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Trina Solar Limited (NYSE:TSL)

Q3 2011 Earnings Conference Call

November 21, 2011, 17:00 p.m. ET

Executives

Thomas Young - Senior Director, IR

Jifan Gao - Chairman and CEO

Terry Wang - CFO

Mark Kingsley - CCO

Gary Yu - SVP, Operations

Analysts

Jesse Peschel - Jefferies

Sanjay Shrestha - Lazard Capital Markets

Kelly Dougherty - Macquarie

Vishal Shah - Deutsche Bank

James Medvedeff - Cowen & Corporation

Paul Clegg - Mizuho Securities

Dan Ries - Collins Stewart

Adam Krop - Ardour Capital Investments

Mahesh Sanganeria - RBC Capital Markets

Tim Arcuri - Citigroup

Ahmar Zaman - Piper Jaffray

Satya Kumar - Credit Suisse

Amy Song - Goldman Sachs

Gordon Johnson - Axiom Capital Management

Mark Bachman - Avian Securities

Operator

Good afternoon, ladies and gentlemen. My name is Martina and I will be your conference operator today. At this time I’d like to welcome everyone to the Trina Solar Third 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)

I’d now like to turn the call over to Thomas Young, Senior Director, Investor Relations. You may begin your conference.

Thomas Young

Thank you, operator, and good day to all. And welcome to Trina Solar’s third quarter 2011 earnings conference call. This is Thomas Young, Trina Solar’s Senior Director of Investor Relations. With us today are Trina Solar 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 to the company’s future performance represent management’s estimates as of today, November 21, 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 our website at www.trinasolar.com.

And 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. The third quarter continued to be a challenging time for the solar industry. Those parameter yield credit situation continued to be a significant decline of module price on the margins. In Q3, we are pleased to achieve that in-house gross margin of 18.3%. In particular we also paid increased attention to customer credit list to ensure the quality of our company is cyclical. We are also continue to maintaining a strong balance sheet.

As our industry consolidation business export are still at as one-third affair meant to be able to priced over long-term. China being able to success in this environment will require strong technology innovation, operational efficiency and brand recognition as well as strong financial performance and a safe balance sheet.

Looking at the lenders, investors and customers are now looking at manufacturer’s long-term viability as in terms of the relations. With our attention focused on demand shifts, we’ve delivered an increase in sales to U.S. and China in the third quarter. We believe this package represent the basic potential of solar going forward. We’re also proud to announce the opening of our Asia Pacific headquarters in Singapore to focus on new customers developed in Asia, the Middle East and Africa. With continued declining system cost, we are confident in the long-term growth potential of solar power and expect to see better performance in 2012 as we focus on maintaining advantages by executing our cost reduction roadmap.

The organization to realize more efficient operating management reacting more quickly to mark the changes and develop an expanding opportunities to grow market share in established markets as well as permitting the dealings such as China, Japan, India, South Africa and the Gulf States.

Lastly, I’d like to highlight an achievement China made on the sustainable manufacture front. We are proud to have received the ISO 14064 verification statement from BSI. This tied into our systematic ways that quantify, monitor, handling cost, green cause emissions reductions.

With that I’d like to turn the call to our CFO, Terry Wang to share our third quarter 2011 financial results. Terry?

Terry Wang

Thank you, Mr. Gao, and welcome to everyone today. I’d like to present an overview of our financial results for the third quarter of 2011.

The third quarter presented some headwinds for Trina Solar, having phased with the environment of over capacity and constrained project financing and the ASP declines. However, we believe our business model and long-term strategies will navigate us through these challenging times.

Our total net revenue in the third quarter was $481.9 million, a decrease of 16.8% sequentially and 5.2% year-over-year. Total shipment in the third quarter was 370 megawatts, a decrease of 6.6% sequentially and an increase of 27.4% year-over-year. ASP was approximately $1.25 in the quarter versus $1.46 previously.

Our gross profit was $52 million, a decrease of 47% sequentially, and 67% year-over-year. Gross margin for our in-house wafer production to module production was 18.3%. Our overall gross margin was 10.8% in the third quarter of 2011. We made a non-cash inventory write-down of 19.1 million in the third quarter as a result of notable market price decline, without write-downs our overall gross margin was 14.8%. The sequential decline was primarily due to the decline in module ASPs exceeding declines in manufacturing costs with a significant price decline in polysilicon and wafer in recent weeks. We continuously reviewed and renegotiated the terms of contract to take advantages of falling prices to enjoy lower costs going forward.

On the stock front, we’re also able to buy poly at below $30 per kilo. Our third quarter operating expenses were 75.5 million or 15.7% of net revenue, the increase from 11.3% in the second quarter. The increase was primarily due to accounts receivables provision of 10.3 million combined with a decrease of net revenues. To control and reduce our expense forward, we engage a series of cost saving programs such as this adjustment of the labor headcount to natural attrition and reducing other variable spending including business travel and the consulting costs.

Our loss from operations in third quarter was 23.5 million compared to operating income of 32.8 million in the second quarter, which has translated to an operating margin of negative 4.9%. We had a net FX gain of $400,000 in the third quarter. The net gain it was back up 37.6 million FX loss offset by a gain in the fair value of derivative of $38 million. The net gain was due to the gain from FX’s contract to hedge against FX risk exposure partially offset by loss from the depreciation of Euro against the U.S. dollar. The related percentage of the euro-denominated sales was approximately 60% in the third quarter of 2011 compared to 63% in the second quarter due to our continuous sales of the diversification strategy on a global basis outside of euro zone to take market share.

Our third quarter net loss was 31.5 million compared to net income of 11.8 million in the second quarter. Third quarter net loss includes a net FX gain of [$20,000]. Net margin was negative 6.5% in the third quarter. Earnings for a fully diluted ADS were negative $0.45 which includes effect of the net FX gain of $0.01 of fully diluted ADS.

To our balance sheet as of September 30, our cash and cash equivalents and restricted cash balance stands at $733 million and the working capital balance at $905 million. In the 2012, we will continue to focus on managing our balance sheet and our liquidity planning to be cash flow positive.

Depreciation was approximately 60 million. Total CapEx for the third quarter is about 32 million which reflects achieving capacity expansion goals of approximately 1.2 gigawatt and 1.9 gigawatt of in-house ingot and wafer capacity, and the cell and module capacity in the third quarter, respectively. To preserve capital for the full-year of 2011 we have also reduced our projected total CapEx from our early estimated 400 million to below 300 million.

