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Trina Solar Ltd. (NYSE:TSL)

Q2 2010 Earnings Call

August 24, 2010 8:00 AM ET

Executives

Thomas Young – Senior Director, Investor Relations

Jifan Gao – Chairman and CEO

Terry Wang – Chief Financial Officer

Sean Tzou – Chief Strategy Officer

Gary Yu – SVP, Operations

Analysts

Rob Stone – Cowen and Company

Kelly Dougherty – Macquarie

Dan Ries – Collins Stewart

Vishal Shah – Barclays Capital

Lu Yeung – UBS

Jesse Pichel – Jefferies

Sunil Gupta – Morgan Stanley

Timothy Arcuri – Citi

Gordon Johnson – Axiom Capital Management

Satya Kumar – Credit Suisse

Sam Dubinsky – Wells Fargo

Operator

Good morning. My name is Alicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trina Solar Second Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Thomas Young, Senior Director, Investor Relations. Mr. Young, you may begin your conference.

Thomas Young

Thank you, Operator. Good day to all and welcome to Trina Solar's second quarter 2010 earnings conference call. This is Thomas Young, Trina Solar's Senior Director of Investor Relations. With us today are Trina Solar's Chairman and CEO, Jifan Gao; Chief Financial Officer, Terry Wang; Chief Strategy Officer, Sean Tzou; and Senior Vice President, Operations, Gary Yu.

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 represent management's estimates as of today, August 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 center of Trina Solar’s website at 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 thank you everyone for joining us on this call. We are pleased to announce that the second was another solid quarter for Trina Solar. We meet our guidance with recorded shipment volume of 223 megawatt and exceeding good margin improvement from our strong managements and exclusion.

We continue to maintain our operating activities, reduced costs and extend our global brand appreciation from the quality leader. We saw promising growth in our business not only across Europe but in Australia, South East Asia and U.S.

We signed landmark agreement with Southern California Edison to supply their California Solar Program with our PV modules. This demonstrates Trina Solar’s high level brand reorganization program and the land market appreciation for our leading customer service offerings. High quality products are the foundation of our appreciation.

In the second quarter, we are very pleased to announced partnership with TUV Rheinland, UL and CGC, by working closely with this top global dedicating facilities, we can reduce the term respect to very innovating to the market we have increased our quality demand at the highest level.

The second quarter saw existing progress on the R&D front. We have also met developing our strong R&D capabilities to develop our Quad MAX technology. We are pleased with this quarter as of July 30th to reach their already efficient they were 18.5% based on recent higher production. We have also increased our [test labor associates] for which 19.42%.

Finally, in June, we are pleased to be ranked second out of 26 leading company in the PRTM PV Sustainable Growth Index 2010. Showing the complete appreciation of growth, success and sustainable.

Looking forward, we continue to fuel our excel quality image and (inaudible). We continue to make improvement to our production techniques, research programs and importantly, maintain focus on internal customer service. It is our vision and long-term goal to be prove leader in the solar PV industry. We view just as this exciting industry develops we are in a greater position to achieve the growth.

I would now like turn the call over to our CFO, Terry Wang, who will share our second quarter 2010 financial results. Terry?

Terry Wang

Thank you, Mr. Gao, and welcome to everyone today. I’d like to present an overview of our financial results, followed by the company's guidance for the third quarter.

As a housekeeping item, I would like, first, to bring your attention to accounting rules, ASC 470-20, that we adopt on January 1, 2010. The prior-period financials will retroactively adjust to reflect the adoption of this new accounting guidance. Please refer to today's earnings release for details.

The second quarter was another outstanding quarter, which were achieved record shipment volume and improved gross margin, which exceeded our previous guidance of high 20s in percentage term. Our total net revenue in the second quarter was $370.8 million, driven by sequential shipment volume increase of approximately 16%.

Our record shipment volume of 223 megawatts exceeded our guidance of 200 to 205 megawatts, reflecting increase brand recognition for product in new and established PV market. Including the U.S. and Australia combined with increase margin demand ahead of the mid-year Germany feed-in tariff adjustments.

Despite ASP declined due to euro exchange impact, our gross profit rose to $118.9 million, approximately 14% higher than the first quarter. Gross margin improved to 32.1% in the second quarter of 2010, above the company’s guidance of high 20s in percentage terms, compared to 30.9% in the first quarter. This was the result of a combined continuing cross reduction efforts, improvements in production efficiencies, technology and innovation methods, and material utilization.

Turning to our cost per watt improvements, our unit silicon cost declined approximately 8% sequentially, as a result of the effective management and the price adjustment efforts for our long-term contracts and effective control of inventory turns.

Our In-house Blended Mono & Multi Non-Silicon cost, including depreciation, decreased to approximately $0.74 per watt from $0.76 in first quarter.

Our second quarter operating expenses was $35.7 million or 9.6% of net revenues, an increase from 3.4% in the first quarter. The sequential increase was primarily due to increase hiring of professional personal for our new operational European and North America regional headquarters.

Our second quarter operating income increased to US$83.3 million, which translates to a 22.5% operating margin, compared to 22.6% in the first quarter of 2010, and 12.4% in the second quarter of 2009.

We realized a net foreign currency exchange loss of $29.2 million in the second quarter of 2010, which includes the positive offset by the gain in a fair value of currency hedging derivative of $13.6 million. This was primarily due to the depreciation of euro against the U.S. dollar.

During the second quarter we continue to refine our in-house hedging program, involving the active monitoring and adjustment of hedging capacity based on the fluctuation levels of U.S. dollar, euro, RMB and other currencies to mitigate possible negative effects of exchange rate volatility.

