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Trina Solar Ltd. (NYSE:TSL)

Q4 2009 Earnings Call

February 24, 2010 08:00 a.m. ET

Executives

Thomas Young - Director, Investor Relations

Jifan Gao - Chairman and CEO

Terry Wang - CFO

Sean Tzou - COO

Analysts

Rob Stone - Cowen and Company

Kelly Dougherty - Macquarie

Gordon Johnson - Hapoalim Securities

Lu Heung - BFA Merrill Lynch

Vishal Shah - Barclays Capital

Nitin Kumar - Nomura

Sunil Gupta - Morgan Stanley

Mehdi Hossein - FBR

Operator

Good morning. My name is Lisansa and I will be your conference operator today. At this time I would like to welcome everyone to the Trina Solar fourth quarter 2009 earnings 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. Mr. Young, you may begin your conference.

Thomas Young

Thank you and good day to all and welcome to Trina Solar's fourth quarter and full year 2009 earnings conference call. This is Thomas Young, Trina Solar's Director of Investor Relations. With us today are Trina Solar's Chairman and CEO, Jifan Gao, Chief Financial Officer Terry Wang and Chief Operating Officer, Sean Tzou.

Before I turn the call over to Mr. Gao, may I remind our listeners that in this call managements 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 represent management’s estimates as of today, February 24, 2010. 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 www.trinasolar.com.

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

Jifan Gao

Thank you, Thomas and good day everyone. Here’s wishing everyone a Happy Chinese New Year and the first year of the Tiger. We're pleased to announce our strong fourth quarter performance, which we believe our increased brand recognition, high quality products and manufacturing cost reductions were key drivers for our growth and margin expansion in 2009. Although ASP declines were felt across the industry, we achieved a year-over-year increase in revenue for 2009.

In the fourth quarter, we continue to improve our cost structure and reduce our blended non-silicon cost to $0.78 per watt in Q4 from $0.82 per watt in Q3.

We established our European and US regional headquarters. We still (inaudible) provide better service to our customers and the (inaudible) to the key solar markets. We accrued 350 megawatt to 400 megawatt demand in the first half of 2010. We continue to see strong demand for our best-in-class products for the second half of 2010 from diverse customer and country sales mix in existing and new PV markets. We continue to focus on our R&D programs through technology development, innovation and application to create solid new products to the markets. We are also expecting to increase (inaudible) for mono and multi-crystalline cells by the end of 2010 upto 19.5% and 18% on a labor tax production respectively.

We achieved positive net operating cash flow of approximately $18 million in Q4. We also improved our balance sheet with a five-year syndicated loan facility. Looking beyond 2010 we believe market outlook continues to be strong and we believe that the declining cost of the solar PV system and implementation of tax change policies will drive growth and pushing countries for vast solar investment policy solar investment (inaudible) proven manufacturing costs and (inaudible) strong financial management, we are well positioned to realize market share gains to secure our market leading position.

With that we would like to turn the call to our CFO, Terry Wang to share our outstanding fourth quarter and the full year 2009 financial results.

Terry Wang

Thank you Mr. Gao. And welcome to everyone participating in today’s call. On this call I’ll like to present an overview of our financial results for the fourth quarter and full year 2009 followed by the company’s guidance for the first quarter and full year 2010.

The fourth quarter was another strong quarter with record shipments volume revenue and gross margin as our cost reduction and efficiency improvements achieved through process and efficiency optimization as well our diversified market and a channel strategy provided solid quarterly and annual results. Although significant ASP declines were experienced throughout the industry, we continue to expand attractive margins as we focus on reducing our manufacturing costs, both silicon and the non-silicon based and increasing productivity, supply chain and efficiency gains throughout our core value areas. Our total net revenue in the fourth quarter was $313.3 million, as the global economic conditions and end market environments continue to improve our (inaudible) brand condition increased demand for our products, and expanded our market share and attrition in established markets as well as both sales in emerging markets to further solidify our leadership in this competitive industry.

This result was our fourth quarter sales near top range of our guidance as $133.7 megawatt representing shipments. The sequential growth in total shipments was primarily due to improved PV system purchased financing conditions in major European markets, and increased year end demand to install new PV systems ahead of [generating] seeking power adjustments in the established PV markets including Germany and Italy.

Gross profit was [$102 million] in the fourth quarter, gross margin was 32.6% in the fourth quarter of 2009, an increase from 28.5% in the third quarter and exceeding our previous guidance of between 25% and 27%.

Our stronger than expected gross margin was due to higher than expected ASP coupled with a lower than anticipated silicon cost and accelerated reduction of our non-silicon manufacturing cost. Our [reducing] silicon material cost declined approximately $0.25 sequentially, which should reflect the changes in our poly portfolio supply price as a result of the effective management kind of type adjustment efforts for our long-term contracts and the effective control of inventory returns.

Our in house splendid mono and the multi non-silicon cost, including depreciation increased to approximately $0.78 per watt from $0.82 per watt in third quarter, while our in house non-silicon cost for multi-crystalline production, excluding depreciation was also reduced to $0.67 per watt. Operating expenses were $37.8 million, or 12.1% of net revenues in fourth quarter, a sequential increase from the 10.3% in the third quarter.