Looking ahead, we expect our market and pricing environment to continue to remain challenging in the near-term. Therefore, in light of a current market outlook in order to balance inventory levels and a working capital going into the fourth quarter of 2012, we will reduce fourth quarter utilization to approximately 80%. In the meantime while deploying the maintenance programs on our existing facilities for operating profits. At this moment, we're also expecting our 2012 capacity addition will be less than 2011. To produce the high efficiency and competitively priced (inaudible) product to add value to our customer such as Honey module. We expect to increase our cell and module capacity by approximately 500 megawatt in the first half of 2012 to a total of 2.4 gigawatt of cell and module capacity. At this time, we do not anticipate a further investment within our in-house wafer capacity given the recent converging of wafer prices and technology capabilities.

This brings us to our guidance for the fourth quarter and fiscal year 2011 as follows. For the fourth quarter of 2011, we expect to ship between 220 to 350 megawatt of PV module, excluding any possible inventory write-down and the provisions in the fourth quarter. We expect our overall gross margin having capitalized outsource wafer and cell capacities will be approximately 10%. This guidance is based on our average FX rates approximately $1.38.

Based on demand outlook for second half of 2011, the company revise this full year 2011 shipment to approximately at 4.1 gigawatts, representing an increase of 32.5% from 2010. Turning to our cost per watt, it was successfully achieved our target of below $0.70 per watt for our in-house blended mono and multi non-silicon costs, including depreciation. We continue to focus our efforts and are still on-track to further reduce our overall non-silicon costs, driven by price introduction of consumables, material, supply chain optimization, technology driven sales efficiency improvements, and an increase in manufacturing efficiency.

To conclude, we believe Trina Solar will prove more resilient with its leading cost efficiencies, economies of scale and more importantly a healthier balance sheet. We believe we’ll boost our strong balance sheet to ensure the market share gains, as a marginal players face liquidity pressure, as well as give us an unparallel level of flexibility to continue with our prudent expansion plan strategy, R&D investment to maintain technology innovation advantage, and a realized market share gains in the established and promising markets.

With that I’d 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

Thank you, Terry, and hello to everyone joining our call today.

As Mr. Gao touched upon, we faced challenging market conditions in the third quarter, which were impacted by a supply/demand imbalance as well as our own requirements for higher scrutiny of customer credit quality and specific end markets. More specifically in the late third quarter and linked to project oversubscriptions to Italy’s Fourth Conto, we saw increasingly speculative market conditions in Italy, which raised concerns about ultimate project connection and receivables risk. These factors in combination with lower ASPs caused us to forego these opportunities in our pipeline and redistribute shipments to other channels and geographies. These actions moved some shipments out of September.

In the fourth quarter, we have further responded to a changing environment by repositioning our commercial focus to more sustainable targets. These include the United States, Northern Europe, China and Southeast Asia. Beyond increasing geographic diversity, we are targeting increased volumes to residential channels, which are showing improved demand in the U.S. and Germany. Additionally for the fourth quarter, we are targeting an additional 60 customers worldwide.

Though we see grid pairing nearing in several markets, in markets such as Australia and utility scale growth in the Americas, Asia Pacific, Middle East and South Africa, at the same time it is increasingly evident that our industry will face further consolidations. One of which ultimate survival and success will depend on abilities to deliver differentiated products offering value and innovation, supported by manufacturing efficiencies and combined brand and bankability assets.

As introduced during our August call, our global commercial operations remain focused in a delivery of new differentiated products which can lower system costs both inside and outside the module. In parallel, we are realigning and expanding our sales coverage to address and capture an increasing number of geographies, revenue channels and opportunities. The recently announced Singapore, Asia Pacific headquarters is a result of this strategy.

To continue and update our new product roadmap, Trinamount, our balance of system hardware and installation savings product line was successfully launched in the third quarter. And it was receiving increased order inquiries from both EU and North American customers. A follow-on to this commercial product will be our initial high-efficiency multi crystalline modules based on our Honey cell technology. From our announced world record, 274 watt multi crystalline TUV test in September to initial test production line results, we are on target to meet this exciting product ramp in the months ahead. Garry will provide further details shortly.

Stemming from our more power less space focus, we estimate balance of system savings from a 1% increase in module efficiency can save up to $0.06 and $0.09 per watt for commercial and residential systems cost, respectively. Further, we believe our Honey technology represents a performance and economy sweet spot proposition that can award us with best-in-class margins for all of 250 plus watt high efficiency offerings. This includes currently produced in-type mono technologies.

Other products recently launched were under development includes integrated solutions to expand our customer portfolio. One such example is our Trina Smart Solution, which will offer more power, active management and enhanced safety to reduce on module optimizers. Additionally, we are diversifying our customer and product mix to development of a specialized module to capture a growing number of higher margin off-grid applications. This includes our recently launched 140 watt module used for remote infrastructure monitoring and other industrial applications. In aggregate, we expect these new products will account for up to 20% of our 2012 shipments. We also believe that these market-driven products present opportunity for Trina Solar to gain sustainable market share and attractive higher margin channel segments.

In the time left, I’d like to touch on North America and then China, which are two key growth markets in 2012 and beyond. With the aim to further penetrate our U.S. channels to market, we started to increase sales coverage of independent power producers and residential channels and add coverage in new states in the third quarter. These new channel relationships will be increasingly tied into the product developments previously discussed, enabling us to deliver more integrated solutions to local and regional installers. Such new opportunities include popular and fast growing residential leasing model segment leaders with whom we recently signed an initial 60 megawatt supply agreement for Q4.

To support utility scale, project financing and to address the increasing importance of project lending and tax equity participation, in October, Trina Solar initiated a global bankability road show involving over 20 banks and equity investors in New York and California. We have also initiated valuation of various third-party financial tools that can provide mutual value to increase the commercial viability of our customer’s project opportunities.

Finally, we are happy to update on our brand promotion initiatives, involving Patrick Dempsey and Dempsey Racing. Serving as our solar ambassador for their photovoltaic adoption, we recently completed a promotional video addressing the increasingly affordable and positive effects for residential and off-grid use of solar. The video is posted on the Trina Solar website for your viewing.

Now for the China market, we are increasingly positive on the prospects for 2012. As evidenced by the project pipelines of our customers and potential customers in discussion. To meet this opportunity, we continue to ramp our country efforts at a variety of levels, which I’m happy to update you.

In addition to our Beijing, Shanghai, and Changzhou offices, we will add sales and project developments and coverage in China’s Northwest region in Chengdu and Urumqi, where favorable and radiants in project feed in tariff can yield highly attractive solar economics. In conjunction, we are leveraging our own proven downstream capabilities to add value to our existing and targeted domestic EPC and state owned enterprise project developers. An exciting aspect of China’s PV market growth is a variety of end project applications at or approaching critical mass. These include, ground mount, roof-top and off-grid, all of which we are addressing in 2012 with our new product line.

