Trina Solar Q2 2009 Earnings Call Transcript

Aug.17.09 | About: Trina Solar (TSL)

Trina Solar Limited (NYSE:TSL)

Q2 2009 Earnings Call

August 17, 2009 6:00 pm ET

Executives

Penelope Ko - Investor Relations

Jifan Gao - Chairman of the Board, Chief Executive Officer

Terry Wang - Chief Financial Officer

Sean Hsiyuan Tzou - Chief Operating Officer, Director

Arturo Herrero - Vice President of Sales and Marketing

Analysts

Rob Stone - Cowen and Company

Jesse W. Pichel - Piper Jaffray & Co.

Lu Yeung - Merrill Lynch

Gordon Johnson - Hapoalim Securities

Dan Ries - Collins Stewart

Vishal Shah - Barclays Capital

Kelly Dougherty - Macquarie Research

Sanjay Shrestha - Lazard Capital Markets

Sunil Gupta - Morgan Stanley

Operator

Good day, ladies and gentlemen and welcome, everyone to today’s Trina Solar earnings release conference call. (Operator Instructions) And now, ladies and gentlemen, without further delay, it is a great pleasure that I introduce the host of today’s conference, Ms. Penelope [Ko].

Penelope Ko

Hello and welcome to Trina Solar's second quarter 2009 earnings conference call. You can follow along with today’s call by downloading the supplemental presentation which can be found on the investor’s section of Trina Solar's website at www.trinasolar.com.

On behalf of Thomas Young, this is Penelope Ko, Trina Solar's Senior Manager of Investor Relations.

With us today are Trina Solar's Chairman and CEO, Jifan Gao; Chief Financial Officer, Terry Wang; Chief Operating Officer, Sean Tzou; and Vice President of Specialty Accounts, Arturo Herrero.

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 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 represents management’s estimates as of today, August 17, 2009. Trina Solar assumes no obligations to update these projections in the future as market conditions change. For those 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 www.trinasolar.com.

With that, it is my pleasure to turn the call over to Trina Solar's Chairman and CEO, Mr. Jifan Gao.

Jifan Gao

Thank you, Penny and hello, everyone. We are pleased with the results of our second quarter, which we believe affected the market’s increased recognition of Trina Solar and its leading [inaudible] quality and value positioning.

We see increased signs of market confidence in the PV sector due to improving financial conditions, as well as increased government commitment to promote [inaudible] energy. From this and our increased sales visibility, our confidence to expand it is further supported by notable improvements we saw in the quarter. To demonstrate our superior quality, in an ongoing performance study conducted by [inaudible] of Trina Solar Center, our [inaudible] modules performance consistently held the top two position compared to modules from several leading European, Japanese, and American bands and is a part of Trina Solar's [inaudible].

As we continue to focus on improving our cost structure, we have reduced our [inaudible] cost for more [inaudible] to $0.73 per watt in Q2, from $0.79 per watt in Q1. We will continuously reduce this [inaudible] as we progress.

For technology, we recently achieved an on-site tested level of product of up to 18.6% for our monocrystalline [inaudible]. Already achieved this year-end target of 18.5%.

As we continue to position our company strategically to capture future opportunities, our focus remains to be planned cost reduction and technology.

[inaudible], we can also successfully [inaudible] to follow-on product offering of 5.175 million ADS, which is grossed over $148 million. This will greatly support our future development.

In order to continuously expand our robust sales activities and to enhance customer support, this [inaudible] will become VP of Specialty Accounts to focus on the growing numbers of key customers in new and existing markets.

Mr. Sean Tzou, COO, will dedicate more effort to overseas sales and marketing activities. Arturo will continue to report to Mr. Sean Tzou. Also, we will step up our regional headquarters in both Europe and the U.S. later this year.

And now, I would like to pass you to our CFO, Terry Wang, to share our financial results.

Terry Wang

Thank you, Mr. Gao and hello to all of you joining us today. To offer you better insight of the company’s recent performance, I would like to walk you through our second quarter financial highlights followed by the company’s guidance for the third quarter and the full year 2009.

We are very pleased with our financial achievements in the second quarter. Our accelerated cost reductions, combined with significant improvements in our demand and financing environments resulted in a significant expansion of our gross margin despite our anticipated decline in average selling price.

As a result of this and our prudent approach to our capital spending, we achieved positive net operating cash flow and positive net free cash flow of over $38 million and $26 million respectively.

This allows us to improve our cash balances and lower our total debt while simultaneously increasing our aggregate credit facilities for future needs. Subsequent to the second quarter, on August 3rd we have successfully completed our follow-on offering which is inclusive of additional 15% ratio grossed over $148 million. We intend to use the net proceeds to fund our facility expansion, repurchase some of the convertible senior notes, and for other general corporate purposes.

Our total net revenue in the second quarter was $150 million. Total shipments were 63.9 megawatts, a 30.9% increase sequentially and 34.3% increase from the second quarter of 2008. This sequential increase in revenue was primarily due to improved demand conditions in our major European markets, improved customer access to PV system purchase financing, and the increase in the number of government incentive programs for Solar Energy projects in Europe, North America, and Asia.

Gross profit was $41.2 million in the second quarter, an increase from $22.7 million in the first quarter. Gross margin was 27.4% in the second quarter of 2009, an increase from 17.2% in the first quarter and exceeding our previous guidance of between 18% and 20%.

In the second quarter of 2009, we continued our successful measures to reduce both silicon material and the non-silicon production costs. Our silicon material costs dropped more than 30%, which reflects the changes in poly supply price, effective management of our long-term contracts, and effective control of inventory turns. Our non-silicon costs was further reduced to $0.73 per watt for our monocrystalline production excluding depreciation, a result of a continual process innovation and a reduction in polysilicon usage per watt through our technology innovation and management.

Operating expenses in the second quarter were $22.5 million, an increase from $15.9 million it the first quarter of 2009. Operating expenses included a $5 million write-off of accounts receivable.

Operating expenses in the second quarter of 2009 included approximately $0.9 million of share-based compensation expenses. Operating income was $18.6 million compared to $6.8 million sequentially and $29.1 million a year ago. Our operating margin was 12.4% in the second quarter of 2009, compared to 5.2% in the first quarter of 2009 and 14.3% in the second quarter of 2008.

