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Trina Solar Limited (NYSE:TSL)

Q2 2008 Earnings Call

August 18, 2008 8:00 am ET

Executives

Thomas Young - Director, Investor Relations

Jifan Gao - Chairman of the Board, Chief Executive Officer

Andy Klump - Vice President, Business Development

Terry Wang - Chief Financial Officer

Xiyuan Tzou - Chief Operating Officer

Analysts

Lu Heung - Merrill Lynch

Rob Stone - Cowen & Company

Paul Clegg - Jefferies & Company

Pavel Molchanov - Raymond James

Charles Yonts - CLSA

Dan Ries - Collins Stewart

Colin Rusch - Broadpoint Securities

Cheryl Tang - Goldman Sachs

Paul Leming - Soleil Securities

Adam Krop - Ardour Capital

Vital Shah - Lehman Brothers

Brian Yerger - Jesup & Lamont Securities

Mehdi Hosseini - Friedman Billings Ramsey

Operator

Good morning. My name is Jacob and I will be your conference operator today. At this time, I would like to welcome everyone to the Trina Solar second quarter 2008 earnings conference call. (Operator Instructions) Mr. Young, you may begin your conference.

Thomas Young

Hello and welcome to Trina Solar's second quarter 2008 earnings conference call. This is Thomas Young, Trina Solar's Director of Investor Relations. With us today are Trina Solar's Chairman and CEO, Jifan Gao; Chief Financial Officer, Terry Wang; Chief Operating Office, Xiyuan Tzou; Vice President of Business Development, Andy Klump.

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 and are subject to risks and uncertainties, and management may make additional forward-looking statements in responding to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, August 18, 2008. Trina Solar assumes no obligation to update these projections in the future as market conditions change.

For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days at the investor relations section of Trina Solar's website at www.trinasolar.com.

And now it’s my pleasure to turn the call over to Trina Solar's Chairman and CEO, Mr. Jifan Gao, and Vice President of Business Development, Mr. Andy Klump, who will be translating for Mr. Gao.

Jifan Gao (Translation)

Welcome, everyone, and thank you for joining us on today’s call. We are pleased to report a successful quarter in which we exceeded our operational targets for revenue and shipments, while yet again demonstrating that the strength of our fully integrated business model and our ability to efficiently expand our manufacturing capacity, develop our technology platform, build our brand, and successfully penetrate emerging markets to diversify our global footprint.

In the second quarter, we continued the efficient execution of our capacity expansion to meet our 350 megawatt year-end goal, while our research and development and technology platforms drove efficiency improvements that allowed us to further lower our silicon usage. As a result of these efforts, our silicon usage efficiencies improved from approximately 7.5 grams per watt to reach 7.2 grams per watt in the second quarter.

We are also pleased with the number of developments and strategic initiatives to broaden our geographic reach and strengthen our brand recognition. We have entered into several important sales agreements with existing as well as new clients, most notably in Italy, where we signed agreements with Enerpoint, a leading Italian PV distributor, [Corelli] Solar Utility, as well as Enel, Italy’s largest power company.

We also had successes in other markets, acquiring new customers and extending relationships in South Korea, Australia, Mongolia, and China. This list also includes the United States, where we’ve initiated sales shipments as well.

In addition to our successes in penetrating new markets and acquiring new customers, we are also very proud of our recently announced marketing collaboration agreement with Spanish Premier League Football Club, RCD Espanyol, to participate both in the construction of their new football stadium and their uniform sponsorship. We believe such agreements will strengthen our brand awareness through both our established and targeted European markets.

Turning to our polysilicon supply, we also made progress in securing long-term silicon feedstock supplies to support our production growth plans in the quarters ahead. During the second quarter, we signed agreements with GCL Silicon Technology, Silfab, and Qingdao DTK for the supply of virgin polysilicon sufficient to [prove] approximately 3.475 megawatts of solar modules in aggregate over six to eight years. These agreements provide direct support for our announced decision to discontinue the Lianyungang polysilicon project.

In respect to long-term financing for our strategic expansion, on July 24th we successfully concluded our convertible bond offering, which can provide for our remaining 2008 funding requirements, in addition to anticipate positive operational cash flows in the second half. We are also developing long-term debt facilities to meet our target capital structure.

Based on our strong performance this quarter and high demand for our products, we are raising out output and revenue guidance, which Terry will highlight later.

With that, I will turn the call over to our CFO, Terry Wang, who will share our second quarter results. Terry.