Finally, we wish to update on our increasingly recognized EHS efforts and commitments. Most recently in October, we were very pleased to receive the ISO 14064-1 2006 verification statement from the British Standards Institution, BSI. It’s a systematic methodology to quantify and report greenhouse gas related information, in accordance with ISO’s rigorous international requirement. We believe we are the first of our peers to have officially received this verification, which complements our existing environmental health and safety, and CSR assets, which include Trina Solar’s inarguable sustainable development report, which can be also downloaded from our home page.

With that I will now pass the call over to Gary.

Gary Yu

Thank you, Mark. Hello to everyone with us on the call. I’m happy to share with you our third quarter update and current developments involving our new product and related R&D initiatives followed by cost reduction discussion.

In the third quarter, we completed our 2011 target expansion, which now stand at 1.2 gigawatt of in-house wafer and 1.9 gigawatt of cell module capacity. Additionally, we furthered construction on our (inaudible) R&D lab to near completion. We initially implement moving schedule in December. This comprehensive [East Campus] facility, we will find a new and a larger home of our internationally recognized hub and the material tracking that and allows for expand testing equipment platform and capability.

To our new premium product, we were also pleased to launch commercial production of our Trinamount series, which involves quick installed footprint and design for three separate environment application.

To update our new Honey technology-based module production, we have successfully commissioned our initial manufacturing line, which has been providing valuable pilot production feedback pertaining to output performance, stability and the unit manufacturing cost. Based on our test data to-date, we have high confidence to our ability to launch commercial production in the first quarter of 2012, after which increased capacity throughout the first half.

Noting that the Honey is our technology platform which involves various profit enhancements, we have the ability to include only the best attributes in the initial period, to better assure quality and the cost aspect. With this approach, we see benefit not only to reduce market delivery risk, but in ability to efficiently scale production.

Following Honey initial launch, we have additional processor in advanced testing which will be incorporated to further extend the product output and the performance. Our recently announced record environment TUV test of 274 watts for 156x156 millimeter 60 cell module reflect the Honey technology platform [technology] and capability.

Moving to our non-silicon cost reduction, in the third quarter, we were pleased to meet and surpass our year-end target of $0.70 per watt. This was achieved through better production pricing under renegotiation, module efficiency increases and the continued Lean manufacturing initiative. Given heightened attention to manufacturing cost reduction, we see benefit to (inaudible) volume, not only respect to lower achievability our non-silicon cost structure in 2012. We believe our ultimate success will be rewarded by the developing new premium product at minimum quality differential to our industry leading cost structure.

Likewise, the priority of our key supply chain input is another critical variable to cost reduction. For nearly everything material, [factual] costs to a lower unit cost are available by substitution of a lower specification of our lesser proven capabilities, no short-term saving can be gained there. We believe the quality and the performance attributes over a 35 years warranty period can be put at risk. The priority for Trina, however, is that increasing supply chain and the technology option are becoming available in China and that we continue to leverage our advanced material testing capability to evaluate and qualify the best of breed entrants. In the big picture, we believe these are the most prudent tests to protect our product leading reputation and the brand assets.

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

Thomas Young

Okay. Thank you and as always given the number of analysts we have on the call, we would ask that we keep questions limited to one plus one follow-up, so that we can do best to get everyone in on the call and perhaps even have a second round. So, operator, we may proceed with the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jesse Peschel from Jefferies. Your line is open.

Jesse Peschel - Jefferies

Do you think the Chinese banks will start a forced consolidation of the Chinese PV industry and is there any way for Trina to avoid a forced merger?

Terry Wang

Hi, Jesse, it’s Terry. Since the beginning of the year and Chinese actually employ the tightening the fiscal policy and to cool down the economy and inflation as a result, so we do see that at macro level and that the fiscal policy continue to tightening and especially in the solar sector that given current situation at the Chinese bank has paid a lot of attention on this current and challenging time. But Trina as a good company with a solid balance sheet and the business model that works so far and going forward have the convincing story that we can make our company sustainable in growth so that we continue to get support from our partner bank.

And in terms of a consolidation, I’d say the challenges in market and we’ll resolve to some and we do see some of the smaller companies that shut down their product lines and reduced the capacity, and so some of the large companies, first brand companies hold their capacity plants. So, they now are in the process of re-adjusting the supply to demand situation. Trina and we do monitor the situation and carefully and watch out and any changes and thinking of any opportunities that we can come across and with the synergies and to Trina, we will seriously consider that. But it’s just a company’s decision. It’s not the banking and dependent.

Jesse Peschel - Jefferies

You mentioned continued capacity expansion next year of 500 megawatts in addition to market share gains, what is the operating expense target you have as a result of your workforce attrition program? In other cost cutting measures?

Terry Wang

Okay, and there is a couple of two questions involved, two answers involved to your question, one is we strategically, we do see that reflected in market change. We do see the increased number of the customers’ request for our high power output modules. So, that the 500 megawatt capacity related to our new Honey product which product have lead among the peers with the same lower structure, cost structure but with a high power output module solution. So, now we will see the increase in demand from the market but we will explore and expand those areas. At the same time, we will put the cap on our wafer capacity expansion and no change and also with the existing cell technology capacity we will not expand going forward for that.

And the operation of our expenses and we do see and because our ASP dropped drastically that give us a pressure to control our OpEx and that we have done quite a few things. Number one, you know that through natural attrition and not just for the first line workers but also the salary workers (inaudible) and the salary head count here as well. And also, we will control to the extent to OpEx and the expense of our controllable which include the business of travel and consulting fee and our other areas that we think that will put us and more look at to how we control those items. But next year, we think that we can control it and down from current level to the lower double-digit percentage of the net revenues.

Operator

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

Sanjay Shrestha - Lazard Capital Markets

A couple of questions. First off, what is the mix of the inventory at the end of the quarter here for you guys? How much of that is finished goods?

Terry Wang

At this time, the end of Q3 we have approximately about $300 million inventory, which among that, and two-thirds finished goods in form. So by year-end, we will have our target effect to control the inventory as much as we can and to consume now the high carrying cost inventory throughout the quarter. So that we can end up with a lower level and the lower carrying cost inventory that enter to next quarter of 2012. And I think that but in mix, things like finished goods is still the main (inaudible) of the inventory going forward and that part of that is we always have already finished goods for our customers who need urgent delivery. But that’s why also same time we control inventory and to reduce our utilization throughout the quarter so that we meet both the purpose of the operation.

Sanjay Shrestha - Lazard Capital Markets

One quick follow-up for me then. So, a two-part question if I may. In terms of your sales mix for 2012, how big do you expect China to be and what is the pricing going to look like there? And when do you fully expect to see the full benefit of what’s happening to the poly spot market and when do you think you’re going to turn profitable given ASPs are probably going to be trending towards $1 down from $1.25 here?

