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Trina Solar Limited (NYSE:TSL)

Q2 2012 Earnings Call

August 21, 2012, 08:04 am ET

Executives

Thomas Young - VP, Investor Relations

Jifan Gao - Chairman & CEO

Terry Wang - CFO

Gary Yu - SVP, Operations

Analysts

Rob Stone - Cohen & Company

Kelly Dougherty - Macquarie

Brandon Heiken - Credit Suisse

Amir Rozwadowski - Barclays Capital

Vishal Shah - Deutsche Bank

Aaron Chew - Maxim Group

Pranab Sarmah - Daiwa Capital Markets

Sanjay Shrestha - Lazard Capital

Mark Bachman - Avian Securities

Timothy Lam - Citigroup

Operator

Good morning, my name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Trina Solar second quarter 2012 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.

Mr. Thomas Young, Vice President of Investor Relations, you may begin your conference.

Thomas Young

Okay, thank you, operator; good-day to all and welcome to Trina Solar’s second quarter 2012 earnings conference call. This is Thomas Young, VP of Investor Relations. With us today are Trina Solar’s Chairman and CEO Jifan Gao; Chief Financial Officer, Terry Wang; and Senior Vice President of Operations, Gary Yu.

Before I turn the call over to Mr. Gao, may I remind our listener that in this call management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we refer you to more detail discussion of risks and uncertainties in the company’s filings with the Securities and Exchange Commission. In addition, any projections as for the company's future performance represent management’s estimates as of today, [May 23, 2012]. 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 made available via webcast for 90 days at the IR Section of our website at trinasolar.com.

And with that, it’s my pleasure to turn the call over to Trina Solar’s Chairman and CEO Mr. Jifan Gao for second quarter commercial overview summary.

Jifan Gao

Thank you Thomas and thank you everyone joining us today. In overview, continued industrial over-capacity and the demand constrains in particular PV market impacted our shipment order. Such industrial environment also led to continued pricing failure in the second quarter which adversely affected our operating margins and the profitability.

Our financial performance was also affected by the equipment and inventory write-downs, AR provisions and FX impact. Market challenges include transitions in traditional feed in tariff markets such as Italy; the US market (inaudible) of ADCVD and project start-up delayed by certain of our US and the China project customers.

To address increasing competition in today’s PV commercial environment, we have recently completed a major restructuring of our group sales organization. The company’s revenue operations will be divided into four regions: the Americas, Europe, China and Asia-Pacific, Middle East and Africa; whereby the four regional leaders will report to me.

We expect these changes will accelerate the fall of information required in our day-to-day commercial decision making which lets us better respond to either of our four global revenue regions and expanding global customer base.

For our current commercial environment, we are focusing in the following areas: One, expand our geographic presence and the sales channels in the new growth markets such as recently added local operations in Canada, Latin America and the Middle East as well as Japan and South Africa.

Two; market to increasing the segments and the sales channels to expand the total customers with each business through successful efforts which include our expanding Partner Plus Program and the technology driven products like Honey and Trinasmart.

Three; in operational and financial area, managing inventory levels, have great effects in AR collections and to control OpEx.

Four; maintaining our leading manufacturing cost efficiencies. We view these specific areas together with maintaining our balance sheet strength will ensure our industrial leadership and our industrial works through consolidation.

With that, I would now like to turn the call to our CFO Terry Wang to share our second quarter 2012 financial results. Terry?

Terry Wang

Thank you Mr. Gao and welcome everyone to our earning conference call. I would like to present our overview of our second quarter financial results followed by company’s guidance for the third quarter and full year of 2012.

Average Selling Price of PV modules continued to decline in the second quarter due to worldwide production overcapacity, reduction in feed in tariffs programs and the falling raw material costs. To outperform in such a market conditions we work to further lower our non silicon manufacturing cost which were to $0.50 in the second quarter on improved supply chain and production management. In addition, the company minimized its provisions related to US ADCVD tariffs compared to the first quarter.

On the other hand, inventory write-down and accounts receivable provisions adversely impacted our bottomline results. Second quarter shipment was 419 megawatts, in upper-end of our revised guidance of 380 megawatt to 420 megawatts representing approximately 10% of higher volume sequentially.

Our gross profit was $29 million, an increase of 43% sequentially.

Gross margin was 8.4% compared to revised guidance of 7% to 9% and to 5.8% in the first quarter of 2012. We wish to highlight that excluding the effect of the non cash inventory write-down totaling $26.1 million and the impairment for property, plant and equipment of $12.8 million our gross profit and gross margin were $67.9 million and 19.6% respectively.

Operating expenses including accounts receivable provision of $44.1 million in the second quarter were [$107 million]. Overall, we incurred a $78.6 million operating loss in the second quarter with the corresponding operating margin at negative 22.7%. Second quarter net foreign exchange loss was $22.5 million, whereby our use of derivatives which had again a fluctuation of euro against the US dollar and RMB made a gain of approximately of $2.3 million.

