Trina Solar's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.26.13 | About: Trina Solar (TSL)

Trina Solar Limited (NYSE:TSL)

Q4 2012 Earnings Conference Call

February 26, 2013 08:00 ET

Executives

Kevin Zhang - Manager, Investor Relations

Jifan Gao - Chairman and Chief Executive Officer

Terry Wang - Chief Financial Officer

Zhiguo Zhu - Senior Vice President and President, Module Business Unit

Analysts

James Medvedeff - Cowen

Brandon Heiken - Credit Suisse

Vishal Shah - Deutsche Bank

Amir Rozwadowski - Barclays

Sanjay Shrestha - Lazard Capital Markets

Mahesh Sanganeria - RBC Capital

Pranab Sarmah - Daiwa Capital Markets

Amy Song - Goldman Sachs

Aaron Chew - Maxim Group

Shar Pourreza - Citigroup Global

Gordon Johnson - Axiom Capital Management

Operator

Good morning everyone. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome you all to the Trina Solar Fourth Quarter and Full Year 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’d now like to turn the call over to our host, Mr. Kevin Zhang. You may begin your conference.

Kevin Zhang - Manager, Investor Relations

Thank you, operator. Good day to all and welcome to Trina Solar’s fourth quarter and full year 2012 earnings conference call. On behalf of Thomas Young, this is Kevin Zhang, Trina Solar’s Manager of Investor Relations. With us today are Trina Solar’s Chairman and CEO, Jifan Gao; Chief Financial Officer, Terry Wang; and SVP and President of Trina Solar’s Module Business Unit, Zhiguo Zhu.

Before I turn the call over to Mr. Gao, may I remind our listeners that in this call, management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we will refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent management’s estimates as of today, February 26, 2013. Trina Solar assumes no obligation to update these projections in the future as market conditions change. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days at the Investor Relations section of Trina Solar’s website at trinasolar.com.

With that, it is my pleasure to turn the call over to Trina Solar’s Chairman and CEO, Mr. Jifan Gao for our fourth quarter opening remarks.

Jifan Gao - Chairman and Chief Executive Officer

Thank you, Kevin. And thank you everyone for joining us today. During the fourth quarter, supply demand imbalance and aggressive pricing in the marketplace continued to impact our business and financial performance resulting in negative loss. In such environment, we have made important in key operating areas such as the inventory management, account receivables collection, and manufacturing cost reduction. (indiscernible) of our effects we achieved around $75 million positive operating cash flow in the fourth quarter.

In fourth quarter, we show positive effects of our streamlining and the structured effects in our global business units. Further progress was also made in the advancement of our in-house system business opportunities in China and the Americas, which include our recently announced 50-megawatt project in Gansu Province. Despite challenging market conditions, including challenges in government policy in some European markets, we believe continued improvements through low gross margin and the total system costs will drive increased global demand in 2013. At the same time, we see increased PV adoption in new markets with the Africa, the Americas, and the Middle East. We are also encouraged by recent announcements in Asia, mostly notably in China and Japan that the governments are encouraging solar energy and raising targets in order to increase solar power’s contribution in grid power.

In the fourth quarter, our China shipments grew sharply, accounting for around 32% of our revenue. For 2013, China has announced a 10 gigawatt installation target, under this supportive environment, the company looks to capture more domestic opportunities in post-utility scale and distributed PV projects. Into the New Year, we continued to execute our strategy to expand our projector systems in this – as a percentage of our overall revenues. Additionally, where we will drive new products owned from our innovation and research such as frameless fiberglass module. Lastly we will expand service and solution confidence through partnerships with the PV industry leading global technology developers. These efforts were recently recognized by Fast Company Magazine, which named Trina Solar in the list of the world’s Top 10 most innovative companies in China.

In summary we believe such a business development and revenue strategies combined with our long-standing attention to maintaining balance sheet strength will further solidify our Trina Solar’s position as brand and a partner of choice across these end user segments.

With that I would now like to turn the call to our CFO, Terry Wang, to share our fourth quarter 2012 financial results and other updates. Terry?

Terry Wang - Chief Financial Officer

Thank you, Mr. Gao, and welcome everyone to our call. I would like to present an overview of our fourth quarter and full year financial results followed by the company’s guidance for the first quarter and full year of 2013. Due to lingering supply demand imbalance effect and aggressive pricing in the marketplace, the fourth quarter saw continued ASP declines. Our costs improved noticeably, which help us maintain positive gross margin. But due to higher carrying costs for some of our inventory, gross profits were insufficient to cover operating expenses resulting a negative operating and the bottom line income.

We achieved module shipments of 450 megawatts, which exceeds our upper range guidance of 380 megawatts to 400 megawatts and the total net revenue of $302.7 million in the fourth quarter, quarter-on-quarter volume increased approximately 9%. Impacted by market ASP reductions and higher carrying costs inventory, our gross profit was $5.6 million, a sequential increase of approximately 140%. Overall, gross margin was 1.9%, in line with our previous guidance of low-single digits in the percentage terms and improving from 0.8% in the third quarter.

Reflecting our restructuring and the cost control measures introduced in second half of 2012, we recorded a 2.9% drop increase in operating expenses to $76.1 million, which includes accounts receivables provision of $14.5 million. Excluding this provision, our G&A reduced over by $12 million or approximately 32% against our normalized third quarter rate.

As I mentioned in our last call, we expect further improvement of normalized G&A expenses in this first quarter as a result of further streamlining our expenses saving initiatives taken in the fourth quarter and the 2013 to-date. Overall, we incur operating loss of $70.4 million in the fourth quarter compared to a loss of $76 million in the third quarter. Our fourth quarter net loss was $87.2 million, which with corresponding net margin of a negative 28.8% compared to our third quarter loss of $57.5 million. The bottom line result was substantially impacted by valuation allowance for deferred tax assets.