For the current third quarter, we intend to maintain up to 75% hedging current coverage of the new exposure with target rate approximately $1.30 to minimize the impact of fluctuations in euro to U.S. dollar rate.

We can also update that for the third quarter, we expect a decrease in a euro contribution to our total revenue. This was due primarily to our increasing sales portion in the U.S. and the rest of the world market, as well as a portion of European customers, who purchases are now denominated in euro.

Our second quarter net income, excluding net foreign currency exchange loss was $67.9 million, an increase of approximately 13% from the first quarter. Our second quarter net income was $38.7 million, which include a net foreign currency exchange loss compared to $44.5 million in prior quarter.

Net margin was 10.4% in the second quarter of 2010, compared to 13.2% in the first quarter and 12.4% a year ago. Earnings per fully diluted ADS were $0.52, which includes the impact of net foreign currency exchange loss.

Our earnings per share in second quarter include the diluted effect of the senior convertible notes issued July 2008 by application of [convert method] and this method, interest expense and other one-time costs applicable to senior convertible notes should be add back to the net income, which results adjustment of approximately $0.03 per ADS to our EPS.

On the balance sheet, we continue to generate a strong operating cash flow an amount of $56 million. This was more than double of our first quarter operating cash flow amounting $25.6 million. This allows us to maintain strong cash and cash equivalents and restricted cash balance of $685 million as of June 30th.

Despite of significant investment to expand our capacity, our cap expenditures were $34.8 million in the second quarter, compared to $55.2 million in the first quarter, total cap expenditure for the year expected to maintain in the range of $250 to $280 million.

Further, our second half anticipate capacity expansion, we expect our cap expenditure to be funded primarily through our cash on hand and operating cash flow that minimizing need for additional funding fee.

To other areas in the second quarter, we reduce our short-term borrowings and current portion of long-term borrowings by $60.4 million to approximately $162 million. With the continued efficient management of the inventory balances, our average inventory turns in the second quarter was 32 days remaining very stable, compared to 31 days in the first quarter.

This brings us to our guidance for the third quarter of 2010. For the third quarter of 2010, we expect the total PV module shipments of between 250 to 260 megawatts of PV modules. Given overall rounding demand for our high quality and vulnerable product in the second half of 2010, we expect to increase our outsource portion of wafer up to approximately 25%, as well as some external source sales. We believe, this will not only allow us to capitalize our brand market share gain opportunity but expand our top and bottom line to expand our EPS and return on equity.

For the third quarter, we expect the gross margin will leave in to our in-house production, involving our self produced wafers to be in mid 30s in the percentage term. Taking in account our wafer and cell outsourcing to meet demand in excess of internal capacity, we believe our overall gross margin will be approximately 30%. Such guidance is based on average FX rate between euro and U.S. dollar from July 1st to August 24 of 2010.

By leading to our strong demand across new and existing regional markets, the company expects to increase its total PV module shipments for the full year 2010 to between 900 to 930 megawatts, compared to our previous guidance of between 750 to 800 megawatts. By the end of the 2011, we expect to expand our analyze sales and margin production capacity to reach up to approximately 1.5 gigawatt and wafer production capacity up to approximately 1 gig watt.

With the very strong business momentum and the visibility into our second half of this year and 2011, we remain optimistic in our expectations of robust earnings throughout this year. We also expecting our shipments in the second half are likely to exceed those in the first half of 2010. Finally, from the expected benefit of demand conditions in our increasing diversifying geographies and the channel ship segment we’re fully expected to deliver quality financial results through the second half of 2010.

With this, I will now like to turn the call over to our CSO, Sean, to discuss our sales outlook and also closing remarks. Sean?

Sean Tzou

Thank you, Terry, and hello to everyone with us on our call today. I would like to take this opportunity to update you on the demand and commercial environment trends we saw in the second quarter, as well as the market indicators we are seeing that look to the beginning of 2011.

To begin with, its important to note that due to the strong and increasing demand for our products in both our establish and new markets, we were able to maintain a capacity utilization rate of 100%, while adding capacities into four manufacturing areas at our new East Campus.

Based on the trend we are seeing, we expect to maintain this capacity utilization rates throughout the second half of the year. We’ve continued strong demand across the very channel segments and geographical regions.

As Terry mentioned just now, to meet our revised full year 2010 shipment of between 900 to 930 megawatts. We are working hard to raise our cells on module capacity from 850 megawatts to 950 megawatts as quickly as possible in the current third quarter while we are also assessing how to extend this capacity to approximately 1 gigawatt during the fourth quarter.

For our in-house ingot and wafer capacity, we were pleased to reached 700 megawatts wafer capacity as of June 30. We continued to leverage a number of cost-efficient partnership through which we outsource a portion of the wafer manufacturing including the totaling of in-house produced ingot as well as the structured long-term contracts with the leading wafer producers.

As we look to 2011, we are excited to see a great opportunity for us to increase the market share in key markets globally. As our capacity of raw materials reached an ongoing demand growth, specifically, over the recent month, we’ve been addressing an increasing number of wallet enquiries for the first half of 2011.

From the program and ongoing customer feedbacks, we believe that this is continuing to build up the demand reflect our increasing brand strengths. This includes our position of the dependable and high-quality provider and also the royalty of a diversified customer base built over the years as we are elevating our service level.

Besides maintaining our strong position in traditional European markets such as Germany and Italy, we are also making inroads into the new markets on regional regions including the U.K. and Asia-Pacific markets such as Australia, India and Thailand for our substantial shipment allocations are anticipated next year.