The increase was attributed to increase in the sales and the marketing expenses due to establishment of a European and the US headquarters, as well as the $6 million write-off of separate powerful receivables related to flexibility of one European customers and the one supplier. As a result our 4Q operating income was $60.4 million. Our 4Q operating margin of 20.6% compared to 18.2% in the third quarter of 2009, and a 1.8% in the fourth quarter of 2008.

We realized a foreign currency exchange loss of $2.6 million in the fourth quarter of 2009 net of sale value of derivatives in currency hedging. During the fourth quarter we maintained our hedging measures to forward the currency contract instruments and enhance our natural hedging effects Q4 in currency denominated account receivables and account payables on our balance sheet.

We continue to actively monitor and adjust our hedging capacity based on the fluctuation levels of the US dollar [growth], R&D and other currencies to mitigate possible negative effect of extenuate the volatility. Net income was $49.2 million in the fourth quarter of 2009, an increase from $40.1 million in the third quarter. Net margin was 15.7% in the fourth quarter of 2009, compared to 16.1% in the third quarter of 2009. The negatively 0.3% a year ago.

In January 2010, the company changed its 88 share ratio. From 100 ordinary share to one ADS two, 50 ordinary share to one ADS. Which carried effect of a two-for-one ADS split. Reflected in the quarterly and a full year EPS figure or [SPF]. Earnings per fully diluted ADS from fourth quarter were $0.74. I will announce couple of few highlights of our full year 2009 results. Which are prepared in our earnings release.

Total shipments were 399 megawatt, an increase of 98.5% from 201 megawatts in 2008. Total revenues for full year 2009. Was $845.1 million, from $831.9 million in 2008. Gross profit of full year 2009 increased 44.2% to $237.2 million from $164.4 million in 2009. Full year gross margin was 20.1% compared to 19.8% in 2008.

Operating income for full year 2009, was $135.4 million net income for full year 2009 was $97.6 million increased from $60.1 million or $61.4 million in 2008 which was primarily due to our gross margin increase and a growth in our global sales. This resulted in earnings per fully diluted 80 days of $1.68 for full year 2009 compared to $1.20 in 2008. 2009 saw an improvement of our balance sheet by our ability to achieve a positive operating cash flow of $79.5 million in the fourth quarter, solid cash balances and an efficient management of our inventory balances.

As of the December 31, 2009, we had $478.1 million in cash and cash equivalents and restricted cash, an increase from $384.3 million on September 30 period. Our working capital balance was $412.1 million. As of January 31, 2010 the company's total credit line from approximately 15 domestic and the international banks including a long term syndicated loans facility increased to approximately $1.03 billion of which includes approximately $425 million of unused available credit lines.

In January 2010, the company's European subsidiary received a Euro 100 million loan facility from our domestic bank with a term of 15 years. The facility can be drawn down in the event that the Company requires financing in connection with certain downstream projects released through a value added service to selective customers in Europe. As of date the company has not utilized this loan facility. We believe this facility presents us with opportunity to further drive incremental market expansion by working closely with our customers. This brings us to the guidance for the first quarter and the fiscal year 2010 as follows. For the first quarter of 2010 we expect to ship between a 180 to a 190 megawatts of PV modules, we believe our gross margin for the first quarter were likely to be between 26% and 28%. For the full year 2010, the company expect total PV margin shift of between 750 to 800 megawatt representing an increase of 88 to a 100% growth from 2009.

In summary, we will reached to affirm our commitment to continually need or exceed our annual target to reduce our non-silicon manufacturing cost for our core raw material to molecule manufacturing capability and to meet our market share expense in gold. In this fourth quarter, we continue witness strong demands for our product and reflecting our financial results as we already had a 100% of capacity utilization at our single campus outsourcing will be a part of our strategy to meet this increase in market demand. Our core manufacturing efficiency we fully enhance the strategically advantage to outsource a portion of our way for need while maintaining our attractive overall margin forward. We believe this pattern described to we are lost to continue to deploy capital with the highest efficiency to meet the increasing demand for products from existing and new customers in a growing portfolio of a country market.

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

Sean Tzou

Thank you, Terry. Hello everyone with us on our call today. We are extremely pleased with the execution of our fourth quarter operations as we concluded a very highly successful 2009. We still continued improvements and strategic developments in several areas. As Terry introduced our ability to realize our 33% quarterly shipment increase we evolve it from the successful commercial launch of our new East Campus which features a large scale single house facility with wafer cell and module production.

During the fourth quarter we exceeded our 2009 non silicon manufacturing cost target of $0.80 to $0.78 per loss by streamlining our manufacturing processes and enhancing our supply chains, while further implementing in innovative technologies that improves our manufacturing efficiency. In addition to the new manufacturing campus we continue to focus to lean manufacturing is being extended are our recent introduced ERP system which ties the key manufacturing and supply logistic requirements to the sales or the process.

We are expecting the ERP system will also benefit our future supply chain efforts. In 2010, we continue to leverage all manufacturing and supply chain strengths as well as the in house quality test lab, a laboratory capability to accelerate our high sale efficiency and introduction of the new market driven products also stated by our CEO, this will be achieved by our focus to technology to comment like innovation. Followed by the technology application, to create the new product such as recently announced square mono cells a high efficiency product whose cost structure will be carefully tied to our existing product lines.