Terry Wang

Look at the breakeven, we need a relatively sizeable gross margin. And one side we have as a strategy, as Mark point out, that we want to have solid and product mix in conjunction with a variety of penetration in the channel, sales channels and cross border, roof top and other areas, so that we can lever up our pricing. Secondly, and with our new Honey product in place or in the market, we expect starting first quarter next year and fully production in the second quarter of next year, so that we have or expecting to have the pricing premium on those products. So, we can have the lever up on that. You can have retail ASP. And at the same time, and on the other hand, we will continue to lower cost to maximize the current situation whether it be in both low material and polysilicon and other material as well working with our suppliers to solidify our delivery turn throughout the next year. So, that is a result, we’re expecting our gross margins will be a [high side] and give us the profitability and back to our profitability and the trend.

Sanjay Shrestha - Lazard Capital Markets

So, just to clarify that, so, you guys are now targeting that 15% gross margin and targeting costs to get to that $0.80 kind of a number and hopefully the volume will pick in some time in Q2 or Q3 of next year is kind of the target here for you guys to get back to that profitable territory, if the demand picks up.

Terry Wang

Yes, if the demand picks up. And $0.80 in cost structure seem too high; we are targeting below $0.80 in second half of next year. So, that we have a conservative view if pricing drop then we have means to still be profitable. So, that we have the program, cost down program in running, in conjunction with the R&D efforts in our production and the product mix include the high efficiency and the turnkey solution.

Operator

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

Kelly Dougherty - Macquarie

I just wanted to see if maybe we can walk through some specific assumptions behind the 10% fourth quarter guidance. So, if you are at the 14.8% level before the inventory write down in the third quarter, hoping maybe you can give us some of the assumptions that go into the number for the fourth quarter. Specifically, around pricing. I know it’s tricky to forecast ASPs, but we’re halfway through the quarter at this point so maybe you can give us a sense of how things are progressing so far?

Mark Kingsley

Yes, Terry will take that. The way we look at it, obviously, there is a range between our utility markets, commercial roof top and residential and obviously, different country markets. In aggregate, we see it around $1.10 for Q4 and may trend down to about $1 in Q1.

Kelly Dougherty - Macquarie

Okay, that was helpful. And then we still on this Thursday one of your Chinese competitors was talking about $0.91 for the fourth quarter. Obviously, not all companies are the same. But can you give us a sense of where you are selling, relative to some of your other Chinese peers? I mean, is it really resonating that you guys do have a better balance sheet, things like that and it’s starting to show itself in a differential in pricing?

Mark Kingsley

I’ve been in Europe this week and again, I hear there is a flight to quality and people are concerned about the stability of the smaller players. They are focusing their actions and their buy on some of the larger players that they feel have good survivability. As Terry mentioned earlier, our focus on the balance sheet is something that comes into those discussions.

Kelly Dougherty - Macquarie

Great. Just one quick follow-up for me, on the other side, maybe if you could give us an idea of what some of the costs are going into that gross margin that you are expecting for next year? I mean, have you just not been able to write the inventory off to the extent that you would really fully reflect what’s going on in the spot market right now or kind of give us an idea of where that pressure is coming from in the fourth quarter?

Terry Wang

Kelly, it’s Terry. Regarding gross margin we’re talking about approximately 10% in market and also the ASP side. The cost side and going forward include the fourth quarter, we do have a means to take the costs down even though right now that given the inventory in carry through the third quarter and we do have consumed now those the high carrying costs in inventory, it gives us a pressure on a gross margin fourth quarter, but we’re expecting that at the same time, we are trying our best to sourcing and the material and the wafer any means at the spot rate right now to capitalize current situation to level down our cost as much as we can.

So, by year-end, we’re expecting that high carrying cost portion is diminishing to the degree. Now we’re comfortable to say that the first quarter and the latest the second next year, that carrying cost will be gone. So, that will only trigger the spot rate, subject to spot rate now we can control working with our supply partners so that we make sure the pricing is predictable and controllable. So, we can have that low cost as I just mentioned that we are targeting below $0.80 and so that we’re expecting to have profitability throughout next year.

Kelly Dougherty - Macquarie

Just one quick clarification, can you tell us where you wrote I guess poly and wafer inventory down in the third quarter so we just have a good idea where we are starting for, for the fourth quarter?

Terry Wang

In the third quarter, we put the $19.1 million provision for inventory write-down and due to match the ASP 103, the time of write-down in this quarter. And if this quarter or through before next earnings day, the pricing remain at this level stabilize then we don’t expect to have further provision related to write-down in inventory. But it all depend on how the pricing changes before earnings day next time. But I think that the material breakdown of the provision are mostly related to raw material poly and the finished goods product.

Operator

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

Vishal Shah - Deutsche Bank

Terry, I wanted to just follow-up on the capacity question. It looks like you are seeing a lot of demand for your higher efficiency capacity. Any risk of a write-down of some of your older legacy capacity, lower efficiency capacity? And can you also comment on what percentage of your Q4 shipments have you already shipped so far through the quarter? Thank you.

Terry Wang

Okay. The capacity right now, I will answer the first question, the second question I will have Mark to answer that. The first question the capacity related, as I mentioned that the company set a strategy and that’s driven by the market demand for increased number of or increased percentage of the demand from the market for high power output modules. And our market segment, actually we treat as to some degree is additional to our existing sales because our current facilities still we don’t see that top line and given the market share and reduced, but we still think that the demand current level. But we think that the high power output product we’re targeting additional market segment, which we didn’t explore too much in the past. So, that I think in terms of write-down for the existing facility like I say the facility, we don’t see at this time, we don’t see any write down at this time near-term.

Mark Kingsley

Yes, I’d just extend, it echoes your comment. We look at it, there is opportunity in very specific channels for both high efficiency and kind of the historical legacy products. High efficiency is initially targeted along with the other solutions at residential and commercial rooftop where space constraint obviously provides a premium BOS reduction on power output for high efficiency. And again, one of the 16 MW orders we talked about in Q4 is looking for high efficiency and is exactly in that channel. But it’s not all over for kind of standard products.

There is a lot of fixed mounts, non-tracking, ground-mount projects where they don’t have size constraint, where people are quite happy to still use that product. It’s got a long proven track record there. So, what we’re trying to do is balance our capacity and our efficiency to the channels we’re targeting and then find other ways to raise the margin levels using more traditional modules. An example that I mentioned in my comments was the off-grid which can use the 235-watt cells that we normally put into those type of modules, repositioned in different form factors. So, we think there is a good mix here and we’re pretty happy with the balance that we’ve got in front of us for 2012.