In terms of the sales geography, our euro denominated revenues represented approximately 59% of total sales in the second quarter compared to 33% for US dollar. Our second quarter net loss was $92.1 million, representing net margin of negative 26.6%.

The second quarter earnings per fully diluted ADS were negative $1.30. The combined impact of the second quarter provision for non cash inventory write-down, accounts receivable provisions and the FX net loss were approximately $0.37, $0.62 and $0.32 per ADS respectively totaling $1.31.

Now moving on to the balance sheet. Our cash and cash equivalent, restricted cash balance increased to approximate $841 million as of June 30th from $748 million in the March ’12, while working capital balance decreased to $445 million from $685 million previously. Due to challenging market conditions, our inventories increased by approximately $112 million to up $463 million; given this increase, we are managing our utilization rate accordingly in the second half in order to improve our inventory carrying costs.

In the second quarter, we increased our short-term borrowings to $733.7 million for working capital purposes to maintain cash level and as a portion of the long term borrowings become current. As of June 2012, the company had more than (inaudible) of undrawn bank facilities. This brings us to our guidance for the third quarter and the fiscal year 2012 as follows.

For the third quarter of 2012, we expect our shipments to be 450 megawatts to 480 megawatts. We expect our overall gross margin will be around mid single digits in percentage term. Such guidance is based on average FX rate between euro and the US dollars on January 1, to August 21, 2012. The company revises the expectations for total PV module shipments to be between 1.7 gigawatts and 1.8 gigawatts for the full year of 2012 compared to 2 gigawatts to 2.1 gigawatts previously representing increase of approximately 16% to 19% from 2011.

Our second quarter CapEx was limited to approximately $11 million and foreseeing our full year of 2012 CapEx will be much less than $20 million or depend on the market in requirement for repairing equipment.

Turning to cost per watt, our blended overall silicon cost including depreciation decreased to approximately 52 per watt from 58 in the first quarter. Our silicon cash project cost fell to mid 20s per kilogram in the second quarter which is flattening our lower cash purchase costs and ongoing renegotiation, long-term contracts as well as from increases in company’s module efficiencies and improvement in manufacturing process.

For third quarter 2012 and forward we expect our silicon costs to fall further but at a slower rate than the last few quarters as we work through our inventory and continue negotiations with our long-term and short-term supply. For 2012 we are targeting non-silicon manufacturing costs per watt below $0.50 on rail track to be chosen by ongoing streamlining manufacturing supply chain and firm module efficiency improvement. With that I will now like to turn the call over to our Senior Vice President of Operations Gary Yu (inaudible) you on manufacturing and technology. Gary?

Gary Yu

Hello to everyone today. And I am happy to share with your our second quarter update and overall development regarding our product and [facility] including our ongoing cost reduction. In the second quarter, our category remains unchanged at 2.4 gigawatts of in-house sales and module capacity with 1.2 gigawatts of income waver efficacy. This includes 103 megawatt of Chinese sales and module capacity (inaudible) in the first quarter. While our recent announcement we are also preparing for initial production of high-output third generation honey technology.

This in fact module include additional [property] enhancement which (inaudible) has verified as 285 watt module power or conversion of 10,000 module of 12000 and 350 mm 992 mm which we have in commercial production during the early part of 2013. In the second quarter we are also very free to launch our module solution which include installed solar upgrade power by up to 20% due to remaining technology build into each module to adjust for (inaudible) and other operating (inaudible).

Rate, at our cost effort drew a fixed rate and immediately involving our [Trina] management. We pull our second and (inaudible) as seen in the first quarter. As announced today, we pull owning module unit cost of $0.57 around $0.75 in the first quarter.

We’re achieving combination of a further operating efficiency improvement, improved supply chain costs, improve materials and the continued increase in sale of the module efficiency and net of cost effective.

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

Thomas Young

Thank you Gary and we would like to remind those participating to submit your questions to which would follow-up and that would allow us to get through the queue and of course if we’re able to, we will go to for a second round. So operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rob Stone from Cohen & Company. Your line is now open.

Rob Stone - Cohen & Company

My first question is with respect to the gross margin outlook for the third quarter. If we back out the one-time charges from Q2 I think you said gross margins would have been 19.6 and they are going to drop to mid single digit. So if you just comment on the various factors that contributed to that big sequential decline. Thanks.

Terry Wang

Okay. And I'll first of all the gross margin in the mid single digit which includes some of the inventory provisions will be based on what always expected and most of the margin and shrinking because of the that we've expecting the ASP will coming down continuously as we number one we increase the sales in China which is typically last lower as given to other markets. And the secondly is because of the (inaudible) and you know over capacity to continue pressure on the types of products.

So that the pricing will continues drop and on the cost side and now we expecting that our cost continue to fall both in non-poly process cost and in the poly side, but we do not believe that the real decline was similar the same rate as ASP might be little bit discrepancy for the out expecting for concept depend view that we effective than the gross margin will be narrow compared to the second quarter. And by that we for that we are fully confident that you know going forward fourth quarter and extend on next year is we'll be in the stabilize and we expecting the gross margin will be expanded going forward.