Net interest expense in the second quarter of 2009 was $5.8 million, compared to $5.4 million in the first quarter of 2009 for our quarter-to-quarter weighted average low interest rate, we saw a drop in the second quarter to 5.7% from 6.3% in the first quarter of 2009.

We realized a foreign currency exchange gain of $10.5 million net of the loss on change in sale value of derivative in the second quarter of 2009, compared to a $7.6 million loss in the first quarter of 2009.

During the second quarter, we maintained our hedging measures through our forward currency contract instrument and enhanced our natural hedge effect through a foreign currency denominated account receivables and accounts payables on our balance sheet.

Net income was $18.9 million in the second quarter of 2009, an increase from a $10.6 million loss in the first quarter and a $17.1 million profit in the second quarter of 2008. Net income includes a foreign currency exchange gain of $10.5 million net of loss on change in self-value of derivative and an accounts receivable write-off of approximately $5 million.

Net margin was 12.6% in the second quarter of 2009 compared to negative 8.0% in the first quarter of 2009 and 8.4% a year ago.

Earnings per fully diluted ADS were $0.71 per ADS.

Turning to the balance sheet as of June 30, 2009, we had $203.9 million in cash and cash equivalents and reserved cash, an increase from $177.2 million from December 31st. Our working capital balance was $126.8 million.

Our total bank borrowings were $300.9 million, which included $33.1 million of long-term borrowings and $268 million of short-term debt. The short-term debt reflected a decrease of approximately $38 million from the first quarter of 2009. Our total credit line increased to approximately $676 million, which includes approximately $230 million of valuable unused credit line.

The company is also developing long-term debt facilities to improve our long-term capital structure in support of our future growth requirements.

This brings us to our guidance for the third quarter and fiscal year 2009 as follows: for the third quarter of 2009, we expected to ship between 90 to 110 megawatts of PV modules, an increase of between 41% and 72% above our second quarter shipments. We believe our gross margin for the second quarter will likely be between 23.5% and 26.5%.

We wish to highlight, however, that despite of the anticipated continued decline in ASP, we expect both our silicon and non-silicon manufacturing cost reductions will enable us to maintain an attractive gross margin for the third quarter.

For the full year of 2009, the company reiterates its expectations for total PV module shipments between 350 to 400 megawatts as previously announced. With the improvements in our demand, visibility and financial condition over recent quarters, we are now in a confident position to announce our capacity expansion target and the timeframe. This confidence is based on several favorable trends which includes overall market conditions, our increasingly recognized quality and in terms of third-party product performance [inaudible], the increase in number of international banks who provide lending to our expanding customer base and lastly our low-cost manufacturing footprint.

Subsequent to the second quarter in July 2009, we borrowed approximately $80 million in the short-term loan which are denominated in Euro and U.S. dollars and RMB from domestic bank to support our [inaudible] campus expansion. The loans are expected to become a part of our syndicated project financing arrangement being led by [inaudible] institutions which we are finalizing with several Chinese domestic banks and expect it to extend up to five years term.

Our COO, Hsiyuan, will be happy to walk you through our specific expansion targets.

We wish to remind that our capacity expansion decision will remain closely calibrated to market demand conditions, as well as our ability to generate positive operating cash flows to preserve reasonable cash balances for liquidity and working capital purposes.

And now I would like to turn the call over to our COO, Hsiyuan, for some closing remarks.

Sean Hsiyuan Tzou

Thanks, Terry. In conclusion, we are extremely pleased with our operating and technology progresses made in the first half of 2009. Although we recognize the global economy downturn and the credit crisis have slowed down the solar demand, we strive to work on what we excel the best -- which is to position for the long-term growth and viability of the business.

We continue to persistently improve our operating efficiency and lowering operating costs.

Referring to page three of the supplemental presentation, the company is on target to increase its annual in-house production capacity of cell and module from the current 400 megawatts to approximately 450 megawatts by the end of September 2009 through process optimization and with legal investment. Furthermore, we expect to increase approximately 150 megawatt additional capacity to achieve a total annualized cell and module production capacity of 600 megawatts by the end of 2009.

As we advance into the current quarter and second half of the year, we continue to leverage the following operating strengths -- first, increased recognition of our product quality and value through independent third-party performance test involving the top module brands from Europe, North America, and Japan. For example, our company modules consistently held top two position compared to the modules from several leading Europe, Japanese, and American brands in terms of the actual power generated based on the independent and ongoing test data by Data Knowledge Australia Solar Center; improved visibility of Trina Solar module via increasing involvement with European and U.S. banks to support our customer’s purchase in over 20 countries; third, customer quality focus -- we continue to receive strong support from established multi-national customers in Spain, Italy, and Belgium who are also actively developing projects in Europe, North America, and China; fourth, viability of approximately 200-megawatt module cells in the third and fourth quarter 2009, which represents over 75% of the midpoint shipment guidance; fifth, obtain an increasing number of [inaudible] for our products from quality for incentive in U.S. state and city solar programs, including California and Florida; sixth, reduction of our manufacturing costs -- for multi-curricular, we have reduced our costs to $0.73 per watt in the third quarter. We believe we are on track to achieve 15% to 20% cost reduction targeted by the end of 2009; seven, reduce our silicon costs per watt by over 30% from the first quarter through realizing the silicon costs decline and improvement of average silicon usage; eight, based on the recent on-site lab tests production, we achieved cell efficiency of up to 18.2% monocrystalline and 16.8% multi-crystalline; nine, increasing our business development activities involving system integrators, project developers, and regional grid operators in Europe, North America, and China.

Having said that, we would be happy to open the call to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Rob Stone. Mr. Stone, your line is now open.

Rob Stone - Cowen and Company

-- getting so much supplementary data, that’s a great increase in transparency. A question for Sean -- how do you see the [inaudible] spend in the third and fourth quarter? And with respect to the linearity of shipments to get to the mid or upper end of your 350 to 400, it seems like you would have to have a very steep sequential growth in Q4 as well. A lot of people were talking about seasonality -- what’s your visibility on Q4 by now? Thank you.

