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Trina Solar Limited (NYSE:TSL)

Q2 2011 Earnings Conference Call

August 23, 2011 08:00 ET

Executives

Thomas Young – Senior Director, Investor Relations

Jifan Gao – Chairman and Chief Executive Officer

Terry Wang – Chief Financial Officer

Mark Kingsley – Chief Commercial Officer

Gary Yu – Senior Vice President, Operations

Analysts

Rob Stone – Cowen and Company

Ming Chu – Jefferies

Dan Ries – Collins Stewart

Kelly Dougherty – Macquarie

Sanjay Shrestha – Lazard Capital Markets

Vishal Shah – Deutsche Bank

Tim Arcuri – Citi

Lu Yeung – UBS Securities

Amy Song – Goldman Sachs

Aaron Chew – Maxim Group

Gordon Johnson – Axiom Capital Management

Operator

Good morning everyone. My name is Sarah and I will be the conference operator today. At this time, I’d like to welcome everyone to the Trina Solar Second Quarter 2011 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 our host, Senior Director, Investor Relations, Thomas Young. You may begin your conference.

Thomas Young – Senior Director, Investor Relations

Thank you, operator. Good day to all and welcome to Trina Solar’s second quarter 2011 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 Commercial Officer, Mark Kingsley; 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 the 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 best estimates as of today, August 23, 2011. Trina Solar assumes no obligation to update these projections in the future as market conditions change. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days at the Investor Relations section of Trina Solar site 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 – Chairman and Chief Executive Officer

Thank you, Thomas and thank you everyone for joining us today. Amidst continued demand environmental challenges, our shipments grew by more than 20% and we achieved record shipment volume of 396 megawatts in the second quarter of 2011. Although module prices declined significantly since beginning of this year and impacted our margins, we remained positive and focused on executing our strategic strategies to ensure that sustainable growth and the success of Trina Solar. With that, we believe we are well-positioned to benefit from better second half of 2011.

In the second quarter, our sales were to some extent expanded in the market of financing and higher inventory due to the Italian solar subspace changes in earlier May. However, we experienced shipment increase due to our increased sales to Germany and U.S. We believe this reflects the trends of our leading brands, quality, and the performance of our products, and a localized service, we’ve consistently delivered to our customers.

We have goals to improve total system performance, reliability, and the cost structures. We carry on to progress strongly in earlier of technology innovation to further differentiate our brand and product offering. We received confirmation from Solar Institute of Singapore. Our module sales achieved record 18.8%. We are proud to announce that our multi-crystalline module has just been recently confirmed by TUV to achieve the maximum power output of 270 watts.

We also announced our partnership with Australia National University to develop higher efficiency n-type of mono cells with efficiency of 20%, and whereas the launch of our innovative just mounting solutions to reduce overall system cost. We keep on expanding our customer base across different regions including China. We expect to announce our supply agreement with Huanghe Hydropower for two ground-mounted solar project in China for a total of 30 megawatts of modules. We’ve announced the China’s solar feed-in-tariff updates, which expected to see strong growth and opportunities to increasing our domestic shipments as market expands.

Lastly, we expect to performing significantly better in the second half of 2011 as we continue to execute our cost reduction go-to-market, significant improvement in order pipeline from our diverse customer mix from distributors to commercial and utility segment across Europe, North America, and the rest of world, development opportunities in promising markets such as Japan, Australia, India, and Middle East for the rest of 2011 and beyond.

With that, I would now like to turn the call to our CFO, Terry Wang, to share our second quarter 2011 financial results. Terry?

Terry Wang – Chief Financial Officer

Thank you, Mr. Gao, and welcome to everyone today. I would like to present an overview of our financial results for the second quarter of 2011 followed by our third quarter guidance.

Regardless of the macro challenges facing the industry, we deliver a relatively sound quarter with sequential increase in shipments of approximately 24% despite our more than anticipated decline in module ASPs experienced in the first half of 2011. We are confident that we have the financial strength, ability to continue our long-term future, and growth of our business.

Our total net revenue in the second quarter was $579.5 million, an increase of 5.2% sequentially, an increase of 56.3% year-over-year. Total shipment volumes in the second quarter were 396.4 megawatts, an increase of 23.7% sequentially and an increase of 77.9% year-over-year. ASP was approximately $1.46 in the quarter versus $1.71 previously.

Our gross profit was $98.3 million, a decrease of 35% sequentially, an increase of 17.3% year-over-year. The sequential decline was primarily due to the significant decline in module ASPs, which has started in April, we realized client reductions due to renegotiations of a long-term polysilicon feedstock and wafer agreements in early June. This ASP versus cost timing differential to extend have an impact on our gross margin. In recent weeks, we have seen module ASP stabilizing as well as material prices bottoming out bring forth significant manufacturing costs reduction in the current quarter.

Our overall gross margin was 17% in the second quarter of 2011. Gross margin for our in-house wafer production to module production was 20.4%. Our second quarter operating expenses were $55.5 million or 11.3% of net revenues, a decrease from 12.1% in the first quarter. The decreases in expenses were primarily due to decrease in general and administrative expenses from overall expenses control and slightly lower R&D expenses. We focused on managing our expenses growth to help partially offset the lower gross margin.

Our second quarter operating income was $32.8 million, compared to $84.5 million in the first quarter, which translated to 5.7% operating margin. We had a net FX loss of $10.8 million in the second quarter. This net loss reflects $6.8 million of FX gain, which was offset by a loss in the fair value of the derivative of $17.6 million. In the derivative loss was impart due to changes in mark-to-market fair value of FX related derivatives partially offset by gains from appreciation of euro against U.S. dollars.