Rob Stone - Cohen & Company

Okay, so I think you mentioned also under utilization and cost of purchase wafers and cells in the Q3 margin guidance, can give us some sense of how significant will be running at lower utilizations and if you are not running at full utilization what is that you need to buy externally I guess it’s just sells for US shipments?

Terry Wang

Right, the US shipment that we definitely US (inaudible) will be market but this OEM or outsourcing third party overseas and for that market and the same time and we have to cut down our utilization also driven by our large quantity of inventory and the finished good in the second quarter. So and with this have to right now cut down our utilization of capacity down to two-third of total capacity, so that we can one side and reduce our inventory and consider inventory have the carrying cost of high given the cost structure and this manages but we will minimize those impact and secondly also if we cut down the utilization capacity and depreciation we will have more on lot basis and couple of cents on the cost structure, so we will have to be aware of that but good things are we have to cut down the inventory to meet our future the market demand from the customer.

Operator

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

Kelly Dougherty - Macquarie

We heard a lot of your peers talk about moving downstream I am wondering what Trina's philosophy was on that and there seems to a be lot of increasing interest in the project business by everybody so I am just wondering how we avoid ruining margins in that business like we have seen elsewhere on the value chain and then if you do have downstream I guess if you can talk to us what about your unique selling point would be or how you go up against the likes of companies like First Solar and SunPower who been doing it for a while?

Terry Wang

As the more increase in competitiveness in manufacturing side or squeezing gross profits and moving downstream and as many as one of the options for those module supply or other sort of companies I think that we actually we started two years ago in Italy and we would the downstream topline. As project power plant in projects been buildup complete access to the grid and we saw that and we have the food cycles for experience on that and actually are making money with the high end profit and our average manufacturing margins and going forward in downstream strategy is going to be one of the major focus as well so that we are building team actually in the US and Europe and China and so we can.

We have a team there and combination of both self development and acquiring some of the top line, so that we can build quickly and as well. As to compete with some competitors, First Solar and SunPower who had experience in US market for long and I think that we target different markets and also we have a different strategy because First Solar for example, they have the legacy top line that acquired earlier.

Now the majority of the operation, the module, the produce and for their own project purpose, but we are now still in manufacturing module. So we supply overall in the market and to our customer in module, that's our main focus.

But at the same time, we help our customers also build our own project to extend our downstream and add more value to our bottom line of profit. For that and gain more experience in a variety of the country market and so we can help us expand our market share in different markets.

I think we're pretty good and we have advantages in rental in China market and European market is pretty strong. And US, we have some top line build out in California in the west part of the US. So we continue to go in other parts of the world and eventually I think that's going to be a big value to us and we will and that's going to be one of our focus going forward.

Kelly Dougherty - Macquarie

So, do you have any quantification of like the size of the pipeline or when the projects are going to start to move the needle as a percent of revenue or anything like that how we can think about, how this may start to factor in and what kind of margins this business may have?

Terry Wang

This is going to be a long-term strategy. If you look at the time span, about five years right. By 2015 we'll have a target ready. When we think about on the revenue side, we can get 50% as revenue on the project development and that will be our target. So gradually year-by-year, we're moving up. So for example, this year if we continue, we do 10% revenue from the downstream.

And next year we'll continue to build out if we have and it all depends about 25% from the downstream is not going to be impossible. So, I think that we have a roadmap on those downstream year by year, but we have to work closely in each market and secure some top line with the project to justify our project return.

We're talking about the margin and definitely, if we look at the net margin point of view, we are looking at least the project base and we will have between 3% and 4% higher in net margins in downstream versus our module production.

So that's what we are looking and also the project return, 8% level should be our target.

Kelly Dougherty - Macquarie

And then just a quick question. Obviously you guys have made impressive progress on the non-poly cost side this quarter, but just wondering, where you can go beyond the $0.50 by the end of year. I mean you can only switch to domestic suppliers once, squeeze your supply chain so much further. I understand about conversion efficiency and things like that, but I know 2013 is far away ahead at this point. But any sense of where you think non-poly costs can go next year?

Terry Wang

We kind of here give the guidance target by the end of the year and approximately below $0.50 for sometime and I think that core competency is our cost leader and next year and it's all depend on how the market is going to be and given the trend and the over capacity phenomenon here continues, I think that's usual and everything should be below $0.50 and it depends how the situation could be below $0.45, it all depend on the situation.

But the (inaudible) have a bottom on that and all depends on how the market developed and if some of the value chain become shortage, it could fluctuate in pricing and those components of the cost area.

So, it is hard to say, but this year pretty clear that we will be targeting below $0.50. That's our mission and we are on the right track to that target.

Kelly Dougherty - Macquarie

So like barring any kind of unforeseen shortages or anything, you do think $0.45 number for next year is realistic?

Terry Wang

I think it's not impossible.

Operator

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

Brandon Heiken - Credit Suisse

This is Brandon Heiken speaking on behalf of Satya Kumar. I was wondering if you could speak about the accounts receivable provision and what led to that provision? Was there a sort of change in the customer's ability to pay or what led to the change for you guys?

