670m, so let's stick to the low end of the $640m. $640m minus $512m, so the revenue worked out for us is about $128m.

Okay.

So, with the -- Mr. Li just explained that because of the price elasticity here that if we're willing to lower our wafer ASP, we actually -- we feel fairly confident that we can make more sales -- make sales in this quarter, to hit $128m in revenue.

All right. So I guess the last question I wanted to ask you, in terms of the poly ASPs, which were, I guess, as you were going through the third quarter were in the $350 to $400 per kilo range. Early November, it was around about $250 to $300 and, as you alluded, now it's $200. What is the key driving metric to -- which is pushing the prices down so fast? And how do you see -- what would you envisage as a realistic price, as you come out of the end of the December quarter?

And I guess a follow-up question is what are you doing currently in terms of trying to offset that ASP erosion in terms of trying to support margins?

(Interpreted). There has been a short-term disruption in the pricing mechanism of polysilicon, just in the past two weeks in China specifically, because some major Chinese solar manufacturers actually have decided to reduce their production output. And that has led to imbalances in polysilicon supply/demand channel in China and that's what led to the fast drop of polysilicon price in the past two to three weeks.

Why this short hiccup in end demand in China for the module manufacture is two reasons. One is the more tightening of credit line in China from banks and then the seasonality issue is one factor.

Do you mean -- how much more erosion do you think that poly prices will go by the end of Q4?

(Interpreted). Titus, could you repeat?

Yes. Do you mean -- do you -- if the poly spot price is now in between $200 and $250, do you see it by the end of the fourth quarter, by December end, being $150?

(Interpreted). We have sort of sniffed the signal that polysilicon pricing has already started to stabilize. So it's difficult to say, as they continue to fall towards the end of the year, but as polysilicon price falls and system price falls, demand will be further triggered. And it's difficult to say at this point, but we see -- we do see signs of stability in terms of polysilicon pricing.

Okay. So, I guess my last question is this. If -- assuming that poly has fallen now to $200 and only marginally more erosion between now and end of the year, now, obviously the key thing for you guys in terms of offsetting the price erosion is obviously the ramp in your internal facilities. How much -- since you're cutting back in terms of how much you are going to ramp for next year, how much will -- do you see gross margins playing out next year on the back of a reduced internal poly use and more of external purchase? Should we be looking at gross margin for next year to look at coming in below 20%?

(Interpreted). Simply looking at in the near-term scenario, I think that our wafer industry decline will be slower than decline of polysilicon. Right? So, in a way, it's going to be contributional to our margin and we do see margin stabilization in one or two quarters or so down the road.

Wonderful. Thank you very much, gentlemen.

Thank you.

And your next question comes from the line of Michael Chou from Deutsche Bank. You may proceed.

Hi, Charles. If I look at your output and the revenue for this year, right, it seems as if that the Q4 is down 20% to 25% quarter on quarter. I don't know if that's a right assumption or you think this steep decline should be more moderate, that kind of magnitude. Thank you.

Michael, I think it's, as Mr. Li mentioned earlier, it's a combination of two things. Primarily, it's because of the customers. Some of the customers are not honoring the contractual obligations. And so we have a challenge, obviously, to fill the gap. We're actually -- compared to our internally budgeted, obviously we are not going to hit the target. But we are very confident that we can actually achieve the provided guidance range.

Okay. But if that's the case, based on what you highlight for your Q4 poly cost, so you can do the calculation, it seems that the ASP's down quite significantly in Q4. So, does that imply your Q4 gross margin should be down about 2% to 3%, at this point?

I think, Michael, it's difficult for us to provide an exact range of numbers to you, because we have not concluded agreements with our customers, some of our customers, with regard to the new wafer ASP. So I think it's very challenging for us to provide the range.

Okay. Regarding Mr. Li, just highlight the -- he thinks the gross margin should stabilize in one or two quarters, if the poly cost should be down much faster than wafer ASP. So, is it fair to say that if the end demand continues to weaken, we can see that kind of scenario.

Can you repeat the later part of the question? What scenario we would (multiple speakers)?