Vishal Shah - Deutsche Bank

And what percentage of the capacity in Q4 will be shipped, have you shipped so far?

Terry Wang

Let me add that. So, as, right now at this time, the capacity as I point out and 80% utilized and that’s matching our shipment basically. If you use your run rate to do that in pretty much in same time, we reduce the inventory and to be able to also the shipments meet the demand of the market dynamic.

Vishal Shah - Deutsche Bank

And your Q4 blended poly costs, will they be $50 based on what you are saying as far as the margins are concerned?

Terry Wang

If the $50 that’s include the legacy inventory in poly and the finished good carrying through approximately about 200 megawatt comes through from the third quarter. So, that is relatively high in terms of poly and but we are right now have successfully renegotiated price with our supply to match the spot rates in poly, so it will lever down. So, that’s why and we’re expecting that throughout the quarter, we will committed to our target.

Mark Kingsley

And let me just add, Terry, we’re ahead of where we were at the same week last quarter in volume shipments.

Operator

Your next question comes from the line of James Medvedeff from Cowen & Corporation. Your line is open.

James Medvedeff - Cowen & Corporation

I have couple of questions. If you are going to run an 80% utilization in the fourth quarter, and you have 1,900 megawatts of capacity that would imply that you are not going to need to purchase any cells, I’m sorry, let me just ask the question, what percentage of production in the quarter and in the fourth quarter were and will be from in-house cells?

Terry Wang

No, cells wise, you’re right and this time and no need for us to outsource the cell. And maybe to some degree in a very limited, also cell that and maybe through the legacy contract last quarter but and typically, we have enough capacity in-house and also we have our internal production cost build advantages versus outsource the cell. So, no need for us to go out for cell outsourcing.

James Medvedeff - Cowen & Corporation

Okay, so I didn’t exactly get a number. What was the percentage?

Terry Wang

You know percentage of outsourcing, I’d say if you really want to know that would probably be one or two maybe could be legacy firm carrying through in the second, third quarter but most of them 99 or 98% now we produce in-house.

James Medvedeff - Cowen & Corporation

And then another question is, if I take 370 megawatts of modules and multiply by $1.25, I don't get to $481 million of revenue. Was there a fair amount? What am I missing there? Is there a big projects revenue piece in there?

Terry Wang

Yes. We do have a couple of things. One is we always have other revenues; talking about the typical some of the customer (inaudible) 2 to $3 million. And the other portion is related to the projects that we sold in third quarter, project located in Italy, we complete in the first half and we turn out will get a solar to our off-taker, so that revenue is also in part of top line as well.

James Medvedeff - Cowen & Corporation

Can you share with me what that number is?

Terry Wang

That approximately, we sold about $22.4 million, right there.

James Medvedeff - Cowen & Corporation

If I can just ask one more. Maybe I missed it on the call but the big jump in G&A expense in the quarter, what’s behind that?

Terry Wang

Number one that you point out, we pointed in the script talking we have account receivables write-down approximately about $10.5 million and also that we did have some increasing hiring related to sales marketing and some G&A cross border, I mean R&D and the talent as well, so that we hire in the second quarter and they arrive in the third quarter, so that triggers our OpEx expenses up. But going forward, we will control our hiring and given that driven by market demand and so we will control as percentage revenue for those OpEx.

Operator

Your next question comes from the line of Paul Clegg from Mizuho. Your line is open.

Paul Clegg - Mizuho Securities

Could you tell us what the margins were on that $22.4 million project sale that you just mentioned in the third quarter?

Terry Wang

The project we’ve done in Italy and in that margin, we have two things, one is within our module and second is the balance system. Entire system in terms of gross, the net margin, I’m talking, and is approximately about 10% double-digit and they’re really profitable. I think that will add value to us.

Paul Clegg - Mizuho Securities

Okay. And then on the $10.3 million accounts receivable provision, was that associated with particular customers? Can you give us a little bit more detail there which markets was it in and then should we expect to see additional larger receivable provisions in the fourth quarter?

Terry Wang

Given the challenges and the fluctuated market and we always put a conservative view on those risks, collection risk and we have our accounting book that write-down, of course, for those that beyond 90 days into some percentage for example 5%. And also, some of large customer and overdues, we write-down as the larger percentage, but in those large customer, most of it located in Europe. But I think that collection is still going and we see and promising that because those customers got good track record and but for prudent measure and we have to take a position so that we can be more reflect to the current market, fluctuating market risk. Going forward, just those customers with a good track record, we’re still collecting those money, we don’t give up.

Paul Clegg - Mizuho Securities

Have the payment terms changed then for those customers or are you requiring letters of credit now?

Terry Wang

Payment term, as time passes and the company’s strategy we understand some customers and have some financing issues and need a longer payment term, we allow them to pick a little longer term. But for existing payment term, then we don’t change it, because that’s subject to the contract we signed at the time, and if it was always used, we will give a high provision percentage and put there. So that’s our accounting treatment.

Operator

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

Dan Ries - Collins Stewart

I’m looking at your inventory line and I’m curious. If you intend to produce that 80% of your sell line capacity during the fourth quarter, do you intend to increase your finished goods inventory during the fourth quarter?

Terry Wang

This time, we all in finished goods taken about two-third of total inventory in third quarter. So, (inaudible).

Dan Ries - Collins Stewart

I guess my question is, it looks like you are planning to produce more than 335 megawatts or so that you intend to sell. Am I just doing the math wrong on the 80% of your capacity being utilized?

Terry Wang

80% up that we’ve put there, and you are right to some degree that because we’re still going to produce some of the finished goods in the inventory by year-end so that we can support our customers who need the inventory, who we need the product and to capture the cash grants in the U.S. market. So, that we will support them and by providing and ship the finished goods to them. But at the same time and we would carefully analyze our shipment term; if we don’t ship it from CIF, we treat it as inventory.

Dan Ries - Collins Stewart

Just the receivable, the $10.5 million provision is that your portion of a larger loss? In other words, was this, is Cynosure also taking a loss with you on this or was that particular receivable not covered for some reason by Cynosure?

Terry Wang

It’s not a loss per se, it’s just a non-recurring and non-recurring term provision that was based on our accounting book and so related to those overdues. Receivables will take some percentage down off that amount. So, that prudent that we’ll take that as to reflect the current market change but it doesn’t mean that we will be lost completely or permanently. I mean, we still collecting some money. But Cynosure, when we do look at the provision, we don’t take Cynosure as part of the factor; we take it as from accounting point of view to do the provision.

Operator

Your next question comes from the line of Adam Krop from Ardour Capital. Your line is open.