Sean Hsiyuan Tzou

Thank you for the question. Yes, we do see a very strong demand in Q3 and Q4. We started to see that and therefore we affect internal capacity, we actually adjust to it as well. And with the recent contract we have in hand, we have over 200 megawatts and 50% of them are confirmed with the fixed price, so we do have a very strong confidence on achieving Q3 and Q4 target in order to achieve the 350 to 400 megawatt guidance.

And on the first quarter, we do expect that our efforts on the new market, which are including some of the new -- more southern European countries, as well as the U.S. and China demand will increase and provide a gross requirement for our Q4.

Rob Stone - Cowen and Company

-- trend that you are seeing, Q3, Q4?

Sean Hsiyuan Tzou

Excuse me? Can you say that again?

Rob Stone - Cowen and Company

What average selling price for modules are you expecting? What sequential trend in Q3 and Q4?

Sean Hsiyuan Tzou

Okay. We expect our Q3 ASP will decline from 10% to 15% and our Q4 sequentially will decline 10% to 12%.

Rob Stone - Cowen and Company

Okay. A question for Terry -- the days sales outstanding is still relatively high after the write-off. Are you expecting receivables to stay at this high level in the second half?

Terry Wang

Rob, I’d be happy to answer that question -- we are -- second quarter write-off related to account receivables and it’s been related to the shipments that was an early, beginning of the year. And since then, we had taken measures to prevent the further risk in the account receivables, so with the insurance covered by [inaudible], the measure we taking will account 100%, so to that extent, that the further more write-offs will not be -- will not highly occur because it’s being 100% covered.

But at the same time, and when we do -- we set up the credit system management in place to analyze our existing customers and also when we sign the contract with the new customers and we have a [stringent] process in-house to be able to monitor the risk going forward, so that is the measure we are taking.

I think that going forward, we cannot completely rule out the risk but the risk will be greatly minimized.

Rob Stone - Cowen and Company

Okay. I was thinking mainly about the average level of receivables -- do you expect to maintain this relatively high day sales outstanding figure?

Sean Hsiyuan Tzou

Yeah, our receivables, then we see the trends due to the prolonged payment term request by customers and due to the financial situation in the first half of the year from 90 days come to 100 days, 10 days longer than the first quarter. But we’ll see -- going forward due to the fact of financial environments improved and we’ve been in frequent contact with the banks in Europe and even in the U.S. and China. We see that -- especially in Europe with the banks increasing financing our customers, so we are expecting the credit environment and the payment term with the customers will to some degree stabilize at current levels for the second half so we don’t see any possibility that will -- well, that might be a possibility but most likely it’s going to be at the current level, or even slightly improved during the course of the year.

Rob Stone - Cowen and Company

And just a housekeeping question, if I may -- what were capital expenditures and depreciation for Q2?

Sean Hsiyuan Tzou

Q2, we only spent about close to $9 million second quarter and depreciation is just similar to the first quarter, which is about $3 million, roughly.

Rob Stone - Cowen and Company

Great. Thank you.

Operator

And our next question will come from the line of Jesse Pichel. Mr. Pichel, your line is now open.

Jesse W. Pichel - Piper Jaffray & Co.

Congratulations for your solid quarter. You are on track, ramping another $150 megawatts of capacity so do you feel the need to drop price further to win shares to fill up the facilities?

Sean Hsiyuan Tzou

Yeah, this is a very interesting question. Because of -- I understand your thinking logic and I think it’s very reasonable -- however, due to our quality of our product and our strong brand and thanks to the strong brand name we established in the current European market, our ASP has held up quite well compared to our competitors, and we do believe a reasonable market competition is necessary and we will be aggressive in our pricing but we certainly will not use that as a key weapon to gain the market share because we do believe in order to gain the market share, our quality and our brand name we establish is the most important thing.

Jesse W. Pichel - Piper Jaffray & Co.

Okay, great and also you gave us some color on your technology road map. Can you tell us when the customers will get the net emitter technology and when the certification will be complete?

Sean Hsiyuan Tzou

Yes, we continue to work on our technology roadmap and currently we do not have -- we do not have a plan to convert our current line to a [net emitter] line; however, in the next generation, which is we do believe we will start to realize this technology in 2010.

Jesse W. Pichel - Piper Jaffray & Co.

Okay, great. Thanks a lot.

Operator

Your next question comes from the line of Lu Yeung.

Lu Yeung - Merrill Lynch

Thanks for taking my question. Congratulations. Could you give out more color on your reduction and profiting costs? And how much higher was mono-processing costs and what is your roadmap of reducing your processing costs in Q3 and Q4, given that you are adding capacity?

Terry Wang

Thank you, Mr. Yeung and yes, the process costs is a result of many things that, you know, process innovation continues and with the increasing yield and the breakage and reduce the efficient use of the silicon in those couple of areas, so comparatively we’ve been able to, especially in the second quarter versus the first quarter, we are still on a track to meet our target and we said at the beginning of the year it was really reduced by 15%, 20% so now we are reaching and blended, included depreciation down from 94% per watt to $0.85 per watt in this quarter sequentially.

So if our multi-crystalline, in last quarter we were $0.79 per watt; now we reached $0.73 per watt ex the depreciation. So this is the -- the trend is more than 8% sequentially but we will be on track to meet our target and by the end of the year, reduce between 15% to 20% reduction.

Lu Yeung - Merrill Lynch

I see. Also, can you comment on your silicon costs from Q2 to Q3 and what will be your projection for Q4?

Lu Yeung - Merrill Lynch

Okay, this we do see the continued drop in poly-silicon as a result of both in market price decline and our efficient manage carrying -- current carrying costs in the inventory, so our case, we’ve maintained the dramatic [drop] trend from the Q4, starting Q4 down to Q1, 4% and this quarter compared with first quarter, down more than [30%]. But our trend continues and next quarter we expect approximately about a 25% reduction and the fourth quarter, we expect it to be around a 20% reduction in [inaudible] per watt basis.

Lu Yeung - Merrill Lynch

I see. Okay, thanks a lot.