We continue to refine our in-house hedging program involving active monetary adjustment of hedging capacity based on a fluctuation that was of the U.S. dollars, the Euro and RMB to mitigate the effect of the exchange rate volatility. Relating the percentage of euro denominated sales were approximated $0.63 in the second quarter of 2011 compared to 78% in the second quarter of 2010 due to our increase in sales diversification in the global basis outside of euro zone.

Our second quarter net income was $11.8 million compared to net income of $47.7 million in the first quarter. The second quarter net income includes the net borrowing currency exchange loss of $10.8 million. Net margin was 2% in the second quarter. Earnings per fully dilutive ADS were $0.70, which include the effect of the net foreign currency exchange loss of $0.14 per fully diluted ADS.

To our balance sheet, as of June 30, our cash and cash equivalents and the ratio of cash balance stand at $684.6 million and the working capital balance at $758.1 million. Depreciation was $18.3 million. Total CapEx for second quarter is $87.4 million, which reflect our continued capacity expansion plans to achieve approximately 1.2 and 1.9 gigawatt of in-house ingot and wafer capacity and the cells and the module capacity in the second half of 2011 respectively.

As we look ahead in light of the current global economic and operating environment, our capital expenditure strategy and capital expansion decision will remain closely tied and adapted to market demand conditions. This brings us to our guidance for the third quarter and a fiscal year 2011 as follows. For the third quarter of 2011, we expect to ship between 480 megawatts to 520 megawatts of PV module.

For the third quarter, we expect gross margin relatively to our in-house production involving our self-produced wafers to be in the high-teens in the percentage terms. We expect our overall gross margins taking into account wafer and the cell requirement outsourced to meet the demand in excess of its internal capacity will be in mid- to-high teens in the percentage terms. This guidance is based on our average FX rate approximately $1.40 euro versus dollar.

Our third quarter gross margin trend reflect a significant reduction in our manufacturing costs of both silicon and non-silicon costs reflecting our continued confidence to market share gains and establish a newer market in the company reiterate its expectation for our total PV module shipments of between 1.75 gigawatts to 1.8 gigawatts for the full year 2011 representing an increase of 65.6% to 70.3% from 2011 of 2010. This shipment reflects our 2011 strategy to increase Trina Solar market share in our existing emerging TV markets to leverage our global Tier 1 brand reputation quality, performance and excellent customer service recognition.

Turning to our cost per watt, our in-house blended model and the multi non-silicon cost including depreciation, no change from previous quarter approximately $0.73. We are focusing on our efforts and the belief, we are still on track to reduce our overall non-silicon cost to decline to below $0.70 per watt by the end of the year driven by cost reduction of consumables, material supply chain optimization, technology driven cell efficiency improvements and the increasing manufacturing efficiency.

To conclude in this environment, we believe we have had attractable weather point with the business model that we have consistently allowed to fine-tune our operational strategies to be able to scale and react quite quickly any specific markets and segments of the PV value chain. Also we demonstrated our ability to manage and preserve reasonable cash balance for liquidity and working capital purposes so that we can remain nimble in constantly changing market and have a buffer against any downturns or upturns.

With that, I would now like to turn the call over to our Chief Commercial Officer Mark Kingsley, who will update you on the market outlook. Mark?

Mark Kingsley – Chief Commercial Officer

Thank you, Terry and hello to everyone on our call today. It’s a great pleasure to address you today and as newest member of Trina Solar executive team for those of you who are not aware I joined Trina after 20 plus years in commercial leadership roles, industry is going to many of the same growth and transition changes we are witnessing today in solar and remain an exciting time to be in the solar industry.

Speaking to Trina’s second quarter shipments, we do shipped the largest selling ever in a quarter by reaching nearly 400 megawatt. This represents a year-over-year increase of 78%. However, the impact of this volume growth is mutating as the prices were adversely impacted by the macro environment in advanced cells and following the issuance of Italy’s fourth decree in early May. In particular, these pressures impacted our opportunity pipeline at our Italian project partners with financing approvals were held or delayed. So in response, we shifted significant volumes to higher credit quality, large utility customers in Q2. This change in mix was compounded by timing effects of the existing in-quarter market reduction and average selling prices.

And as for current outlook in the third quarter, we are benefiting from several positive trends, which includes a growth recovery in Europe, increased order rates from new markets, and improved demand in the U.S. linked to the cash grant subsidy windows. These factors are allowing us to rebalance our mix of end segment and geographic allocations throughout the second half. We are also benefiting from our global accounts for leveraging their expertise and financial resources as they expand across regions. As an example of these deepening global relationships, in the second quarter, we announced a 55-megawatt deal with Gestamp Solar to power all of Renault’s manufacturing sites in France. The total rooftop area is equivalent in size to 55 European football fields.

And as Terry mentioned though macroeconomic challenges remained to demand growth. In Q3, we see continued evidence of customers’ flight to Tier 1 product reliability and bankability throughout our distribution segments. We are very encouraged by our steady progress in newer markets. For the China market, we recently announced two agreements totaling 30 megawatts with Huanghe Hydropower despite two projects in Qinghai.

Furthermore, to capture new demand created by the recent feed-in-tariff updates, we have pre-established streams across China focused on increasing our pipeline of local market opportunities. Beyond new growth in China, we have also dramatically increased our shipments in North America to a combination of distributors, large project, and utility segment customers. In fact in the first half of 2011, we have shipped over 170 megawatts of our products to address an increasing number of state solar programs including supplying one of the United States largest PV systems outside of Austin, Texas. Our U.S. year-on-year growth was approximately 172%.