Adam Krop - Ardour Capital Investments

Maybe it’s a little early to talk about the first half of 2012 but maybe you could shed a little bit of light on what you are expecting, or what you have for contracted volumes in the first half of 2012? Or if not, maybe you can talk a little bit about how volume should trend in the first quarter of 2012 versus the fourth quarter ‘11. Thanks.

Mark Kingsley

Yes, I’ll take that. As we look at it, first half is going to be, it’s going to be, again, a change of geographies. A lot of the large project volume in the U.S. will be served at the back end of December and early January as people get things in for the federal grant. Following that, we’re seeing a lot of activity now in some new geographies actually, and we’re seeing them in Israel and Africa, some large projects landing.

So, we’re still determining exactly how the pipeline is firming for our first half, but we just see, again, a part of our strategy, we see continued growth in residential in the States, we see activity in China as it picks up and we see nice geographic diversity from some countries that weren’t in the mix before replacing softness in Italy and perhaps Spain.

Operator

Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets. Your line is open.

Mahesh Sanganeria - RBC Capital Markets

Yes, can you help me with what is your current poly acquisition prices? What I mean to say is that, if you exclude inventory, what is your blended cost of poly as of today? And what are you expecting that to go to in Q1?

Terry Wang

The poly is the one that has been changed, the poly pricing changed drastically and it’s a couple months. And last first quarter, if you looked at, approximately our average is about $60 per kilo in building and stabilizing. But going through that, if you have the 200 megawatt carrying through this quarter, you’re not going to lever up our average poly price cost. And currently in the spot rate, we’ll be able to and capture low pricing on poly at this moment and we’ll continue to buy to be mixed up with the high carrying poly costs. So, that it’s going to be between spot and inventory level.

Now, average right now, as there’s just people talking about, is between 48 to $50 a kilo in building, and this time, while it go through when we increase the number of shipments and through our time, we purchase more poly at low price so that the price in poly coming down, and I expecting that when we enter next quarter, the inventory in our poly in finished good form will be much less. I expecting approaching spot rate, but still have some couple of cents more over the spot rate when we build it into finished goods.

Mahesh Sanganeria - RBC Capital Markets

But in Q1 suppose you’ve used up your inventory but still, you have some you’re not depending on 100% spot rate because you still have long-term contracts. So, your blended price is still going to be higher than the or much higher than the spot rate. Is that not correct?

Terry Wang

Number one, for long-term contract, we have successfully renegotiated price down; more than 95% of the long-term contract being renegotiated down to match the spot rate. So, that overhang has been removed to a great degree. And secondly, we do have that, we are moving average inventory measured.

And we still have some carrying cost throughout the quarter and put into the (inaudible) inventory, now we will carry it through the first quarter of next year. But I think that due to the effort we made and the poly we purchased at this time, I’m pretty confident that next quarter the impact on next quarter, as I said, it could be only about $0.02 higher than spot rate for next quarter.

Mahesh Sanganeria - RBC Capital Markets

If you had the poly inventory right now why are you purchasing poly? Are you obligated to purchase a minimum amount of poly? Is that the reason you are purchasing poly right now?

Terry Wang

The provision from last quarter was 19 million, not only match 103 ASP. And as I said, if ASPs stabilize, we don’t expecting to have material write-down. But we’re still going to buy and take advantage of the current market, the low spot rate to prepare for next quarters as demand for our production so that we can lever down and move the average for when we enter next quarter.

Operator

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

Tim Arcuri - Citigroup

Could you just tell me, I guess you said you’ve renegotiated some of these poly contracts down to the spot right now? Could you just tell me what that spot rate is now? Is that what you said was 48 to $50 a kilogram?

Terry Wang

No, the spot the 48 to 50 is the carrying from last quarter at this time in blended. We continue to buy poly in this couple of months, so that’s blended. But going forward, we continue to buy lower at spot rate at this time and I’d say below $30, and so that’s at the poly average form continue to be lower.

Tim Arcuri - Citigroup

And with regard to the $22.4 million sale that came through in the third quarter here, I think you mentioned something around a 10% margin. Was that a net margin or a gross margin and how many megawatts was that?

Terry Wang

That’s about close to 4 megawatt and that’s approximately it depend. We haven’t allocated, but that’s a gross margin but the gross margin also include they don’t have the lot of allocation from our tax yet. So, it’s equivalent to the margin, but that’s the gross margin also include the financing cost in those projects, so that’s the pretty much that’s all the, the margin we have for those projects.

Tim Arcuri - Citigroup

Maybe one last quick question, are there any big sales expected in the fourth quarter similar to this?

Terry Wang

Fourth quarter?

Tim Arcuri - Citigroup

That’s right.

Terry Wang

We are right now still have some of the more projects to be sold in this quarter. We are still working on that.

Operator

Your next question comes from the line of Ahmar Zaman from Piper Jaffray. Your line is open.

Ahmar Zaman - Piper Jaffray

The first question is around your geographical distribution, so your sales to Spain and Italy grew fairly meaningfully this quarter, quarter-over-quarter. Given what is happening in those markets recently, how do you think about those markets and your exposure to Italy and Spain going forward?

Terry Wang

We’ll have Mark to answer that question.

Mark Kingsley

Yes, Terry. Again, we watch it very carefully, we did grow earlier in the year and especially in Spain but as we’ve looked at it, we’ve been pulling back from Italy and repositioning in other geographies. We’ve been much heavier in Germany than Italy and that’s continuing on through quarter to-date. Where we’re focused on in Italy is where we have direct connection to a utility or residential as we feel that carries less risk so we’ve been positioning out of some projects that we felt were in the wrong Conto.

Ahmar Zaman - Piper Jaffray

Great, and then just quickly on your costs commentary earlier. Terry, I think you mentioned that you expect your target is to be below $0.80 a watt next year. Could you remind me, is that in the second half of the year or do you expect to achieve that in the first half of the year?

Terry Wang

Expecting a prudent aspect should be the second half of the year and also you can see that we are expecting to reach the $0.60 per watt for non-polysilicon process cost and by that time, we also have a means to the poly that we would lock in and the rates for poly are relative low, so we can easy to get below $0.80 in cost.

Ahmar Zaman - Piper Jaffray

And the $0.60? Is that the addition of $0.05, are you going to get that, how much of that is going to come from higher efficiency versus supply chain and other manufacturing efficiencies?

Terry Wang

We expecting that, because we were low mass, we ramp up our 500 megawatt by full capacity in second quarter. So, after second quarter, you can see if you have approximately about at least 25% and sales related to our high efficiency. And by what I mean high efficiency (inaudible) but keep in mind, our existing capacity still will have some high efficiency and power output module can be produce from our existing one, so that will also add to the high efficiency cells as well.