(inaudible) and then the development including the architecturally (inaudible) direct modules and the large size module line which offers installation efficiency for utility care projects. Turning to our market outlook, in light of concerns to incentive program revision in Germany, we have been followed for sales distributing strategy which we believe can best position us in both existing and emerging PV markets going forward.

Specifically we believe we are best positioned to minimize the potential negative impacts due to the following.

First, our long-standing strategy and proven ability to diversify our country sales portfolio to balance both near and long-term objectives. For example our both fourth quarter 2009 and full year 2009 shipments will allocate approximately only one third of our shipments for the German markets.

Second, our ability to allocate our products to established partners who are largely and increasingly focused in roof-top end market where feed-in tariff premium over the land-based system are expected to be preserved in markets such as Germany, Italy and France.

Third, our focus to customer services which include their flexibility to distribute or employ our module products on a multinational or even multi-regional basis.

Fourth, the strong established relationship and work history with our European customers with 2 to 3 years on average. As a result of this distribution strengths, we continue to build the existing European market as the core of our business going forward. We have essentially secured our entire European shipment allocation through out 2010 which we believe will represent approximately 80% of our global sales.

For our estimated 10% allocation to the United States, we are currently in discussion or advanced negotiations involving the better portion of this figure as we stand only six weeks into the New Year.

Furthermore, we also experienced substantial business opportunities in Asia Pacific areas, which provides continual growth potentials in the years to come. As such our visibility into our 2010 order book is significant and estimates to be between 350 megawatt to 400 megawatt in the first half of the year and 750 megawatt to 800 megawatt in the full year. For our current first 2010 sales, we remain nearly 100% allocated based on the current and anticipated capacity extensions.

Our second quarter order though if not fully priced currently reflects strong ASP tradition from first quarter for shipment into May. Regarding capacity expansion plan for our year end 2010 forecast of between 800 megawatt to 950 megawatt of cell and module capacity, we're phasing our quarterly additions to reach this period by September quarter end to allow the potential expansion of site based on our monitoring of sales demand going forward.

In regards to in house, non-silicon manufacturing cost, we wish to reiterate our year end 2010 target to reduce to $0.70 per watt from $0.78 in the fourth quarter of 2009. Our confidence to reach this mark is based on the long-term sustainable operating and inventory efficiency advantages afforded by our single campus location, superior management team and our ongoing logistic and supply chain improvements which is further supported by a world class PV material quality testing lab.

Related to this we wish to update on additional area we believe differentiates our business model. Whereby in January 2010 we received initial deliveries from our PV Park slowly reclining partners who is strategically collocated with our Changzhou manufacturing campus. Additionally our second PV Park supply partner has initiated construction of their new PV class manufacturing facility with the initial production targeted in the second quarter of 2010.

We continue to work closely with Changzhou national Hi-Tech district who has recently signed investment MOUs involving additional key PV component manufacturers of which we hope to announce soon. Finally in the area of local market operation support, we have recently opened our European and North America regional headquarter offices in Zurich, Switzerland and San Jose, California as of January 2010.

Additionally we have initiated local sales office operation with key staffs in Japan and Korea. By bringing our sales operation, back office, technical, logistic support functions closer to our customers, our simple goal is to make our customer’s purchase experience smoother, efficient and more delightful. We also believe our benefits of increasing local presence will extend to our regional banking relationship and eventually to finance the purchase of our modules easier by our customers. With that we would be happy to open the call to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Rob Stone with Cowen and Company.

Rob Stone - Cowen and Company

In terms of your outlook for the first half, can you say what sort of ASP trend you are expecting into Q1 and how much of that is reflecting exchange rate versus actual and market pricing?

Terry Wang

Hi Rob this is Terry, to answer that question we are expecting given current situation in Germany and other area we anticipated in the first quarter will be a drop between 5% to 10% (inaudible) comprised as result of the impact of Euro fluctuation. The second quarter that we think and given feedback from order’s top line, that is pretty much flat in the first two months up to May similar to the price in the first quarter, then we see slightly moderate decline in June. Overall for the year, we’re expecting the ASP will drop between to 15% to 20% on average from Q4 of 2009.

Rob Stone - Cowen and Company

A question for Sean about your overall shipment expectations and allocation to market. If you have close to 400 megawatts of shipments in the first half, it sort of implies a flat second half. Do you expect the slowdown in Germany is going to outweigh normal seasonal trends in other markets or is there potentially upside to your second half shipment outlook?

Sean Tzou

Yes, our first quarter guidance right now is between 350 megawatts to 400 megawatts as we indicated and we are due to the German feed-in tariff, we are not expecting the volume to be changed. We expect our volume is going to tip our original forecast of 750 megawatt to 800 megawatts from all the indications indicated by our key comments and we had originally planned to reach our capacity by 800 megawatt to 950 megawatt by end of the Q3 and we’ll reserve the flexibility if we see the market is going to continue to be strong, we will reserve the options to potentially increase a little bit.

Operator

Next question comes from the line of Kelly Dougherty with Macquarie.

Kelly Dougherty - Macquarie

I'm sure you are surprised to get a question about your first quarter margin guidance. So I'm just wondering if you can give us some detail on how you arrived at the 26% to 28% level given that you had 32.6% in the fourth quarter, you are talking about strong demand relatively resilient pricing in the first half, so I am just kind of wondering what might be the reason you are expecting the client and margins?