Terry Wang

Thank you, Chairman Gao, Andy. Hello, everyone and thank you for joining our call today. As previously noted, we are very proud to announce that our second quarter operating results have exceeded our Q2 guidance in output and revenue. We experienced significant growth in the second quarter’s net revenue, which grew by 69.2% sequentially, and 171% year over year to $204.2 million. This increase reflects the strong growth in output resulting from our strong market demand capacity expansion and increase in ASP to $4.03 per watt. [inaudible] in the second quarter were 47.6 megawatts, a sequential increase of 61.3% from 29.5 megawatts and a yearly increase of 134% from 20.3 megawatts.

Gross margin was 23.2% in the second quarter of 2008, a decrease from 25.8% from the first quarter and an increase from 18.9% from a year ago. The sequential decline in gross margin was due to the increase in our average cost of polysilicon material, which was partially offset by the further reduction of silicon usage rate, which is now approximately 7.2 [per watts on average].

Including the one-time loss of $2 million from our discontinued Lianyungang silicon project, our operating expenses were 8.9% of second quarter net income, or net revenue. This represents the third straight quarterly improvement in percentage terms, which was primarily due to the company’s ongoing expense control measure. Operating expenses in the second quarter of 2008 included approximately $1 million of share-based compensation expenses.

Our expanded output contributed to significant growth in operating income, which rose 44.2% sequentially and 260.2% year over year to $29.1 million.

Second quarter operating margin, including a one-time loss of $2 million, was 14.3% compared to 16.7% in the first quarter and 10.7% a year ago. The sequential decline was

due to lower gross margin related to the higher cost of silicon raw materials while the year-over-year increase was due to operating efficiency from increased vertical integration.

Our interest expense in the second quarter of 2008 was $5.1 million, compared to $2.2 million in the first quarter of 2008 and $1.1 million in the second quarter of 2007. These increases were primarily due to additional bank borrowings for capacity expansion and a prepayment to the long-term contract.

The company recorded foreign currency exchange loss of $6.1 million in the second quarter of 2008. This was primarily linked to the appreciation of the Renminbi against the U.S. dollar, which resulted in a loss upon the re-measurement at the end of the quarter of short-term borrowings partially offset by a gain from re-measurement of raw material prepayments.

As many of you are aware, based on our operating activities, Trina Solar [targeted] U.S. dollars as a function of currency so as to comply with FAS-52 beginning in the first quarter of 2008. Going forward, to the extent we continue to have RMB or other non-U.S. dollars denominated obligations, we will report a loss if U.S. dollars depreciates, or record a corresponding gain if the U.S. dollar appreciates. We continue to revise our capital structure to reduce our exposure to RMB denominated debt inclusive of recent senior convertible notes offerings in favor of U.S. dollars denominated debt to provide us with a natural hedge to minimize the volatility of our U.S. GAAP results from quarter to quarter.

Our net income grew 32.8% sequentially and 132.1% annually to $17.1 million in the second quarter, and net margin was 8.4% in the second quarter of 2008, down from 10.7% in the first quarter of 2008 and then 9.8% in the second quarter of 2007. The sequential decrease was primarily due to the one-time project related loss and the further appreciation of the RMB in the second quarter.

Earnings per fully diluted ADS were $0.60. The effect of the second quarter foreign currency exchange losses and the one-time loss due to the Lianyungang silicon project discontinuance, net of tax effect, were approximately $0.24 and $0.08, respectively, per fully diluted ADS.

On July 24, 2008, the company completed an offering of $138 million of

senior convertible notes due 2013. We intend to use the net proceeds of the offering for manufacturing lines expansion for our integrated production, as well as for purchase of raw materials, research and development and other general corporate purposes.

Turning to the balance sheet as of June 30, 2008, the company had $59.5 million in cash and cash equivalents, which excludes the company's restricted cash balance of $125.6 million. The restricted cash comprises deposits pledged to banks for secure bank borrowings and letter of credit facilities. We anticipate that in the third quarter, a significant portion of such deposits will be released as a result of the convertible bond received in our repayment of short-term loans.

Given our senior convertible notes offering was a subsequent event in July, this cash and cash equivalent balance [inaudible] to reflect the net proceeds of our [inaudible] offering.

Our capacity expenditure for the second quarter was approximately $54.1 million, linked primarily to expansion of manufacturing capacity of approximately 50 megawatts in the second quarter.

Now I would like to review our guidance for the third quarter and fiscal year 2008 as follows: for the third quarter of 2008, we expect to ship between 62 megawatts and 66 megawatts of PV modules and total net revenues in the range of $250 million to $265 million. We believe gross margin for the third quarter will likely reach between 23% and 25%, and estimate for operating margins will range between 15% and 17% of total net revenues.