Terry Wang

Accounts receivable provision has been in this quarter is pretty vague versus our inventory and we have the AR provision across border with those only based on according to our accounting provision policy.

So, across border, so some of the customers with a large amount and longer payment term overdue such that we have the big write-off on those and I think that's driven by a couple of things in the market and financial situation is going to be a major one of them. And the other one is their project implementation and took a longer time than expected.

So that delays in delivery for financing purpose. But we are right now focused on the collection. I think that even if we could write off those provisions, but it doesn't mean it's uncollectible. And we do have the good news on those provisions under the customer that we have the provision on and collectibles to that we have right now and they are moving progress on that project.

So we expect to continually collect those money.

Brandon Heiken - Credit Suisse

And then you mentioned the CapEx I believe. Did you mention the operating cash flow for the second quarter and what you expect for the second half of the year?

Terry Wang

Yeah, the second quarter continues to remain negative for operating cash mix. But in terms of magnitude, much drastically down from the first quarter, down to like $54 million negative. And this quarter, in the second half and we're expecting the given efforts we've made, we emphasize and focus our efforts in our collections on those overdues and also in conjunction with the measures we take for reducing our inventory.

And so we are expecting and starting from third quarter we will have the positive operating cash starting in the third quarter and also extended to the fourth quarter for this year.

Operator

Your next question comes from the line of Amir Rozwadowski from Barclays Capital. Your line is now open.

Amir Rozwadowski - Barclays Capital

You know one of the things that you focused on, on the call was really diversifying come of the opportunities on a global basis. You were mentioning Canada and other markets.

One of the questions that I had was really how do I think about sort of your capital allocation going forward, not just in the near term, but over the next one to two years? Is it fair to say that it's going to continue to focus on investments into some of these new markets?

I'm just trying to get a better sense of what type of trajectory your operating expenses will be on at this level?

Jifan Gao

For expenses allocation, you can see from our CEO's remarks that we are right now streamlining our organization and to be more regional focused. So the regional for region through that own P&L. And the other one response for on the expenses. The markets such as Canada or Australia, we have offices there and it also depends on how the market can develop.

If for example UK first develops pretty fast, so we will penetrate and we will expand on market share in the UK very successfully in the first half. So we would develop our team there. And also for the new markets and potential markets such as Japan and we will build a pretty solid team and be ready for next move out for sales.

And I think that more towards in terms of the asset resource allocation I think they are more towards the emerging markets, the markets with the fast growth potential. And then in China as well and this year we are expecting in just China market will grow drastically so that we build in China team, high multi-point China than ever before, so it’s a market-driven situation.

Amir Rozwadowski - Barclays Capital

And then, you talked about sort of the overcapacity in the marketplace and clearly it’s an issue that the industry in and itself has been grappling with for sometime; where do you see sort of relief from the issue of overcapacity; at some point do you expect to see some more rationalization with respect to suppliers perhaps some more M&A or is this really waiting around for demand to finally catch-up with supply?

Terry Wang

This is a very good question. Supply and demand imbalance that’s current, that’s why the pricing continue to fall and as a result of the past few years tremendous investment in this market I think going forward and two sides have to work together one side; and as pricing continue to fall and posing good parity to open-up more market, so that the demand going to be picking up. But the same time we cannot just wait for that, because if you fit that into the current excessive capacity going to be continue to fight each other for lower pricing and nobody making money and that’s not healthy for the company to grow or for the industry to move forward.

I think that sooner than later we will see some of the momentum of the consolidation that’s taking place and rationalize the industry will be the case; but, we cannot deny some of the other factors from government or the policy, antidumping or the government intervene might make it a little bit complicated.

But I think that end of the day the market driven will be the main force of the consolidation. Then combination of the both and we are looking for potential rebound going forward in the future that which will go ahead of in the future.

Operator

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

Vishal Shah - Deutsche Bank

Can you maybe talk about what percentage of your Q3 shipments will be to the China market in the third quarter?

Terry Wang

I cannot give you exactly what it is (inaudible) but one thing is clear, is the first half the China market relatively delayed as a result of the longer approve process and with the participation as a pre-condition for the final approval and that the state’s great opposite and has a sign, the connection to those projects. But second half, starting in Q3, we see that gradually there were more increasing number of projects being approve and I think that we will pickup in China our sales; I think there is roughly for second half and we are looking for a double digit, it could be high single or 20% in that portfolio come from the China.

Vishal Shah - Deutsche Bank

So double digit to 20% of your second half shipments will be from the Chinese market?

Terry Wang

Yeah.

Vishal Shah - Deutsche Bank

And what was the number in the first half?

Terry Wang

It’s probably (inaudible) approximately of portfolio.

Vishal Shah - Deutsche Bank

And how big do you think the Chinese market will be this year?