Fourth quarter net loss includes a gain of $0.6 million from our repurchase of approximately $5 million of our senior convertible notes due July 2013. Earnings per fully diluted ADS was negative $1.23, of which effect of net foreign currency exchange gain was $0.07. Despite the market environment changes, we fundamentally improved several key effects of our first quarter operations in the balance sheet, which I will touch on next. Our global sales diversification improved significantly. Euro-denominated revenues comprised only one quarter of our top line alongside the US sales approximately 30%. We experienced greatest sales growth in Mainland China, which accounted for approximately 32% of sales in the quarter.

Moving to our balance sheet, our cash and cash equivalents and the restricted cash balance rose to approximately $980 million as of December 31 from $703 million in the September, while working capital balance decreased to $286 million from $361 million previously. Due to our strong fourth quarter sales and inventory management, we reduced our inventory by $49 million to $390 million as of December 31 whilst we lowered our accounts receivables by over $79 million or approximate 17% to $390 million. In total, these factors contributed to our achieving positive operating cash flow of approximately $75 million in the fourth quarter. As stated previously operating cash flow remained our focus area for us in 2013.

Moving to financing activities. In the fourth quarter, we were granted a year $170 million and the full year $80 million of facilities by China Development Bank, a facility for working capital purposes. We draw down approximately $220 million from these facilities at December 31 which contributed a positive financing cash flow approximately $165 million in the fourth quarter.

For our full year 2012 results, total shipments were at 1.6 gigawatts, an increase of 5.4% from 1.5 gigawatts in 2011, and then up end of our most recent full year guidance. Year-over-year total revenue decreased to $1.3 billion from $2 billion in the 2011. Full year 2012 gross profit fell to $57.2 million from $332.6 million in 2011, representing a gross margin of 4.4% compared to 16.2% a year ago. Operating loss for full year 2012 was $261.9 million compared to operating income of $31 million in 2011.

Net loss for full year 2012 was $266 million compared to a loss of $37.8 million in 2011. This was primarily due to lower year-on-year gross margin resulting from ASP declines, in excess of our cost improvements combined with the increase of operating expenses as a percentage of net revenue in 2012. As a result of the above, losses for fully diluted ADS were negative $3.77 for full year 2012, compared to $0.54 in 2011. Total CapEx for 2012 was approximately $160 million, this is below our $170 million estimate made in our last call and notably less than our original forecast of approximately $200 million we made a year ago.

This brings us to our guidance for the first quarter and the fiscal year 2013 as follows. For the first quarter of 2013, we expect our shipments to be between 400 megawatt and 420 megawatt and 430 megawatt. We expect our overall gross margins to be lower-single digit in the percentage term such guidance is based on the average after tax rate between euro and U.S. dollars from January 1st to February 26, 2013. The company expects a total PV margin on system deliveries of between 2 gigawatts and 2.1 gigawatts and for full year of 2013, representing an increase approximately 25.5% to 31.8% from 2012.

Turning to cost per watt, our plant in non-poly costs including depreciation decreased approximately $0.51 per watt from $0.54 in the third quarter. Our silicon costs fell to $0.10 per watt from $0.30 in the third quarter reflecting our lower cash purchase cost. We continued to renegotiate with our suppliers with regard to long-term silicon supply agreements and we expect to maintain competitive silicon costs relatively mark to market prices. For the first quarter 2013, we expect that our silicon costs to stabilize due to supply demand readjustment compared to demand 2012.

In terms of CapEx, we currently have no plans of capacity expansion in 2013. Lastly, to update on our system business, we continue to examine and expand our opportunity pipeline in our four global operation regions. This involves increasing (field pace), awarded PPA tenders with EPC partners in Americas as well as a separate in-house developments and the various partnership models, which can be bundled with our module products or third-party execution. In China, we were pleased to announce our 50 megawatt Gansu with rights assignments. We’re also progressing a larger scale project here in Gansu Province, which we hope to formally announce soon.

With that, I would like to turn the call over to our Module Business Unit President, Mr. Zhiguo Zhu to update you on our commercial and manufacturing and product developments. Zhiguo?

Zhiguo Zhu

Thank you, Terry and hello to everyone on the call. It’s my pleasure to update you today on our commercial manufacturing and products. Overall, we are pleased with our commercial execution in the first quarter, given really importance of aggressive and irrational pricing by some competitors. We maintained strategic focus on profitable sales to higher volume segments and customers in new and existing markets, while increasing sequential shipments 9%.

As our industry looks through consolidation, our balance sheet strength are viewed as increasing brand reputation factor of Trina Solar’s customers, partners and the project related vendors adding to our transitional product quality and performance attributes. We believe such factors have also contributed to our recent reported number one market share in Australia as this also believes the further United Kingdom. Leveraging this whole loss, we are further dependent our marketing efforts to higher value added segments which (indiscernible) so initiatives launched in 2012, we are again increasing total customers quarter-on-quarter, especially amongst distributors as we launched our successful PartnerPlus loyalty program in Europe, the U.K. and the United States where we are also seeing a strong growth in the Residential Leasing segment.

To our 2013 outlook, we are pleased to say participated solar adoption taken further probably in newer markets, as declined system cost continue to drive demand, together with the increase in government support, network planning and (indiscernible). We believe such drivers including continued trend in roof top segment in Europe had stabilized and in some cases affected development of ASPs recently observed in the first quarter and targeting initiatives, our latest marketing tagline, smart energy together has been exemplified by innovative technology driven offering to lower and levelized costs of solar energy through both our module product and in the balance of system. Rolling our product introduction of Trina Smart in the Chinese market as Trina Smart Solutions in 2012, in 2013 with this we lost our innovative and higher voltage ability to top class products module, which we believe, we were better meet our commercial and utility partners needs due to improved cable and hardware and labors installation cost from its branding.

We also recently a team agreement with Silicon Valley-based QBotix Inc., to combine Trina Solar products with their QBotix driving team access checking system to again levelize costs of solar of energy and utility scale applications. From our delivery of such market-driven solutions, we are extremely proud to be recently recognized by company magazine, which named Trina Solar in their list of the world top 10 Most Innovative Companies in China. Lastly, to meet our 2013 manufacturing cost tariffs that Terry just added, we have recently recognized our manufacturing team into several operation teams to promote our driving enhancements and efficiency through the year. And with that, I’ll turn the call back to Terry to commence Q&A.

