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Trina Solar Ltd. (NYSE:TSL)

Q3 2010 Earnings Call

November 30, 2010 8:00 AM ET

Executives

Tom Young – Senior Director, IR

Jifan Gao – Chairman and CEO

Terry Wang – Chief Financial Officer

Gary Yu – Senior Vice President, Operations

Ben Hill – Vice President, Sales and Marketing

Analysts

Rob Stone – Cowen and Company

Kelly Dougherty – Macquarie

Jesse Pichel – Jefferies

Vishal Shah – Barclays Capital

Timothy Arcuri – Citi

Sanjay Shrestha – Lazard Capital

Ahmar Zaman – Piper Jaffray

Nitin Kumar – Nomura Singapore

Adam Krop – Ardour Capital

Paul Clegg – Mizuho

Mark Bachman – Auriga

Operator

Good morning. My name is [Brooke], and I will be your conference operator today. At this time, I would like to welcome everyone to the Trina Solar Third Quarter 2010 Earnings Results 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 turn the conference over to Mr. Tom Young, Senior Director of Investor Relations. Thank you, Mr. Young. You may begin your conference.

Tom Young

Thank you, Operator. Good day to all and welcome to Trina Solar’s third quarter 2010 earnings conference call. This is Thomas Young, Trina Solar’s Senior Director of IR. With us today are Trina Solar’s Chairman and CEO, Jifan Gao; Chief Financial Officer, Terry Wang; Senior Vice President, Operations, Gary Yu; and Vice President, Sales and Marketing, Ben Hill.

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 risk 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, November 30, 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 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 thank you everyone for joining us today. We are pleased to announce that the third quarter was another quarter of spectacular conclusion for Trina Solar. We exceeded our guidance with shipment of volume of 291 megawatt, a 30% jump, resulting in surpassing a milestone of $500 million revenues. We exceeded our gross margin guidance due to ongoing strong demand and the continued efficient execution.

We have furthered our goal to build a globally recognized and trusted brand through raising the performance and reliability of our products to an expanding customer base. We continue to witness promising growth in our businesses not only across Europe but in North America, Australia, Japan, India, China and other emerging solar markets.

With excellent creditability across most of our geographies, it has the cost conscious and with first three integrated manufacturer platform. We are better positioned crystalline player going into 2011. We believe our diversified sales approach will allow, allocate our products to higher growth market in Europe, North America and Asia.

The third quarter saw new progress on the (inaudible) plant. We announced the signing of a Letter of Agreement with MIT to become a member of its Industrial Liaison Program. This will provide Trina Solar the possibility to directly access the search opportunities with MIT researchers.

Finally, we are pleased to announce that Trina Solar’s ADR is one of the 19 companies selected to be quoted on Singapore Exchange GlobalQuote Board in October. Our ADR quotation on the board has significant value by increasing access to our ADR (inaudible) investors during local trading hours.

Looking forward, as a global power leader with focuses that -- focus the business model, establish the brand through strong sales and distribution network, (inaudible) and solid balance sheet, we have significant room to continue gain market share.

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

Terry Wang

Thank you, Mr. Gao, and welcome everyone today. I would like to present an overview of our financial results, followed by the company’s guidance for the fourth quarter. The third quarter was another exceptional quarter, which we believe reflect our secular execution, growth and cost structure.

We achieved record shipment volumes and the gross margin, which exceeded our previous guidance of approximately 30%. Our total net revenue in the third quarter was $500 million -- $509 -- $508.3 million driven by sequential shipment volume increase of approximately 30%.

This has record shipment volume of 291 megawatts exceeded our guidance of 215 to 250 megawatts, reflecting increased brand recognition for products in the established and the new PV markets, including the U.S. and of the Australia market.

Net revenue in the third quarter included approximately $4.3 million of other sales. Our gross profit rose to $159.4 million, approximately 35% higher than the second quarter. Our overall gross margin was 31.4% in the third quarter of 2010 above the company’s guidance of approximately 30%.

This was the result of our favorable reduction of a silicon purchase price and then non-silicon manufacturing costs. Starting by this, overall gross margin was up 37.6%, gross margin for our in-house wafer production to module production of which was above our previous guidance of mid-30s in our process percentage return.

Our third quarter euro ASP improved sequentially due to strong demand in our successful efforts to improve our brand and channel positioning. Our improved third quarter ASP was further extended to our dollar denominated ASP through the appreciation of the euro against U.S. dollars.

Our first quarter operating expenses were $46.4 or 9.1% of net revenue, a decrease from 9.6% in the second quarter. Our third quarter operating income increased to approximately $130 million from $82.3 million in the second quarter, which translated to up 22.3% operating margin.

We realized a net foreign currency exchange loss of $8.3 million in the third quarter of 2010. The net loss was primarily due to loss from foreign currency for contracts, partially offset by appreciation of the euro against the U.S. dollar.

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

For the current fourth quarter, we will intend to maintain up to 80% hedging coverage of the euro exposure for the year to minimize the impact of our fluctuations in euro to U.S. dollars rate. We received the percentage of the euro denominated sales to 62% in the third quarter compared to 78% in the second quarter, then 93% in the fourth quarter of this year due to our increase in sales in United States and the rest of world market and increase in sales in Europe and denominates by customs sales.

Our third quarter net income, excluding net foreign currency exchange loss was $91.2 million. Our third quarter net income was $82.9 million, which include a net currency exchange loss of $8.3 million, a $0.40 increase from net income of $38.7 million in our second quarter.