Moving onto North America, we are very pleased with this year’s success in U.S. Well the clearer demand could translate to between 15% to 20% of our 2011 shipments. To date, we have made strong progress to establish channel relationships in all of our coveted segments, namely with our regional distributor from system integrators, project developers and EPC and probably utility grid owners, the operators.

Switching to the manufacturing costs, center to our strategic goal to advance our brand, our market share is our continued focus on expanding our costs for watt leadership for both our standard and near-brilliant products under the development.

Further ahead, we are already working to meet our 2011 year-end goal of reducing our in-house costs by approximately 10% should the technology treatment sale, efficiency gain for PV pass a surprise synergy and our expanding programs of innovative lien manufacturing initiatives.

To update you on our newest high efficiency module products based on our internally developed Quad MAX sales technology, I’m pleased to report that we have progressed from the R&D production to the pilot commercial production stage. From the initial indicative -- predicative cell line, the production runs has achieved up to 19.2% cell efficiency while average gained 18.5% overall.

Finally, in regards to our 2011 capacity growth, we expect to expand our in-house production capacity of ingot and wafers as well as the sale and manufacturing modules to approximately 1 gigawatt and 1.5 gigawatt respectively by the end of 2011. These allows Trina Solar brand to reach our targeted global market share of approximately 10% to 11%, an increase from our 2010 estimation of 8% to 9%.

We look forward to updating the market on the more specifics going forward. With that, I’ll now pass the call back to Thomas. Thomas.

Thomas Young

Yeah. Thanks Sean. And before we move to the Q&A, I just want to remind everyone that due to an increasing number of participating analysts, we will limit our participants to one question with a limited follow-up. If time allows we indeed will do our best to conduct a second round for those remaining in the queue. Operator, you may now open the call to questions.

Question-and-Answer Session

Operator

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

Rob Stone – Cowen and Company

Hi guys. Congratulations on very strong results and outlook.

Jifan Gao

Hi, Rob.

Rob Stone – Cowen and Company

My question is kind of a big picture one about next year. You’re looking at roughly gig of internal ingot wafer of 1.5 gigs of cell module which I guess implies somewhat higher portion of outsourced wafers next year. You also talked about roughly 10% in-house cost reduction. Given all that and any sense you might have about ASPs next year, does that add up to somewhat lower gross margins next year?

Terry Wang

Hi Rob. This is Terry. Glad to answer that outlook question. I think that next year and the capacity expand that we plan at this point is our strong demands outlook for next year. We’re expecting and going forward and next year and we in the market that we expand our emerging market and the demand is strong also in the existing market. And so internal capacity comes to a limit that have to go to outsource specifically in area of wafer and that we strategically we plan in our way for that, number one, we can try that for the Cap expanded purpose, for the short-cycle time to jump up our sales to meet strong demand.

Number two is and we still have a mid-utilities that a wafer capacity to help us to bring down -- continue to bring down our cost in-house so that things that and for the flexibility in the market finishing area we can meet the strong demand, also defensively if a market fluctuate that we can minimize the risk.

I think this is our strategic planning but in terms of our margin, I think that as I said, as we plan -- we will maintain our in-house gross margin and sustainable, you can see that this quarter, we will give guidance for mid-utilities for produced wafer up to module. And we will maintain that level and the difference little bit is come from the outsourced portion but we analyze the thought as only for cell only 1% around additional and 3% to 4% on wafer outsource. So if we’ll maintain mid-utilities, you can see our gross margin still remain very competitive.

Rob Stone – Cowen and Company

Okay. My follow-up question has to do with your confidence in that outsource supply chain for next year. We’ve heard from various places that wafers are bit constrained right now. What kind of relationship and supply agreements that you have in place for the portion of outsource supply next year?

Terry Wang

You know, we’ll have to talk a bit to second half now that we will -- that the passing outsourcing of wafers stocked in about 25% and for those 24%, we’ve outsource from a major partner and domestic and outsource some oversea suppliers. And with a long -- in the form of a long-term contract and next year, that outsource portion in volume increase as we need it.

I think we introduce solid and diversify our sorting and also we have a partnership in our buildup which give us assurance in delivery and the cost of advantages for us.

Jifan Gao

And then Rob, may be, I can actually this is also part of our strategy on the Trina Solar part, one of the key purpose. We do have a strategic partner already situated right next to our factor and at the same time, we’re looking for more strategic partners that will be able to come into the product so to share the burden. However, we do -- as Terry said we do already have the plan, we do have a partner also engaged to support our next year demand.

Jifan Gao

We have good visibility on supply.

Rob Stone – Cowen and Company

Great. Thank you.

Jifan Gao

Thank you, Rob.

Terry Wang

Thank you, Rob.

Operator

Your next question comes from the line of Ms. Kelly Dougherty with Macquarie.

Kelly Dougherty – Macquarie

Hi everybody. Thanks for taking the question. Just a need to follow up a bit on what Rob was asking. You know, you obviously have decided to outsource more to drive stronger EPS growth and shipments. And I’m just wondering if you’re able to get more wafers or cells in the second half, if there could be upside to your shipping guidance because I would stand now it suggests a flat down fourth quarter to sort of, if that you’re being conservative?

Jifan Gao

You know, Kelly, I like that question. Guidance gave to the phase and we’ve been -- our record that we are committed to the guidance. Of course, in our wafer outsource and it’s one of the resource or constraint that we have to adopt what it will be if because it’s strong right now but in the market demand for our product is strong and we are balanced out of demand and still alive and also the outsource costs and so that we’ll meet and come in to our guidance, but we do have -- we do expect that have upside if we outsource wafer and prices coming down, we’ll have much bigger room there.