My concern is if the demand continues to weaken, then the wafer ASP may continue to drop, right, because of definitely the ASP should be the function of the demand and supply. My concern is if the end demand continues to weaken going forward and there's no significant signs for recovery, even as Mr. Li just highlighted it seems that the demand is stabilizing because the ASP dropped a lot recently. So, what we see, especially Europe region, the demand actually continues to weaken. So, if there's no signs of the recovery, is that possible we will see the margin downtrend even until second half '09, even with the internal polysilicon ramp-up?

(Interpreted). So, in general, Mr. Li means that the stability of the industry is based on price elasticity of demand. So, he still believes that as the pricing along the supply chain, the cost along the supply chain, be it poly, be it wafer, be it margin, as it falls, further demand will be proliferated and triggered, right? That is what this industry has survived on since its establishment. We are approaching the end of the worst time and that scenario that you just described to us should be unlikely.

Okay. One question. Do you expect ASP issues stabilizing in Q1 next year, for wafer ASP?

(Interpreted). We've already approached a lot of our customers and the general sign is that we do see signs of ASP stabilization into end of November, early December, or even a slight rebound around that timeframe. So we think that, pricing-wise, it could be stabilized pretty soon.

Okay. Do you have any information regarding your build-up, if you (inaudible). Is it possible you can discuss that?

You'll have to repeat your question, due to the (multiple speakers).

Do you still have any build-up on hand of things that -- you say the demand -- I mean ASP in Q1, based on what you say, is stabilizing, maybe see some rebound in Q1. So any signal we can see to tell how the ASP should stabilize in Q1, like your order on hand or any order visibility?

(Interpreted). Right. In terms of pricing stabilization, a portion of our wafer to be sold, the pricing has been contracted already in the first quarter. We've visited many of the customers. As you saw, we have already regained massive orders by the end customers. So we do this trend as a sign of demand recovery in the long run. Modules are still being sold and cells are still being sold, so we do see that ASP could gradually stabilize into first quarter.

Oh, many thanks. I have no further questions. Thank you.

Thanks, Michael.

Thank you.

Your next question comes from the line of Emily Liu from Arete Research. You may proceed.

Hi. Thank you for taking my question. I have a quick question regarding your target output of 100 megawatt for fourth quarter. I think you briefly mentioned 50% of that would be for tolling and the other 50% wafer cells. Can you disclose what percentage, of the 50% wafer cells, how much goes to spot market, how much is contracted?

(Interpreted). Yes. As Mr. Li's mentioned previously, right now it's a question of whether this customer will fulfill their obligation to buy this wafer from ReneSola in the fourth quarter. So, so far, the firm wafer to be sold, our own wafer production to be sold in the fourth quarter, we've now secured 30 megawatts already out of the -- 35 megawatts already out of the 50 megawatt target.

Right, okay. Okay, thanks. And as that (inaudible), that leads to my other question. Because I know in China some of your clients are not honoring their contracts and they actually tried to renegotiate price with you and you have to -- you in turn have to negotiate your price with poly suppliers. I just wonder, what is the likely scenario that you have in mind? What if your clients don't want to fulfill their contracts? What's -- is there going to be any legal action you're going to take or what do you think will happen in the end?

(Spoken in Chinese).

Because I know some of the clients already stopped giving you extra prepayments, sort of thing. I wondered whether that is true or not. And I wonder whether in your contract you have take or pay clauses in any of your contracts.

(Spoken in Chinese).

Okay.

(Spoken in Chinese).

(Spoken in Chinese).

(Interpreted). In general, what Mr. Li said is that of course, if the customers do not honor their contracts, there should be penalties based on the contract itself.

Right.

(Interpreted). So we have to understand that this is very rare and we believe that it should be a relatively short-term hiccup in the industry development.

Okay.

(Interpreted). So (technical difficulty) decide that we should take further actions on this or we should just consider it as part of difficulty that the whole industry is going through and it's just sustaining a longer partnership with the customers in the long run.

Okay. And actually, I have a quick follow-up on the tolling business. That previously, and other analysts mentioned this, is your effort to broaden your customer base to international clients. Is in Europe and do you have a euro exposure, euro hedging policy related to that?

Emily, we do have customers in Europe. But actually, currently the contract volume is relatively small.

Okay.

But that -- we want to and wish to push into international market. Our exposure to euro, our exposure is less than 4%, based on the contracts we have signed. Obviously, if we have a new contract in Europe with European customers, we would look into the hedging of potential exposure.