For full year of 2008, based on our current outlook, which incorporates high demand for our products, silicon supply visibility, and our current and soon-to-be realized capacity increase, the company revises its projection upwards as follows: total revenues to be in the range of $850 million to $900 million, representing an increase of 182% to 199% from our 2007 revenues. And this compares to previous guidance of $770 million to $808 million. Total PV module shipments between 210 megawatts to 220 megawatts, which represents 176% to 189% increase compared to 2007. This compares to previous guidance of 200 megawatts to 210 megawatts.

The company believes the gross margin will remain in the range of 23% to 25% for

the year and estimated operating margin will likely be in the range of 15%

to 17% of total revenue. The gross margin and operating margin estimates remain unchanged from previous guidance.

And now I would like to turn the call back to Andy Klump, our VP of Business Development, for some closing remarks.

Andy Klump

Thanks, Terry. In summary, we are very pleased with our second quarter results and we remain quite confident that we will execute our strategic goals of strengthening our brand, technology platform, and low-cost integrated model. We continue to build and expand our sales distribution in new and emerging solar PV markets and have secured approximately 95% of our revised targeted 2008 module production under contracts. The company has secured approximately 95% of the estimated silicon feedstock requirements for 2008.

We continue to work closely with new and existing short, medium, and long-term partners to secure commitments for our remaining requirements under favorable conditions.

Looking ahead, our well-recognized brand and ability to expand and diversify in global revenues in many markets gives us significant visibility to our 2009 sales demand. To this date, we have sales in 12 countries and have secured orders for approximately 60% of our 2009 sales target.

Lastly, based on anticipated lower polysilicon costs from our long-term supply contracts, we believe that our 2009 gross margins could increase from current levels, despite an anticipated decline in module ASPs.

In addition to the improved cost basis from our feedstock, we anticipate that further improvements in cell efficiencies and lower manufacturing cost will also contribute to the company’s gross margin expansion in 2009.

With that, we would be happy to open the call to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of [Lu Heung] from Merrill Lynch.

Lu Heung - Merrill Lynch

I just want to know -- you raised the revenue guidance for the year but you didn’t really raise the shipment guidance nearly as much. I just want to see what your thoughts are -- is it because the second half ’08 ASP being stronger than what you expected? Or can you provide more color?

Terry Wang

Okay, actually I just want to point out, we raised both the revenue guidance and shipment guidance but revenue guidance compared to the previous guidance is up about close to 10% and the shipment guidance compared to the previous guidance is up about 5%, so the difference between the increase because of how upside ASP and given the current contracts signed and also the market orders we received, particularly for this quarter, and visibility for next quarter as well, and that comes from the high demand of product, especially in the end market, such as the Italy market, German and other, the emerging markets as well.

Lu Heung - Merrill Lynch

I have a question on the 2009 demand, based on the contracts that you signed. Maybe you can give some more details on what is the percentage of contract that you signed from each country, and also you indicated your polysilicon costs will reduce quite significant in 2009. Maybe can you quantify that?

Andy Klump

I’ll take that question. We have very strong customers that we’ve been working with the last several years and we’ve continued to extend these relationships. Particularly markets like Italy are going to be very important for us next year. We have approximately a third, say 30% to 35% of our contracts next year in Italy. Germany also roughly about 30%, we expect. Spain will most likely be a smaller percentage in the latter half of this year into 2009 but just in aggregate, we’ve signed roughly 50%, as I mentioned, and we have roughly 20% which are at fixed prices. And these prices only represent a fairly small decline off of our current levels. We are looking at roughly 3% to 5%.

Now, in terms of our polysilicon cost reductions, we have long-term contracts and so the overall result of these contracts will be roughly about a 15% price decline, so we see in aggregate that the pricing or the cost decline from our polysilicon savings. This will give us a much better position to be able to accept any type of ASP decline.

Lu Heung - Merrill Lynch

So if I understand correctly, 20% of your 2009 production is already fixed in terms of price?

Andy Klump

That is correct.

Lu Heung - Merrill Lynch

And how many percent do you have orders for for 2009?

Andy Klump

So 60%, and this is based off of the guidance we had said of 360 megawatts to 400 megawatts of shipments.

Lu Heung - Merrill Lynch

Okay, so 60% of those you have orders for and within the 20%, you have fixed price.

Andy Klump

That is correct.

Lu Heung - Merrill Lynch

Okay. Thanks a lot. Congratulations on this quarter.

Operator

Our next question comes from the line of Rob Stone of Cowen & Company.