Kelly Dougherty – Macquarie

Great. Thanks. And then just wondered if you could may be talk about what you’ve paid for wafers and cells in the second quarter and may be why your expectations for that in the second half and then as we move into the first quarter with the feed-in tariff changes, may be what happens to wafer or cell pricing.

Jifan Gao

As we just burn out or mentioning we’ll not answer the questions and Robert’s question is the outsource portion and the second quarter in follow up to one extent, wafer outsource from our major suppliers or turners with the price that are favored to us. And on top and top of that and have a margin impact about approximately 3%. In other words, about $0.05 range, up above all, I mean having that over because we’re only having 20%. You can multiply five to get the incremental costs.

And second half, we will increase from 20% to 25% outsource for sale or the wafer. And we’re expecting the margin impact could be in -- still in the range 4%, 3% -- between 3 and 4. The pricing we’re expecting still remains that the wafer pricing -- wafer costs also surprising relatively you see stabilize as the second quarter. We don’t see or find it continuous growing.

And next year, next year as we protect it and given many capacity of wafers and taken place of its initiative this year. And we will see and the demand and supply situation will ease to some degree so that will -- certainly wafer pricing will decline.

Kelly Dougherty – Macquarie

Great. Thanks very much guys. Congratulations

Jifan Gao

Thank you.

Operator

Your next question comes from the line of Mr. Dan Ries with Collins Stewart.

Dan Ries – Collins Stewart

Hi. Good evening. You mentioned, Quad MAX, I guess went into commercial production. I thought, I sensed you said it was in a limited basis. You may be, indicate what portion of shipments you think it might represent in the back half of the year and if the average cell is in 18.5% efficiency, what does that work out to for the module at this point?

Jifan Gao

Our manufacturing plan -- our plan is to produce over the Quad MAX modules to the market on the first quarter of 2011. And this should represent, I would say, approximately 10% of our shipment.

Dan Ries – Collins Stewart

Okay.

Terry Wang

And on the margins in that area and we’re expecting that the margin -- we have a margin contribution and throughout a competitive ASP and ASP value added on ASP5 and so that we do see the contribution, incremental contributions we’ve expected.

Dan Ries – Collins Stewart

Okay. And may be just a quick question, project assets grew a little bit during the quarter. What is that -- are those China-based projects? What does the $24 million represent?

Terry Wang

$24 million represents the downstream project that we’re under construction -- that we’re currently and in about 50 megawatts under construction, that includes centralize costs and it also includes that the module we ship there, I mean, the place and the duration and also other component associated with the solar system. It’s current assets and that -- and for the downstream project that we do have a sale of -- those projects, those situated in southern part of Europe, nothing in China. So far -- but currently -- and that we have a line in sales contracts, lines so once it’s complete, you can sell and the project as well as we turn to revenue sales.

Dan Ries – Collins Stewart

Okay. So somewhere in the back half of the year, we may see a project sale that adds to revenue.

Terry Wang

Yeah. Some.

Dan Ries – Collins Stewart

Thank you very much.

Terry Wang

Thank you.

Jifan Gao

Thank you, Dan.

Operator

Your next question comes from the line of Vishal Shah with Barclays Capital.

Vishal Shah – Barclays Capital

Yeah. Hi. Thanks for taking my question. I was wondering if you can talk a little bit about your pricing outlook for the second half and also for first quarter of 2011. I thought you said that demand was really strong in Q1, Q2 next year. So what kind of price declines are we looking at right now?

Jifan Gao

Okay. Let’s talk about 2010 first. Second half of 2010, we’re expecting slightly increase on the price -- on the pricing level both in the U.S. dollar term as well as on the European dollar term. And we’re looking at probably, the mid-single digit decline using a feed-in tariff impact in the European market for the first half of 2011.

Vishal Shah – Barclays Capital

And when you say mid-single digit decline, are you talking about contracts that you’ve already signed so far or you expect them to -- or you expect to sign these contracts at Valencia?

Jifan Gao

We are in a process of discussing quite a lot of contracts and those are the indications that we are working on.

Vishal Shah – Barclays Capital

And if you are -- if your capacity constraint in Q4 on the module side, I believe, should we expect lesser percentage of outsourcing in Q4 than in Q3 and we see margin expansion in Q4.

Sean Tzou

Let me answer that question, Vishal. We have -- as Jifan mentioned we have very strong in demand for the second half and expecting the third quarter and fourth quarter, both quarter strong in demand and as we work, ramp up the capacity in sales, but keep in mind that we have a way for approximate to trend over 700 megawatt, now we may or may not for the rest of the year.

So our soft portion, we’re expecting to remain similar to what we had in the -- where we will in the third quarter. So the margin will driven by the wafer called to outsource and also the self made between the in-house called and now ISP and again, outsource portion will be summit.

Vishal Shah – Barclays Capital

Okay. But I thought your name plate marginal capacity was close to 950 megawatts, right?

Terry Wang

Sales capacity, yeah, sales marginal fee in growth, we will complete -- completed the capacity by this month, end of this month.

Vishal Shah – Barclays Capital

Okay.

Terry Wang

So in other words, but we also do believe we have outside demand in the fourth quarter, in other words and also it could be remain similar in percentage.

Vishal Shah – Barclays Capital

Okay. Great. And then one last question on your capacity expansion for next year, how should we think about the 1.5 gigawatt number, when do you expect to bring that capacity online, is it going to be Q1, Q2 or more back and loaded?

Terry Wang

It’s before the end of the next year, but it’s most likely in the second half on next year for 1.5 sale capacity, but also -- keep in mind, we also run our wafer capacity up to 1 gig. Also it’s going to be delivered completed by the end of the next year.