Terry Wang

It could be 4 gigawatts to 5 gigawatts initially and we're talking about the 5 gigawatts to 6 gigawatts, but the first half is relatively slow and I think the second half when those approved (inaudible) released to the public then the market will accelerate to a larger scale.

Vishal Shah - Deutsche Bank

And then what about the price differential, you said that prices in China are lower than global pricing; as I see in the last quarter you reported pricing, ASPs of around $0.70, I mean where do you think the Chinese prices are?

Terry Wang

Which one, I did not talk about the $0.70?

Vishal Shah - Deutsche Bank

In the last quarter, you were probably in the mid $0.80s, so anything on the Chinese front?

Terry Wang

Yes that’s correct. That's going to be down to pricing– the pricing I will say is lower or high, lower 70s and high 60s, but I really cannot comment too much on that, because right now different countries have been pricing too much discrepancy and I really don’t want other country naming China’s ASP as bargaining power for our product; I mean that’s not healthy.

Vishal Shah - Deutsche Bank

And do you see the third quarter shipments to be all backend loaded, in other words do you expect July, August to be very slow and September to be the big month for third quarter?

Terry Wang

I think its back loaded and you are talking about overall globally or you are talking about the China market only?

Vishal Shah - Deutsche Bank

No, globally.

Terry Wang

Okay globally, it's always the case that September is highest in the quarter and I think that this year it remains the same pattern in China market as well and I think about take a long time and build up the topline to release also taking time and people and get ready in shipments, so that's why back loaded will be the phenomenon at this point.

Vishal Shah - Deutsche Bank

Are you still negotiating your contracts for the third quarter or have you already fixed pricing and you are just already underway shipping to your customers?

Terry Wang

We signed the contract and PI, and once we have a PI, the pricing is pretty fixed, contract-wise we signed month ago. When you ship the tonnages might make the pricing a little bit different, so we typically track PI with the fixed price as a reference.

Operator

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

Aaron Chew - Maxim Group

Hey Terry just a real quick, how does that $0.52 watt breakdown cell-wafer module?

Terry Wang

Typically, we didn’t give any breakdown costs to the public, but I just want to comment that, we improved versus our previous quarter, modules down $0.02 and cell down by $0.02 and the other things are down about approximately of $0.02, so that’s basically even and improvement.

Aaron Chew - Maxim Group

And to clarify one thing on the tariff, did you actually book nothing for 2Q or did you just already know what the number was going to be in 1Q and you just expensed it in the first quarter; or is that $10 million you referred to before, did you end-up not paying that?

Terry Wang

We told them of $10 million that we are expecting if anything figure out we ship. Actually, we have a provision in the first quarter in covered that area already, so it’s cumulative and cover entire first half provision and against the antidumping subsidies already.

Aaron Chew - Maxim Group

And one last quick final one if I may; on the project side, as you embarked on a strategy to move downstream, I noticed like on the balance sheet your project assets started in short already on the long term side, so how do we think about that going forward; if you are really going to move downstream, are you financing these projects on your own?

Just wondering, how much we should expect this project asset line item in the balance sheet to ramp up over the next 12 to 18 months and maybe any comments you can make on just how the financing markets are in China for project development; I mean, we hear a lot about 5 gigawatt pipeline, but just wondering, who is actually paying for that and what banks are supporting you; what the equity debt ratios are or any color you could provide that will be great. Appreciate it Terry?

Terry Wang

You know downstream long-term project that’s over one year we have to put in the long term, but it doesn’t mean that we are going to hold it for as a utility company; we are not going to do that. For the things that we put there, if you look in the dollar term, it’s not very large and we sold most of them, but those for the project side then haven’t get payments then yet, so we have put it, I mean we keep our own ownership so we don’t sell it, and we have not transferred the ownership yet and then we will keep them in the balance sheet.

But for project itself in China overall and in the market, financing is also critical for the success of a good project and I think that also have fueled our partnership with (inaudible) and project return on quality and everything involved in different countries, different requirements, the US have the PPA requirements and then tax credit those type of things.

And then China, the RMB 1 per kilo hour feed in tariffs that really helped on top of the Golden Sun and the subsidies and those things also then gives the investors an incentive. The point is, given current situation, the bank more cautious and take a long-term along profits for reviewing the documentation and before finalize their funding.

So that’s leave a longer time but at the end of the day, if we have a (inaudible) which is justified with high return at this solid project, we don’t think we have an issue to debt finance funding and also sell it. So that’s basically we have to deal with solid project and that’s all the task right now.

Aaron Chew - Maxim Group

Just to clarify Terry, should we, are those projects assets going up, I mean if you are investing in China, should we assume that numbers going to $100 million in the next 12 months, are you dedicating capital to project development in China?

Terry Wang

In terms of the business model for the project, if in China, we could have a different model doing that. One if we can build ourselves, and then we have to borrow from banks and before we sell it and that’s we are going to have putting out project assets but that’s not a typical business model. A typical business model we can partnership with the (inaudible) partners then we invest portion and sell our modules or we have a project top line with project development area, then we have a (inaudible) to come in and locking and purchase equipment and same time we have to deposit in the bank and come into validate the project and with the funding, to that we, those funding is not going to be fitting in our book, because that’s all we have sold and with the off taker. So I think that have multiple models its all depend how the situation we would treat differently.