Rob Stone - Cowen & Company

Just on the prior comment about the portion of contracts that are fixed, the prices only being down low to mid-single-digits, can you give us a sense of where that demand is coming from? Certainly it wouldn’t be in someplace like Germany where feed-in tariffs are going down by more than that. I’m just curious where, which region you are seeing such shallow price erosion.

Andy Klump

The key markets like Italy, Belgium is also another key market, The Netherlands. You know, we have strong customers in these markets. You are correct, Rob, that the pricing in Germany may be a little bit more around 6% to 8% but of the visibility that we have to date, it is low to mid-single-digits, as I mentioned.

Rob Stone - Cowen & Company

How much of your 2009 silicon is covered at this point?

Andy Klump

60%.

Rob Stone - Cowen & Company

And that’s the portion that is under long-term contract but it wouldn’t include renewal of short-term relationships that you are using this year, correct?

Andy Klump

That is correct. As we stated last call, we have roughly 60% to 65% secured next year in long-term contracts, and so that does not include short or medium-term contracts. As we’ve been working with these suppliers over the last several years, we anticipate that those contracts will be extended but once again, they are not secured as of to date.

Rob Stone - Cowen & Company

Terry, can you say what your non-silicon processing costs were in the quarter?

Terry Wang

This quarter we had about $1.13 per watts for the second quarter.

Rob Stone - Cowen & Company

Okay, and what is your outlook for interest expense in the current quarter, in Q3?

Terry Wang

As you are aware, the past, the second quarter is about over $4 million or $5 million. Going forward for the second half or for this year, on a quarter basis and we anticipate a slight increase on the interest expense, not in the rate as previously because of controlled, the total size of the borrowing, especially on the RMB loan denominated loans. So that we can keep a manageable level so that we don’t -- you know, the cost of capital will be in control.

Rob Stone - Cowen & Company

So with respect to the RMB denominated liabilities, relative to the for-ex charge on conversion at the end of the quarter, would you expect that your exposure is going to be similar or larger or smaller than in Q2?

Terry Wang

We expect right now, as we mentioned, since the end of the second quarter in Q3, recently we pay, actually repay some of the short-term loans significantly so that we will be able to reduce exposures to the RMB denominated loans exposure.

But given the size that we increase our capacity and we still need money running our long-term contracts prepaid, so that -- I expect that the size of RMB to loans will slightly lower but not as significantly because of the expansion requirement but RMB, and if we look at the RMB trend in the second half, it will slightly stabilize, my view, given the straining U.S. dollar, the strengthening, so I think that the exposure is not as severe as the first half of this year.

Rob Stone - Cowen & Company

Finally, on your non-silicon processing costs, I think you had previously talked about a year-end target of $1.05. A two-part question; whether that’s still your target, and then if you have an objective for non-silicon costs for 2009. Thank you.

Xiyuan Tzou

Yes, we will continue to keep our $1.05 as our year-end target, still shooting for it.

Rob Stone - Cowen & Company

And for next year?

Xiyuan Tzou

Next year, we are looking for a 5% to 10% reduction, so it’s about $0.95 to $1.00.

Rob Stone - Cowen & Company

Great. Thank you.

Operator

Our next question comes from the line of Paul Clegg of Jefferies.

Paul Clegg - Jefferies & Company

When you talk about your gross margins expanding in 2009, what level of overall ASP decline are you assuming in that number? Obviously you are looking at some of your contracts coming in at sort of low, mid-single-digit declines. Are you assuming that the other markets that you approach will have faster declines?

Andy Klump

I think we are looking at roughly an ASP decline of roughly 6% to 8% and that’s what we are using as the basis for that number, so yes, we do anticipate that in other markets, such as Germany, the price may decline more than the number I gave you before.

Paul Clegg - Jefferies & Company

Okay, and then just a quick follow-up -- do you have any other major pre-payment or deposits related to the recent silicon contracts you’ve signed?

Andy Klump

What I will say, Paul, is that we can’t disclose the specific details of our contracts but what I will say is the new contracts that we see in the marketplace are at far more favorable commercial terms and this is part of the reason we have engaged in a few more new contracts. So we will certainly only do those in the case where we see favorable terms, such as low-single-digit prepayments, so that is a benefit for us.

Paul Clegg - Jefferies & Company

Okay, and we could expect to see those funded later in 2008?

Andy Klump

Yes, in some cases in these contracts, the prepayments are conditional on certain milestones, so as long as those milestones are met, maybe 2008 or even 2009.

Paul Clegg - Jefferies & Company

Okay. Thanks very much, guys.