Continuing our drive for geographic expansion, we recently announced our second strategic partnership in Australia with Origin Energy, which we believe can strengthen and sustain our market position as this area’s residential segment continues to expand. Outside of Asia, we’ve also recently established sales presences in Israel and are establishing a business entity in the United Arab Emirates to address PV opportunities in the Gulf States and the Middle East. We have been encouraged by new opportunities in this region as multi-crystalline efficiencies and system cost reductions enable a desired alternative to thin-film technologies. In sum, as these initiatives have gained traction, we are on a path to sell to 50% more accounts in Q3 than we sold to in Q2.

Next, I’d like to address our product development efforts. Our strategy to further extend our customer value and differentiate the Trina Solar brand is focused on three levers. The first is creating high-efficiency premium performance modules based on practical and scalable technologies. Second is offering innovative new products capable of lowering the balance of system costs, which represent approximately 70% of the total system.

Standing behind Trina’s differentiated product quality with a 25-year linear warranty is the third leg of that strategy. To extend our lead in installed module economics, we are advancing a new high efficiency product that is multi-crystalline-based while offering performance associated with our premium model baselines. This in-house developed product which is targeted for fourth quarter commercial production is on track.

As Garry will touch on next, our approach is to develop such high-efficiency product based on practical and scalable process technologies. Further, this initial multi-platform high efficiency product will be followed by sister offerings in the first half of 2012, which will reflect additional technologies under development and testing. Trina’s historical growth has been driven by delivering higher performance at cost points attractively positioned of the industry value curve. This is our logical next step.

In conjunction with our high efficiency offerings, we are also focused on increasing attention to lower the ex-module costs of solar to drive growth in newer markets and regions. As recently announced, we are very excited to update that our first such product, our Trinamount solutions line are shipping to the North American market whereas you expected the lower installation costs while at the same time enhancing the structure and esthetics for a variety of application environments.

In the big picture cost reductions, we are driven by a balance of technology-driven efficiency gains, more efficient materials used, and solutions designed to reduce installed systems cost. Specifically, as we further develop innovative offerings to lower the cost of solar, both within and outside the module, we will continue our rigorous evaluation of new and second supplier technologies. Of course, this includes meeting Trina’s high environmental health and safety standards.

This consumer approach is directly tied to our recent confidence to adapt an improved linear warranty program for products purchased starting July 1, 2011. The upgraded warranty guarantees annual power output declines of no greater than 0.7% after the initial year offering extended value over a standard two-step warranty, which previously limited power coverage to 90% and 80% prior to and after year ‘10. This new warranty has already been well received, which is backed further by Trina Solar’s positive power tolerance and our recently announced salt mist in ammonia test certifications.

In summary, we believe our strategic focus on innovative market-driven solutions based on technologies that they scale practically and economically will ensure our brand’s leadership position as market opportunities continue to expand.

With that, I’ll now pass the call over to Gary.

Gary Yu – Senior Vice President, Operations

Thank you, Mark and hello to everyone with us today. I am happy to share with you our second quarter, second operations update and the current development at this time.

From an operations standpoint, in the second quarter, we continue to try that in the completion of new manufacturing and R&D infrastructure, in the commissioning of new capacity line and the preparation of innovative new products such as our Trinamount product line and our new high efficiency multi-product currently in higher (indiscernible). To our previously announced 2011 in-house capacity target, we are pleased to announce we are commissioning new manufacturing lines at our (indiscernible) to linear capacity as of July 31 to 1 gigawatt of ingot and the wafer capacity and the 1.9 gigawatts of cell and the module capacity.

We remain on track to complete our new ingot and wafer facility, including just linked to our new marketing spend line based high-efficiency products that Mark just now introduced as well our construction of new State Key Research Laboratory. We are also pleased to update that we have successfully upgraded of all pre-existing (indiscernible) to produce our connect high-efficiency module, a premium product that has increased our 72-cell mono module by a promissory 7 watts through adoption of near squaring cells chips our advanced monocrystalline module with connect technology during our (indiscernible) cell technology wet module. We continue to build. During the second quarter, we also completed manufacturing line preparation to our new Trinamount quick install brand designs, which is now in commercial production.

To update our non-silicon conversion costs starting an inflationary price pressure, let us start over a year ago, we are seeing increasing improvement in our purchasing price of key supply chain components. This favorable change is completely by another key cost reduction factor. Our reduction in unit material usage, which we have initiated for our silicon combined (indiscernible) and other areas.

With this favorable trend and the forward visibility in the second half, we are confident in our ability to lower our non-silicon costs per watt to $0.70 or below by the end of this year. Given increased market attention to module efficiency increases, manufacturing cost reduction, we continue to evaluate new improvement technology with primary savings that our initial capital cost, joining cost, our net output against (indiscernible) for new and the existing supply chain materials. We make effective quality performance evaluation at our PV park center saw excellent test and material as part of our approval process, which then must pass the additional EHS safety and handling parameter link to our commitment to sustainable development principle and measures.

While we are invited to be offered an increasing number of cost savings option from both, outside and the China. We are up to effect that our product of just financed and the warranty for 25 years to outperform our senior warranty program. As such for both our cost reduction and market delivery of new and higher power products. We favor (indiscernible) scalable technologies and innovative process in light of the long-term concern of our customers and their project financing partners.

I now comment, we believe this is not only a more pertinent approach, but one that can be adapt more efficiently to our new and existing production line to assume commercial status.

With that, I will turn the call back to Thomas for our Q&A. Thomas?

Thomas Young – Senior Director, Investor Relations

Thank you, Gary. Before we commence our Q&A, I just want to remind that given the number of analysts we have in queue that we will prefer one question with one follow-up and then do our best to take a second round of questions, if time allows. Well, operator, you may now proceed with our Q&A.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from the Rob Stone of Cowen and Company. Your line is now open.