Terry Wang

Hi Kelly this is Terry, I glad you ask that question more than 32% of course in the fourth quarter 2009 really was the record for us and as I talked in the past we were sustainable provided the commitment to margin and then the high 20 and that’s the philosophy we were thinking and the other one was the given the current situation that’s ASP drop of between 5% to 10% and the cost relatively and we had cost (inaudible) probably cost drop probably about 5% range and the other 10% contrast on the party so as a result that the EURO depreciated and from the beginning of the year up to this date and I think about for the safe side that prudent to predict next months and still uncertain. So I think about gross margin will be we think that prudents throughput 26% and 28%, but I was expecting an upside if the EURO is not appreciate too much and we could have upside on that.

Kelly Dougherty - Macquarie

And what kind of EURO assumption do you factor into that, that guidance level?

Terry Wang

We are expecting that for that level and for the you know there is downwards from current rate.

Kelly Dougherty - Macquarie

And then I'm just hoping if you can give us some detail in to your guidance for 750 to 800 megawatts shipments. Are you assuming a specific market size for this year and then a market share assumption and then did you say that you had visibility into about 80% of those shipments? If that’s the case, if you could kind of just talk to us a little bit more about that that would be great.

Terry Wang

Let me talk about market share and then the other thing might be (inaudible) can answer that the sales with market related. We have a target in the last year and we achieved given the now official number, we are growing about 6.5% market share from the previous year 2008, 3.5%, so that’s big jump. As we are expecting and range (inaudible) 8.5% to 9% market share expansion. So based on that and given that the top line we had already in the secure and visibility as a phase to give up the dollar and for the year.

Kelly Dougherty - Macquarie

And just a follow-up on that visibility, did you say you had about 80% visibility and about 80% of that number?

Sean Tzou

No, I think in our (inaudible) maybe I can further clarify that. Currently we are working on the allocation system per region and we allocate about 80% of our modules to Europe and that was what I meant by 80%. Okay and so our yearly total shipment expectation is between 750 megawatt to 800 megawatt, we are located about 80% to Europe, 10% to the North America and 10% to the rest of the work.

Kelly Dougherty - Macquarie

Okay great and then, can you just talk to us about any visibility you might have into the numbers that we see before the first half?

Sean Tzou

The first half currently we are seeing in between 350 megawatt to 400 megawatt shipment is expected.

Kelly Dougherty - Macquarie

And as that shipment that you have contracts or purchase orders for already?

Jifan Gao

For first quarter, yes we do have a consent and purchase order to cover that. For the second half order we have about 60% contracted, and 40% basically firms and these are already allocate to the specific (on us).

Operator

Your next question comes from Gordon Johnson with Hapoalim Securities.

Gordon Johnson - Hapoalim Securities

So with respect to your OpEx, it seems like you guys took a slight charge in Q4, so modeling that going forward how should one think about your OpEx trending maybe in Q1?

Jifan Gao

The OpEx which as mentioned in the script that one of the big jump is related to the sales marketing expenses of increase on (inaudible) and most of the regions. The second component that can be a 6 million write off in each of the collectability of the customers and the supplier and we were not expecting that the level of that continue for that to work this year on quarter basis, but I will see that without that we are pretty much in a range of similar to last quarter, so roughly about 11% of the revenue in that range.

Gordon Johnson - Hapoalim Securities

Okay 11%. And then with respect to this discussion around the feed in tariff cut in German that’s potentially coming in June of 16% for roof-top, should we expect your ASP to kind of show a pretty significant decline in Q3 to represent this feed in tariff cut that’s coming in Germany and the potential price reduction that we'll likely follow globally, how should one think about modeling your ASP in Q3 of 2010?

Sean Tzou

Okay this is Sean and thanks for your question. Yes this has been the question that everybody is paying attention on. We have been polished with the market with our strategic partners in Germany to understand voluntary impacts will it be our conclusion is actually what we believe is the price drop in the beginning of the year is actually already start to accountable for the changes and we do not believe we would drop substantial this quarter feed in tariff drop because currently the distribution channel and also the indicator is actually enjoying a very good bonding and therefore we do believe there will be a moderate drop in the ASP and we won't know the detail that probably until mid of next quarter.

Gordon Johnson - Hapoalim Securities

Okay. And then with respect to the Q1, ASP, it sounds like you guys said it was down 5% to 10%, but when you include the impact from the year over, it seems like that would add roughly another 5% to 6%, so net net are we talking down more than 5% to 10% when you added the impact of the Euro and if the answer to that question is yes. It seems like the ASP decline kind of in line with the 10% cut in Germany, so how can one conclude that maybe we won't see some additional pressure win ASPs adjusted lower in Q3?

Terry Wang

Gordon I'd that wasn't correct was reported 5% to 10% and operating recruits to the Euro potential drop, and dealing current orders we have. As obviously translate to US dollar term already and with the submission the third quarter (inaudible) third quarter and we expect another drop by the within because we call it a 15%, 20% drop for the year. A piece of track, 5 to 10, then we expecting another 10% which includes and comprehend the changes in the Euro. I think that's in line what we expected and also some of the feedback from the company been pricing but one thing we'll we report now because of the currently. The German customers, European module makers, supplied customers, that the pricing is much higher than us and we right now help the customers to find more our product to level down on average basis and for their costs so that they can gain a decent return to reflect the changes of (inaudible) policy change and that’s what we are expecting that even next quarter relatively stabilize in our ASP because of this scenario and going forward the second half (inaudible) we will continue to play so that will hold our pricing and to some degree not in the same level to decline as getting good quality.