Operator

And our next question will come from the line of Gordon Johnston. Mr. Johnston, your line is now open.

Gordon Johnson - Hapoalim Securities

Thank you for taking my question and congratulations on a good quarter, guys. I guess my first question has to do with gross margins. When I look at your blended non-silicon costs, Terry, I guess you guys said that they were 94 last quarter and this quarter they went to 85. I just want to make sure I had that right.

Terry Wang

That’s correct.

Gordon Johnson - Hapoalim Securities

Okay, so $0.85 per watt blended silicon costs, it looks like polysilicon is at $70 right now. Would it be fair to say you guys could be conservative on the gross margin guidance? It seems like there is significant upside there due to the low non-silicon costs.

Terry Wang

You know, we see a couple of things related to gross margin. One is the cost that we can control and to some degree, and especially in the process costs, we were looking on a track. But partly we still, due to the majority and partly with the long-term contracts [inaudible], the prices are manageable but the other side of the coin is ASP in the margin side and we are expecting a 10% to 15% reduction from the second quarter in Q3. You know, we -- the market is right now getting more competitive so we think that risk even do have uncertainty in ASP decline, so we think that that’s one thing we have, we can’t -- you know, we have to be -- we targeted in the middle 20s in the guidance, I think was reasonable. And secondly is the -- right now talking about approximately $70 per kilogram partly but as the market and our procurement price but we haven’t completely consumed some of the raw poly in our inventory that needs to carry through the third quarter, so that -- we have to consume that, so given that consideration, so we think that the guidance is reasonable fact.

But I think that we also look for the upside and if the ASP is relatively stabilized as we expected, then we are expecting upside in the third quarter.

Gordon Johnson - Hapoalim Securities

Okay, thanks, Terry, that’s extremely helpful. And then on the gross margin, I guess on the ASP specifically, you said that there’s been some increased competition. Can you talk a little bit about what you think the impact from First Solar’s recently announced rebate program will be and if you think you guys are positioned from a cost perspective to continue to take share despite First Solar’s recently announced rebate program -- and then I have a few follow-ups.

Terry Wang

Let me take a tap on that -- you know the First Solar, they have a program announced that they have a road map for cost reduction and obviously expand their market share and so do we and our goal is to increase the market share as well. But we have -- we are a polysilicon based and to different technologies so far, and First Solar, up to this point, they enjoyed the cost advantages due to the fact that the larger the poly price is high now and their advantage is getting a more sort of squeeze or diminished but still they do have some advantage at this time in terms of the balance of system cost.

When we do this, we have to look at the balance system, so typically we do the rule of thumb and it’s about close to a $0.30 per watt difference that makes a [inaudible] competition.

So going forward next year, and our cost reduction road map will allow us to be able to compete with First Solar in terms of the system -- balance system level, so that margin wise we are going to compete with them sometime next year, so by that time and we expect to have relatively stabilized the gross margin and they might have to suffer and to have the decline in the gross margin because they started at the high level of gross margin.

And the things we are looking for is we have to internally continuously increase or improve our non-profit costs innovation technology that allows us to be able to meet our cost reduction roadmap in the long-term.

Gordon Johnson - Hapoalim Securities

Okay, that’s extremely helpful. And then just a few housekeeping questions -- I guess number one on the operating expenses, how should we think about modeling that moving forward, flat versus this quarter, down or up?

And then lastly, there’s been some discussions among some of your competitors of the decision to do the EPC process themselves, like Canadian Solar, LBK [inaudible] Solar have talked about developing projects themselves with the intent to sell them off later.

I guess number one on the OpEx, how should we think about that going forward? And number two, do you guys have plans to develop projects with the intent to sell them later?

And thanks, guys, and congratulations on a great quarter.

Terry Wang

Thank you very much. Let me answer the first question -- the operating expense that in the second quarter we disclosed but included -- we cannot say one-time but it relates to a write-off of $5 million accounts receivables, so if you take that out it’s about only $17 million approximately for the quarter and going forward, I think that we are expecting the third quarter and fourth quarter will increase due to the fact that we increased our activities, especially in the sales and marketing area as Mr. Gao and Hsiyuan mentioned that increasing global sales activities so that we will accordingly operating expense will more sort of expand in growth in the sales and marketing expense, and also related to our R&D roadmap down the road. We will increase our R&D expense in the second half so in general speaking, we will increase our operating expense.

But it’s going to be very tight on the G&A expense in the second half, so in other words, the relatively we have this fixed and semi-fixed expense related to sales, shipment. So you can model in -- I cannot give the number but a moderate increase will be sufficient enough for us to support our operations.

Sean Hsiyuan Tzou

Regarding the second question, maybe I can take that -- yes, we do have a business development team who are continuously looking at the opportunities for investment and for the -- we do have a project in review to look into the return and however, we are taking a very careful approach and we do want to make sure every investment we do, we are earning money back. So we do not have any firm plan at this moment in order for the announcement.

Operator

And Dan Ries has our next question. Your line is now open.

Dan Ries - Collins Stewart

Thanks for taking my call. First I had a clarification -- I think you mentioned a 200-megawatt backlog; is that just for the fourth quarter, just for the third quarter, or for the second half in total?

Terry Wang

It’s the second half in total.

Dan Ries - Collins Stewart

Okay. I’m curious -- do you think you can get through all of the remaining high cost inventory during the third quarter and would the fourth quarter therefore then represent kind of your purchases under contract?

Terry Wang

Thank you for asking that question. Yeah, you can see that we are pretty confident we can get through and we’ll be completely out in the fourth quarter of this year, and due to the fact that we’d be looking at our balance sheet inventory continue to decline through last year and quarter over quarter up to less than 70 or 60 in million dollars of inventory and second quarter. We expect in the third quarter inventory will be even lower due to the high demand we have to rent -- currently rent out at the full utilization of the capacity that would have to support our customer demand.

So end of the third quarter, we are expecting the carrying cost in inventory will to a great degree diminish so that we have a very good start in the fourth quarter of this year.