Rob Stone – Cowen and Company

Good evening, gentlemen. Lot’s of good stuff going on in the new products area. I wonder if you could just add any more color on the new multi-crystalline product. Is that using some type of cast mono technology, or what else can you say about it?

Jifan Gao

For the multi-crystalline, I think that there will be better (indiscernible) to our customer because our approach to use the multi-crystalline technology to approach the efficiency as mono-crystalline, but the cost structure we have been as our current multi-crystalline cast structure. So, I think it will be better to Trina, ourselves and our customers. Thank you.

Rob Stone – Cowen and Company

And for Terry, could you just comment, you said you are going to see a big drop in non-silicon cost, can you comment on what you see as a trend for external cell and wafer purchase prices in the next couple of quarters?

Terry Wang

Hi, Rob, I’d be happy to. Given the top one in the second quarter, we had 73 non-poly and poly fell 43 per watt basis. So, $1.16 for in-house, and top of that and we have few cents higher, $0.05 higher with the outsourced wafer in sales. And going forward in this quarter, next quarter we can see clearly in the poly dropped drastically and given current and couple of polysilicon may, number one, we renegotiate price for our existing contract and down to the current market level.

Number two and then if you look at the our usage of poly that we from six down to the 1.9 and the other area for non-poly process costs that we understand that last couple of quarters of stable price is relatively high, but now we have the measures taken to, number one, we renegotiate price with the supplier, but at the same time and comes up innovation that we try to use employee usage as much as we can.

Other area also the efficiency that will continue to build up and so that’s why we have seen our results indicating and positively on our efforts as a result we see in price in June or July in this quarter, the first month and we do see in our non-poly process cost an approximately about $0.70. So, going forward by our projection given our supply procurement plan, we are looking at and coming down our cost with solid measure. So, that’s why we are pretty confident to say that the costs were coming down below $0.70 and without any question.

Rob Stone – Cowen and Company

Great. Thank you.

Terry Wang

Thank you, Rob.

Thomas Young

Thank you, Rob.

Operator

Your next question comes from Jesse Pichel from Jefferies. Your line is now open.

Ming Chu – Jefferies

Hey, good evening Young, Terry and team this is [Ming Chu] for Jesse. First question is for Mark, first of all welcome aboard Mark, your shipment to Germany almost doubled to 131 megawatts, can you give us some more color on your trends in Germany and also the percentage shipped to distributors versus installers?

Mark Kingsley

First of all thanks for the welcome. Germany was an island of safety for us in Q2 as the outlook was unclear on volumes. What we did was stick with this long-term strategy we’ve had which is really selective poly partners so it’s a winner strategy, who had the volumes. In Germany, as I said before we’re getting better diversification in Q3, but we will continue to have some strength in Germany. As you’re well aware, there are people trying to get under the fit changes at the end of the year. So, we still see some volume strength in Germany currently in the current quarter.

Ming Chu – Jefferies

Great, it’s great color. And a quick followup for Chairman, Gao. There has been a lot of capacities in China that’s not competitive. One of your peers actually acquired some of those capacity. Have you been looking at such opportunities?

Jifan Gao

I speak Chinese, Gary will translate.

Gary Yu

Mr. Gao said given current environment and especially on those capacity over-excessive related to small scale and outdate equipment and technology. So, at this time, we don’t have a plan to go that area. But plus and we keep our eye open and we will build our own capacity, that’s our strategy now and keep our eyes open.

What we’re doing now and number one, we have (indiscernible) some of the derivative investment related to improve or upgrade it in our current equipment and manufacturing facility, so that we can and to meet the high efficiency production requirement. Number two, accordingly if the market allow, we will upgrade it or expand our capacity accordingly at level in terms of current technology and efficiency requirement.

Ming Chu – Jefferies

Okay. Gao and Terry, Thanks.

Operator

Your next question comes from Dan Ries of Collins Stewart. Your line is now open.

Dan Ries – Collins Stewart

Hi, guys. Thank you very much for taking the question. I guess it’s safe to say that you are probably running at a 100% utilization rate now. My question is what happened at the end of the year, as you get to the end of the year December and into early next year. Will your production – how will you run your production lines, will it be based on a forecast or will you do it based on actual orders? Last year, we saw big inventory build in 1Q as people produced the orders, I am wondering if you’ve changed strategy at all for entering 2012?

Terry Wang

Yeah, thank you Dan. For capacity, you know that, number one that we do have a strategy to handle, you’re right, by right now it is running out of capacity or 100% utilized, because we had to go out to outsource wafer cells. And given currently, we are on the right track to expand our capacity up to 1.9 gigawatts of cell, 1.2 gigawatts of wafer, that actually given second half of our forecast number.

And I think that still fully utilized at that time, but you are right in the first quarter next year, it could be different and the demand is going to be different. So, we will adjust in our throughput given the demand at that time by adjusting outsourced portion, but anyway if you adjust the – but typically at this time we still outsource wafer and cell in terms of cost still are few cents higher. So, that will be a buffer to adjust and to fully utilize our capacity and so that remain our competitiveness in the cost structure.

Dan Ries – Collins Stewart

Okay, thank you very much.

Terry Wang

Thank you, Dan.

Operator

Your next question comes from Kelly Dougherty of Macquarie. Your line is now open.

Kelly Dougherty – Macquarie

Hi, gentlemen. Thanks for taking the questions. It seems that you took a lot of ASP pain last quarter. Your ASPs are lower than some of your peers, but then you are able to renegotiate your poly and wafer contacts and since then you had a nice improvement in processing cost already in third quarter, but that doesn’t seem really evident in your margin guidance. Are you just being conservative here especially with the $1.40 exchange rate and maybe what kind of ASP declines you assume for the third quarter?