We believe this record quarterly profit clearly affirms a success of our flexible vertical integration and a capacity goal strategy. By outsourcing a part of our wafer needs from strategic partners, we’re able to thrive a higher top and bottom line results to deliver consistently attracting return of equity relating to our peer group.

Net margin was 15.3% in the third quarter, earnings per fully diluted ADS were $1.08, which include the impact of a net foreign currency exchange loss. Keep in mind, that our earnings per share in the third quarter includes the diluted effect of the senior convertible notes issued, July 2008 by application of convertible by a common method, which will result in adjustment of approximately $0.30 per ADS to our EPS.

To our balance sheet, we continue to generate a strong operating cash flow of a $122 million more than doubling our second quarter figure of a $56 million. Despite of the significant investment to expand our capacity, this positive operating cash flow resulted in our achieving positive free cash flow in the third quarter.

This operating cash flow allows us to grow our strong cash and cash equivalents and restricted cash balance to $820 million, as of September 30. The increase in working capital balance to $859.6 million with the continued management of our inventory balances, our average inventory turns in the third quarter were 27 days compared to 32 days in the second quarter.

Total CapEx expenditure for the 2010 expected to be in the range of approximately $180 million to $190 million. This reduction from early estimated dues to our successful efforts in our negotiation of the equipment supplies and the payment term.

For our anticipated capacity expansion in 2011, we expect that our cash-on-hand and operating cash flow to play a major role to fund our cap expenditure requirements. This bring us to our guidance for the fourth quarter of 2010.

For the fourth quarter of 2010, we expect the total PV module shipment of approximately 300 megawatt of our PV modules. For the fourth quarter, we expect the gross margin relating to our in-house production involving our self-produced wafer to be in a mid-30 in the percentage term taking into account our wafer and a sale outsourcing to meet demand in excess of our internal capacity, we believe our overall gross margin will be approximately 30%.

Such guidance is based on average FX rates between euro and U.S. dollar from October 1 to November 30 of 2010.

Relating to our strong demand across the new and existing regional markets, the company is expected to increase its total PV module shipment for the full year of 2010 to be approximately 1 gigawatt compared to our previous guidance of between 900 to 930 megawatts.

For our current and the planned production capacity, the company expects that during the fourth quarter of 2010, exactly the manufacturing year of cell in the modules production, we reached up to 1.1 gigawatt and analyze the capacity from 915 MW in the third quarter as a result of technology innovation enhancement and efficient use of the manufacturing cost in line.

So next year, we expect to increase our analyze in-house ingot and wafer as well as PV sales and module production capacity to approximately 1.2 gigawatts and 1.7 gigawatts respectively based on actual manufacturing yield in the second half of 2011.

With a very strong business momentum and a visibility through year-end, we remain optimistic of our expectations of a robust earning throughout this year, we’re expecting euro ASP during the fourth quarter to increase from the third quarter.

Looking ahead of 2011, we believe our profits have yet to be complete given Trina Solar brand’s experience as a global quality and a cost leader, we expect to again increase the market share as a result of two factors. Number one, the inability of some high-cost producer to lower cost structures and number two, continued reduction in ASP premiums between traditional European module brands and a newer established Tier-1 brands, such as our Trina Solar.

Our sales mix is also expecting to change meaningfully into and over 2011, as we pursue significant market shares in North America, Australia, India and Asia to gradually leverage our overall euro currency exposure.

Turning to our cost per watt improvements, our unit silicon cost declined approximately 3% sequentially as a result of the effective management and the pricing adjustment efforts for long-term contracts and effective control of inventory and operations.

Our in-house blended model and non-silicon costs including depreciation decreased to approximately $0.73 per watt from $0.74 in the second quarter. For the fourth quarter, we expect our unit non-silicon costs to be approximately flat into the third quarter due to the manufacturing supply chain price pressure resulting from the second half sell out demand environment. This same dynamics, however, has contributed to a higher unit ASP and a gross profit that was earlier forecasted for year-end 2010.

Looking to 2011, we expect that during our overall silicon and non-silicon cost will fall below $1.00 per Watt, timing of which we expect will depend on investor demand trends.

With that I’d like to turn the call over to our Senior Vice President of Operations, Mr. Gary Yu, who will update you on operation on our manufacturing and technology development. Gary?

Gary Yu

Thank you, Terry. And hello to everyone with us today. I am very pleased to have the opportunity to share our operational update and the development. We are very pleased with the future of our third quarter operations. Our ability to realize a 30% sequential shipment increase was the result of our successful rental delivery (inaudible) a 150 megawatt increased sales in the module capacity earmarking of events of our earlier September 2010 target.

As Terry highlighted, we believe our actual product during the year was actually a result close to 1.1 gigawatt of annualized capacity during the fourth quarter of 2010. For our announced 2011 capacity 1.2 Gigawatts of wafer and 1.7 gigawatts cells and module capacity.

Our continued East Campus construction is operating on schedule to deliver its targets increasing in the second half of next year. As mentioned, our 3Q reduction in non-silicon costs per watt to $0.73 represented the net difference between the continued in-house cost reduction and the supply chain cost increases.

Out of that from the sale of given condition, of course, the PV industry. Note down our manufacturing efficiency continue to improve in the 3Q, price increases of some key supply component negated some of our cost reduction gains achieved from innovative in-house initiatives, provide profit, the material utility and the year increases.

As these material components return to more balanced market demand and supply, we expect that our ongoing profit and the sale efficiency gains will drive our total product per watt to below 1 ASP in 2011, representing a non-silicon cost of $0.70 per watt, although, these are ongoing cost reduction also involve our ongoing duration testing and timing commercial reduction of new and the second sales supply chain, which is evident by our renowned in-house material project [tepidness] capability.