Dan Ries - Collins Stewart

Okay, and then my question really on polysilicon is that as you go into 2010, there’s some scenarios that have polysilicon going way, way down, maybe staying flat, maybe some could even go up. How much of your 2010 purchases do you expect to be under your existing long-term contracts and how much would be -- how much I guess overall would be related to spot versus fixed?

Terry Wang

Currently we have about more than 80% of our requirement for poly from long-term contracts, so we are expecting going forward next year will be maintained and at that level, which means we will have more than 80% poly requirement from long-term contracts. And the other gap just exposure to the market, so they will have room to be expansion or reduce, depending on market demand.

So that in long-term contracts we sign in the costs on average, we do have an advantages over -- and actually favor price over the market price going forward. We expect it, so next year, even market jobs, so we are expecting we are still going to have favored price according to the marketplace.

Dan Ries - Collins Stewart

Maybe a clarification on that -- the 80% that’s under long-term contracts, some long-term contracts can have fixed prices, where others can have floating prices. Are you saying that the 80% is all fixed or is there a floating component to a portion of it?

Terry Wang

We have three categories in the long-term contracts -- one is that we sign -- we’re the first company in China to sign with the large, big well-known brand name suppliers, such as Walker and DC Chemical two years ago, and with a lower fixed price and still lower at this time, to this time. And also we do have the [inaudible] of long-term supply, contract with the market price adjustment discount of 10% and that’s in the terms, so that can be adjusted accordingly and it depends on the market price change.

And thirdly we did have a high fixed price in the past and last year when price was up but now, since this year and due to the current situation, the poly dropped dramatically, we have successfully renegotiated price down for the remaining projects, the contract at favourable price.

So in other words, we don’t have any fixed price above market price for all the long-term contracts poly volume.

Dan Ries - Collins Stewart

Thank you very much.

Operator

Your next question comes from the line of Vishal Shah.

Vishal Shah - Barclays Capital

Thanks for taking my question. Can you clarify what percentage of your Q4 shipments will be to the U.S. and Chinese markets?

Terry Wang

Okay, we expect our Q4 we will ship about 20 to 30 megawatts in the U.S. and maybe a little bit less than 10 megawatts in China.

Vishal Shah - Barclays Capital

Okay and do you need any further clarification on the loan guarantee program in the U.S. in order for you to achieve the shipments in the U.S. or you don’t need anything else?

Arturo Herrero

Let me answer your question -- for the U.S. markets, as you may know from our last release, we have been [inaudible] [production] California commission so we have the certifications for the UL for all our range of products in different categories and powers and also we have been, as you know, we have been sitting in the board of SIA, the association for photovoltaics. So far, at that moment we have everything on the basis to build a very growth potential expansions in the U.S. market. We have established a team of professionals there, apart of the [inaudible] that we also announced in San Francisco Bay area.

Vishal Shah - Barclays Capital

Very good. So it looks like you don’t really need any clarification on the loan guarantee program in order for you to achieve this growth? What about the Chinese market? Do you need a fee and tariff in order for you to achieve the 10-megawatt shipments in Q4?

Sean Hsiyuan Tzou

We are actually very closely following of government programs. We do -- government did -- the federal as well as the provincial government actually announced all the targets. We do have a claim submitted. However, all the details will have to come out in order for us to proceed, so those are the ones we are waiting. And some of them are -- some of the programs will involve in [fee and tariff].

Vishal Shah - Barclays Capital

Okay. What about prices in these two markets? It appears to me that these two markets are going to be more challenging in terms of the prices relative to some of the Europe markets. Is that fair and do you expect to sell at a discount to say the European markets in China and the U.S.?

Arturo Herrero

Well, if you see the historical evolution on the trend on prices, always has been depending mainly on two different variables -- one variable for sure is the supply cost of the raw material, of the silicon. And so far, at this stage, we don’t have the shortage that we had in the past years. And the second variable is the demand.

In this country, like U.S. and China, the price, the ASP has been lower than European countries, like Italy, Spain, Belgium, or even in Germany. However, we have seen a trend on the [inaudible] price but only because it’s so -- it’s not so difficult to transport product to the different regions.

However, there is also differentiation price depending on the quality of the products and in this sense, Trina Solar has a very good [branded commission] and Hsiyuan was pointing that at the beginning of the call. So we can reposition ourselves as a competitive product but at the same time, high quality and brand recognized. So it impacts also in the price that the customers are able to pay for our products.

So the USA for sure will be slightly lower than prices in Europe and in order to enter into the Chinese market, it depends a lot on the demand and how the law is established. We expect that at the end of the year in order to see which is the prices and the demand that will grow in the next year [inaudible].

Vishal Shah - Barclays Capital

Very good, thank you. So then going back to your guidance, your margin guidance, it looks like your silicon costs are declining by 25% and you are expecting further, say 5% or so non-silicon cost reduction. That should enable you to maintain relatively flat gross margins, even if ASPs were to decline by 15%, so it looks like you are seeing more pricing pressure than what you are guiding to. Is that a fair assessment or should I assume that visibility at this point is fairly limited and your ASP conservative?

Terry Wang

The guidance for the third quarter, I think that based on the things that we always say and in the past we were talking about, we will maintain a sustainable, relatively high gross margin in the poly based margin product that talking about the middle or high in the 20s. But the market right now in the second quarter, even though demand has increased dramatically but we will also see the decline in the ASP, so we -- as we treated the ASP is still -- it’s not very controllable still in the -- uncertain, so risk is still there so responsibility, we’ll see give the guidance that we can meet and we are looking for the up-side. That will be the benefit for investors and for operation. I think that is the right thing to go, to do and we will maintain a high level. And the point is important to maintain and a sustainable, relatively high gross margin -- that way we will meet our target for the year.

Vishal Shah - Barclays Capital

Based on the visibility you have so far into Q4 and next year, what do you think your margins will look like in Q4 and Q1? Do you think you can maintain these levels or -- it looks like pricing is coming down at a much faster pace. You’ve caught all or most of your cost reductions pretty much complete by the end of this year.

Terry Wang

You know, these things have to see how evolution of the ASP trend is going to be for next year and also the cost reduction, how can we achieve. But given the current roadmap or projection we have in the cost area, we are still expecting relatively aggressive cost reduction on both sides, on non-poly and poly.