So it's 4% of revenue, less than 4% revenue exposed to euro?

Exactly.

And the tolling is for domestic customers?

Tolling, we have a combination of international and domestic customers here in tolling.

Okay. International, does that include Taiwan?

No.

No. Okay. So, US dollar contract or RMB contract?

Yes. Well, our tolling contracts are primarily denominated in USD. I don't think we have tolling contracts denominated in euro.

Okay. Great. Thanks. Thank you for taking my question.

Thanks.

Your next question comes from the line of Paul Leming from Soleil Securities. You may proceed.

Good evening and thank you. I was just wondering if you could expand at all on your comments about customers not meeting contractual demands. What volumes are we talking about here that have not been met? And are these top-tier or what you would consider second-tier customers?

And finally, do you think it's truly a pricing issue that has driven these customers not to meet their contractual obligations? Or is the final demand for the cells and modules that they convert your wafers into not there?

(Interpreted). For now, what we see is that the offshore customers, right, those located out of China, they are fulfilling their obligations 100%. Most of our domestic Chinese customers, most of them, to a certain degree, are dishonoring their contracts. This is a demand issue. It's not a pricing issue. So when our customer, Chinese customers, regains the traction of business activity with their customers, then they should keep buying wafer from us.

And if I could ask on a separate topic. On the polysilicon consumption per watt that you cited in your press release, I'm just curious what wire saws and wafer thickness are you operating with today? And what conversion efficiency or cell efficiency are you assuming to come to that gram per watt calculation? What wattage output are you assuming for your wafers, to get to that grams per watt calculation?

(Interpreted). Okay. Just repeat, for third quarter our silicon consumption per watt was 6.1 gram. And before the end of this year, we should reach below 6 grams per watt. In terms of wafer thickness, for our mono production we're all 100% at 180 micron. And for multi, we're in a relatively swift transition from 200 to 180. In terms of wire saw thickness, almost -- in most of our wire saw machines, we're now using 0.1 micron wire saws to slice the wafers.

0.1 micron?

(Interpreted). And our cell efficiency -- our wafer efficiency in general has surpassed 17% already for the -- yes. Okay, so in general, for customers who use our wafers in their mono-cells, the efficiency rate has achieved over 17% already. For multi, it's about 15.5%.

And I'm not sure I understood the answer on the wire saw thickness. What was the thickness on the wire saws?

(Interpreted). It's 0.1 millimeters, which is the diameter of the spring.

Okay. Thank you very much.

And your last question will come from the line of Dan Lee from Collins Stewart. You may proceed.

Hi. Actually, Paul asked one of my questions. But from your answer, are you saying that the Chinese customers are telling you that they're having a demand problem and that even if you were to reach a price point of, say, $1.85 a watt or something like that, that right now they would not take wafers at that level? And going -- are they not giving you a price where they say they would take it? Are they just violating the agreement at this point, I guess is the question.

And then second, with polysilicon having freed up a bit and the price coming down, will you change your target level of inventory days next year? 140 to 160 days seems like it's set for an environment where there was a potential for a shortage. How will you change that target days in 2009?

(Interpreted) Please hold on one second. You're right. For the short-term hiccup, it is a demand issue from the customer. It's not a pricing issue. Mr. Li wanted to reemphasize.

Okay.

Dan, let me answer to the second question on the inventory days. Obviously, we have increased the usage or consumption of the inventory raw materials. And we do expect that the inventory days is going to drop next year, along with our further depletion of our inventory raw materials.

Is there a range? Will it be 100 days, will it be 80 days? What would you expect to target?

I think, right now, we have -- based on the third quarter, we have about 160 days in inventory days.

Right.

And obviously, we'll try to lower that to 100 -- to probably 140 days next year.

Okay. Thank you very much.

Thanks, Dan.

And this concludes the question and answer portion of the call. I would now like to turn it over back to management for closing remarks.

Thanks. In summary, although the short term presents a pressure on revenues and margins from decreasing -- in decreasing the feedstock prices and our ASP, and additional challenges due to the global financial situation, we remain confident in the mid and long-term prospects of the industry. And we're taking the steps necessary to ensure ReneSola is well positioned to capitalize on future opportunities.

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any other investor relations representatives. Thanks. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.