Moving to our sales efficiency. In the third quarter, our sales efficiency for our mono cell reached up to 19.5%, based on our R&D method adoption. For our module recurring sales, our sales efficiency reached up to 17.8%, based on R&D [related] production. This progress puts us on a check to meet our best 2010 goals to reach up to 19.5% and 18% for mono and multi-crystalline cells is credited to update on State Key Laboratory facility.

In the third quarter, we initiated construction within our Changzhou PV Park. We also attended our State Key Laboratory’s technical Community countries of the Park PV, research experts from Europe, South America, Japan and China. We are also believe to update, we have commenced pilot commercial production of a new module product with our monochromatic sales technology, to be produced in the first quarter of next year.

New 72 cell module is currently producing between 200 and 205 watts, an extra 10% increase over our standard dimension 165 watts monocrystalline module.

With that, we would be happy to turn the call over to Ben Hill, our Vice President of Sales and Marketing, who will discuss our sales and then channel strategy, speaking its outlook and overall closing comments. Ben?

Ben Hill

Thank you, Gary and hello to everyone on the call today. I’ll briefly tell the opportunity to share based on outlook review today. Given our time position in the fourth quarter, our production capacity is fully allocated, I will proceed to the topic of 2011 broad demand and Trina Solar’s positioning in the very potential scenarios.

We now could say in certainty, what the 2011 aggregate demand will be. We believe Trina Solar’s brand is uniquely positioned to increase its market share in a variety of scenarios due to the following strengths.

Number one, the justification strength, our long proven strategy and ability to distribute our product lines across a wide geographic portfolio to program -- minimize program country risk in any one market.

Number two, channel managements strength, our ability to allocate product between our three major channels. Our position of distributes to integrate the channel, our project development partners and a growing number of utility on this, within and outside of North America to requesting our brand from the growth of ASP requirements.

Number three, customer quality strength, which includes our profitability to distribute or employee on multiples, on a multinational or in multi-regional basis and to a range of end-user PV segments.

Number four, strong established relationships with customer partners in both newer and established PV markets. Our commercial relationships average two years or more.

Number five, our increasingly -- our increasing brand recognition and the supplier first choice effecting top tier quality and system performance as marked by an increasing number of completed projects and independent test labs.

While 2011 proves to be below range of our base type customers that being flat to moderate growth in 2010, we believe our market share can grow to approximately 10% due to first rate quality performance and brand proposition we offer.

The total demand, which increased to 20 gigawatts likely due to a combination of accelerating growth markets and increasing IRRs throughout the year, we will also share in the sector’s growth and sales with the possible more modest amount of share increase.

Finally, for any causes 2011 proves to be more challenging year for the industry, we believe in (inaudible) like this, the Trina Solar is again positioned to accelerate share gains (inaudible) and our global peers, because of the industry and partnering efficiencies. We believe that TSL is also one of the virtual listed brands which connect good parity, solidarity.

To update our 2011 sales outlook, we are already fully committed for Q1, 2011. Our increasingly signing contract volumes that are just rich in all allocations to major markets, to the North America for the year. Heavily, these contracts also carry take-or-pay clauses.

Our visibility for the first half of 2011 and the order book is also significant. The productive cost exceeding our anticipated forecast capacity by a factor of two. Additional, many contracts are positioned to send 25% above the contracted base volumes that as it appears at this time, 2011 could well prove to be another year of tight supply on profit growing demand for us.

For the rough cycle, this demand may align a huge obsolescence of potential, which will actively follow in fast-growing office at U.S. and emerging rest of the world markets such as India and the Middle East.

Finally, in the area growth of market operations support, we are increasing investments to raise our local service and support levels to established European and North American regional headquarter offices in Zurich and San Francisco.

Additionally, we have initiated local sales operation offices of key stock in Japan, Korea and Australia coming in the first quarter.

By bringing in sales operations back-office and technical logistical support functions closer to our customers, our simple goal is to make our customers experience newer and more efficient.

In (inaudible), I would believe this will position Trina from a solid to target high volume, high rates and channels, customer project segments and so it further distance Trina Solar from our peers.

Last year, I’d like to confirm our commitment, our continue commitments environmental health and safety, both in social responsibility and sustainability to increasing volume areas that we will be facing and increasing frequency in 2011.

At present however, we are highly pleased to inform, in October Trina Solar successfully passed the TUV stage one audit of OHSAS 18001, a precursor to receiving globally recognized occupational health and safety management system certification.

We believe this will scale to the high standards Trina Solar has sensed to -- upheld and is founding and with care, the environment and may be communities as well as employees and partners.

Now, I would like to hand back to Thomas.

Tom Young

Hey, thank you, Ben. And as we move to Q&A, I wish to remain everyone that due to increasing number of call participants, we just like to limit participants to one question with one follow up each. And of course if time allows, we’ll do our best to conduct the second round. So, operator with that, we’d like to open the call for questions.

Question-and-Answer Session

Operator

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

Rob Stone – Cowen and Company

Good evening, everyone. Congratulations on a strong finish to the year.

Jifan Gao

Hi, Rob.

Rob Stone – Cowen and Company

Terry, a question for you about operating expenses, how should we think about the expense trend in Q4? And going forward as Trina becomes increasingly a global company, what’s the right way to think about a target model for operating expenses?

Terry Wang

Thank you, Rob. As you mentioned -- as growing global demand and with in our branding recognition world wide, which required us to go each region, I mean Europe and U.S. and Asia, which areas that we will focus. So, we’ll be recruiting more talent people in those areas.