And ASP, it depends on the next year’s in total global market size demands. If the relatively strong demand that we expect in the ASP will be stabilized for next year so that we can have comfortable gross margin, but you know, you just released the [inaudible] expected outlook for next year but we will do our best to match, to maintain our gross margin as of this year so that we can -- you know, to deliver our results, to [set aside] our [inaudible] and investors.

Vishal Shah - Barclays Capital

Great, and just one last question -- Germany was the biggest market in Q2, correct? And it will be the biggest market in Q4, is that right?

Arturo Herrero

You mean general in the market or you mean for Trina Solar?

Vishal Shah - Barclays Capital

For Trina.

Arturo Herrero

For Trina Solar it is still the three biggest markets are in this order -- Belgium, Italy, and Germany. And the percentage are very, very similar -- the three of these areas.

Vishal Shah - Barclays Capital

And Q4, you still see the same mix?

Arturo Herrero

Yeah, in Q4 we see still a similar leadership by Italy, Belgium, and Germany and also we’ll be taking much more percentage USA and China.

Vishal Shah - Barclays Capital

Okay, so the growth in Q4 will come from USA and China, you will maintain your volumes in Italy, Belgium, and Germany in Q4 for Q3 levels -- is that fair?

Arturo Herrero

No, that is not correct -- I mean, the volumes will have increased in all of these areas but in terms of percentage, will be reduced in Italy, Germany, and Belgium in favor of new emerging markets.

Vishal Shah - Barclays Capital

Very good. Thank you so much.

Operator

Our next question is from Kelly Dougherty.

Kelly Dougherty - Macquarie Research

Thanks. Just to follow-up on your downstream strategy, for the project in China, are you planning to partner with some of the large state-owned enterprises like some of your peers are doing, or are you going about it a little bit differently?

Sean Hsiyuan Tzou

Yes, in the downturn, if you are referring to our strategy in China, yes, we are looking for different ways to work with developers as well as large utility companies and at the same time, we also are developing certain projects with our current system integration team in Trina, so we actually took the multiple approach in China. Did I answer your question?

Kelly Dougherty - Macquarie Research

Yes, thanks. Just a quick follow-on to that -- obviously brand is a significant factor and in a lot of the other markets -- do you really think in China that brand is going to make all that much difference?

Sean Hsiyuan Tzou

Yes, definitely. I think -- well, we do believe the Chinese government is -- they are coming -- they do have a very strong commitment to the green, so the current -- actually the current two programs we saw are just a starter. We are actually looking for the [inaudible] tariff program for the fixed station in the forthcoming few months and it will be for the strong programs from every province to support this, so we do feel the -- yes, those are going to help the entire solar industry.

Kelly Dougherty - Macquarie Research

I totally understand -- what I am trying to understand is is brand really that important in China or is it going to be more about price or going to be about kind of equitably giving everybody a share of the market? How do you think about that?

Sean Hsiyuan Tzou

I think it will, okay? Because if you -- some of the market definitely will because of locality of the company, they may take some advantages. But if you look at -- if we look at the larger piece of the programs, eventually all this competition will be in line with the -- will be actually aligned with the international brands, just like a good example is in the earlier -- the [inaudible] building, one of the very famous -- our customer which is our Belgian EPC program installer, they actually are actively involving China. They are not the only company actively involving China, so when -- what they are going to bring in is not only the technology advantages but they are also going to bring in the knowledge and to help the entire China PV program to better position ourselves.

So pricing used to be the most important factor; however, we do believe this situation is going to be gradually changed.

Kelly Dougherty - Macquarie Research

Okay, great, thanks. And then thinking about cost reductions going into next year, how should we think about quantifying that and what do you still have left to drive the processing costs even lower?

Terry Wang

The process cost reduction next year, we’ll continue to improve and reduce from this year and due to the fact that we lay out and -- all the way and a few factors, number one as we continue to work on with suppliers, that we know a PV product, we had signed six contracts with the non-poly material supplier and going to their plan to invest actually and some of them already started to come in, so we can work with them and they are going to be our solid supply with the relative [inaudible] price going forward, long-term partnership. And secondly as the -- you know, our technology evolved, not just for the efficiency level improvement but also the process cost, process innovation and throughout the four areas, from [inaudible] to [inaudible]. That we will -- especially we adopt the manufacturing line and programs so that we can optimize our consumable material to increase our production yield and also further reduce our cycle time at our [East Campus] is set up with the more advanced design, you know, that -- for manufacturing pipeline with [inaudible] so that -- the goods can move around and logistically within the one roof so that virtually there was the lost [inaudible] of those can be greatly minimized or diminished to the degree of being targeting to what class levels. And so anything that is related to the usage and also the -- you know, the things that especially in quality also in conjunction with efficient level improvement, so we are expecting next year we’ll continue to lower our process cost as a result of those combined.

Kelly Dougherty - Macquarie Research

Thanks, and do you expect to lower them 5%, 10% -- is there any kind of quantification of that number there?

Terry Wang

You know, this year we’re expecting 15%, 20% reduction and next year we haven’t completely done the study analysis yet but we are expecting and as we mentioned, we are targeting by the end of next year, given our projection is correct, we will target a $1 dollar through costs by the end of the year, so that we are expecting a similar rate of reduction for non-poly process costs as of this year.

Kelly Dougherty - Macquarie Research

Okay, great. Thank you. Congratulations again.

Operator

Our next question is from Sanjay Shrestha.

Sanjay Shrestha - Lazard Capital Markets

Thank you. Good quarter, guys. A couple of quick questions, actually -- so when you were talking about this 200 megawatts in backlog for the second half of this year, is the pricing fixed on that and if so, why are you guys kind of hedging as to what your margin profile is going to look like? Or is there a contingency clause if the market price continues to go down, you’ll adjust the ASP to your customer?

Arturo Herrero

I will answer your question. On these 200 megawatts, 50%, around 50% are with fixed prices. We are understanding the dynamics of these markets, the prices have been reduced in the last three quarters and ASP will be reduced further according also to the [inaudible] reduction. So we are going to be flexible to our customers and our partners in order to make sure that we defend our market share, we gain market share, and we defend our position in these important customers for us. So I think this answers your question?