Terry Wang

Our costs in the last couple of quarters and we do have couple of things that carry through and as a high and carrying cost inventory, but now the costs will be negotiated and the material wise that would supply, we would negotiate it down and pretty confident this quarter and the cost of tremendous is going to be carrying out expecting could be in middle teens and – but for the ASP sight, it’s uncertain and then now the markets are volatile and we have a – this quarter’s ASP target and because last quarter we missed it and because we didn’t realize that in June that the ASP dropped drastically, so I have to – and foresee that the potential of volatility for the ASP side. So, I think that gross margin guidance, I think that relatively stabilized compared to the second quarter. And I think we are pretty confident we can get there and also you can see that stabilized and could be a turning point for us to be and profitability increase in the future quarters.

Kelly Dougherty – Macquarie

Okay. So, you are basically still working through some of the high cost inventory in the third quarter, is that the way to think about it and then maybe in the fourth quarter you’ll see wafer and spot – wafer and poly prices closer to the spot markets, flowing through the income statement, is that the way to think about it?

Terry Wang

Pretty much in Q3, those inventories going be down, so fourth quarter we don't have any legacy inventory, but the third quarter will have a very small portion, because remember in June when price dropped and we actually are quite a few maturing. So, that actually moved average point of view, our inventory costs were averaged down since June. So, I think that’s now becoming positively for our cost reductions and from this point on.

Kelly Dougherty – Macquarie

Got it.

Terry Wang

So, the first quarter and second quarter largely the margin mix because of the inventory they carried with a high cost. That’s for the first half, now and it’s different now returning to our – favor to us in terms of productions – the cost reductions.

Kelly Dougherty – Macquarie

Okay. And I know you haven’t given guidance for the fourth quarter, but kind of reading into that, it seems that you think that margins can improve sequentially in the fourth quarter from the third?

Terry Wang

I cannot comment on fourth quarter, but one thing is clear, the fourth quarter ASP versus the third quarter relatively we don’t think it’s such a big drop and maybe a low and middle 1% off. So, our cost reduction program if you look at the current cost reduction program we are running and we are running actually at fast speed and the rate of decline higher than ASP and given current forecast. So, I am not seeing margin expansion, but I’ll say at least we’ll have upside for margin for the third quarter.

Kelly Dougherty – Macquarie

Thanks Terry.

Terry Wang

Thank you, Kelly.

Operator

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

Sanjay Shrestha – Lazard Capital Markets

Thank you. Good evening guys. Just kind of a follow-up question on the market outlook, so when you guys are putting this guidance together right how are you thinking about sort of the overall growth materializing the size of the German market, size of the Italian market? How do you think that U.S. market unfolds? And how big do you think China is going to be? And what do you think the overall size of the market and I have a follow-up question?

Mark Kingsley

Well, I mean, overall size of the market, as you know, changes. We’ve been running at a central range of 10 outlets of about 22, but that changed a couple of weeks ago in China and added some more megawatts to the pilot. The way we look at it is we take a long-term and a short-term view.

Our strategic view is we are very focused on China and the U.S. to add diversification as they become some of the largest markets in the world. We continue to invest there and expand our teams there. We are also adding geographic diversity as I mentioned before. I talked about Australia, talked about what we are doing in Southeast Asia, Mideast etcetera. Short-term what we see the most activity right now in this quarter and next quarter is the lift in China. And so we’re seeing really nice activity there.

And as I said, our model is to be more diversified. As we look at Germany, over time, we do expect Germany, Italy to decrease and we are taking the actions to offset that with better diversity, different range of customers, and we also do a lot of work on extending our pipeline, so that we can direct exactly where we are going to be growing as we move forward.

Sanjay Shrestha – Lazard Capital Markets

Okay. Kind of follow-up on that, so if things are stabilizing and demand is picking up in Germany and I am a bit confused with your Q3 margin guidance, I am just trying to understand this from a pricing strategy standpoint, because if your poly prices is in line with the spot, which then means it’s around 50, which means your internal cost is $1 and if you are talking about sort of high-teens gross margin, then implicitly you are talking about ASP somewhere around $1.18, and that is obviously lower than other Tier 1 players what they have talked about. So, is my math wrong here and/or are you guys still being cautious that things look like it will pick up, but it hasn’t quite picked up yet?. So, it’s better to be conservative rather than go out and give a bigger guidance at this point in time?

Terry Wang

Thanks for the question, it’s Terry. For margin guidance for the third quarter, yeah, you know that the number one that if we calculate we believe we have approximately about 50% outsourced wafer and cells and our average about $0.04 or $0.05 higher than our current costs, overall allocated. So – and we do see that the costs will reduce drastically and top to middle teens reduction, but we do see an ASP right now with things that will be dropped and could be in the range in low teens, but you could see they might have margin strength, but outsourced portion, if you take that into account, they might have a different soul that’s why and the plus of volatility of ASP. So, we think that the margin relatively stabilized the second quarter is reasonable guidance for us to go an d outperform.

Sanjay Shrestha – Lazard Capital Markets

Okay. If I may just a quick follow-up on that, so have you seen unbankable Tier 2 and Tier 3 capacity if shutdown and exclusively have, how much of that has been taken out of the market? And two, are you truly seeing the benefit of the Tier 1, where there is actually a chance given the return profiles in the European market that the prices could impact, go back in Q4, if Germany does turn out to be a 7 gigawatt market in 2011?