But now in this couple of quarters, we are operating in our expenses as expenditure revenue, as approximately 9, little above 9% to 10% range that I’m expecting. Going forward next year, as we will ramp up our global sales marketing program and secondly we will put efforts, more investments in R&D technology innovation area.

So I’m expecting R&D expense will go up -- percentage trajectory will reduce in SG&A. So, in other words, we’ll maintain approximate 10% in all tax as percentage of revenue for next year. And you can model for that as this reference.

Rob Stone – Cowen and Company

Okay. My follow-up question is on the FX situation, you’re going to be with substantially hedged for the balance of the year, do you have any way to tell whether that nets out to a gain or a loss in the fourth quarter?

Terry Wang

I just only that we have a net FX currency loss of $3.3 million, which is a result of 4 million FX came from the sales from the fluctuation of euro and the 49 and the mark-to-market loss was the contract, driven by a full contract. And that basically is a result of one-month’s change based from $1.26 to $1.36 in September timeframe. But going forward, to one market fluctuations euro, then our mark-to-market loss and gain will be reflected in terms of the comparison between our quarter -- end of the quarter.

So this quarter we are expecting -- and giving the current spot rates, we are expecting to have FX gain in the fourth quarter of this year.

Rob Stone – Cowen and Company

Okay. Thank you.

Operator

Your next question comes from Kelly Dougherty with Macquarie.

Kelly Dougherty – Macquarie

Hi, gentlemen. Congrats on a strong result. Just wondering if I could talk about your expansion plans. How much is it going to cost to get 1.2 gigawatts of wafers and 1.7 of thousand modules?

And then, what the cadence is for adding the new capacity next year? I’m basically trying to get at how many megawatts of production you think you can get next year?

Gary Yu

Okay. Let me answer your question, Kelly. Capacity wise, the capital expenditure for next year and so far we’re expecting between $250 and $400 million for next year and which depends how our ramp-up schedule is going to be. But this year, you can see, we successfully pushed it off from the payment term and reduced some of the equipment and the price and so the CapEx actually from $250 to $280 down to $180 to $190 million range.

So expecting we will continue to help us to make efforts to make improve or reduce the CapEx swap basis down below $0.60 per watt per fully diluted -- volume growth of four areas. But, next year we will move towards expansions in the area of sales. So, I think given that and even the capacity -- given our time schedule for ramp up.

And also the demands from the streets, from the market, we still believe we’ll have exposure some of the outsourcing in both the single-digit outsource of sale and approximately 35% of wafer outsource so that we can meet our customer demand.

So in other words, our capacity will be fully utilized and not enough to if to meet the demand, but we have to go out to outsource to meet our customer demand.

Kelly Dougherty – Macquarie

Okay. I guess maybe just a follow-up real quick on that, may be how many megawatts of modules do you think you can break? Given, when the new capacity comes on line, I understand you might have to outsource some sales on wafers, but how many megawatts of modules do you think you can produce next year?

Jifan Gao

Kelly, I’m sorry I cannot give that or I haven’t given our guidance yet for next year, but we will give out in next earnings call, when we know markets even better. But I was expecting or definitely we will outperform the market growth as we always do in the last few years. And given what I was expecting capacity ramp up at a rate of more than 50% range, I was expecting our output we’ll grow at an associated rate accordingly.

Kelly Dougherty – Macquarie

Okay. Great. Then just a follow-up on your wafer and cell outsourcing, how much did you have to buy in this third quarter and how much will you have to buy in the fourth quarter? And maybe what kind of impact that will have on the margins?

Jifan Gao

As we pointed out in the third quarter and we will exposure 25% in the wafer and sale. So, overall impact on our gross margin is above approximately $0.10 range and which translates at above [60%] in the -- if you recall, I said during the script our in-house gross margin more than 37% in our overall gross margin above 31%, 31.4%. So I think that a few with this outsource product is still be within our gross margin more than 30%, so which is translated even incremental of gross profit and net profit.

Kelly Dougherty – Macquarie

And you think that impact will be similar for the fourth quarter or you are going to have to outsource a little bit more?

Jifan Gao

But we were expecting the most similar percentage in outsource, because our capacity ramp up in August and we have a more efficient use of the capacity in fourth quarter. So usually an outsourced portion will to some degree, we are not more than the third quarter. We’re expecting flat or down.

Tom Young

Gary, thank you. We really should move on. We got a very long queue there.

Operator

Your next question comes from Jesse Pichel with Jefferies.

Jesse Pichel – Jefferies

Hi, good evening to Jifan Gao, Mr. Wang and team. What are your thoughts on industry oversupply and pricing trends for 2011 and I have a follow-up question.

Jifan Gao

I will answer the question and then Mr. Ben Hill will add on that. But supply demand situation for next year and we produced a lot of our research paper and trend 16 gig and 20 gig range depending on how the German market will be developed. But in our case, we are number one, we have a less impact and on the German buyout diversification strategy.

Number two is and we are actually gaining market share given our top line in outlook. So we -- even the market goal and even the flow in the next year but given our prime aim recognizing improvement while we recognize in this existing market and new markets. And also our strategy in channel positioning we are off to position ourselves to penetrate in new markets and new customers so expanding our market share.

So if the situation is -- actually overcapacity situation for the role of globally but in our case and because our effective capacity is few out of a -- still fully utilized given our forecast we firmly believe -- that won’t happen to us and experience excessive capacity. But if overcapacity might drive the pricing will be down -- because of the cost to U.S and we’ll have the better plan to increase our in-house manufacturing percentage so that actually our cost will be coming down associate accordingly.