Sanjay Shrestha - Lazard Capital Markets

Yes, it does and kind of a follow-up on that then -- so to defend that market share, right, because they are enjoying a pretty attractive margin profile at this point in time, if --

Arturo Herrero

Exactly and also you have to understand that in the contracts that we have signed also, there is already a price decline quarter after quarter, so we know, we have visibility which is the prices on this next coming months and also we know, which is our potential, in order to keep the same profit, the same margins and at the same time, gain market share.

Sanjay Shrestha - Lazard Capital Markets

Got it. So kind of a follow-up on that, if things were to get tough, right, and you guys were to start your competition from all of your domestic peers, if you would, how low do you guys potentially see margin going and despite the continued decline in poly prices, as well as ongoing decline in ASP? How low are you comfortable taking that margin down before you said this is getting silly now?

Arturo Herrero

Let me just answer the piece of ASP -- and I will pass the question of margins to our CFO, Terry. For ASP, again we are seeing devolution of the market. We see the aggressive positioning of our competitors, especially local competitors. And as I told you before, we have advantages in front of our competitors that not only do we have a good cost reduction but also we have a very good position in markets, especially in Europe and now we are entering into U.S. and in China with the same marketing strategies.

And in all these markets, we have the advantage that we are very diversified in terms of customers. We have more than 15 customers per quarter and more than 60 customers in our portfolio, active customers for the year. And also in terms of geographic diversification, we are in more than 20 countries and this is something that our competitors, local competitors haven’t been able to position themselves in so many countries. And I think Terry will answer your further regarding the margin.

Terry Wang

To answer your question on the ASP, number one is I just want to summarize that I know that the price is competitive but we are not the company looking for one tier to lower the price and to disturb the market but we will compete however to lower the price in the market and the reason that we do, as mentioned as a cost leader, we do have advantages to be able to compete in the market and at the same time, maintain the relative high margin. But if you ask what’s the margin -- how low can it go in order to make it market share expansion, that will depend on our competitor performance, how they can lower. But the bottom line, we will maintain a profitable situation going forward. I mean that’s -- because we have the cost advantages, not just the 1% or 2%. I mean, we have pretty substantial advantages in gross margin in terms of percentage, so we can --

Sanjay Shrestha - Lazard Capital Markets

I hear you, and I agree -- okay, that’s great. A few follow-ups, if I may -- so for 2010, right, how much sales visibility that you guys already have at this point in time? And I imagine that you are expecting incremental growth meaning, you know, at least a [bear growth] market probably with the U.S. and China, unless you guys have a different pot on that.

The second thing is can you remind us as to your long-term poly suppliers -- who are they for ‘010 and what sort of an average poly prices do you have coming to you from those long-term suppliers during that year?

Terry Wang

The polysilicon, I can answer that one first. The poly, as I mentioned that we have more than 80% coming from the long-term suppliers next year and going forward and that the average price was -- that’s going to be a level down year over year and in some cases, quarter over quarter. But currently, that price on average price is -- it’s below our current market price.

Sanjay Shrestha - Lazard Capital Markets

Below current market price, okay.

Terry Wang

Yes, and next year we will continue to see [unstable] price to the market as if you were expecting the $6, 60 or 65 or [inaudible] 60 and we still have an advantage and that depends how you view the market price is going to be over next year.

In next year, in terms of going -- in terms of 2010, the -- you know, in terms of market, [inaudible].

Sanjay Shrestha - Lazard Capital Markets

But Terry, who are some of your long-term poly suppliers for next year?

Terry Wang

Oh, sorry -- currently we have the Walker, DC Chemical, GCL and [inaudible]. And those are our major suppliers.

Sanjay Shrestha - Lazard Capital Markets

Okay, and the majority of that would be coming from Walker and Hemloch -- is that a fair assessment or not?

Terry Wang

GCL is number one and Hemloch and DC Chemical and Walker, in that order.

Sanjay Shrestha - Lazard Capital Markets

Okay, terrific. Great, appreciate that.

Sean Hsiyuan Tzou

Okay, so to answer the question regarding visibility for 2010, what we have so far is already contracts with our existing partners and some of these contracts are multi-year contracts, so we have two three-year contracts that are already signed in 2008 and 2009, so even the prices are not fixed so we will need to have a negotiation and we will have to be flexible according to market conditions. We have volumes and we have the service provided and the relationship established with these long-term players and partners that we have.

And also taking into account that we are entering with putting a lot of the photo investment in new countries like USA and China where we are already betting on entering into big tenders for huge megawatt projects. We foresee that 2010, when we see much more, a better situation on the financial markets and we see much more availability for loans, we can feel that 2010 will be a very good year for the photovoltaics and especially for Trina Solar.

Sanjay Shrestha - Lazard Capital Markets

Okay, that’s fair enough. Thanks a lot, guys, and congratulations on a good quarter.

Operator

Our final question will come from the line of Sunil Gupta.

Sunil Gupta - Morgan Stanley

Thank you. Terry, I had some questions on your inventory -- could you provide us the breakdown of how much of it is finished goods versus polysilicon, raw material, work in progress and the other supplies?

Terry Wang

Hi, Sunil, I’d be happy to answer that question -- yes, among the inventory, about $68 million and we approximately maintained a little bit decline some sort of raw material size and it now became approximate 20% of the total inventory in raw material -- now it’s about approximately 50% in the form of [inaudible] as we -- and purposefully produce a little bit more in finished goods in second quarter inventory so that we can support the high demand in the third quarter and due to the fact that in the second -- high demand in the third quarter, we’d be able to stretch, be able to meet our demand at the same time with stretch our capacity limits.

Sunil Gupta - Morgan Stanley

Okay, and your polysilicon inventory, what is the price of that inventory, or rather the cost in your books right now?

Terry Wang

In our books and we have been carrying -- the relatively and whatever the poly and price in the second quarter is the average in the inventory, so in other words in poly we have about 80 -- it’s about $0.85 per watt basis, so you can [model that back] to 6.1 grams per watt, so that’s roughly about 110 -- between 110 and 120 per kilogram now in inventory.