Terry Wang - Chief Financial Officer

Thank you, Zhiguo. And we would like to request to those participating to limit their questions to two each with a short follow-up to offer all those in queue a chance of access today. Sarah, you may begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Medvedeff of Cowen. Your line is now open.

James Medvedeff - Cowen

Good evening.

Terry Wang

Hey James.

James Medvedeff - Cowen

Hi, I just have a couple of questions on the cost side. What is your grams per watt these days?

Terry Wang

It’s about 5.4 grams.

James Medvedeff - Cowen

Okay. And can you say what you – what’s the cost of – what’s your average cost of purchased silicon was in the quarter?

Terry Wang

We just said that, it’s about $0.10 per watt and non-poly silicon is about like $0.51.

James Medvedeff - Cowen

Okay. So, I can do the math and figure out what you’re paying for kilogram, right? And…

Terry Wang

And the other things the carrying costs from inventory from last quarter that’s going to add few cents on top.

James Medvedeff - Cowen

Okay, what about internal wafer conversion?

Terry Wang

I mean I have…

Zhiguo Zhu

Wafer unit we have silicon cost is about – just about $0.10. Then the cost of processing to wafer we have costs that another $0.10 – $0.11 or $0.12, it depends on…

James Medvedeff - Cowen

Okay, thank you. And finally on the frameless product, is that a – is there a cost benefit for you for making the modules without frames?

Zhiguo Zhu

Yeah, we make frame by ourselves, specific question.

Terry Wang

So the – obviously, we’ll have cost effective without the frame and because as frames obviously...

Zhiguo Zhu

Our frame is made of aluminum, that’s a quite a big cost for us – quite important cost for our module...

James Medvedeff - Cowen

Right of course the question is not having to have the materials for the frame itself as opposed to having what would presumably be a more complicated or more expensive production process is, am I thinking about that correctly?

Zhiguo Zhu

Yeah, most importantly, this is a new technology. It’s not really a cost reduction. Actually, it is on GPIB. I mean this cut double glass can be used in very wet climate place. Also anti-fire like this was anti-fire that we call Class A modules. So, that’s a new technology. Our glass thickness is about 2.5 millimeters, Trina was the first company who can make it produce these kind of products. That’s why we’ve already signed 2 megawatts contract for this kind of products. And it’s welcomed by market. So, I’m not really product concerned, as well as new technology use. And that makes...

James Medvedeff - Cowen

Okay. Thank you. I appreciate it. And congratulations and we’ll talk again soon. Thank you.

Terry Wang

Thank you, Jim.

Operator

Your next question comes from Satya Kumar of Credit Suisse. Your line is now open.

Brandon Heiken - Credit Suisse

Hello, team. This is Brandon Heiken, speaking on behalf of Satya. Thanks for taking the questions.

Terry Wang

Hi Brandon.

Brandon Heiken - Credit Suisse

Hi guys. I was wondering, if you could talk about your expectations for tariffs that maybe pending in Europe and India, again shipments and how you made deal with those potential tariffs?

Terry Wang

Yeah. For those tariffs initiative for those two regions and we fully are aware of that and within company, we’re fully prepared and ready, and monitoring the progress every step of the way, every step of the way. But that’s still in the process and the European Commission is right now still viewing the case. And we do see that right now that we’re making progress with our people in Europe and to talk and say that with our partner alliance to communicate with them see for – indicated that by imposing tariffs we heard actually in solar sector market in Europe. So, I think that the message being closed and you can see that the news indicated a couple of days ago talking, if Europe imposed the tariff on Chinese modules and might cause the 0.25 million workers unemployed. So, I think that’s the message in close. We’ll watch it out carefully and monitoring what’s going to be will look like in the near future. India same so what, but in case of what scenario and things come out we have other backup plan to be able to deal with those consequences.

Brandon Heiken - Credit Suisse

Okay, thank you. And do you have at this moment any cost reduction targets for the rest of the year?

Terry Wang

Yeah, of course, we do have internal cost reductions both in the poly and the non-poly process, but you understand, I mean, now poly relatively be cost – the pricing relatively flat and to some degree slightly up a little bit due to our demand. The things we can do, reduced usage and the efficient use of the materials and other area could be non-poly material do see some risk of the rebound to some degree. Within company, we’ll continue to move the improvement in our profit productivity efficiency by reduce that breakage, it continuously increased our yield. And that we are fully confident that our non-poly will obviously will continue to fall. I was looking, I think that we are really in line or move down fast on ASP. So, we are expecting the margin will be expanded and cost at least is going to be reduced by 10%, and given what we are seeing now.

Brandon Heiken - Credit Suisse

So, overall cost maybe down 10% this year?

Terry Wang

Yeah.

Brandon Heiken - Credit Suisse

Okay, thank you.

Jifan Gao

Thank you.

Operator

Your next question comes from Vishal Shah of Deutsche Bank. Your line is now open.

Vishal Shah - Deutsche Bank

Yeah, hi. Thanks for taking my question. Terry, you talked about further OpEx reduction in Q1. Hi, can you hear me?

Terry Wang

Yes, hi clearly. Yes, Vishal, OpEx, yeah.

Vishal Shah - Deutsche Bank

So, can you talk about where the OpEx will be for Q1 and then for the rest of the year?

Terry Wang

Okay. OpEx, we have – that’s comprised the different like warranty shipments, selling expenses, G&A and R&D. And we since last September and the company has done twice and cost reductions, especially in our headcount reductions and we can see the results. We can see that from the script and reduced by $12 million. So, in other words that’s compared relatively into normal Q3 rate is about 18% down. So, going forward, throughout this year and we would like to maintain our level given we might have another review or cost reduction programs ongoing. So, we want to control our OpEx as much we can so that we put the combined – we are looking for little over $200 million of OpEx and should be below $250 million that’s our target.