Ahmar Zaman - Piper Jaffray

And then if I may, for the next quarter, your guidance of 10% gross margins overall. What is your penalty for the 80% utilization for your factories? How much of that is incorporated into the guidance?

Terry Wang

That included as our gross margin guidance as well and that the penalty is about $0.01 and by the other equivalent depreciation.

Ahmar Zaman - Piper Jaffray

So, it is a $0.01 per watt?

Terry Wang

Yes.

Operator

Your next question comes from the line of Satya Kumar from Credit Suisse. Your line is open.

Satya Kumar - Credit Suisse

Terry, I was wondering if you could give a little bit more color on how did costs per watt decline from $0.73 to $0.65. Is there an apples-to-apples comparison from Q2 to Q3?

Terry Wang

You said $0.65?

Satya Kumar - Credit Suisse

Yes, the cost per watt went down from $0.73 in Q2 to $0.65 in Q3. It seems like a very sharp decline in cost per watt. What drove that? I mean the two numbers (inaudible) Q2 to Q3?

Terry Wang

That’s a good point. And you might notice that the first quarter and second quarter, the non-poly process costs of $0.73 remain flat and that driven mostly material side, even we have technology innovation in that area but the impact is limited during the second quarter. But the third quarter, we see the results as we continue to put a lot of efforts in technology innovation. You can see that return our operational excellency and consolidate some of the suppliers and to be able to lock in lower spot rate of poly and the non-poly materials. And even for some of the material we lock as a prepay at lower price such as a stable pace and also the technology knowhow are put in there and designed to reduce our usage of the material. For example, that the stable pace that have reduced the usage drastically by $0.01 only in (inaudible). So, I have 100 items, cost related items improved, so end of the day we achieve where we are right now, so we’re expecting that trend will continue throughout the quarter and throughout the next year.

Satya Kumar - Credit Suisse

That's good to see. In terms of your current production plan, does the 80% number that you mentioned for utilization include for both the ingot wafer step as well as the cell and wafer step. And given that right now it looks like the spot market price for the wafers is under $0.30. Are you looking to perhaps deemphasize or lower the utilization some more on the wafer side compared to the cell and module side?

Terry Wang

Yes, I don’t know where you get the $0.30 wafer per watt, but it’s certain that the wafer result of overcapacity can drive the wafer price down in the market and we will take advantage of that. But we’ve done our analysis that in terms of cash cost, we still have one center has been lower than spot rate and given current and the lower poly and the cash costs. So, in other words and we pretty much used our internal capacity as much as we can, but same time, we found the lower wafer we were also to be able minimize or optimize our cost structure as much as we can for our blended operation both for in-house and outsourced.

Satya Kumar - Credit Suisse

One module question, Terry. What do you expect CapEx to be for this 500 megawatt Honey cell and what do you expect depreciation will be for 2012?

Terry Wang

The $200 million CapEx for next year which include the majority approximately 150 related to 500 megawatt and the other 50 related to others include R&D and investment. And you can see that relatively speaking, CapEx for the high efficiency Honey product equipment and that CapEx wattage is approximately about 10% higher than our existing CapEx, the CapEx for the existing facility. So, depreciation you could see that it’s only apple-to-apple comparison, it’s only 10% higher per watt basis.

Operator

Due to time constraint, your final question comes from the line of Amy Song from Goldman Sachs. Your line is open.

Amy Song - Goldman Sachs

Just a follow up on the CapEx. Can you give us an update on the CapEx you already spent in the third quarter and are you going to continue to spend in the fourth quarter? Just CapEx for this year?

Terry Wang

You know that we have some preparation that orders increment in this quarter, and so that’s why we have some capital expenditure related to that expansion in this quarter. But next year, most of the CapEx will be occur in the first half of next year, and that will ramp up our CapEx the 500 capacity expansion. We also have some of the balance to be paid in the second half related to those 500 megawatt capacity expansion.

Amy Song - Goldman Sachs

Okay. So, can you remind us what is your CapEx guidance for 2011? Are you adjusting it down a little bit or just maintain previous guidance?

Terry Wang

(Inaudible) given the market earlier, beginning of the year, and $400 million of CapEx, but now given current market situation and we will cut down the CapEx by more than $100 million. So, we do not expecting the CapEx for this year beyond $300 million.

Amy Song - Goldman Sachs

So, another question to follow up on the non-silicon costs. So you mentioned that you are cutting out non-silicon costs to $0.65. So, what that cost savings coming from it's from wafer or cell or module segment? Can you give us that guidance?

Terry Wang

The most of what I said, Amy, is that the combined, all the improvements in our cross-border, and most of the cost cut is related to the module area even though our internal in-house wafer, converting costs is right now improved drastically given the percentage that in-house, I think the more attributed and contribution from the module in terms of percentage.

Amy Song - Goldman Sachs

So you said you expect the trend is going to continue. So at the same magnitude, what we see now from 2Q to 3Q or is it going to be slightly lower? What will be the percentage of decline in quarter-by-quarter next year? How should we model that?

Terry Wang

We’re expecting end of next year or fourth quarter next year, we are targeting $0.60 in total in-house. And you can see from this point on, it’s approximately about 10% reduction, so I’m expecting will be roughly, I’m not saying even every quarter even down, but approximate and pretty much an evenly distributed effort.

Thomas Young

Amy, this is Thomas. We’re going to extend the call to two more callers, so we will move on from this point to the next caller. Okay.

Amy Song - Goldman Sachs

Okay, thank you.

Thomas Young

Thank you very much.

Operator

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

Gordon Johnson - Axiom Capital Management

What was the utilization of your capacity in Q3?

Terry Wang

Q3 is approximately because of flexible between the grid and the wafer’s 100% utilized and cell also 100% utilized. You can see that will build out the inventory in quarter.

Gordon Johnson - Axiom Capital Management

Right. Yes, so just I guess going back to Dan’s question, it looks like if you were 100% utilized in Q3, you built about 105 megawatts of inventory and if you’re 80% utilized in Q4, it looks like you’re going to build another 45 megawatts of inventory. Can you just remind me again of what that builded inventory is being targeted to next year?

Terry Wang

Inventory, we’re still going to maintain some inventory because we’ll control one side, we want to control inventory and to minimize those carrying cost as much as we can. And the same time, we want to meet the demands of the market, especially when U.S. market and the customer want to capitalize their cash grants and, remember, the cash grants going to expire by end of the year, so the customer wanted us to ship the finished good to them. But at the same time, if we ship and not in the form of a CIF, we still cannot recognize revenue, we treat it as within inventory form. So, that’s why that inventory but those customer with inventory, we put there and shipped and still inventory but it’s related to the fixed price already and we’re pretty confident that we began by helping our customers and to secure their volume delivery for next year.