Operator

The next question comes from Jesse Pichel with Piper Jaffray.

Unidentified Analyst

Hi this is (inaudible) for Jesse Pichel. Congratulations with strong execution in the quarter. You sort of guided to second half shipment flat or modestly up, do you see a declining or flat German market and what other regions do you see demand pick up and I have a follow up.

Sean Tzou

We do see the second half the entire European market will continue to be very strong and a Trina module by what was totally indicated Trina module is actually very welcome and the inquiry of Trina module is actually much stronger coming forward. So we do not believe the Trina module will in a way our second half of the shipment in Europe will decline. We believe it’s going to continue as our current forecast.

Unidentified Analyst

Great. So and you sort of guided to a lower gross margin is that because you are buying external sales and also you know you are buying external wafers. What price are you buying those external wafers and how does that compare to your internal wafer cost?

Terry Wang

The lower guidance has offset the trend for the depreciation of the Euro and also to some degree as I mentioned earlier that remember last quarter the total outsourcing and we are expecting only outsourcing the wafer to the portion of up to approximately 20% of the year of output. So translated to the margin impact approximately 2%, less than 2% so in other words the guidance that we allow in margin has already reflected those any changes in that. That is a major outsourcing we come from but still have very, very small fraction with outsourcing sales but this is an insignificant portion.

Unidentified Analyst

Thanks for the clarification what’s your poly cost in Q4 and Q1?

Terry Wang

Poly cost in Q4 for what basis and we had about 30, 40. The 46% swap…

Unidentified Analyst

And about Q1?

Terry Wang

Q1 we're expecting as I said between 10 to 15 reduction from Q4.

Operator

Your next question comes from [Dan Reese with Colin Stewart]

Unidentified Analyst

I guess I have two quick housekeeping questions. One is did you say what the percentage from Germany was in 4Q09 and then have you said what you expect CapEx for 2010 to be?

Jifan Gao

The CapEx, we might have to retain, the outskirts of all the German market. CapEx for the year, because the last year we didn’t spend the money expected towards plaintiff for $200 million. We spend less than $130 million. So we push out the payment this year. So add up and we thought this could, we plan well of $200 million for each year. Now those 200 that’s close to our between $250 million and $280 million where we expect it to expand at this year.

Unidentified Analyst

Okay thanks and then so I was just curious if you have the percentage of revenue that was generated in Germany during 4Q.

Terry Wang

We delever over one third of our modules in the 4Q to Germany

Unidentified Analyst

Okay. And then I think the last question is kind if the question I was getting at. When I look at your capacity, your talking about shipping 180 to 190 in first quarter but I think you said that your capacity at least entering the first quarter was 600 megawatts for the sale in module which would I guess if you did on quarterly basis be 150. So are you saying are you operate your equipment above name plate or are you buying some sales to get to that 180 to 190 range?

Terry Wang

As I mention that we will buying very small fraction in sale the reason is with fuel capacity during this quarter already you add another more than 100 megawatts in sale capacity now we are support out to meet our demand.

Unidentified Analyst

Okay and the currency charges about $8 million in the quarter if the EURO stays flat here at about 1.35 exchange can you size it all the expected currency charge in 1Q?

Terry Wang

We did 1.35 that’s even more then the today's fleet that might further down is it in a currency charge but also we had a decent percentage to be expose it in (inaudible) by our hedging facility so that we hedging at a different level at $1.50 we hedging to some percentage at $1.45 to $1.40 I mean we have different level of hedging so we will minimize the currency risk as much as we can but I expecting if that will be case we will be more than and the loss going to be more than the previous quarter.

Operator

Our next question comes from the line of Lu Heung with BFA Merrill Lynch.

Lu Heung - BFA Merrill Lynch

Hi, I have a question on our polysilicon costs. How should we think about the polysilicon costs going forward, keeping that you have outsourcing and also how sustainable it is with very favorable cost structure achieving in fourth quarter is very high utilization.

Terry Wang

As I said, well I said polysilicon costs building in the product is not equivalent to the market price because we have some carrying costs in inventory. So, because of that actually help up to drop our price each quarter faster than the market price. So, but as we consumed less inventory so that carrying customer be minimized so the degree that’s why we had 25% deduction from Q3 to Q4 and for law basis is now becoming roughly between 10% to 15% and going forward I was expecting that next quarter is going to be around 10% reduction range and going forward could be in line with the single digit decline. So, that I think we'll to some in degree in line with the in general for the year in line with the (inaudible). So that’s why we will be able to see we will suspend our gross margin going forward.

Lu Heung - BFA Merrill Lynch

Can you give us your non-silicon cost in your multi and since that was not given in the presentation?

Terry Wang

Yes, non-silicon costs, we did have the release, I think that put into (inaudible) depreciation is about $0.67 per watt (inaudible) depreciation. Overall blended including mono is $0.78 include depreciation per watt and going forward we expect being the include deprecation level for blended, going down by end of the year we’re expecting $0.70 per watt include depreciation.

Lu Heung - BFA Merrill Lynch

And how much of the shipment is multi in the fourth quarter?