Vishal Shah - Deutsche Bank

Okay, but a little over $200 million below $250 million that’s helpful.

Terry Wang

Yeah.

Vishal Shah - Deutsche Bank

And then when you talk about margins in the low-to-mid single digits, where do you think margins can go for the rest of the year. Are you seeing pricing getting better in some markets or how do you see pricing for Q1 and then for the rest of the year?

Terry Wang

Yeah margin, number one and we are pretty confident that we can have our quarter-over-quarter margin expansion and always still we have orders. The pricing we do see rebound in China and Europe in some regions, and also for the Europe and post the tariff we’re expecting that ASP will come up quite a bit. So cost side, as I said, at least we’ll reduce our cost by more than 10%. So by this two then we are pretty confident then we will see the margin expanded quarter-over-quarter and we’re looking for double-digit second half sometime in second half.

Vishal Shah - Deutsche Bank Securities

Okay. That’s helpful. And then one last question, can you maybe talk about the breakdown of shipments by geography and also by first half versus second half as well as by projects and modules. Thank you.

Terry Wang

In terms of this year and that’s carry through from last year’s trend, if I look at the fourth quarter last year and you can see the big changes in China added to our portfolio. And U.S. also as compared to third quarter we had stocks in more than 22% and the things that we see the Europe and Germany are coming down. So that trend we move forward continue this another year. Geographically, we’re expecting China will be flat for the quarter of the total portfolio and U.S., will be more than 20% and Europe is still the largest one, but that’s going to be below 50%. And we will expand our sales in emerging markets, which include Australia that’s we’re already a number one market share in Australia, we will maintain our position. And Greece, UK all those Japan, that we will continue to maintain our position even we expand our market share as well. And mostly exciting things for us to see – we do see that upcoming orders from South Africa and orders from Latin America, I think that will be our new frontier in markets that we’re supposed to penetrate. At the system level and we still believe that throughout the year, we will deliver in a revenue base, we can achieve approximately 20% of total revenue, which confirm the system. And also I think that overall for the year - but and most likely back loaded in the second half for the year.

Vishal Shah - Deutsche Bank Securities

I appreciate that. Thank you.

Terry Wang

Thank you, Vishal.

Operator

Your next question comes from Amir Rozwadowski of Barclays. Your line is now open.

Amir Rozwadowski - Barclays

Thank you very much and good evening folks.

Terry Wang

Hi, Amir. How are you?

Amir Rozwadowski - Barclays

Good, good. So, just wanted to clarify some of your prior comments, specifically on ASPs, this quarter how much did ASPs decline this quarter for you folks?

Terry Wang

Compared with quarter three because we took for the ASPs average selling price, so quarter four (indiscernible) that still declined in the last quarter actually in December its lowest price in last year. But in quarter one, you may ask generally with (indiscernible) in lower markets, but in China, in Europe all price already rebounded. So we can say a lot of price loss price in history where we believe – where we in December of last year.

Amir Rozwadowski - Barclays

That’s helpful. So I guess the expectations for this year are sort of stabilization or are you folks expecting sort of an up tick in ASP at some point through the quarter – through the year pardon me.

Terry Wang

Yeah Amir, I think that ASP will follow the same and in some country it might drop a little bit like Japan, but country like China and Europe and in those countries the ASP will go up. So, average wise that we will see the stabilized ASP and to some degree and depend on which country you ship more and visit, so you do see in some quarter the ASP, we do not rule out the possibility, the rebound ASP will occur. And also add on top of that we will have system project developer system add on top of revenue and with the higher ASP, so that will put our revenue in favor to support our margin expansion in that scenario.

Amir Rozwadowski - Barclays

Great, that’s helpful. And then if I may, one of the principal concerns, I guess facing the broader industry has always been this issue of over capacity. Clearly you folks are expecting a fairly healthy growth here in 2013. I was wondering, if you could give any sort of overall commentary on where you see sort of capacity. Have you seen a capacity from some other vendors or from the broader industry, reduced at this point, do you feel comfortable with the level of capacity is for the boarder industry, any color you maybe able to provide to that effect will be helpful?

Terry Wang

Sure, excess of capacity is being few quarters already and versus demand and we do see as the time passes, we do see turning point at the time after the few quarters excess of. So market adjusts itself and company who had loss for few quarters and running out of cash. So, some company in China we do see shutdown the product line. Even large companies that are reducing their product line utilization of the capacity and according to adjust to the demand, but we have to be well and some of shutdown is temporarily and some shutdown closed up are the permanent. So, we have to be careful. So, permanent one we like to see, but temporarily – some temporary shutdown that might come back into market catch up. But markets adjust themselves and we do expecting and things in near future might trigger some more consolidation or shutdowns. So, that will be a good sign for us – for that factor.

Amir Rozwadowski - Barclays

Great. Thank you very much for the incremental color.

Terry Wang

Thank you.

Operator

Your next questions comes Sanjay Shrestha of Lazard Capital Markets. Your line is now open.

Sanjay Shrestha - Lazard Capital Markets

Great, thank you. Good evening guys. First question on pricing for the team, I’m just trying to understand that a little bit better. When you say that you think the pricing is at stabilizing and done going down this year. Is that a change in your philosophy of not pricing it below, sort of like that margin target you have or is that expectation that the overall market is getting better and that’s why the pricing has stabilized. The reason I am asking that guys is because one of the issues behind – cost goes down, prices goes down and at the end of it everybody’s margins getting destroyed, and nobody is making money. Is that a change in the philosophy for you or you are just expecting pricing stabilizes because the market is getting better?