Vishal Shah – Barclays Capital

So more second half?

Terry Wang

Yeah. More second half.

Vishal Shah – Barclays Capital

Okay. Thank you very much.

Terry Wang

Thank you.

Operator

Your next question comes from the line of Mr. Lu Yeung with UBS.

Lu Yeung – UBS

Thanks for taking my questions. You talk about your costs are coming down from $0.74 in Q2 at [$0.47]. Can you explain the capacity in 2011? Did you have a target for your in-house positive cost, next year?

Terry Wang

Yeah. We do. As we point out that the non-highly profit cost is our co-competency, we render in a living position for via. And I think that we still have a room to improve continuously throughout the year. And we’re targeting towards our $0.70 by the end of the year. And next year, we’re expecting and approximately 10% down and from next year, given the situation that was running in a cost reduction programs and the usage of material and technology innovation efficiency and a supply chain continually improve for the suppliers in partnership term. So that we have a plan and have program to run and we’re expecting to reduce approximately by 10% of that for next year.

Lu Yeung – UBS

And as you expand your capacity to 1500 for modules and 1000 for wafers, what kind of changes in the processing cost between your in-house and your outsource and maybe you can talk about that?

Terry Wang

As I said our in-house one has already, we’re talking and also outsource portion you can see that next year and we’re expecting a modally gross in outsourcing portion, but currently the markets are also and they drive the pricing fluctuated and now we can see we live a different and from next it will be different from this year. As we’re talking about supply demand might change next year. And so we -- it’s the area that we will expanded in this two for the return on equity and now that the deployment viewed and also the several time to capture the capacity -- the demand.

So the difference outsourcing and it installs and the outsourcing most of the in wafer and other are ready to change will still remain in less then 5% in new pack on a gross margin overall. So that’s the same time we continue to see the in-house reduction and especially on non-highly profit cost reduction by $0.10, so that we can see that our in-house margin will sustain. So in other words our gross margin for the rest of the year will be still very competitive on top in the market in the sector.

Lu Yeung – UBS

So basically, you have them bargain margin you want to maintain and depend on that margin you will adjust your outsourcing levels?

Terry Wang

Yeah. Absolutely. And the other thing also we have to look at the gross profit concept, because the way you grow your marketing shares and the gross margin is only one of the factor, but also gross profit is very critical that will have value on -- add on to the GPS and that’s what for the benefit of the shareholders.

Lu Yeung – UBS

I see. Last question from me is what kind of CapEx are you looking for 2011 and how you’re going to funded and can you maybe mind me what was operating cash flow in second quarter?

Terry Wang

Okay. That’s a nice question. You can see that for this couple of quarters we’re talking about operating cash flows. The operating cash is our core in competency in cash management fund. And we had about $50, $60 million in second quarter and $25 million in the first quarter, we feel the trendy move in right direction and we’re expecting this year is going to be a much higher then what it was last year and the year and next year and we are expecting given that the current situation in change and we have an cash management program in place that will cash -- operating cash will be tremendous blow.

And the other thing for cap expenditures for -- to meet our demand for next year, CapEx expansion, now we estimated based on what we could plan and approximate involve $250 million range, you can see that that we have right now about $680 million of cash in our bank and also operating additional operating cash to come and we believe that we will be -- we are in barrelful position from plus to go to next years expansion, in the same time you can see from the best financing area, we do have the increased credit facility and more profit by $200 million private facility available in the same time and that availability of amount will increase, as we continue our receiving increase of credit facility for next year.

Lu Yeung – UBS

Okay. Thanks a lot.

Terry Wang

Thank you.

Operator

Your next question comes from the line of Mr. Jesse Pichel with Jefferies.

Jesse Pichel – Jefferies

Hello, Chairman Gao, Mr. Wang and team congratulation on the results. It looks like you’re paying $65 a kilo for silicon based on your cost of $0.36 a watt, if you were paying $50 a kilo you would say $0.09 a watt to your costs and then reach the goal of a dollar or what, when do you think your silicon cost may reach $50 a kilo and I have a follow-up question?

Terry Wang

Jesse, thank you for the question. Yeah. $65 per kilogram, for kilogram is the faced off cost that carries through our inventory in procurement funds combined and which is good and we can see that in the current price and market with $50 to $55 per kilogram so once we -- the high carrying cost in the inventory will be continue to the digest and we will be approaching that our $50, $55 for the this current price.

Our next year, we’re expecting given our current haven’t signed without suppliers and we’re expecting and the purchase price will be below $50 per kilogram. So we’re expecting next -- the first quarter of next year, we’ve reached approximately $50 range, so that by the end of the year or beginning of next year, we’ll reach $1 range our target.

Jesse Pichel – Jefferies

Well, thank you for that information, that’s good to win that you’re back. Wall Street always looking for more and you would have had an even greater quarter expect for the foreign exchange loss. Now last quarter I think you were targeting a 60% hedge at an exchange rate of $1.3 did you meet that target and can you walk us through why the foreign exchange was so much greater in Q2 versus Q1?

Terry Wang

Okay. Very hard question. The first quarter we have to see the hedging number one, hedging involve quite a few things and you cannot only look at the one quarter. So in other words and there was two, basically two components in hedging, one is the fair value the hedging of mark-to-market, the other one settlement. And through the quarter, I mean, first quarter we hedged and we outperform, if you compare to our competitors, we hedged over than our competitors and more better and in same magnitude it’s about 10 -- more than $10 million or $15 million a less loss.

And so that the mark-to-market will be and reverse and for the following quarter, because once the track the volume of the product continue to drop and that will be mark-to-market instrument, contract will be adjusted or adjust back. So that in other words we do not have adopt over $10 million mark-to-market gain in first quarter then this quarter we’re going to suppose to reduce and the loss by more than $10 million, it also magnitude there.