Gordon Johnson - Axiom Capital Management

That was helpful. And on your cost, a very impressive decrease in cost per watt. Can you just help me, what should we be thinking about in this total cost per watt? Where will it be trending next year, just in the total number, right, the 102 number in Q3, how should we think about that trending towards the end of Q4?

Terry Wang

End of Q4 next year, I think that, pardon?

Gordon Johnson - Axiom Capital Management

Yes.

Terry Wang

Yes, non-poly, we’re expecting we’re targeting 6%, so we’ll have a means to get there, and I don’t want to say too much about that. It’s a lot of efforts, but we’ll get there. And poly area that we have means to get that down and we’re expecting that we’ll be below $0.80, that’s no question about it. We have our side few cents, if we have some our product that we are right now in technology and development area, and plus, area in conjunction with our turnkey solution, that we and to some degree add some of the value to a customer. So, that’s on the ASP side. But the cost side, we have a means to reduce our usage of material, some of the new material we right now in process, so we are pretty confident that we will get below $0.80 or even approaching middle $0.70’s if we can. But conservative, I’d say below $0.80, there’s no question about it.

Gordon Johnson - Axiom Capital Management

Yes, that’s impressive. And then just two housekeeping questions. Your OpEx, how should we think about that trending in Q4 and can you give us a number to look at for 2012? And then also lastly, what was your operating cash flow in the quarter? Thank you.

Terry Wang

The OpEx this quarter, our third quarter, and if we exclude the write-down, we were okay. I mean, it include 10 million higher. But we talk next year as we increase the volume shipment, expecting revenue increase. But we maintain our current level of expense such we can so that will be narrow, or control our OpEx as percent of revenue in lower double-digit, and we’re pretty confident we can get there. I mean, we’ve done it before and if you look at 2009 with even those revenues very low, we still control it. So, we have means to control it.

The only area that we’ll expand is the sales area and or some minor addition on these sides. We’re pretty confident so far our head count, and can meet the demand from globalization point of view. And the operating cash for this, we’re expecting you can see the trend, every quarter and from the first quarter, the negative cash continue to be diminishing. So, we’re expecting positive operating cash in this quarter. We will see. So, far in the progress we’ve made is very optimistic and promising. So, we will see and we’ll get there positive operating cash this quarter.

Gordon Johnson - Axiom Capital Management

What was it in Q3, Terry, please?

Terry Wang

Q3, it’s about 30 million negative.

Operator

Your next question comes from the line of Mark Bachman from Avian Securities. Your line is open.

Mark Bachman - Avian Securities

I just want to go back to this $0.08 improvement in non-poly costs. From Q1 of 2010 through Q2 of 2011, non-poly only improved by about $0.03 a watt. I mean that’s really six quarters of production and costs only declined from $0.76 a watt down to $0.73. But now and during one of the most challenging markets you reported an $0.08 per watt improvement in just one quarter. I really want to get to the bottom of this. Is the Q2 and Q3 cost of $0.73 and $0.65 comparable? Or did you reclassify some of those expenses from cost of goods sold to SG&A?

Terry Wang

No, the accounting management has remain the same, but as I point out, in the second quarter and the first quarter compared there was because of the part of the material pricing, revenue was stable at a high level. And actually starting for the second half of the last year and remain high level extended to the second quarter, in conjunction also we purchase little more material in our inventory in first quarter. So, that remain, those materials at a high level. But also the same time, even we have the knowhow to make more efficient, to reduce usage but when we see the result, actually in the third quarter. So, that’s a combination of the pricing of material down and our successful reduce the usage of those materials, our key materials. So, that make us, you see that is impressive and which is good and then we also see that trend continue, we have some of the cost reduction programs still in process. We will see the results later for next near-term.

Mark Bachman - Avian Securities

So Terry, if this cost level of $0.65 that was achieved in Q3 that was done underneath the 100% utilization. Shouldn’t these non-poly costs now trend higher in Q4 given that you’re only forecasting to use about 80% capacity?

Terry Wang

The concept is right and if we don’t have any, assume any of material pricing or the technology innovation related to those material or usage of material, no change, you’re right, a less utilization and give us a $0.01 higher in (inaudible) area. But the same time, we don’t start into the usage of the material and to consolidate purchase of the material. So that we will take, could be at least offset in the addition cost and driven by under utilize of the capacity.

Mark Bachman - Avian Securities

Okay and, Terry, just the last question here. Do you have 100% confidence in all the reporting units that come into your finance organization? And the reason why I ask this is a couple of years back SunPower had a quarter where they reported some very good numbers that almost seemed unbelievable but had to come back and re-state quarters two quarters later to find out that their accounting was not correct. It seems to be a very Herculean effort here to improve your cost by $0.08 in one quarter. I just want to get the confidence level that this $0.65 is real.

Terry Wang

$0.65, I think we don’t change any accounting management and there is no reason for us to doubt these numbers will be incorrect, but I think I’m confident that we have a track record of our accounting and measures everything from bottom up and if you come down to our company and see the effort we made much of the third quarter and throughout the year, and beginning of the year and first half and turn out the second or the third quarter see the results in conjunction with the decline of purchased material we’ve purchased. And so that area, I think that’s the way it is, I mean that we have no reason to be not prudent or to be realistic.

Thomas Young

Mark, this is Thomas, I’d like to add something. We appreciate the question and it’s a valid question but I think in the big picture, we must remember that all non-silicon supply chain has been in deflationary pressures along with silicon and we’ve discussed this all throughout the year and through last year, our non-silicon cost per watt was relatively flat due to the combination of rising silicon costs and declining process costs. In the first and in some cases the second quarter of this year, these non-silicon supply costs which make approximately two-thirds of this total, [$0.07] peaked and started to come down. In the last quarter they accelerated, just like poly. And so, it’s a combination of the supply chain cash cost and the inventory work through that have created the significant change, it’s for a tailwind that we had built up over the previous five quarters. I hope that’s helpful.

Mark Bachman - Avian Securities

It is, Thomas. I really appreciate that. The fact of the matter is you understood that your raw materials were rising over the past year and if you’re going to start to see this, the first of eight reports to come over the next three days so maybe we will see this kind of root itself out through the rest of the conference calls as well.

Thomas Young

Okay, we appreciate that. Thank you.

Thomas Young

Okay. And on behalf of the entire Trina Solar management team, I wish to thank you for your interest and participation on the call. As always, if you’re interested to visit our Changzhou PV Park, please let us know. And this formally concludes the Trina Solar third quarter 2011 earnings conference call. Operator, thank you, and you may now disconnect.

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