Terry Wang

The fourth quarter was more than 80% for multi-crystalline

Lu Heung - BFA Merrill Lynch

Sean, what kind of the capacity ramps do you expect by the end of the first half?

Sean Tzou

The end of the first half, we currently are looking at about 700 megawatt to 750 megawatt capacity.

Lu Heung - BFA Merrill Lynch

And do you have a guidance for mid-year?

Terry Wang

That’s for mid year.

Lu Heung - BFA Merrill Lynch

Okay, also the question is for your market. In your presentation, you record some mix shift to the US. Can you talk about any new customers or share gains over there?

Sean Tzou

Okay in US, we are taking multiple approaches to the market. We are currently have secured the major distributors in US is going to carry our products starting this quarter and we still counter materialize, we will announce that very soon I believe and also we are in the process to secure major utility projects, it is also going to be matured in probably the first quarter.

And at the same time we are working multiple [EPC] companies and developers on different projects, but those customers I do not believe we share a lot of customers name (inaudible) is material.

Also let me probably go back to a little bit about the capacity. Our capacity are coming out in phases. The first phase, we are going to reach about 700 megawatt capacity which is going to be the first quarter and we are going to continue to increase our capacity working on the second phase which is gradually (inaudible) by the third quarter. So it will be a different phase, the first quarter capacity and second quarter capacity is pretty much the same.

Operator

And the next question comes from Vishal Shah with Barclays Capital.

Vishal Shah - Barclays Capital

Can you talk about what percentage of your first half shipments will be to the German market?

Terry Wang

It’s about 32%.

Vishal Shah - Barclays Capital

In the first half of 2010?

Terry Wang

In the first half of 2010, that’s correct.

Vishal Shah - Barclays Capital

So no change?

Terry Wang

No significant changes.

Vishal Shah - Barclays Capital

Second question is around your inventory procurement costs for the fourth quarter. Can you talk about that please?

Terry Wang

For the fourth quarter or third quarter?

Vishal Shah - Barclays Capital

For both; in fact I'm looking for fourth quarter particularly first.

Terry Wang

Now that's roughly about $77 per kilogram.

Vishal Shah - Barclays Capital

That's how much you paid to buy poly in the fourth quarter?

Terry Wang

The procurement poly is roughly close to about $55 per kilogram in the markets.

Vishal Shah - Barclays Capital

Okay 55. If I do the math, you had about 75 megawatts worth of inventory as of Q3 '09. The blended poly cost as per my math is slightly lower than what you're talking about and if I continue to do the same math for the first quarter, your poly cost should drop below $60. So I'm just trying to understand why your poly cost is only going down by 10% to 15% especially given that you had really strong fourth quarter and first quarter and you should be done with all your high-cost inventory?

Terry Wang

You have to realize that the inventory will have a large portion in the form of the finished goods and it’s just raw materials. The finished good, if you add a portion that’s related to the raw material costs and stored in the inventory the portion is high. So we are expecting that some of the provisions that’s been taking place, so we have to take that consideration as well. So that’s what will set us about between 10 to 15%. If you take a 15% out of 75 that’s close to $62 or $63. That’s close to what you have in the $60, only a couple of dollars difference.

Vishal Shah - Barclays Capital

Yes I think your Q1 2010 silicon cost guidance is somewhere around $72 right, based on what you just talked about and so I am just trying to figure out why it’s not close to spot volumes?

Terry Wang

Vishal, I said the silicon cost drop in the first quarter, this quarter from fourth quarter is about 10% to 15% drop. If you use $76 per kilogram from last quarter, you multiply by pretty much 85%, that’s the number you should remember right. It’s now $70. That’s simple math.

Vishal Shah - Barclays Capital

Going forward, do you expect that from second quarter onwards your overall cost structure will be comparable to buying poly from spot and adding $0.70 to $0.75 to get to your total cost structure.

If look at your second quarter cost structure assuming $0.75 to $0.77 of non-silicon cost and $50 poly, you should be able to operate at somewhere around $1.10 per watt or lower?

Terry Wang

You are talking about second half?

Vishal Shah - Barclays Capital

Second quarter.

Terry Wang

Second quarter should between $1.10 and $1.20 range. So that typically, we are expecting $1.13 range.

Vishal Shah - Barclays Capital

Okay that is your cost guidance for the second quarter okay.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

First on the recent trend insight on Taiwan. I know some of your competitors have already announced their intentions to expand the OEM business. You must have heard that they have managed to win some new business as well.

So you must have heard about [Honai] getting module making as an OEM. So what do you think it’s going to be the impact of this module business, you see this trend as a threat or opportunity, what you consider being in the OEM business yourself or have you got any enquiries from your customers on other big fronts for the same.

My second question is about your strategy, but a little more color on this. Some of our competitors have started building their own inhouse and having EPC expertise. Do you think that this will be a big advantage to you if you want to compete in the utility scale or commercial segment business, so some color would really be appreciated.

Thomas Young

Unfortunately the line that we have incoming from you is a bit gargled, so I just may well just take one question at a time and [partner] correctly your first quarter was whether or not that we were look in or we were receiving OEM opportunities is that correct?

Unidentified Analyst

Yeah absolutely

Jifan Gao

Okay, let's take that question first.