Operator

Your next question comes from the line of Pranab Sarmah from Daiwa Capital Markets. Your line is now open.

Pranab Sarmah - Daiwa Capital Markets

Terry my first question is on since Europe is also talking now into anti-dumping issue. How you are handling shipment to Europe now are you outsourcing cells from Taiwan at this point and if it is so have you lined up enough capacity on by there?

Terry Wang

Europe is not plan or rule me yet right just been positive solar supply and for you know to this that they are that's really but do not final. So we don't have to do now but for US market we are doing overseas and so for the OEM and ship to US market. For Europe if I mean insist different scenario and first of all are you assuming that European Union approve that the cell [awards allocation] now and case or if that’s the case then we have a strategy and for that one side is the you know have other part of the world you can do that manufacturing for the market and secondly I think that and combine with the local compound requirement and also we could do that partnership or we end upon in Europe and working with the partnership or direct investment in local to penetrate those market, so a different it all depend how the situation and we feel would develop and we will have a different measures that we will take and all depend how what’s the best benefit for the company and move forward and to help our customer.

Pranab Sarmah - Daiwa Capital Markets

Okay, and my second question is on as you said like you would like to buy some of the solar front to get revenue up front or some projects how much capital you will allocate to buy those project directly or acquisition type of acquisition basically?

Terry Wang

Acquisition for the top line project and that all depend on just like (inaudible) some of top line or project it all depend on market and right now it’s the price is coming down right and because the pricing in entire project and the per-watt basis is coming down, we (inaudible) expenses the cost is only a small fraction of the total project investment, so for that portion I would say it’s not going to be more than 10% of total project, that’s not having money so when you look at our balance sheet, our bank facility and we could do that but we will have to look in for quality projects.

Operator

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

Sanjay Shrestha - Lazard Capital

Quick question guys so you talk about this revised network planning and delay in the bid awards in China impacting near term dynamics here. Has that already been resolved that you see the confidence that China is going to confer meaningful portion of this second half shipment?

Terry Wang

As I said you know China deposits has been pushed off in the second half and for us we have certain customers that are building our project and we do see the trend and as back loaded in the second half and for ourselves for the project development purpose and we started yearly and beginning of the year but it will take longer time and we do see the result in this quarter and I think the backlog is going to be there so that’s why I think that if I am talking about 4 gigawatts or 4.5 for the year and they will split fast approximately 1 gigawatt in place for seasonal second half could be four.

Sanjay Shrestha - Lazard Capital

Okay and then one follow-up guys so you guys keep talking about reduction in the non-silicon cost which went down pretty significantly two part question on that one want to make sure that is a fully loaded cost and not cash cost and two if that’s how you are reducing the cost is there an internal target for what is your long-term aspiration for gross margin and operating margin and eventually making money in terms of being in the industry how do you guys think about that?

Terry Wang

You know the one thing is non-poly process (inaudible) but that’s only non-poly but the other portion is poly and poly owing cost that including the carrying cost and inventory that have more. But you know that you minimize those inventories and poly side the cost coming down quickly. And for non-poly side that’s also driven by non-poly material cost down and efficiency improvement and excellence in operation and continues to improve the efficiency, those couple of things continue (inaudible) and we will continue to do it but I don't think that's going to be huge potential to draw in future but the thing that poly side because of the heavy inventory looking for much big potential to drop. So our cost is going to drop quickly next two to three quarters. So I think the gross margin if the future product ASP stabilize that we’re looking for, we're expecting that the gross margin will be expanded.

Sanjay Shrestha - Lazard Capital

So just to clarify then that right so, prices are, you are basically not willing to continue to get in the pricing war and maybe taking a few, the [$0.70] kind of a number is the least level where you probably not going to go too much lower than that and that’s the only way you can get the gross margin expansion given what's happening to what the poly and the non-poly cost for you guys right?

Terry Wang

Not necessarily, I mean the $0.70 is not going to be, whatever (inaudible) but we’re seeing that, you know, we have a different way to do it. So one side has an existing product cost structure we continue to improve, we continue to cut down. The other thing is we have to maintain or release new product and talking new channel and new country market. So we can even up for stabilize ASP so that we can maintain or expand our gross margin. But most importantly is the how you know balance our market share at the same time and put some profitability I mean.

Sanjay Shrestha - Lazard Capital

You almost have to do.

Terry Wang

Yeah.

Sanjay Shrestha - Lazard Capital

So you almost have to do that right otherwise you always be playing catch up there is a always going to be some high place inventory you know that is sitting there and if you keep on planning this place low you will never really be turning profitable foreseeable future and that's something you guys probably are going to be say some point right?