Terry Wang

Hi, Sanjay. Good question. I think that the ASP decline apparently in the few years since the last two years. And now we do see the sign for 2012. But the trend, if you depend on one country or one channel, you are going to see the pricing decline. But what we will see from China point of view, number one we’re not looking for only the market share expansion, we now we rely, we think of those processes to keep the profitability and as the top priority. And so that, one side we can in the module sales we spend the channels across and the channel we typically a smaller customer installer, we do not ship in part, now we’re getting more efforts to across that area. But the smaller customer has installer and with high ASP. And the other things that we will intend to high ASP region efforts then penetrate those markets. And now we see the sign that when we can progress as well. So, and on top of that, as I said the project development area we could in some regions we do the business model and sell our module with the premium improvement on top with their project development equipment. So, that’s combined with our system solution to our customer solution. So, I think that with these efforts, I believe Trina will do maintain a least ASP stabilized or looking for upside to some decrease so that we’ll continue with the margin expansion target.

Sanjay Shrestha - Lazard Capital Markets

Got it. Okay, my second question then guys if I may, so it’s related to China alright and how should we, well, first question on China is really about how big the demand is going to be and is that all are going to come from existing Golden Sun and Golden Roof or do we expect some sort of national feed in tariff announcement this year and if you can also comment on your prior point about the stability of pricing in China and how do we think about the overall cash collection in that market?

Terry Wang

Okay. In China, starting from the year actually end of last year and Chinese government has really given current market situation, they think that Chinese government need to do promote the solar factor in China by opening up or by increase the subsidiaries in this incentives so that’s why the and promote so called the distributor generator project on roof and targeting the each part of the China. So in targeting and people estimate that with that incremental feed in tariff, how that and to match with utility scale now we are at targeting approximately about 10 gigawatts for the year installation. I think that will be achievable and people believe because given those top line in the Q4 approval actually more than 10 gigawatts already may not – the things they will have to look in for how the financial factor will support. I think that and that’s why we do see some of the demand come off in that ASP and starting a new year, we do see rebound by $0.02. And the other things for collection in China typically, China the collection cycle a little bit longer than the other place in the region. That doesn’t mean that default law are higher, I mean so many state owned companies with little longer like 20 days, but this puts pretty much and lift the company with solid financials and we have now see and those large company default congress peoples.

Sanjay Shrestha - Lazard Capital Markets

Okay, great. My final question then guys should we expect any M&A or consolidation among large players in China to address operating expense issues because you can really get a big leverage if you people were to combine. Can that happen this year?

Terry Wang

Yeah, I think that the things are getting clear. I mean last year people wondering and see with expectations, but now since getting clear that some of the smaller one or the company with shortage if cash looking for the way out. So, I think that consolidation – if things have remained at current level of demand or slightly above last year. So that the consolidation will take in place soon and so, I think that’s good for the sector and that we are looking for and we watch out carefully, see there is any opportunity out there.

Sanjay Shrestha - Lazard Capital Markets

Okay, that’s great. Thank you so much guys, really appreciate it.

Terry Wang

Thank you, Sanjay.

Operator

Your next comes from Mahesh Sanganeria of RBC Capital. Your line is now open.

Mahesh Sanganeria - RBC Capital

Yes, thank you very much. I have a question on your guidance, just looking for some color on what the assumptions are, so if I look at the guidance the shipment has to increase pretty significantly in the second half. So can you tell me something about what sort of visibility is and which market do you see ramping in the second half compared to the first half that gives you confidence in the second half shipment guidance?

Terry Wang

Okay. For the guidance wise, one thing I have to be clear that this year unlike the previous years and we’ve given – a couple of years experience in project development, we do see pretty confident than we can expand that business in downstream and so called project – power project area, which of course at even countries in China specific will be a big large market that we penetrate. So that was on top of the additional, we do believe there were additional teams increase compared to that normal and the marginal shipment increase. So, the other half, that’s just 16% growth and the other 15%, that’s a normal growth and also the most growth we believe, and driven by China market for certain case of China market target 10 gigawatts. And even U.S. market will be stabilize or down a little bit, but in – the rest of the world and we do see the increase of volume and for us. And which includes the country that we just mentioned – a much countries and also the countries that first time and we shift include – which include that the South Africa and Latin America. And second half particular in China, the market having back loaded in both in the system level and the module shipment. So, pretty confident that the guidance can be achieved and we will see.

Mahesh Sanganeria - RBC Capital

Okay. And then a follow-up on your comments on the project business, on the project business, there is a wide variation in ASP and profitability. Since you talked about your most project business seems like is in China, can you give us a general idea not specifics of what ASPs and profitability are you targeting or expecting on the project business so that we can model it properly?

Terry Wang

Yeah. The project wise, we have a different business model across different countries. Europe and U.S. and China are different. In China specific and we have, we develop our self, we outsourcing or would do the EPC into the construction and sell to buy as a whole entire tower project per watt basis really now approximately – it can sell about RMB10 approximately and a little bit less than that and excludes the VHE which is 17%. So profits in China, we do looking for double-digit gross margin in those part and net margin of high single digits at least in that margin on those projects. And overseas, other countries, U.S., we do have some fully loaded project, but also we do see as a fact as I point out strategy fails with the project developer with the premium plus our EPC working with the partners. And now we have the profit to us leased net profit could be high-single digit and I think that for that I pretty confident that the margin even higher because a space is a little smaller, but you’ll probably get higher – the margin will be higher.

Mahesh Sanganeria - RBC Capital

Okay. Thank you very much.

Terry Wang

Thank you.

Operator

Your next question comes from Pranab Sarmah of Daiwa Capital Markets. Your line is now open.

Pranab Sarmah - Daiwa Capital Markets

Thank you very much. My first question is on 4Q, how much of your revenue came from project-related business?

Terry Wang

4Q, we didn’t have – we have a very small from business – from the project because but 4Q, we secure and develop a pipeline. And as we spend some of the projects expenses into secure our top lien and ready for delivery in this year. So...

Pranab Sarmah - Daiwa Capital Markets

Got it, my second question is on this anti-dumping tariff on polysilicon. If I see like you’re targeting about 75% of your product moving out, going out of China in 2013, is anti-dumping tariff on polysilicon comes in, would it impact your cash flow requirement and how you’re going to address that?