Sean Tzou

Okay, this Sean thanks for your question. Actually, it seems our Trina Solar plans is to continue to work on our brand name and we do believe that Trina brand is very established currently dual by where we see by our strategic [partners] so in this moment we were not leased to 70 OEM tender at this moment

Unidentified Analyst

Alright and my second question was about your (inaudible) strategy I mean (inaudible) about some parallel acquiring sort of a down stream so do you think that it makes sense to have downstream sales of your own as to compete in commercial segments or your (inaudible) scale businesses or you still have some more in this expertise?

Jifan Gao

Okay just again I apologize, just want to confirm you are asking whether or not we are looking into downstream strategies i.e. acquisition is that correct?

Unidentified Analyst

Absolutely (inaudible) where you look developer or something of that sort?

Terry Wang

Yeah this is Terry, in terms of down stream strategy and acquisition recover (inaudible) the company Trina and number one that we still stick with the things with under past which is focused under the cost, quality, customer, field up, market share expansion and throughout our organic growth but same time and because and in the future that market evolving pretty relatively close to the customer and markets being competitive. So we are looking at and we will not rule out the any possibility in that area and if we have a high return or help up in the revenue generate and the profitability we will looking at, but they won’t have anything on place and we carefully analyze any opportunities.

Unidentified Analyst

Yeah in that regard I just want to understand do you anticipate as there’s going to be any channel conflict with your existing customers? Let's say if you want to go add and acquire one of your channel partners, do you anticipate any kind of conflicts with them?

Terry Wang

No we don’t expect any conflicts and talking about down stream.

Unidentified Analyst

Where you are coming from is a example and let's say it defined as one of the market is opening up, but it might be relatively difficult you might need to have some sort of channel or some other Japanese brand to sell your products out there so I just want to understand what's your strategy for some of these new emerging markets, both from channel perspective and brand perspective?

Jifan Gao

So if (inaudible) question correctly you are talking about if we go to the down stream we may have a conflict with some customer is this correct?

Unidentified Analyst

Yes absolutely.

Jifan Gao

Actually like Terry explained earlier the reason of Trina don’t do some of the down stream project actually is to pace the role for us to do the better service to our customers. So we need to know our customer what they need better serve them and those was basically the busy quarters we do the down stream strategy. And we have been approaching to the market very, very carefully and we do not get into our customers project as well as we do not get into our customer’s opportunities and in order to avoid that we work together with some of our customers on the downstream projects and you know in one way to support our customer in another way to learn the what how our customer want to be served. So we do not believe we are in any conflict with our customer in our current activities.

Operator

Your next question comes from Nitin Kumar with Nomura, Singapore

Nitin Kumar - Nomura

Just a couple I mean one housekeeping question and then one strategy question, what was the depreciation in 4Q [should] you give me a number. The strategy question I will go through the strategy question meanwhile. Essentially the Europe market looks to be on kind of a slowing momentum going forward you are seeing Germany kind of cutting their prices if you are relooking at it properties Czechoslovakia relooking at its subsidy I mean is there growth in the other markets strong enough to counter and what is the strategy of Trina to address the other markets.

Terry Wang

Okay let me answer the quick one which the first one and then I'll have someone answer the second question. The first one is depreciation expense by close to roughly about $9 million in the fourth quarter, in regarding the market and (inaudible).

Thomas Young

This is Thomas, could you just for Sean is going to do (inaudible) repeat the question for us.

Nitin Kumar - Nomura

Sure, what I’m actually trying to understand is that there is kind of a slowing momentum, if you go forward from second half to 2011, you have Germany cutting [FIB] footprint I mean kind of slow the market growth, you have Czechoslovakia looking at subsidies, you have Italy looking at subsidies and probably most of the countries would realize that super high IRR there is not a sustainable model. So, in a sense Europe is looking at a point where the order growth will be slow. At this point the order growth looks to be coming from Germany, China and Japan as the mean markets, but those are three markets where your exposure is not very high at this point. So, I’m kind of trying to understand what is the market strategy in each of these markets, and if there are any other markets which you are evaluating?

Sean Tzou

Okay, let me answer this question in general, because if we go into each market, it can be a very lengthy answer, maybe we can talk it all flat. But I think basically what our approach is very simple. First of all we try to establish a stable base of the premium customers. We do believe we need to work with premium customer who are financially strong and they have channels for the future markets. So for those customers that we really are working with them much closer and that’s why you are seeing we continue to improve our customers portfolio as well as we continue to work with some of the long-term customers and even in the market tough time we continue to receive the contract from the customer beneath, because some of those customers we work on they do see, they do have a much better visibility and they do accountable for the industry changes.

And the second of all is actually is our prolonged strategy of continuing to create a brand recognition and the preference of the (inaudible) piece and the installer because we do believe this future customer, we would need to improve our brand image, we would continue to improve our bank ability in order to [relieve] our customer so we continue to do that, furthermore is trying to differentiate our self from the services. So the soft offering actually we differentiate Trina from the others, and this is also a mean to protect our ASP, so these are the basically the general strategy we are working on and for specific regions we do have a specific approaches to the customer end.

Nitin Kumar - Nomura

Sean just to drill down a little you mentioned that you were going into services kind of model what exactly are the services which actually help you differentiate from peers?