Jesse Pichel – Jefferies

Terry, at this point you’re not expecting any losses in non-operating for Q3?

Terry Wang

Our non-operating for fixed income FX?

Jesse Pichel – Jefferies

Yeah. I think sure.

Terry Wang

Yeah. At this time we can see that the FX has saturated the high at the end of the last quarter. And you can see expecting and we’re experiencing FX gain.

Jesse Pichel – Jefferies

FX gain?

Terry Wang

Yeah.

Jesse Pichel – Jefferies

So we can think directionally just adding back your foreign exchange loss this quarter to next quarter and that should give us the earnings per share roughly, right?

Terry Wang

I cannot dictate your model.

Jesse Pichel – Jefferies

All right. Thank you very much. Congratuations.

Terry Wang

Thank you.

Operator

Your next question comes from the line of Mr. Sunil Gupta with Morgan Stanley.

Sunil Gupta – Morgan Stanley

Thanks for taking my questions. Terry, I just wanted to understand some of your cost a little better for Q2. What was your total silicon usage and the silicon cost in Q2?

Terry Wang

Silicon usage in Q2 is approximately 6 grants, approximately. And certain calls as I said, $0.36 for loss and that our restock through all basis and but we do see the room that continue and to decline as we consumed out or the hiring carrying cost inventory. So we’re expecting that number from that cost we continue to opt.

Sean Tzou

Okay. Let me quantify little on this, $0.36 Terry, indicated the $0.36 did include process cost for recycling the silicon’s so the actual cost is across eventually $0.34 on the silicon trail projects per watt?

Sunil Gupta – Morgan Stanley

Okay. And the tight wafers, how many megawatts of sales did you have to buy in Q2?

Terry Wang

We didn’t know, we will mention that -- before buying we indicated a strong demand that’s one thing. The other one is and we will control a minimal through the single digit as this process return $0.05. Did I answer your question?

Sunil Gupta – Morgan Stanley

Yeah. You did. And you will maintain that in the second half.

Terry Wang

Second half is currently and we’ll have to balance and number one we have to fully utilize our in-house capacity that’s the baseline. On top of that the demand is coming and also the other parameters is the outsource cost and we have a balance out to meet our gross margin target, gross profit target, so accepting that we do have a single digit sale household in the second half.

Sunil Gupta – Morgan Stanley

Okay. And I have a follow-up on your ASP I know you don’t disclose that ASPs but it seems like quarter-on-quarter it was down by almost 5% compare to Q1 which seems to be a decline to the bigger then what some of your peers experience. So I’m just trying to understand does that have anything to do with your FX hedging and how you book that or is there something hence that’s that has driven that kind of pace to be decline?

Terry Wang

Sunil, let me answer the FX related then I have Sean to answer ASP in market situation. Now, this is not related to FX hedging, hedging in the dot line related is now top line related and both we’re in just further information we’re booking in a monthly basis as beginning of the rate of currency rate at the beginning of the month. And for the month then the difference will be follow to move down to the bottom line, so the hedging will match offsetting any FX loss in bottom line and Sean will answer that market ASP.

Sean Tzou

Sunil, good you asked the question. Actually, quarter one to quarter two we on the ASP we’re now speak to show approximately 5% decrease however, this is mainly due to currency impact that from the same currency point of view that we actually are maintaining the same or slightly above on the ASP especially on the European currency. And we then continue to see this off board trend being in actually Q3 and probably majority by in Q4.

Terry Wang

Let me add one more on the Sean point. And you mentioned that our ASP have been load up here but it’s just one now that, thinking of the year and we’ve signed the contract with our lawyers customs. And once we signed a contract in both in existing customer and the new customer we will committed to our contract, we don’t revise our price even the market is up and down. So we will committed, so that’s the -- we do see -- our prices are even lower, but then you will see will get reward in the second half our pricing and we will have upside.

Sunil Gupta – Morgan Stanley

Okay. Great. Thank you.

Terry Wang

Thank you.

Operator

And our next question comes from the line of Mr. Timothy Arcuri with Citi.

Timothy Arcuri – Citi

Hi, couple of things. First of all, can you give us some idea of what the megawatt system this business will be in the back half of the year, I think you said that you will sell a project? And I’m wondering what sort of megawatts we should expect there and what sort of gross margin that would be. And I am wondering what your outlook in this Systems business next year, I think each year appears have taken different views on the Systems business and so I am wondering where do you stand?

Terry Wang

Okay. System efficiency will cause downstream project development and it’s still one of the things the strategy will supports us, our company goals to be on top of PV company in next couple years. And I think we are renounced doing in construction and strong with southern part of where the profit returns are higher and competitive and it’s a one way constructed on a small business product. And then we -- to initiate the project we have the conditions and (inaudible) to meet and such as the buyers in line and our financing in place and the construction team and EPC.

And in line so that to make sure the projects will be completely successful in time and also we start with small and we analyze on the project basis. And so that once the company gets connected situates and we will sell to a buyer and return for that and we will have various return, but we do have the company guidance and minimum requirement for the part of return.

In other words that return should be in line or in average, in line with the company’s business return and on a return equity. So that we don’t have any diluting our returns, so, and we will add values in both and top financials results and our market share expansion effort.

Timothy Arcuri – Citi

Well, just on that front, most of the other systems businesses are high single-digit gross margin business, maybe they are slow double-digit gross margin businesses. So I’m wondering, A, is that going to be dramatically different for you and why, and B, I’m trying to figure out the number of megawatts that you might sell in that business in the back half of this year and what you think you might do in that business next year? Are we talking about a 10-megawatt business or is this a 30 or 40-megawatt business next year or more than that?