I think that we have that model -- we will support either way in both strong demand and weak demand situations.

Jesse Pichel – Jefferies

Gary, as the lowest cost solar company and most successful solar company in China, what are you doing, if anything, to grow the Chinese domestic solar market? What are your expectations for the China market?

Terry Wang

Ben, do you want to comment on that?

Ben Hill

Yeah. I can comment on that because I am -- within the Chinese market is typically a project market today. So we’re putting parties on the ground, office in Beijing, expanding our local team to work with utilities and property developers within the China market. So, exactly now we’re just delivering, almost finalize delivery in Q1 of 10 megawatt power plant in Tibet. So, there’s some very exciting things going on in China now.

Jesse Pichel – Jefferies

And your expectations for the Chinese market for next year?

Ben Hill

As far as the guidance on the Chinese market, I think our thought is that, that will increase. Again the,typically the margins there seems to be low in Chinese market. So, we’re careful on what we’re bidding for, but certainly we plan to increase the Chinese market and we see a very positive future in the Chinese market.

Jesse Pichel – Jefferies

Thank you very much.

Operator

Your next question comes from Vishal Shah with Barclays Capital.

Vishal Shah – Barclays Capital

Yeah. Hi, thanks for taking my question. I just had a clarification question first. Terry, did you mention your Q4 gross margin guidance was based on average FX rate through the quarter?

Terry Wang

Yeah. I mean, if --

Vishal Shah – Barclays Capital

That’s 1.38. Is that 1.38? I mean, that’s the math so far?

Terry Wang

This is based on that average, yeah. But you have to realize that the when you forecast your guidance and the things that are going forward, we’ll be -- the guidance means -- be the guidance rate, so you could -- because you’ll have a room that gets down a little bit will hatchet it already and given the hatchet situation, we believe that the guidance will be met.

Vishal Shah – Barclays Capital

Okay. Okay. The second -- just a follow-up on that, have you already negotiated all your contracts for Q1 with your customers particularly in Europe?

Terry Wang

I will have to divert this question to Ben Hill?

Ben Hill

Yeah. Let me answer it. This is Ben. Basically within Q1, we’ve got about 80% completely secured with pricing fix. The demands for Q1 for an excessive (inaudible) we’ve extreme confidence on Q1.

Vishal Shah – Barclays Capital

And what kind of pricing trends are you seeing in Q1? Are you talking about flat pricing or --?

Ben Hill

It depends on the markets. In some markets we see flat and other some major market, we see single digit decline.

Vishal Shah – Barclays Capital

Okay. And your comments about Q4 ASP up in euro terms, what would that be in dollar terms?

Terry Wang

Let me comment on that because this is regarding the guidance that we are. As I pointed out and we’re experiencing sequential ASP growing in both dollar terms and euro terms. And I cannot comment on ASP at this time and at what price, but we will see pretty sizeable growth in the fourth quarter versus the third quarter.

Vishal Shah – Barclays Capital

Okay. Great. Thank you very much.

Terry Wang

Thank you, Vishal.

Operator

Your next question comes from Timothy Arcuri with Citi.

Timothy Arcuri – Citi

Hi, a couple of things. Just a follow-up on that question. If you sort of compare the FX, it looks like dollar pricing is going to be up about 10%, sequentially, roughly, at least 7% more like 10%? And yet, regarding gross margins down, what is the reason for that? Is that because of some of the third-party wafers that you’re having to buy?

Jifan Gao

First of all, and we grow our guidance 30% -- positive 30% versus 31%. And I do not believe, we guided the gross margin down that’s the in the ballpark of approximately 30% range. And secondly, and ASP going up and as a result of our branding recognition, our efforts within sales channels, in fact has, I will see the results going down, associated with that in cost wise, you’re right, we do see the wafer and the poly-silicon prices going up in through fourth quarter. So, we take that into consideration and prudently to give the guidance on approximately 30% in consideration of this rising, maturing cost.

But either way, we believe that even with a rise in pricing material -- while our cost structure, I mentioned that non-party, even some of the non-poly materials up, because our so efficient in running our process in product manufacturing, so that we maintain a flat in our non-poly manufacturing cost.

So, the poly area is only the fact that’s drives the rise price to some degree. But we believed our ASP, incremental ASP or rising ASP high enough to offsetting the rising part to come. So we firmly believe that the confident that I will reach albeit our guidance more than 30% -- approximately 30% guidance.

Timothy Arcuri – Citi

I see. Thanks, Terry. Just the second question. You gave a 2011 demand number between 16 and 20 gigs. What pricing does that assume on the module side. I’m sort of wondering what you think the U.S. sensitivity is of the market next year. So if module pricing went down to say a euro or at euro 10 for the year. How would that change that 16 to 20 demand model and what pricing is that demand based on? Thank you.

Terry Wang

You know, this is a global research paper. And most of the consensus have been reached the 16 and 20 gig. And the pricing range and the people are talking about between 13% inline with the feeding back, Germany although low for the industry, but in practically and specifically in our case and because of our pricing positioning, a strategy and to show the results as this couple of quarters and also our quality and brand name is recognized. So we don’t experiencing ourselves, expecting ourselves to have that kind of pricing profile because our average basis, expecting for those high cost producer.

We’ll experience a higher, a larger scale ASP for a while. And while we see a some shipments from those customers of those type of marginal producer shift to us. So are -- increasing orders so I think that are pricing for us and we feel pretty confident that we are much or less than the industry impact. So demand relatively stabilized with our target and our cost is going to be coming down next year. So I would firmly believe our gross margin and profitability will still suspend over next year.