Zhiguo Zhu

I do not believe there was an impact on our cash flow, because in China policy, the trade policies have been many for years and you can buy import material for export purpose without any tariff or penalty, that’s pretty much on the, it’s for surely exclusive for export purpose. So, that’s why we have within internal we have the separate record for the domestic sales and export sales. So, that’s documented pretty well. Collections similar that the cash flow and the normal payment term those compound fee we have to pay early on or late, but that’s we do not see any changes on payment term on that.

Pranab Sarmah - Daiwa Capital Markets

Got you. Thank you. And my last question is on, if I may on your market share basis, I think 2012 I have observed you practically didn’t gain any global market share, probably that you have just maintained. But obviously you’re targeting to gain market share in 2013 with your shipment guidance. Will that impact your margin in that case because sometime market share gain normally comes at the cost of margins?

Zhiguo Zhu

Yeah. If you see the market is uniform, market that theory might work. But the market share and we actually if we look at it by country and we do have some market share expansion such as China, we have the market expansion compared to 2011, and Australia we have market share expansion and U.S. will maintain three positions and then on top of that we will see the ASP and related to project developer and also as I point out, the ASP, market shipments are not necessarily I mean ASP drop because they’re weak, what if expand our channel penalties in dollar which has pretty good fees and higher ASP, we’ll just see in first quarter and starting for the fourth quarter and the first quarter of this quarter already.

Pranab Sarmah - Daiwa Capital Markets

Thank you very much.

Zhiguo Zhu

Thank you.

Operator

Your next question comes from Amy Song of Goldman Sachs. Your line is now open.

Amy Song - Goldman Sachs

Hi Terry. Thanks for taking my question. First question is regarding your ASP comments. So, can you just help us to understand, is the ASP upside is it mainly passing through the polysilicon hike or you do get a margin expansion there. Because we see as poly price being hiking starting from the end of last year, although we know that you do have different sourcing strategy you maybe lagging in terms of your total wood average poly price cost. But just want to see forward-looking basis, if you say you are doing the margin expansion, is it poly price continue to rolling up, is it mainly passing through or you are going to make more margin out of that on your ASP outlook? That’s my question.

Terry Wang

Yeah, as I mentioned on two sides, the cost we continue to see the cost reduction. We’re not – our costs are not bothering yet, that trend will continue. But that’s not enough for our margin expansion target. And the ASP is the one we have to walk through. In ASP as I’ve said China, we do see in this quarter and we see the rebound by a few cents already in China. And I think partially and driven by this was a rising and a few cents on poly. And also the demand by looking forward 10 gigawatts, people really want to put things into the plant fast. So, that’s triggered some of the pricing up. But again strategically, we will see the channel that we’re talking, the Europe then we have to spend a lot of efforts and staff hours into penetrate those installer smaller customers and not just about one. That’s going to be 100, and so that add a few cents on the ASP as well. And as I said, project with the strategic partners and with project developer efforts, we do gain premium on both projects and the module fell with it. So, I think that’s a margin also comes from that area, and also the some of the projects that we sell in total in China. Also as I said, double-digit gross margin will be realized. I think that, on though – all those put together that we’ll contribute to our margin expansion scenario.

Amy Song - Goldman Sachs

Okay. Thank you. So, about the cost structure, yeah, just to turn on its day or 10% declining on target, is it mainly in non-polysilicon costs right, the $0.51, the fourth quarter you just reported, that number is going to be declined by 10% in 2013?

Terry Wang

Yeah, majority is driven by non-poly, but the poly doesn’t mean we don’t have any chance. We do have a chance by reduce, or efficient use from us, usage of the poly. And in the sourcing, by different mix of poly, we’ll contribute to poly in the cost reduction as well. And we do everything we can and maintain our high quality and at the same time be able to reduce the cost.

Amy Song - Goldman Sachs

Okay. Thank you. One last, a little question is the – new dilution rates, so your assumption of $0.51 declined by 10%, at what new dilution rate?

Terry Wang

Yeah, the other thing that I would probably mention, you pointed a very good point, because the things we’re talking, if you look at the cost for this fourth quarter and with a carrying cost and the cost we put that, and utilization, in fourth quarter, we’re not going to kind of utilize, that’s why add a few cents on top of that in the process too. So, as we move forward, and especially on the second half, when we – right now, our utilization is more than 70%, but we still have a room to improve our utilization. So once we get the annualized capacity, our cost will be reduced by significantly as well. So I thank you for mentioning that. I just forgot to point out that. By that, we will save a quite few cents, if you can check yourself.

Amy Song - Goldman Sachs

Okay. Let’s say, if the 100% you are rising, what will be – when can you reach maximally in terms of cost structure?

Terry Wang

It’s not going to be 100%. It’s not going to be - if you do them 90% versus 70%, a 20% difference. You can see that your – the depreciation that’s allocated by unit and now we have – we ship of the bowl like 400 megawatts and that’s if you translate to be like 70% you add another 20% and that’s almost close to more than 500 megawatts. So, same expenses, you allocate additional 20% or more than 20% right, because 70% versus 20% is close to additional 30% instead of more than 500 megawatts. So, by that, you can see we have depreciation per watt basis about like $0.09. So, then we’re going to reduce that by another $0.03 at least in cost – $0.03 or $0.04, so we’re right there.

Amy Song - Goldman Sachs

Alright, thank you.

Operator

Your next question comes from Aaron Chew of Maxim Group. Your line is now open.

Aaron Chew - Maxim Group

Hey, Terry, thanks for the question. I’m wondering if you could spend some time just following up on the question about the poly tariff, but maybe less than thinking about in terms of how it would impact your income statement. Can you just maybe offer an update on how – what you hear is happening from China’s perspective, why it looks like it was postponed, the decision was postponed a couple of months, what do you guys are doing in terms of lobbying the government to take into account your broader interest. And lastly if you are doing anything internally to sort of plan for some type of contingency plan to circumvent the tariff ala what you guys did with Taiwan and the U.S. – any color on how you guys are going to respond and what do you think the poly tariff would be helpful?