Sunil Gupta - Morgan Stanley

Okay, so --

Terry Wang

But that’s only very small fraction when compared to a demand requirement for the third quarter, so in other words -- and it will have some impact on the average poly price for the product costs but it’s not going to be a real material impact because the only small fraction there.

Sunil Gupta - Morgan Stanley

So just looking at that, given how small your inventory is and if you are buying most of your poly you said at below market prices right now, of the $70, why is it that your average poly cost is going down by only 30% I think which you said in Q3? Or I think you said 45%.

Terry Wang

No, we are talking about Q2 versus Q1, about more than 30% reduction and Q3 versus Q2, we are looking for 25% reduction in poly.

Sunil Gupta - Morgan Stanley

So that’s exactly my question, that with the kind of shipment volumes that you are talking about, say roughly 100 megawatts, and you have a very small amount of inventory end of Q2 at 135 to 140 and if you are currently buying it roughly half the price, why is your blended cost not going down fast enough? Is it because you have some legacy contracts where you are buying poly at higher than [inaudible] the billing spot prices?

Terry Wang

No, our legacy contracts complete everything in the second quarter, so when I mentioned that the poly building into the cost of the product and we have to look at two parts -- one is raw materials sitting breakdown in inventory. The other one is the inventory that is already built into the finished goods, so next year, or next quarter, this quarter actually, third quarter and the average, the poly you have to [inaudible] with both raw materials and the finished goods in form of a material. So that portion is getting a little bit larger than just kind of the raw material side.

Sunil Gupta - Morgan Stanley

Okay. And what is your inventory policy going forward? How many days of polysilicon inventory do you want to keep?

Terry Wang

You know, so far when we are talking about inventory, the inventory side we are I believe one of the shortest in terms of days of inventory turn and we are down from -- right now it’s approximately about 50 days and so -- we are looking for -- continued to decline in the third quarter and the fourth quarter due to the fact that demand, and we don’t have enough product to be able to meet the demand, so that the inventory will continue to drop to the level that we are expecting and close to maybe 50 days by the end of the year.

Sunil Gupta - Morgan Stanley

But this is 50 days of sales, your total inventory?

Terry Wang

Fifty days of inventory turns.

Sunil Gupta - Morgan Stanley

Okay. How about your raw material inventory?

Terry Wang

Raw material inventory, that’s even -- percentage wise, we even declined, even higher down, even further just for the breakdown will be below 20% but keep in mind raw materials in the working process also taking some portion, so in other words our [half-in-half] in the raw materials and plus work in process we’ll take in the half and the finished goods we’ll take in the half in the composition of the inventory breakdown.

Sunil Gupta - Morgan Stanley

Okay, and I do understand that this is the last question, but maybe just a last follow-up from my end -- in response to earlier questions about your demand in Q4 and I think both you and Arturo mentioned that you expect about 20 megawatts in U.S., 10 megawatts in China. Even if you were to take that out of, you know, what’s implied in your guidance, it still seems to imply fairly significant growth Q4 versus what your Q3 guidance is.

And I think you mentioned that there’s some modest growth in Italy, Belgium, and Germany -- is there anything outside of those three countries which is driving your sequential growth in Q4 over Q3?

Arturo Herrero

We are seeing a lot of improvements in the market and we are seeing the demand increasing quite strongly from the first half of the year to the second half of the year. As Sean was mentioning, we have 200 megawatts in contracts and these contracts are spread in at least eight countries that I can remember, so it’s not only Germany, Italy, or Belgium -- it’s also Spain, it’s also Korea, it’s also USA, as we mentioned before. China, maybe we don’t reach 10 megawatts but it will be a split in other countries outside Europe and U.S., like [inaudible], where we have been doing the first sales, Israel we have been doing the first sales. This quarter is Slovenia, so we have several countries. France for sure, that I forgot.

So these not only [inaudible] countries. These are a lot of countries that they have established subsidies and programs to [incentivate] and we have been establishing their our brand in the last year-and-a-half. So now that the market is ramping up, we are quite confident that we will get market share and volume from these other markets.

Also you have to take into account that the first half of the year, part of the seasonality was a very strong impact in Q1 because it also delayed on the projects and now there is currently a lot of customers that are having the financial support. They want to do the installation of the systems before the change in the feeding tariff in the measured countries.

And a part of that could have the strong demand, we are seeing the improvement from U.S. thanks to Obama’s support and subsidies.

Sunil Gupta - Morgan Stanley

Okay, so if I was to ask this slightly differently, Arturo, looking at your full-year guidance, it seems that in Q4, you’ll have to do about 150 megawatts to come at the midpoint and if you take midpoint of your Q3, that’s 100. If I take out U.S. and China, I am left with say 130 in Q4 excluding U.S. and China, so that’s about 30% kind of sequential growth.

So will the markets such as Germany and Italy sequentially for you grow by a similar percentage in Q4, say 30%?

Arturo Herrero

Well, according to my estimations, if Q3 is around -- assuming Q3 is around 100, in Q4 we’ll do another 137 and have the minimum to complete the guidance to investors. And to answer your question, our guidance is still the 350 to 400 megawatts and the split will be mainly in the same amount of countries or the same countries that we have been selling in Q1 and Q2. In this order is Italy, Belgium and Germany and then Spain, France, Korea, and what is quite important impacting in Q3 and mainly in Q4 will be USA. That will be significant improvement and it will be impacting a lot of growth on our volumes in Q4.

Part of Australia that I am sure you have seen our release, that we have been showing the quality of our products there and Australia is a market that they have subsidies and we are increasing also our volume for the end of the year.

Sunil Gupta - Morgan Stanley

Okay, great. Thank you very much.

Operator

Currently there are no further questions in queue.

Penelope Ko

On behalf of the entire Trina Solar management team, we want to thank you for your interest and participation on this call. If you have any interest in visiting Trina Solar, we invite you to contact us through our IR address.

Again, thank you for joining us on this call. This concludes Trina Solar's second quarter 2009 earnings conference call. Thank you, Operator. You may please now disconnect.

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