Terry Wang

Let me answer that capacity first and then Mark will answer on the market side. Both capacity on smaller one Tier 3, Tier 2 and we know they are struggling right now, because we do see that some of the tier, when we acquired the material and relatively speaking they sale at lower ASPs enough. So, the margin squeezed. But they survived, but they have a running risk because they are running out of the cash. So, cash is the king right now. So, they might be issue for them. But the current need and for emergency, they might further reduce their ASP so that they can and generate cash themselves. So that’s the phenomenon, we watch it carefully.

Mark Kingsley

I think I answered that partially before when I said if you see the diversity of accounts that we’re shipping to Q2 over Q3 reduce a more diverse group of accounts and also smaller accounts. And the reason for that, there is a couple of things. I think, one is obviously based on the maturity of your buyer. They understand surety of supply, so we’re having more of those dialogs. We’re also seeing as financing has become one of the large drivers, who is actually able to buy and install, the banks have become stricter and so they have been tightening specifications, even technical specifications on product. So, that’s helped create more dialogue for high quality Tier 1s.

But in general and I think Terry said as well there’s going to be people that don’t have reinvestment economics that are going to price because they’re looking for cash. But we think again the clients that we work with a lot of them are very focused on not only how do they get over priced had a great process on that this year.

But they are also looking beyond that if you want to create demand they have to actually get the balance down as well. So, the third legged stool is also we’re talking to a lot of people about things like Trinamount, where we’re not only taking cost of the module, but ex-module cost. So, as I said, where that hits the road is 50% more accounts in Q3. So, there is some macro effect going on.

Sanjay Shrestha – Lazard Capital Markets

Are you still getting about $0.15 to $0.20 per watt type of premium versus those guys and you expect that to continue until they go away?

Mark Kingsley

I think again you’re going to have obviously a range that based on the segment it’s in, but yes I think they will be. I think there were people that will price at non-sustainable reinvestment economics a while until it continues to shake out.

Sanjay Shrestha – Lazard Capital Markets

Okay, great. Thank you so much guys.

Operator

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

Vishal Shah – Deutsche Bank

Yes h, hi, thanks for taking my question. Just wanted to understand your outsourcing cost structure a little bit, some of your competitors have talked about getting wafers for less than $0.50 a watt. So, I’m trying to reconcile your $0.05 per watt higher cost structure of outsourcing and also can you maybe talk about what percentage of your second half shipments will be directed to the U.S. market? Thank you.

Terry Wang

Let me talk about our cost structure first, Shah and then Mark will add on market type. That the outsource portion typically if you see sample of that some of that from the lowest wafer outsourced that might be true close to $0.60 per watt, but it’s that only take a portion of that and you have to outsource from other source and the other one what we outsource, don’t forget we have approximate 10% cell outsourced portion.

So, from that when you add together and that view in-house production costs still lower and quite few cents above $0.04 lower on our wafer together and for cells, we really want to cell outsource that’s now close to $00.15, $0.16 higher. So, that’s put together that’s positive by $0.04 to $0.05 advantage. And Mark, can you take on markets?

Mark Kingsley

Yes, what I’d say is, one of the reasons we're also pretty severe in our testing of our modules. I mentioned we stand by at 25-year warranty. Behind that is the industry's leading test lab, where we have the most severe lighting test in order for the source to us, you will have to go and pass that. So,, we're picking a premium piece of what we are in-sourcing. As I said EHS requirement is what most importantly it has to meet long-term performance capabilities that are in line with what Trina has. So, I think that's part of it. You can always get something cheaper based on the dynamics in this industry. We're looking at total life cycle costs and picking the sweet spot is our approach.

Vishal Shah – Deutsche Bank

So, what percent of your wafers come from GCL?

Jifan Gao

Wafer and GCL we are taking that as part of majority, the more than 60% of wafer from Japan.

Vishal Shah – Deutsche Bank

More than 60% of wafer?

Jifan Gao

I know what you are saying is that GCL offers the lowest wafer price, but $0.50 but without the achievement you have to understand everything that's purely and because GCL has a facility next to us that was approximately about 600 megawatts and the $0.50 that we talk, but we have a calculation there. I mean you have some different variance from what the market flow information. Yes, we are approaching their costs, the pricing is rather a bit low, but still high than our internal production cost that's for certain.

Vishal Shah – Deutsche Bank

Okay, great.

Jifan Gao

Yes, thank you.

Vishal Shah – Deutsche Bank

And just one clarification, 25% of your shipments you said came from not America in the first half, is that right? And would that trend continue into second half also? Thank you.

Mark Kingsley

I know they’re only 25%, but we’re on that path. 19% and I think we have supporting document that actually breaks that out that for you. We actually see America is a very encouraging market and then there has been some changes, as I said, the silver lining in this reduction of price has been some demand stimulus in the U.S. So, we are having very active quarter in the U.S. right now in projects and we see a continued ramp as we look at pipeline.

Vishal Shah – Deutsche Bank

Great, thank you very much.

Operator

Your next question comes from Tim Arcuri of Citi. Your line is now open.

Tim Arcuri – Citi

Hi guys, I was wondering if you could just give a little highlight in terms of what it looks like your inventory was up a little bit from the first quarter there? Could you give us any sense as to what portion of that inventory is finished goods?

Jifan Gao

Okay. This second quarter and we have approximately about 30 days inventory turns and approximately $220 million and within that it’s about 15% relating to raw materials, it’s about talking about 30% work-in process, the other remaining are finished goods.

Tim Arcuri – Citi

There was one comment on the call there, you mentioned that you saw that balance of system costs were about 70% of total system costs. Is that only for residential markets or what was that comment in relation to?