Jifan Gao

Currently, for second half I just mentioned that and right now and the constructions part approx about 50 megawatt and the construction. And we expect the -- some of will be sold in second half. We have the buyers in line and in fact our topline also build up topline for next year but, again, that we will analyze the project on project basis based on the part of return and the risk. This area and then we decide if it’s going to be regular business settlement for next year. But so far we see and the fact, particularly right now we see the results are positive and so that gives us confident that next year -- we will be happy of our good efforts and good results to show in the next year financials.

But -- back to the gross margin part. The return area -- I think that, in keeping mind we are pretty much have earned higher profit returns of gross profit -- gross margin than our competitors, because we have low -- we use our own margins and our margins with cost are effective, cost competitiveness. And we will gain higher profit than it appears. So we so far we’ll see a drop happening.

Thomas Young

Hey, Jim, this is Thomas. We need to move forward because we are approaching -- actually we are little bit over than our clock hour.

Operator

Your next question comes from the line of Gordon Johnson with Axiom Capital Management.

Gordon Johnson – Axiom Capital Management

Thanks for taking my call, gentleman and congratulations on a great quarter.

Jifan Gao

Good morning, Gordon.

Gordon Johnson – Axiom Capital Management

Thanks. Can I get just some clarification on -- I think last quarter you guys provided with the ASP -- I think it was 174ish. Can we get some clarification on what the ASP was this quarter? I’m getting a number of roughly 1.66 but I wanted to maybe get some clarification on that.

Terry Wang

Yeah. That approximately, 1.65 point something, close to 1.66. Yeah, right.

Gordon Johnson – Axiom Capital Management

Okay. Thank you. And then with respect to -- I guess looking forward, would have been impressed with you guys, with respect to you guys as your diversification in different countries. Can you talk a little bit about what you are seeing even though there maybe some weakness in Germany, what you are seeing with respect to incremental share gains? I’ve heard that you guys are taking some share from some of the thin film guys and even some of your Chinese competitors. I wanted to confirm if indeed this was correct in Germany and maybe some of the other countries and then my last question.

Terry Wang

We’ve continue to maintain our European shares to about -- currently above 80% and it’s according to reduction from the previous over 90%. And currently, we are continuing to improve our market shares on the new market developing areas like, for example, like United States.

The North American area is that we are expecting the next year, we are going move into about 65% to 70% in Europe, about 15% to 20% in U.S. and probably close to 15% in the rest of the world countries. And Japan, China will be about 5% to 10%. And among those developing areas, we do see a very strong growth potential in North America as well as the countries like Australia, India and China.

Gordon Johnson – Axiom Capital Management

Okay. That’s helpful. Then some housekeeping questions. Your operating expenses, what should we think about modeling that moving forward, because it looks like your revenues are going to be up here pretty significantly. Should we think about flat versus Q2 or will we see it increase as you increased your sales force in other regions?

Terry Wang

OpEx at, we are pretty much in the back (inaudible) we extend our operation internationally, so that non-foreign expenses this quarter or the second quarter, we expect our demand similar percentage going forward for the rest of the year.

Gordon Johnson – Axiom Capital Management

Okay. And then lastly, when I look at what you guys are guiding to costs and I look at some of the thin film players out there currently, it looks like poly goes to $40, $30. We are looking at cost for you guys below to $1 range. I guess the question is -- there is a balance of system differential in crystal and silicon versus thin film. Is this balance of system differential, is this real because the thin film guys are now claiming that there is no balance of systems differential? And if indeed the balance of systems differential is real, are you guys aggressively going after attacking thin film market share? Thanks a lot guys.

Terry Wang

Thank you, Gordon. But, attacking will extend a market share stock, that’s no question, model and no matter what is thin film model. But the point of balance system and it’s going to be and is real, is not, because you imagine, if the one thin film megawatts, only efficiencies is about, talking about 10% and we are running at 18%, so how can you do not expect the balance system is similar.

I mean, the sizes, the areas like differently and the space and the needs are differently, so we expecting a -- bunch of a research we put out there indicated there is a quite few, as we are talking about $0.20 and $0.25 different in module level. So that, an example, if a thin film -- if a PV module or silicon based $1 and similar cost in balance systems, we push the -- the thin film will be below $0.80 or $0.75, so that it’s going to be equal in balance system cost.

I think that we -- in silicon cost brand we’ll give a positive trend. So going forward the results will be very competitive and market and then we are very good for silicon based PV company to gain market share.

Jifan Gao

Not only the balance of the system costs different, actually proven from the -- quite a lot of test reports in the market regarding the module performance. Thin as a module on the quality and the output, which is we actually share with our customers that the better we do to need, we do offer the best value on the dollar per kilowatt basis that, developing in the market. So this has helped Trina to get some of the market shares, not only on the thin film but as well as on the silicon based modules as well.

Gordon Johnson – Axiom Capital Management

Thanks again, guys. Congratulations.

Jifan Gao

Thank you, Gordon.

Operator

Your next question comes from the line of Mr. Satya Kumar with Credit Suisse. Mr. Kumar, your line is open.

Satya Kumar – Credit Suisse

Yeah. Hi, can you hear me?

Jifan Gao

Yeah. I can.

Satya Kumar – Credit Suisse

Yeah. Hi. Thanks for taking my question and congrats on the strong quarter. I was wondering if you could comment a little bit on today’s news in France, what is your exposure in the second half? I see that you didn’t have much exposure in the second quarter and you have a full year exposure of 4% to 6%. Do you expect France to be about 10% in the second half? Where are your customers expecting that 4% cut and today, I know the cut was expected, what do you expected that to do to pricing in France?