Timothy Arcuri – Citi

Thanks a lot, Terry.

Terry Wang

Thank you.

Operator

Your next question comes from Sanjay Shrestha with Lazard Capital.

Sanjay Shrestha – Lazard Capital

Hi. Thank you. Again, congratulations on a great quarter guys. Two questions from me, talking about this whole supply demand situation for 2011. Given your cost position, have you guys looked at how much capacity is out there in the market, which is going to be essentially non-cost competitive if the pricing keeps on falling kind of like some of the numbers that have been commented by some of the earlier questions. How you guys looked at that all of a sudden, if would like to manage is not as dramatic as -- maybe it sounds right now?

Terry Wang

Yeah. This is Terry again. I think that’s a good question for our supply demand situation, when we do the planning, we carefully analyzed our capacity, if this capacity can be grouped as effective capacity, so that in other ways that can be use to support and some customer demand and versus the entire capacity globally, you can see that, you’re right.

And some of the high-class producer, we might -- if the pricing continues to drop and do you have that have hurdle rate for that cost structure, so they cannot and low their pricing any more and they are losing their capacity and with the excessive mode, but our case, because they’re still a bonus of our cost structure and continually improvement.

And also our sales and marketing strategy to be in our brand name. So the pricing premium gaps are getting small but we still with the increasing orders from customers across different regions. Again and I would talking about a more diversified regions, not just in Europe and also at -- we have a more of -- more sales in U.S., Australia in those areas.

And I think that, we can fully analyze and we believe that we’ve been -- planned well but if in any case, that the capacity or demand is coming down with the week demand and remember we have a potion, also failed and we could use it to remove or terminate those outsource plant to be more produce in-house.

Our cost, we actually is coming down as increase our percentage of in-house for deep production, so that they need to some degree, to support if our potential for the ASP drop, our cost drop, will drop will decline accordingly. So that’s all a beauty how our model to handle those increasing demand, a weak demand mode.

Sanjay Shrestha – Lazard Capital

Got it. One quick follow upon that Terry, if I may. Just want to make sure that I understand this right. You guys talked about being able to get to that dollar module cost, sometime during 2011 and you said, it’s a bit of a function of the end market demand. What is your embedded grams per watt or the poly cost assumption in that?

And second part, if I may to the question is now, if you get to a dollar, you clearly become a cost leader beyond even where you are right now. So what’s your pricing philosophy in that scenario? Are you going to run your business to that 30% gross margin? Or is it one of those where if the demand remains relatively okay, you could actually see continued margin expansion even in 2011 and margin should not go down below 30%, regardless of what the overall demand scenario looks like?

Terry Wang

Okay. We have two questions. One is the one-dollar with the assumption for poly. And in our plant, I think that’s easy for us to reach below one dollar, the in-house that the assumptions of $50 per kilogram and can reach that level.

Sanjay Shrestha – Lazard Capital

Okay.

Terry Wang

Below, I’m talking about below $1.

Sanjay Shrestha – Lazard Capital

Got it.

Terry Wang

So, in that case and we’re very confident that we can maintain our gross margin and our profitability. We continue to sustain, but if you ask us to expand our gross margin or to gain market share, our philosophy is we’re not going to play or compete in pricing. So in other words, we are gaining market share given current gross margins, still we continued growing as we put more and valued services to the customers and we’re expecting our pricing get some recognize through our branding and the knowledgeable pricing.

But, we also do not believe and you can continue growing your gross margin to very high level, but we basically -- we will share our profit with our customers. So in other words, we maintain pretty comfortable maintain our gross margins going forward.

Sanjay Shrestha – Lazard Capital

That’s kind of what I was trying to get. Again, congratulations on the great quarter and the outlook, guys.

Terry Wang

Thank you, Sanjay.

Jifan Gao

Thank you.

Operator

Your next question comes from Ahmar Zaman with Piper Jaffray.

Ahmar Zaman – Piper Jaffray

Hi. Thank you for taking my question. Congratulations. Most of my questions have been asked. Just to follow-up, on your comment about achieving a dollar a watt or below a dollar a watt, cost per watt next year. Can you give us some color? Will that be in the first half? Would you expect to do that in the first half or in the second half of the year?

Terry Wang

No. I’m expecting that -- the timing of which we’re expecting to depend on the market trend, it’ll be more -- I think will be towards the second half of the year.

Ahmar Zaman – Piper Jaffray

So the second half of the year is when you adjust EBITDA.

Terry Wang

Yeah. By putting that quality and forecast range. But from market thoughts that’s the -- and that’s the market coming with the decreasing pricing material, we could move ahead of schedule to meet demand.

Ahmar Zaman – Piper Jaffray

Okay. Now is that also dependent on your expanding capacity, or can you achieve that target at current capacity?

Terry Wang

The capacity expansion is aiming for to meet the demand of our customers. And honestly, if we do, in current capacity -- the demand will come – assuming, they will come down, but our cost is coming down as well. So in terms of percentage wise and the in-house cost, I think that it’s not related in our capacity expansion and in all expansion.

Ahmar Zaman – Piper Jaffray

And then finally if I may ask a question on cash flow statement. So, congratulation on great execution there, I think you’re probably one of the first Chinese companies to achieve net cash, net cash position. Looking to 2011, do you expect to be free cash flow positive in 2011?

Terry Wang

Good question. Free cash -- operating cash positive is our strategy going forward. But free cash positive, is not necessarily that we have to come across each quarter. Even current, our growing capacity, so in other words our cash expenditure is coming on line next year to boost our capacity, the demand and that’s the highest priority.