Terry Wang

Okay. The first question is about why delay and the official statement people suspect that will be Chinese New Year. I mean, however, the second half of February and the time like this and also talking about transition of leadership and the things they have to – the government is pretty busy on that. And internally are if things go through and import material being taxed and I think that I’ll point out that in China the improvements to many years hidden power policy for the import material and manufacturing OEM in China for export purpose. For that, you can waive your tariff versus if we sell in domestic market, so internally we have documented we have to be putting the reference in our accounting for audit. So I think now we are ready in doing (indiscernible) started doing that. So I do not believe that we will have a big impact, but slightly might have for poly, especially for poly made in China demand – might release more demand for Chinese poly maker and for domestic market. That might streak a little bit poly pricing up, but I don’t think that’s going to be a significant impact on us.

Aaron Chew - Maxim Group

Okay, that’s helpful, and then if I – just my follow-up, I wondered if you could spend a little bit more time on OpEx, I know that someone else asked that question earlier, but just taking it different angle, even taking into account whatever reduction you guys have already built into the model, which are pretty impressive as is, it’s still leaving you at a run rate on a quarterly basis that’s roughly 75% of your current second half quarterly revenue run rate. I mean with ASPs unlikely to really rebound in with any force and you’re generally operating 400 megawatt run rate. I’m just wondering what are the barebones do you think you’ve really needed to run this business in term of OpEx, like what can you really bring this down to and what is going to take to maybe really allow for an internal reset, because it doesn’t seem that even a $50 million quarterly OpEx run rate really is doable in this environment. And just if you could spend some time on helping us better understand on what, on how much room you had to work to, it would be helpful? Thanks.

Terry Wang

Yeah I think that’s a good question about – that will affect that well, how well we can get the profitability taking place. But you know you’re right. And we in the past, we had about 8% OpEx as a percentage of revenue. But this time double-digit. And but given, if you take this provision out in the backbone, you’re talking about $50 million, that’s pretty solid. And that’s which include warranty in the shipment. And G&A those type of things, if you take those out, and you can maintain in high 20s, that’s backbone, exclude warranty and shipments. And even though we have room to continue to reduce by another few million, but it’s not going to be significant, as we changed the landscape. But what I am saying that in the future as I have said, reduced OpEx with continued efforts that we will continue to implement. But the things we want to looking for, and the effort we’ll make should be in the revenue side and project development area, to expand our top line and revenue side. And so by keeping the OpEx or even reduce to some degree, but at the same time, the revenue side will be going up by increased more shipments, and which targeting high pricing, customer channels, and with the new products that delivered to the customers and with the pricing permits. That’s the direction where we should go. And internally, we have a plan to do and but same time the OpEx area we should be watch carefully to the – to monitor by productivity, efficiency, operation, and measures. And we do see the results now, but we think that we would do better in the second half of the year.

Aaron Chew - Maxim Group

Alright, great. So just to clarify, by the way, I don’t want to take anything away from the amount of OpEx that you have guys already done. I know it’s not easy, but just going ahead, you feel like really the leverage has to come from higher revenues. You don’t think it’s really realistic to maybe cut quarterly OpEx to $40 million without really impairing business prospects?

Terry Wang

If you cut for the (indiscernible) yeah, that’s going to be big by 20% cut. I am not saying it’s not possible, but it’s – we need a lot of efforts on that. But things, it’s clear and it’s for the year – over the year, we are not going to get the profitability, and thinking for the five, we are looking for some amount of quarter breakeven and the bottom line. So, I think that we will – that’s our target with our project development efforts and then we will achieve that profit breakeven by sometime in the second half.

Aaron Chew - Maxim Group

Okay. Thanks for the questions, Terry.

Terry Wang

Thank you.

Operator

Your next question comes from Shar Pourreza of Citigroup Global. Your line is now open.

Shar Pourreza - Citigroup Global

Hi, everyone. Just a quick follow-up question on the poly tariff, you know your upward trend in gross margins from low-single digit in the first quarter, do your assumptions include an import tariff?

Terry Wang

As I just pointed out, we are fully aware of that impact from import functions against sort of imported material. And as I said, we pretty much itself produced all the materials. It doesn’t matter if we include the domestic sourcing or overseas sourcing for the purpose of the exports. So, it’s pretty clear and we see currently a rebound to some degree, but it’s not going to be significant. In the same time, for domestic market, we set apart our wheel for outsourcing local sourcing for purely the domestic use. And by doing this, we can maintain – optimize our cost structure. And the China Trade Policy and not going to have tariff on imported material for export purpose. So, that’s – and on those assumptions, and we have our guidance for the first quarter and the margin in lower single-digit margin into the Street.

Shar Pourreza - Citigroup Global

Got it. And besides the project in Gansu, is there any other active downstream projects right now are you just kind of bidding?

Terry Wang

Say again, downstream project?

Shar Pourreza - Citigroup Global

Yeah, besides the project in Gansu, the development project in Gansu is there any other systems-related projects you’re currently…

Terry Wang

Yeah, we do. We do have quite a few, Gansu is the one that’s ready construction and the other that’s in the process in Gansu Province that will have 600 megawatts project for four years and that’s the utility scale, the other one 200 megawatts that’s the distributor generator. We haven’t announced yet, but we’ll announce soon. And also the globally in U.S. and Europe and U.S. particular we have the things that with the PPA are hence and ready for construction is by approximately 100 megawatts already, which includes the California and Puerto Rico projects. In Europe, we have the projects that’s initiative and already taken place in UK and Italy that we maintain some of the projects that’s raining already. So we have a global presence in those, the project development area.

Shar Pourreza - Citigroup Global

Got it, got it, very helpful. And just one last question, besides the inventory charge, the receivable charge you had for the quarter, was there anything else that impacted gross margins on a non-cash basis?

Terry Wang

Yeah. There were one and you can see that we cut deferred tax assets provision and that have impact on the net bottom line, the net profit.

Shar Pourreza - Citigroup Global

And how much was that amount?

Terry Wang

Approximately $22 million.