Terry Wang

Yes, I should and also as I point out that some of the markets I mean they have relative high ASP and such as Japan or you know you required little bit you know high standard and we right into improve the quality efficiency and work with the partners in Japan to penetrate the market. So to that extend that we have relatively value added on ASP. On the cost side also continue to view the momentum but things that quarter little different utilization is coming down that's all about we have add more (inaudible) depreciation and expense that negative we feel but good things overcapacity to become phenomenon than they could do outsourcing and you don't have to expand borrow money to expand the capacity for that purpose and we don't have to you know become which have to be light assets driven not heavy assets driven company.

Operator

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

Mark Bachman - Avian Securities

Hi, thanks so much guys. Terry can you quantify in dollar term the amount of one time charges that you baking into your mid single digit gross margin guidance for Q3. I really need to understand here why gross is really declining but think about this on an adjusted basis from about 20% down to 5% quarter-over-quarter. So if you can give us those dollar ranges for whatever you're expecting for both inventory and PP&E would be great, I'd appreciate it?

Terry Wang

Number one, one time on PP&E, we don't expect anything on it on the continuing PP&E. Maybe it's a very small fraction of that. But inventory could continue to provision depending on the ASP trough. But most of the things, I really don't want to give you the ASP and the cost of the third quarter because we are right now running in a very challenging market. And as I said, a different discrepancy, a wide advantage of the ASP might trigger in our commercial benefit in the market.

But I'm seeing that the ASP in our case, we have a worse scenario to target and that the ASP drop and also that then to assume that some of the inventory is not, we have to write down some of the inventories but given that worst case of ASP. And I cannot give you the dollar terms, but I'm saying, logical thinking is the way that the ASPs that might trigger some of the inventory provision, increase of provision.

And because you see we have a high inventory in second quarter and plus and we have a two-third utilization of capacity at a more sort of depreciation cost per line basis. So those things combined with things that we should be conservative and be responsible for our investors and give them the number and if anything come out as risk, we'll be able to handle it.

Mark Bachman - Avian Securities

Terry, let me see if I can ask this a different way then. Don't give me ASP and don't give me lower utilization. I'll make those own assumptions myself. I did hear you say that there will be no write-downs for PP&E in Q3. So, if I look relative to the $26 million charge that you took for inventory in Q2, do you expect that number to be higher in Q3?

Terry Wang

We have an upside potential, but what I am saying that as we increase the sales in China, so the ASP is very competitive. So that by product mix or country mix and the ASP is coming down quickly. So I have to take that into consideration.

If you say, for example the China market will be up from 5% up to like 20% and ASP swab in China have been down in average ASP and also in Europe you can see that Germany ASP coming down quickly as a result of the both (inaudible) and the euro depreciation.

So, those things also we have to consider. But the point is, I cannot give you the ASP, what is the ASP assumption in our model and cannot do that because as I said can't do that this time.

Mark Bachman - Avian Securities

Second question for me then, did you have any revenue recognition issues in Q2? I ask this because you missed your original Q2 shipment guidance by roughly a 100 megawatts and then you had to take out $44 million AR impairment. And I'm just wondering, if your total shipments were significantly highly than the 419 megawatts that were recognized revenue in Q2, are your auditors restraining your revenues right now due to your customers' inability to pay?

Terry Wang

If you are talking about the revenue recognition, that's impossible. So we watch this very carefully. We never have had an issue. The reason that AR provision is $44 million related to the long payment term is approximately, the payment term could be running through almost one year. Together the last, the previous third quarter of last year in Germany and that based on our AR provision policy where for those over dues we have to write off all.

Those things, it doesn’t matter if we have a (inaudible) of coverage or whatever and it is just their financing is now in place and that's why I have to based on the policy, but doesn’t mean those are not collectible as I point out. We do see making tremendous progress right now, we will see the results in third quarter.

But, the shortfall between our guidance shipment in the second quarter, as I've said. Number one, in China we have a forecast in China in the second quarter and so the process take much longer to push out and back loaded in second half, and the US as well.

US, as a result of the anti dumping and the (inaudible) and the cash grants, So first quarter there was more inventory build, so we didn't realize the important factors in the first quarter for those Chinese companies. So they can bypass the anti dumping ruling in the first quarter. So the second quarter, there were more inventory in channels.

And secondly, the anti-dumping under those come out and all the banks review and revisit the project in the process and take much longer process for the second quarter project delivery. So that's why the second quarter US shipment is being delayed to the third quarter and fourth quarter.

So, these two major countries and the shipment (inaudible), but I point out in Europe and we're right on target actually more than we expected in Europe. But in China market we will push it off, so that will make shortfall against our guidance in the second quarter.

Operator

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

Unidentified Analyst

Hi, everyone this [Caron Kelly] on behalf of Ahmar. Thanks for taking my question. So I missed it, but can you repeat the total module cost again for second quarter including the inventory and the outsourcing.

Terry Wang

Okay including everything. That's $0.70 per watt. Yeah that’s a total everything.

Unidentified Analyst

How much per watt?

Terry Wang

$0.70 per watt all in costs that’s what you are asking right?

Unidentified Analyst

Right.