[Multiple Speaker]

Sean Tzou

Let me name few, but there are lot of services for example we are talking about shipping, warehouse for the customers, we are talking about the warranty, we are talking about better quality plans and the insurance and after service activities and some of the service activity we worked together with customer of the solar farms and some of the activity that we do together. We start core marketing program, so those are all the services. In addition to that, we established our European headquarter and U.S. headquarter. We're moving our services from our manufacturing end towards the customer location. So we do believe those are the services that is going to make our customer as a more joyful experience to what we [stream].

Nitin Kumar - Nomura

And because I'm just trying to understand, I mean a lot of these, lot of your peers can also actually do some of these services. I mean how would Trina actually go differentiate in the market? I mean the one area where I see is something which other company may not want to do is core marketing programs, but isn’t that actually going to increase your OpEx?

Terry Wang

It really depends on how we utilize the budget, and its all difference on execution. We just like everybody is making the same module. Why Trina's cost is better than other people. I think this is exactly the same thing that we do believe with Trina's can do everything and also the execution capability. We are executing or we will be executing.

Nitin Kumar - Nomura

So the key for Trina is essentially the execution around these services, and not to the services itself. And Trina has proven itself in the manufacturing part of the value chain. So services should be something that Trina should execute. Is that right way of looking at it?

Terry Wang

Yeah execution of the service I think you can say that we're about in reality its the end product of our customer, the soft product customer is looking ahead its facility that they would see.

Nitin Kumar - Nomura

Sure I understand probably take the next question off line with you guys may be I will pass on for now.

Operator

Your next question comes from Sunil Gupta with Morgan Stanley.

Sunil Gupta - Morgan Stanley

I just wanted to understand your euro currency exposure so in Q4 what percentage of your sales was denominated in euro and what do you expect that mix to be in Q1.

Terry Wang

Okay the we have the increment the hedging instruments that will cover the euro exposure in Q4 and approximately about 60% so that actually we gain about $3 million in the hedging and then going forward this quarter we continue to increase to how the hedging facility established and at the beginning of the year and we are hedging at the high rate and the continued increase on hedging to our right at the back then it is currently I think that we're hedging exposure about between 30% and 40%.

Sunil Gupta - Morgan Stanley

So did you say Terry that 60% of your revenue is the euro denominated and you hedge about 30% to 40% of that?

Terry Wang

And the total amount that 60% of the hedges in Q4 last year and this whether the hedging of about total revenue about between 30% and 40%.

Sunil Gupta - Morgan Stanley

And what percentage of your sales are denominated in Euro because I guess not all your sales to Europe must be in euro right?

Terry Wang

At this stage it is close to 90% in euro.

Sunil Gupta - Morgan Stanley

90% of your global sales or of your European sales?

Terry Wang

90% of the global sales at this time but going forward as we increased our sales in other (inaudible) and we will be down to 80% or less that 80% in workers here.

Thomas Young

Sunil this is Thomas we are getting very close to market and what we have I think we have got one or two people that probably have been waiting so well it may be in less you have a very, very quick question we’ll going to have to move on to.

Sunil Gupta - Morgan Stanley

May a be a very quick one on your tax rate, your tax rate in Q4 rolled out to 13.3% what should we be expecting going into Q1 and FY '10?

Thomas Young

Sunil for the (inaudible) purpose for the modeling I expect you should just use a 15% of fixed size [asset] 13.5 that we have from credit now and sometimes it is not recurring so 15 is for the safe side but since we have the global setting and I expect there may be effective taxes there will be less than 15 globally but for the safe side shouldn’t use 15%

Operator

Your final question comes from Mehdi Hossein for FBR.

Mehdi Hossein - FBR

One question for Terry and one for Sean, Terry can you please tell me what's your expected free cash flow for 2010?

Terry Wang

The Trina as a company has a state of a [quorum] and specifically solar factor has read out to 15% and 40% for annual basis and but we need to spend more money and cash expenditures so we don’t use that expense now, we use the operating cash as benchmark so now we change in for committed positive operating cash on a quarter basis and not about (inaudible) think about front but we have a free cash positive in first half of '09 when we don’t have any capacity expansion with such there are for two quarters and we did have the free cash and that fourth quarter of '08 we did have a free cash positive.

Mehdi Hossein - FBR

Is there any guidance for 2010?

Terry Wang

2010 I do not expecting we have a positive free cash about because we need capital expenditure to expand our capacity by the way I am expecting free positive operating cash flow on quarter-by-quarter basis.

Mehdi Hossein - FBR

Sure and then Sean, do you have any view or assessment of inventory idea of customer side?

Sean Tzou

Yes or no we did always quite a long customers and some of our customer they do have inventory during the winter time because of the snow I have heard that they expressed all customer expect to digest some of those inventories in the later part of Q1 and going in to Q2.

Mehdi Hossein - FBR

Is your guidance dialing in or does that include any risk if that inventory is not digested?

Sean Tzou

No we don’t expect that we actually are calculated all those already.

Mehdi Hossein - FBR

So it's already…

Sean Tzou

We already consider that those on the front although we receive from customers.

Mehdi Hossein - FBR

So you don’t think excess inventories are going to have an adverse impact?

Sean Tzou

No.

Thomas Young

Okay on behalf of entire Trina Solar management team we want to thank you for your interest and participation on this call. If you have any interest to visit us please let us know again thank you for joining us and this concludes Trina Solar’s fourth quarter 2009 earning conference call. Operator, you may now disconnect.

Operator

Thank you ladies and gentlemen.

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