And free cash is a secondary, so I cannot promise to get free cash positive, but I can get the positive operating cash flow. That will be clinical for us to grow to support our growth in sales, in operation. And also give us some value on top of our capital expenditure as well.

Ahmar Zaman – Piper Jaffray

Give us some color on CapEx plans for next year at this point?

Terry Wang

As I just mentioned that next year, if we reach 1.7 cell capacity or 1.2 wafer capacity, we need -- and also we have some other R&D lab improvement (inaudible), we will -- budgeting $250 from the $400 million cap expenditures for next year. I think that given per watt basis, we experienced improvements for CapEx per watt already.

Ahmar Zaman – Piper Jaffray

Thanks very much and congratulations again.

Terry Wang

Thank you.

Operator

Your next question comes from Nitin Kumar with Nomura Singapore.

Nitin Kumar – Nomura Singapore

Yeah. Hi, Terry, Thomas. You have already come up with great results. Just a quick question on the market share. I understand that you’re looking at market share in 2011. Do you have any kind of target as to what to you want to achieve and secondly on the same type of execution, any particular percent exposure that you are targeting?

Tom Young

Nitin, this is Thomas. We didn’t hear clearly your second question. First question was about market share.

Nitin Kumar – Nomura Singapore

Basically, the sales diversification in 2011, do you have any kind of targets to what exposure you would have from U.S., what exposure from Europe and how do you see that -- I mean in case of a weaker demand, how do you see you self being able to move your shipments?

Tom Young

I think I will have to move for this question to Ben Hill. Ben?

Ben Hill

Yeah. Let me see if I -- I think I -- let me answer the question, I think you asked. Certainly in terms of -- if you look at our geographical splits of our markets, certainly what you saw list of any one major thing happening in any one major country. So that’s the reason that we deliberately have those split across many different countries. I think that was the question you asked, correct me if I am wrong.

Nitin Kumar – Nomura Singapore

But do you have any kind of -- in terms of your order outlook or your current expectations, is there kind of a shift or rather than the definition that you see, is like the minimum possible -- say from the non-European markets?

Ben Hill

Yeah. I think we -- okay, sorry, we the line is little bit bad. So forgive me if I’m not touching anything. Certainly, we have our plans basically for Europe, U.S. and many other countries. As we -- basically it is similar to the -- similar to this year in terms of different type split, in terms of percentage. A lot of the business that we see in India or other developing markets is projected tight, most of them done with forecast. Certainly, we will like our plan to expand as much as possible.

Nitin Kumar – Nomura Singapore

I understand. Any expectations for market share for 2011 and any targets? Like for this year, you have roughly between 9% to 10%. So, is there any target for next year?

Ben Hill

In India, we’ve already reached the markets. So I believe there is a couple of (inaudible). We believe -- the first time to handle the project and pretty more projects like that coming within 2011. So we’ll be looking for very strong possibilities for us right now.

Nitin Kumar – Nomura Singapore

Sure. Great. Thanks for the help.

Ben Hill

Thank you.

Tom Young

Thanks, Nitin.

Operator

Your next question comes from Adam Krop with Ardour Capital.

Adam Krop – Ardour Capital

Hi. Good evening.

Jifan Gao

Hi, Adams.

Adam Krop – Ardour Capital

Follow-up on the cost per watt. It looks like you are at about just below $60 on the poly side per kilogram. I know you said you want to get -- you’re going to get down to the $50 per kilogram. When do you expect to get there? Is that going to be a 2Q or 3Q ‘11 event?

Jifan Gao

Overall, our average -- I’m expecting it in the middle of the year, we will be -- and given the current contract was sign. And I think that we will be in the ballpark. It depends on how the market moves, but we’re expecting in the mid of the year will be.

Adam Krop – Ardour Capital

So, I guess you have a little bit of exposure to the spot market, is what you’re seeing, what is your exposure to the spot market in 2011?

Terry Wang

I think it’s 20%, less than 20% exposure to follow it. That’s combined with both poly silicon and all sorts of wafer.

Adam Krop – Ardour Capital

Okay. And then just a follow-up on the outsourcing. It looks like you are about 30% now. How are you mitigating the quality or technology risks as you outsource this production? Can you just walk us through how you are getting potential manufacturing partners?

Jifan Gao

Okay. For the quality control for the outsourcing wafer because our major supply comes from our long-term partner, so we have really long relationship and we know what the party requirements both looks like. So, basically we can control really well. Besides that, in Trina, we have very good quality testing lab. So we have a different kind of equipment and the test method to confirm the quality to meet the standard for Trina Solar quality standard.

Adam Krop – Ardour Capital

Okay. Great. Thanks.

Operator

Your next question comes from Paul Clegg with Mizuho.

Paul Clegg – Mizuho

Good evening. Thanks for taking my questions and congratulations for giving strong number. Are you talking about (inaudible) shipments pushing along. Are you seeing targets along with those Q1 orders and then if you could talk about how Q2 is going? I have a quick follow-up.

Tom Young

Hi Paul, this is Thomas. I just wanted to confirm you, your voice is a little sloppier to what could that we have our pre-payments for our one, two orders, is that correct?

Paul Clegg – Mizuho

That’s correct.

Tom Young

Okay. Thank you. Ben, can you answer that question.

Ben Hill

The question is to what extent we have pre-payments.

Paul Clegg – Mizuho

Yeah.

Ben Hill

Could you repeat the question for me please.

Paul Clegg – Mizuho

It was about pre-payments for the first quarter and 80% of 1Q shipments that you have locked in? And then how Q2 is filling in?