Terry Wang

I want to emphasize in the second quarter product cost exclude the inventories, all in cost we actually reached $0.67 per watt. Okay.

Unidentified Analyst

Okay, that’s the poly and the non silicon costs.

Terry Wang

Yeah all in cost in product.

Unidentified Analyst

Okay, great and going forward what is your percentage of your total module shipments that’s going to be using in house poly versus external wafers and external sells.

Terry Wang

Number one, it all depends how the market capacity on those wafer and the cell. And cell for US market, it will have to go (inaudible) and also OEM and that all depend on how the size of the US market is. And the other thing is that we only have 1.2 gigawatt wafer and so that's a 50% of total cell capacity, to that we have 2.4 gigawatt.

But right now we're running two-thirds of our utilization. So and currently in outsource and potion there is only $0.01 difference compared on to our cell production. So I think that that's moving. It all depends how the market situation is, but currently we have approximately about 80% -- more than 80% in the utilization of cells production in wafer, in in-house, but only two-thirds of the wafer cells production in house.

So that you can see going forward, I mean, it all depends on market and the inventory. And so it's hard to see what is utilization going to be moving. But it all depends on the market we will be planning accordingly going forward.

Unidentified Analyst

So just to repeat, your outsourced wafers is only $0.01 different than your in-house produced wafers, is that correct? Did I understand that correctly?

Terry Wang

Yes.

Operator

Your last question comes from the line of Timothy Lam from Citigroup. Your line is now open.

Timothy Lam - Citigroup

I have just a couple of follow-up questions on the account receivable write offs that obviously that you are doing. Could you give us some highlights on where the customers are located for the ones you are doing the account receivables write offs, perhaps maybe knowing the details at least for the country they are located in.

Terry Wang

And I pointed out, the full (inaudible) in provision is based on our cross border AR provision policy across all the customers who are over dues and it depends on how many days the over dues then will give the different percentage. For over days like longer than 90 days, we’ll give then 100% write off and location wise and across border we have some customer in Germany and Europe, in US and in China; and in terms of percentage wise it’s similar, it’s similar, but this could be Europe, some of the major customer in Europe might take a little bit longer time because we had last year and so for the fourth quarter we have more shipments in Europe, and so that in this year we’ll have more, in the first quarter we’ll have more towards the US customers. So that different days, but overall we’ll have reduced it across border.

Timothy Lam - Citigroup

Another question I have is in terms of your sales breakdown; I look at your presentation, you are guiding for about 46% coming from Germany and Italy. As I understand, Germany demand has been falling off in the second half. What type of module price level do you anticipate for companies who reach their target in terms of getting the 46% of your full year shipments from Germany and Italy?

Terry Wang

No, we didn't give the 46% in the full year in Germany; all I am saying that the second quarter we had shipments to Germany about 42% of total portfolio and the first quarter about 36%. Overall for the year…

Timothy Lam - Citigroup

Page seven of your presentation, if I am not mistaken?

Terry Wang

Yeah, page seven; 42%, right; 42% in Germany; you're talking about Germany only, right?

Timothy Lam - Citigroup

No, that's page six on that is posted. On top this part page on your presentation.

Thomas Young

Okay, so for full year '12, we're forecasting 23% in Germany, Italy 7%.

Terry Wang

It’s a 39 and in Germany for this full year.

Timothy Lam - Citigroup

So my question is given that demand has been weakening what kind of price level do you anticipate that the company can provide a shipment to this European market and to get about a combined of well close the half of the shipment for Europe and for the full year.

Terry Wang

I cannot give the ASPs because that’s the sensitive, then if I can give ASP our customer is going to argue for that in your bargaining with our sales guys. But I am seeing that the reason that 39 for the year and the most it’s a front loaded because if you look at it the second quarter have a 42 shipment to Germany and second half and a relatively slightly light but you know we do have channel buildup in the Germany of course install and so that the SPU seen certainly in coming down from the second quarter but I cannot give exact the pricing assumption for that because you know its going to be damage to our commercial team.

Thomas Young

We're running bit out of time I think it's important to note at the bottom of that slide as Terry said this is on the country purchase of record. As we know that we have a lot of distributor partners and project partners there that may go into that, but it doesn’t mean that all of the volume in Germany should be tied to the German market.

Timothy Lam - Citigroup

No problem, just one final thought and I think on yesterday there were some news probably from China Ministry of Commerce that they are saying that US could potentially breaking the WTO rules for some of the US projects. Just wondering if your company may have any thoughts of, is there an invitation to your sales in the US in particular due to this news from the Chinese government, that’s all the questions I have. Thanks.

Terry Wang

Yeah we don’t believe there was any impact on us..

Thomas Young

Thank you, Timothy. Okay on behalf of our entire management team, we just thank everyone for their interest and participation on this call. If you are interested to visit us at our (inaudible) or would like to schedule a follow up call, please let us know. At this point we conclude Trina Solar’s second quarter 2012 earnings conference call and thank you operator. You may now disconnect.

Operator

So then ladies and gentlemen, that does conclude today’s conference call. You may now disconnect.

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