Jifan Gao

We actually continue to have a very strong inquiries and demand from our customers as well. Despite feed-in tariff cut and due to the -- actually on the same currency basis, we continue to see the ASP on a slightly upward trend at this moment.

Satya Kumar – Credit Suisse

All right. And you also mentioned that your visibility is increasing into 2011. At this point do you have any customers who are willing to put down any down payments or agree to any firm take or pay pricing for volumes in the first half of next year?

Terry Wang

We saw current business transaction. We believe there may have some of -- this situation may happen.

Satya Kumar – Credit Suisse

All right. Thank you.

Jifan Gao

Thank you, Satya.

Operator

Your last question comes from the line of Mr. Sam Dubinsky with Wells Fargo.

Sam Dubinsky – Wells Fargo

Hey, guys. Thanks for taking my questions. Just a couple of quick ones. First, if you assume the euro was stable at today’s rate, let’s say $1.26 or $1.27. How should we think about the FX gain in Q3? And I have a couple of follow ups?

Terry Wang

The guidance given in terms of the gross margin is based on the average FX currency ratio, euro against U.S. dollars -- the current rate on average point, begin the quarter up to today. And we’re expecting it will remain at current level. We can see that above at end of the first quarter constant rate and in theory you will see and expecting the foreign ex-FX gain from this quarter.

Sam Dubinsky – Wells Fargo

What type of magnitude, I mean the FX gain -- the FX loss last quarter was pretty significant. Are we talking about like a $5 million gain or something a low single-digit million or could be potentially much higher? And then I have a follow up?

Terry Wang

I really cannot comment on the expectation of the FX gain for this quarter. But you can see, you can check the results and I’ll give you some of the numbers that the -- a number one is second quarter, you can see the significant loss is from $1.35 down to $1.21, from beginning of quarter two to the quarter end and also magnitude changed and versus and we have about approximately 78% the euro terms in our sales and our account receivables.

So you can see that that’s the magnitude again, and you can translate logically in this quarter, see how was difference between in quarter and beginning of quarter, end of the quarter, you can see that what is the account receivables and euro in percentage wise, but we still update on that.

And in this quarter the euro and in terms of percentage, will be continue reduced below 70% in this quarter. So in other words euro exposure is getting limited in terms of spending the revenues in the account receivables. So you can translate and based on the current and the increase of the or changing the constant rates and it gets your own numbers.

Sam Dubinsky – Wells Fargo

Okay. Fine. And what are your processing costs return for wafer into module?

Jifan Gao

Pardon?

Sam Dubinsky – Wells Fargo

For the non-vertical integrated portion of the business. What is the processing costs returning wafer into a settlement of module?

Jifan Gao

As we’ve said, internal with the self-produced wafer up to module and currently -- we and second quarter $0.74 which include depreciation of both mono and multicrystalline.

Sam Dubinsky – Wells Fargo

But if you…

Jifan Gao

Go ahead.

Sam Dubinsky – Wells Fargo

If you purchased a wafer though, what it would be -- if it’s $0.50 per watt like Suntech or is it lower or higher?

Jifan Gao

We cannot comment. Basically, the cells have produce -- wafer cost, we cannot comment that, but obviously, we are much better in costs than our peers. And you can imagine because the total cost only $0.74 for four areas. You can slice or dice to get a number. I think we are going to be number one in those wafer and cells and the module in comparative way.

Sam Dubinsky – Wells Fargo

So you think best of breed by comparison it’s $0.50 or $0.55. So you are saying you are better than that? And then I have one last follow-up question.

Jifan Gao

Yeah. $0.50, $0.51 to high plus.

Sam Dubinsky – Wells Fargo

Okay. And then when you…

Thomas Young

Sam, this is Thomas. This is going to be very short of you.

Sam Dubinsky – Wells Fargo

Yeah. This is the last one. Most Chinese vendors purchasing cells at today’s rates are making close to no gross margin. What is your target gross margin profile when you purchase an external cell?

Jifan Gao

Such as external?

Sam Dubinsky – Wells Fargo

Yeah.

Jifan Gao

When we purchase external, as I have said, overall, I just gave you overall. I didn’t mean the 1% impact on the sale. It will outsource single-digit sale. I – if you got -- that’s the basic -- we – you modify by single-digit it could be a $5 and you modified by a $20, to get to a additional incremental of sell cost, right?

Sam Dubinsky – Wells Fargo

Yeah. But what I’m trying to get out is, do you – it seems like the sell market is pretty inflated in terms of pricing and then as you are using as to satisfy customers. Is there historically a target profitability profile on just a module only business that you think is reasonable? Let say, 5% plus or minus. When you think longer term, what do you think a rational gross margin is for just doing module only?

Terry Wang

Module only is not our -- we are a module producer. But module only, is for us another option. So we are and core competency is not just modules but also cell and wafer. So, in a package we are -- so that’s what makes us strong right now and we never think that the modules only is the option for us.

Sam Dubinsky – Wells Fargo

Okay. Great. Thank you, guys.

Terry Wang

Thank you.

Thomas Young

Okay. So, on behalf of the entire Trina Solar management team we want to thank you for your participation on this call. And as always, if you are interested to visit us at our Changzhou PV Park, please write or call. And thank you for joining us. And we look forward to seeing many of you at PVSEC at Valencia and Solar Power International, Los Angeles, as well as other international conferences as well. This concludes Trina Solar’s second quarter 2010 earnings conference call. Operator, you may disconnect and thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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