Ben Hill

Yeah. About 30% to 40% of the Q1 have pre-payments between typically about 5% to 10%. Q2 is basically secure – (inaudible) pricing is secure for Q2 and the volume is secure, so some of the pricing, the system integrate for very secured level doing (inaudible) of them on the distribution side not so between key markets.

Paul Clegg – Mizuho

Okay. So, I’m sorry you said in terms of Q2, the volumes are blocked and are secured already, but the pricing is still variable? I was having trouble hearing you, I’m sorry.

Ben Hill

In some places, the price is still variable. It depends on the customer site. In some places, the pricing is still variable.

Paul Clegg – Mizuho

I see. And then a quick follow up on wage inflation in China, I’m reading a lot of articles about that. It’s particularly in the coastal regions being difficult to keep in place. Are you seeing any of that?

Terry Wang

Let me answer that question. Paul, the inflation in China is a potential risk. We haven’t seen much [security]. Quality has changed to three year to four potentially. I think that, the things we prepare for those risk management, couple of things we are doing. One is the material, that and associated with the inflation or appreciation view on (inaudible). And we’re internally to try to be more efficient use of materials to reduce the usage.

Our block base is actually -- we see the results in the third quarter already compared to the second quarter. And secondly, we don’t know on the other area or neighbor or other cost components, that we -- and focus on the productivity implement and I think that the things we’ve done and to some degree offsetting the potential risk. I think that we will continue to drift and we firmly believe that we handled that well next year.

Paul Clegg – Mizuho

Okay. Thanks a lot.

Tom Young

Thank you. Operator, we would like to open the line for one last caller. Thank you.

Operator

Our last question comes from Mark Bachman with Auriga.

Mark Bachman – Auriga

Hi, gentlemen. Thanks for taking my call here and congratulations on your results.

Terry Wang

Thanks.

Mark Bachman – Auriga

Terry, hoping that you can add some clarity around your answer about the euro exchange rate that is embedded in your guidance. With the euro trading at roughly at $30 here right now, investors are acutely focused on its recent decline and want to know what the variability is to further movement to through year-end. So if I just ask specifically here what exchange rate did you embed in your Q4 guidance and then, given your hedges that are already in place what is the sensitivity to both revenue and EPS as the exchange rate changes?

Terry Wang

Our guidance is averaged basically more towards and give us more rates on recent. So on average, we are above $1.35 range and as I reference, we are budgeting for the quarter. But a similar situation that we also had for a contract, the high ratios above $1.35, so that range from -- we can be prudent -- we have some also conserve the prudent numbers probably in the guidance. So I think that given current ASP trend in the fourth quarter, I think that the guidance can be met or be given current currency rate that we report in the budgeting.

In terms of sensitivity analysis, I mean, that’s the -- we have -- first quarter, we are down, the euro exposure is above 62% from the 78% from the second quarter. This fourth quarter that exposure still, the demand could be a little down a bit but at least it’s not going to be above that range. So sensitivity and exposure because we hedged by about 80% and so 20% exposure versus a 60% euro is to some degrees not very – it’s material, but not that significant. So can manage it well, if any currency drop but should be mined in the second quarter, which is or in the third quarter, we had mark-to-market loss 49 and finally, we had spot rate hedging target. And now if it’s down, euro coming down actually favor for us to get the mark-to-market gain and to offsetting affects impacts.

Mark Bachman – Auriga

Okay. So Terry, just to clarify, what we can take away from this stand is that your euro exposure is coming down and what the hedge is you have in place, you feel comfortable, even with the euro here at $30 that you can at least meet, if not beat your guidance than for Q4?

Terry Wang

Yeah. That’s correct.

Mark Bachman – Auriga

Okay. And then lastly, my follow-up here is, with regard to capacitive expansion in 2011. Why is it now a building discrepancy between wafer, ingot and then [solar] wafer build out. In my question here is just, why is Trina deviating away from being a completely balanced manufacturing model.

Terry Wang

Yeah. That’s good question to really talking about, we see the result of flexible, vertically integrated because vertically integrated model is all critical, our experience or core competency, we are not going to abandon that. And because we took it in terms of in-house, so vertically integrated produced in terms of costs and quality controls. At the same time and given association right now, all such as, fast of growing in our demand for product from customer side and given it logistically and the short cyclic times for to ramp up our sales and module capacity. So, physically, we’ve moved the capacity in the downstream, which is at sale and module, at fast pace and the upstream, which is wafer and ingot.

So that usually help them gap but that gap easily can be for our favor, as we have the partner -- wafer partner in line, who can support or provide us with the cost-effective module. And in the company and supply, actually build that facility here in local next to us. So become a partnership virtually, vertically integrated. At the same time, we kind of see that capital to be focused more on the downstream and for the Trina investment point of view and the time to market to the customers and this is actually favor to us and to adapt this model.

But again and from our point of view, this allows us to adjust it depends on the market fluctuations and as the market strong or weak, we can reduce our position for the market to awake. But if the market is strong, we can easily wrap our sales and market capacity to meet the demand of the customers. So either way, we’re running at fully utilized in-house work fully four areas, vertically integrated at the same time and capture the demand with the outsourced portion.

Mark Bachman – Auriga

Excellent. Thank you Terry.

Terry Wang

Thank you.

Tom Young

Okay. Thank you very much. And on behalf of the entire Trina Solar management team, we wish to thank everyone for interest on participation in the call today. Of course, if you’re interested in visiting us at our Changzhou PV park, please contact us. This concludes Trina Solar’s third quarter 2010 earnings conference call. Thank you, operator. You may please now disconnect.

Operator

Thank you. This concludes the conference. You may now disconnect.

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