Shar Pourreza - Citigroup Global

Right. Pre-tax, right?

Terry Wang

That’s tax deferred carrying through from few quarters before when you have loss then they have few inclusive of the deferred tax, that’s putting in the assets, I have to go through estimated safe of fully recover going forward which years and then we couldn’t measure and take and those $22 million we do not believe we will recover. So, we put the measure we take as provision.

Shar Pourreza - Citigroup Global

Thank you.

Terry Wang

Thank you.

Operator

And your last question comes from Gordon Johnson of Axiom Capital Management. Your line is now open.

Gordon Johnson - Axiom Capital Management

Hey guys, thanks for taking my question.

Terry Wang

Hi Gordon.

Gordon Johnson - Axiom Capital Management

I guess just – hey guys, how are you doing? I guess just first on the OpEx, I’m just looking at which you guys kind of guided last quarter $53 million it came in at $76 million. I’m looking at some of the one-time charges we’ve seen in the past 4Q 2012 this quarter, $14.5 million on receivable, 3Q 2012 $13.3 million on inventory, 2Q 2012 $26.1 million and 12.8 million on inventory of asset impairment, there is $26.2 million charge in 1Q, I guess in another charge in 4Q, I guess my question is how do you have visibility that these one-time charges aren’t going to continue and I have a follow-up?

Terry Wang

Yes, couple of questions, what it just ask the question back on OpEx, but this is sitting in one-time charges, but one-time charges and fluctuated and you do see that trend of improvement and that’s related to accounts receivables, inventories and last second quarter that we had fully utilized the production that carried through more inventory. Now at the pricing, the materials getting stabilized and that the carrying costs from inventory is going to be minimized and I think throughout the first quarter. Account receivables area that pretty much provisions out and got as result of the big shipment that – came through the end of the 2011, first quarter. So, with our accounting provision policy that we take in even some of the collection might we will collectable, but given our policy we will take prudent provision. On going forward, this amount will minimize especially in the inventory side. You can see we don’t have the – we don’t have a lot of inventory write-down in the first quarter. In provision, you can see $15 million in the fourth quarter versus much higher in the fourth quarter versus much higher in the second quarter or third quarter. So that amount continue to decline, so I expect in next couple of quarters those inventory provision and account receivables provision will be gone.

Gordon Johnson - Axiom Capital Management

Okay, so we – we won’t see any more those in the next few quarters?

Terry Wang

Yeah, beyond this couple of quarters, then the second half I don’t think there was any – I’m not rule out possibly there was 1 million or 2 million, but it’s not going be this size of the amount.

Gordon Johnson - Axiom Capital Management

Okay. That’s helpful and then when I think about the ASP guidance, I’m looking at what Yingli said, they increased their shipment guidance versus what they provided initially by 150 megawatts and guided gross margins to negative 8%. You guys outperformed your guidance by 25 megawatts and your margins were slightly positive. So, clearly Yingli is using ASP, lower ASPs to take market share. They outperformed by $150 million, you guys outperform by $25 million. Given that’s the case and we’re hearing Yingli selling in the market at $0.58 to $0.59 a watt today, what gives you guys confidence that there’s not going to be any incremental ASP pressure?

Terry Wang

You made a very good point, and I think that we have a different strategy and over different target. Market share expansions are our first priority. And we like to be responsible for our shareholders to see the profitability margin expansion. That’s our responsibility. Negative gross margin, I think that’s not going to be sustainable for the defense. So the pricing and you mentioned other competitors quoted in the marketplace, we don’t competing, we’re not competing for market share expansion. We’re not competing with the low pricing. We are competing for market expansion, market expansion with a high pricing with a value added service to our customers, that’s all. That’s our strategy.

Gordon Johnson - Axiom Capital Management

Okay, that’s extremely helpful. And then lastly, from what I’ve heard, the Golden Sun program, there were 2.8 gigawatts approved to be installed by June 30th, and what I’m hearing is that the profitability on that, on those projects are extremely high. And from our discussions with some of your competitors, they’ve kind of positioned us that, that represents roughly 10% of their first half shipments. Two questions, one is can you share with us what percentage of those Golden Sun projects represent you first half shipments? And secondly, seems like you guys expect significant growth in the second half, are you expecting that second phase of Golden Sun projects which have yet to be approved by the Chinese government to be approved over the near term. And thanks a lot guys for the questions?

Terry Wang

Okay. Golden Sun was successful early days, but the government – I heard – is going to be in this (indiscernible) last year for Golden Sun program. They in fact would replace with – distributed generator with the filling of incentive scheme. Golden Sun thinks that – you’re talking about 2.6 gigawatts, I don’t think that will be that much. And Golden Sun, that’s – in terms of implementation on the roof and with high profit, because the 50% reimbursed by government. But they have a lot of issues related. So, we say we look at Golden Sun very carefully. So we have some Golden Sun program but that’s not going to be significant in our portfolio of sales. But Golden Sun saw the sometime in the buyer (indiscernible) it’s hard to get in and take some of the ownership. And then you have to carry on your own, and some of the companies doing these facts, that’s used a different model to do it. But end of the day, they hold themselves and it’s not going to be ownership transfer. So we have to be careful on that Golden Sun thing. And plus, the Golden Sun is not sustainable because it’s going to be end soon. And the things we’re looking for and long run we have to be targeting – these will be the January solar project on a commercial roof which does highly promoted by governments and local government, central government with a feed-in tariff. In that area, we think that’s with a return and also verified too. So, we now we put ourselves in efforts and to get those top line in place.

Gordon Johnson - Axiom Capital Management

Very helpful. Thanks guys.

Terry Wang

Thanks.

Operator

There are no further questions at this time. I’ll turn the call back over to presenters.

Kevin Zhang - Manager, Investor Relations

On behalf of the entire Trina Solar management team, we want to thank you for your interest and participation on this call. If you are interested in visiting us at our Changzhou PV Park, please let us know. This concludes Trina Solar’s fourth quarter and full year 2012 earnings conference call. Thank you, operator. You may please now disconnect.

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