Mark Kingsley

That's a balance between mainly actually commercial rooftop and residential. That's mainly affected by the fact that module price has come down as a ratio of the total cost. Obviously, people are working to reduce the BOS and depending upon, we talked to these different ranges and what application, but it's the number we use and that's a full stack, it's not just the equipment, it's the whole process of getting something installed, all right. But we do see great opportunities as we Trinamount it’s a commercial rooftop and residential rooftop is up to a four to one labor reduction because of faster installation speed and so we still get the right place to focus and as we try to actually incent demand in the market, we have to tack it out of the side of equation as well.

Tim Arcuri – Citi

Okay, thanks.

Operator

Your next question comes from Lu Yeung of UBS Securities. Your line is now open.

Lu Yeung – UBS Securities

Hi, Terry, it’s housekeeping questions. What kind of OpEx do you expect going forward and could you provide some of your tax guidance and maybe foreign exchange guidance for third quarter please?

Terry Wang

Okay. Hey Lu Yeung, how are you?

Lu Yeung – UBS Securities

Good.

Terry Wang

The OpEx you know that in this couple of – last couple of quarters it’s above than what we think and due to the ASP drop, but we still view buildup our sales force globally. And going forward for next couple of quarters or beyond, we do have measures to take to reduce in terms of extended revenues and so that we were running a company more efficiently. So, that range could be – in this year, it should be approximately of $0.10 or 10.5% range going for next couple of quarters. And in terms of tax rate, we still see for effective tax rates and for modeling I still suggest 15%. But going forward and this couple of quarters, we are well (indiscernible) our application to Swiss tax authority and then in China for our additional Trina tax in Changzhou for high tax status. So, for principal company status, Swiss, we have approved and we are expecting by the year (indiscernible) absolutely could have our effective tax rate lower, but for modeling, I would suggest that still in the 15% as reference.

Lu Yeung – UBS Securities

I see. One more follow-up is Trina has probably one of the lowest inventory days among the peers. I am just wondering maybe you can share with us what the cost basis for the inventory that you have on hand and how much impact it will do to actually to impact the margins according to your guidance?

Terry Wang

Okay. We do see from the first quarter to second quarter, when our fourth quarter last year we have 19 days now. First quarter, we get high on 29 and second quarter 38. And from first quarter to the second quarter and the impact on the costs and from the inventory carrying through is approximately about $0.03. And from second quarter to third quarter, we are expecting right now is that impact is very limited, less than $0.01. So, but there has some impact, but I think that impact was diminishing as we get into the September.

Lu Yeung – UBS Securities

I see. Is it fair to say that your blended wafer costs and your blended poly costs should approach very close to the current spot price by the end of the quarter if the price didn’t change?

Terry Wang

Yeah, you can say that. Because as I said, the contracts signed you see on other and partly even outsource and wafer also approaching renegotiates down to a portion of market rate, but that will reflect the current demand our strategic partnership. So, yeah, you can say that.

Lu Yeung – UBS Securities

Right. Thank you very much.

Terry Wang

Thank you.

Operator

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

Amy Song – Goldman Sachs

Hey, good evening Terry and the management team. Just have a question on the gross margin guidance, if we, let’s say, excluding the high inventory carryover from the cost structure can we assume that gross margin actually will be flattish going from 2Q to 3Q. Would that be fair to say?

Terry Wang

I would say it mid to high teens and relatively gives the signal that our stabilized gross margin from this point on and that’s fair to say, but given current market ASP and we have to be pulling on that. So, our obligation to give the investment confidence that we can get it, because we missed the last quarter, and we have to be careful on that if the guidance was related to gross margin.

Amy Song – Goldman Sachs

Thank you.

Terry Wang

Thank you.

Amy Song – Goldman Sachs

So, what is your outlook – yeah, thank you. Another follow-up question is what is your outlook on ASP for first quarter and also what’s the poly price outlook you had in 4Q as well?

Terry Wang

Outlook for fourth quarter.

Amy Song – Goldman Sachs

Yeah. Just the ASP, but…

Terry Wang

Last quarter, we are still looking at the cost continue to drop as I mentioned that the retail decline is dropping and will be faster than we anticipated for ASP. We’ll have so many ASP number out there, because given current, we anticipated – and the rate, we could have a chance upside by dropping cost faster than ASP. So, that I am not saying that, but at least we could keep our margins stabilized for this rest of the year.

Amy Song – Goldman Sachs

Okay. So, one last question, on the new silicon costs, what is the room you are seeing going forward in fourth quarter, below something below $0.70. Are we – should we think about $0.68, $0.69 or even lower? How do you calculate – the raw material guy says they are going to cutting cost from you?

Terry Wang

Yeah, that’s good question that using imagination below $0.70. And we have a room to the upside and we have to see that the efforts made will see results and then give you confirmation.

Amy Song – Goldman Sachs

Okay. Thank you for the answers. Thanks.

Terry Wang

Thank you, Amy.

Operator

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

Aaron Chew – Maxim Group

Hi, guys. Thanks so much for the question. If I can just two quick ones, one, wonder if you can comment a bit on the demand dynamics in Italy as we speak and wondering really specifically two things. First, what reaction you are seeing to the September start of GSEs registration requirement if it’s impacting demand in the fourth quarter, as you expect there to be some follow-through or maybe a drop off? And secondly, if you can comment on how second half demand has been to the commercial rooftop market and if there has been – if there seems to be any potential upside in that area? And then just one really quick follow-up, also noticed you have started reporting a small project asset line on the balance sheet. Just wondering if you can comment what that is, is that for Chinese projects? Is that something we should expect to go away or build over time? Thank you much.

Mark Kingsley

I have been waiting for Italy since I got there. So, we are actually seeing some good activity finally. And we have some pickup in activity. We see it. Obviously, our historic Italian account is at the utilities. We also see Spanish accounts that a lot of them actually served projects there. So, after much waiting and unclarity, we are seeing some pickup in demand. There is – we still have a mix of utility projects in commercial rooftop there. And so what we are seeing moved quicker was the stuff that was utility that was finishing off and now it’s blending into commercial rooftop.

Aaron Chew – Maxim Group

But is the upcoming deadline for this GSE registration requirement complicating things in the fourth quarter or are you not seeing any as you just relate it to that?

Mark Kingsley

I am saying less. There is the one, there was complication throughout the process this year, but now at least there is also running out of time. And so those two things are working together to bring some demand back.

Aaron Chew – Maxim Group

Okay, gotcha. Thank you. And on the project assets?

Mark Kingsley

You might want to repeat it?

Terry Wang

Yeah, could you repeat the last?

Aaron Chew – Maxim Group

Yeah, I just noticed that there was a new project asset line on the balance sheet. And I think historically you really haven’t had been capitalizing expenses, so I am assuming that’s for some type of project involved on instead of a module supply contract, is that a Chinese project or just maybe you can shed light on what that’s coming from?

Mark Kingsley

Sure. Actually, it’s not new, but just (indiscernible).

Terry Wang

Let me handle. Project assets are related to our (Thompson) project, I mean, the power plant project that we have done in Italy, now it is related to Chinese. But you see the one line, if you look at it clearly and that’s a long-term project assets, but if you look at it on a current asset you see that project assets as well. But that long-term it's a first time project. So, that one project that would hold over one year then we have to re-class back to the long-term as always. And going forward second half asset project is right now in the process to be sold. Without that project asset, it will be declined to offset the balance sheet will be recognized as revenue in the second half.

Aaron Chew – Maxim Group

Okay. Thank you.

Thomas Young

Operator we have probably for one more set of question. Thank you.

Operator

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

Gordon Johnson – Axiom Capital Management

Thanks for the questions, gentlemen. I just have few questions. Number one is I noticed a pretty significant increase in your debt this quarter. It looks like your short and long-term debt, were up roughly $414 million, while the increase in cash was just $141 million. So, excluding that debt issuance it looks like cash was down pretty significantly. Can you help us understand, who this debt is coming from and why on so much incremental debt continues to accumulate?

Terry Wang

Gordon, the first question, the debt most from the Chinese bank and which includes the Bank of China and the Chinese Development Bank. The cash you can see that our cash balance is somewhat closer to $700 million versus the first quarter. As we increase our cash balance, so as to increase the liquidity and, but on the other side of coin and our debt on the increase and the reason that increase of debt because that our working capital this couple of quarters and come across the negative operating cash, that and we have to borrow money to feed in to support our operation and remain our liquidity in a cash balance plus to maintain competitive in the cash balance level. I think the negative cash for first half and more than $200 million that's the GAAP and right there and that's driven by longer payment term from accounts payable, our accounts receivables and you can see our inventory days that’s been longer. So, that's major and entire for negative operating cash and for this couple quarters.

Gordon Johnson – Axiom Capital Management

I think it's great that you guys have access, but I guess it's not just you guys ,when I look at CSIQ's balance sheet or Yingli's balance sheet, I know it's a similar trend. Suntech's debt didn't increase that much, but their cash was down nearly $200 million. I guess, the question is, if you guys have so much cash, why does this borrowings still continue and should we be concerned about the potential increases in capacity that this incremental debt will bring about potentially in a weaker market?

Terry Wang

The capacity wise that we're not going to increase capacity more than we anticipated or we're planning because the market demand, market size we are very sensitive to that and if we are all running full capacity and utilize and we'll be okay. But we bring the high level of – you could see it depend on how its judge and high level of cash, but given current uncertain market, the customers and given their side and their financial situation, a longer payment term and also inventory buildup, those couple of things uncertain. So, we got have enough cash to be able to handle potential downturn and upturn. And the other things going forward and the liquidity is very good, cash is key, especially around the time of the year or environment like this, and we don't want to have a too excess of cash, but we want enough cash to be able to support a different (indiscernible) going forward.

Gordon Johnson – Axiom Capital Management

All right. Thanks Terry: And then lastly, there has been some speculation that Foxconn, GCL and Hareon are potentially looking to ramp some module capacity, some of the numbers going around are as high as 10 gigawatts, if that were indeed to happen, what would be the strategy of Trina given the low cost access to poly that GCL has?

Terry Wang

You know, GCL is our strategical partner for wafer outsource, our partner and I think right now is the largest wafer producer. One of the largest poly producer and they have a cost advantage in that because they produce within themselves and going forward in the market of people talking and we haven’t heard directly from them, but it could be rumor or it could be real.

Jifan Gao

Mr. Gao mentioned that we talked to the Chairman of Board or CEO of GCL, and they told him clearly on the phone that they are not going to do the module. Strategically, it's a violation for detrimental to their customer base.

Gordon Johnson – Axiom Capital Management

Right, that’s great to know. Well, thanks guys and congratulations for a pretty good execution in a tough quarter.

Jifan Gao

Thank you, Gordon.

Thomas Young – Senior Director, Investor Relations

Okay. Well on behalf of the entire Trina Solar management team, we wish to thank everyone for their participation on today's call. If you are interested to visit us at our Changzhou PV Park, please reach out to us. This formally concludes Trina Solar’s second quarter 2011 earnings conference call. Thank you, operator and you may now disconnect.

Operator

This does conclude today’s conference call. You may now disconnect.

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