Operator

Our next question comes from the line of Pavel Molchanov of Raymond James.

Pavel Molchanov - Raymond James

A question about your cell efficiency -- can you talk about where you currently stand and where you are anticipating reaching in 2009?

Xiyuan Tzou

Our cell efficiency are more [decreased during] wafer -- currently we are reaching about 15 [inaudible] on average, 15.6%. Our mono-crystalline product is currently at 16.8%.

Pavel Molchanov - Raymond James

Is that at the cell level or the module level?

Xiyuan Tzou

At the cell level on average.

Pavel Molchanov - Raymond James

Okay, and do you have any projections for where you will be next year, maybe a year from now?

Xiyuan Tzou

Currently our target for the year-end for the mono-crystalline is we are still targeting at 17%, next year at 17.5%.

Pavel Molchanov - Raymond James

Got it. Great. Thanks very much.

Operator

Our next question comes from the line of Charles Yonts of CLSA.

Charles Yonts - CLSA

Great quarter. Really quickly, could you break down your currency exposure for both sales and COGS? Hello?

Terry Wang

You mean break down revenue? We are a module manufacturer so the majority of our revenue is from the module sales.

Charles Yonts - CLSA

Right, sorry, so in U.S. dollars and Euros --

Terry Wang

Okay. We do have the sales in U.S. dollars about close to 70% and the Euro is about 25% and the other side is about 6%, around 6% or 7%.

Charles Yonts - CLSA

Okay, thank you. And also, you are very clear that polysilicon costs will drop quite sharply in 2009 but could you give us a little bit more color on where you see poly costs in the second half of ’08?

Andy Klump

We do see silicon prices will remain high this year. However, due to the fact that we have long-term contracts that are now coming in to benefit our overall cost structure, in effect we see those kind of negating each other. So we actually see our polysilicon costs per watt being more or less flat the second half of the year. I’ll let Terry add some more.

Terry Wang

As Andy mentioned, the silicon costs we have actually increased about close to 10% in the second quarter but we are expecting the polysilicon in our modules per watts is flat from Q2 to the third quarter. But we are expecting the fourth quarter will come down, given the contract was signed, given the market that the sourcing supplies. We are confident that the silicon costs will be coming down.

Charles Yonts - CLSA

Okay, thank you. That’s clear. And one last question -- it wouldn’t be a call without asking what your view is on upgraded metallurgical grade silicon, whether you are making any moves with that right now.

Xiyuan Tzou

Thanks for asking the question. Yes, we have continued to evaluate the UMG grade silicon since actually more than one year ago and we continue to try out and we did make significant progress on the usage of it; however, we do not have any plan to do the announcement yet.

Charles Yonts - CLSA

Okay. Thank you very much.

Operator

Our next question comes from the line of Dan Ries of Collins Stewart.

Dan Ries - Collins Stewart

Thanks for taking my question. In the past, you’ve released the portion of revenue and portion of cost of goods sold that was from modules and then from other -- could you provide the other? Can you provide that breakdown?

Terry Wang

Out of the $204 million in the second quarter, and other revenue taken about $12.4 million, so the remaining portion remains from the module sales.

Dan Ries - Collins Stewart

Okay, and of cost of goods sold?

Terry Wang

Proportionally, it’s in the gross margin 23.2% range and you can break down evenly.

Dan Ries - Collins Stewart

Okay. You mentioned the 7.2 grams -- I just wasn’t clear. Was that the average for the second quarter or was that where you --

Terry Wang

That’s the average.

Dan Ries - Collins Stewart

Great. And can you just update -- I think in the past you’ve said $250 million to $300 million of CapEx for the year. Are you about 100 into that at this point?

Terry Wang

For the year, CapEx we’ve been spending about, roughly about $100 million already, up to June 30th. For the remainder of the year, we will spend the other 100 -- between $100 million for this year CapEx but also we will spend about roughly less than $80 million preparation orders and to book the equipment, as the prepayment for next year.

Dan Ries - Collins Stewart

Okay. I’m a little unclear on that -- what do you expect CapEx for the year to be I guess?

Terry Wang

CapEx for the year is a little over $200 million but additional, on a cash basis, we will pay less than $80 million for next year prepayment equipment orders.

Dan Ries - Collins Stewart

Okay, and lastly in GCL’s F1 filing, they indicated that the final, that the total prepayment from Trina would be received by August of this year. Can you give us any indication how much would be going out as part of a prepayment to GCL during the third quarter?

Terry Wang

I think that we pay --

Andy Klump

We generally do not disclose the specific dates of the contracts and the prepayments, so that’s something we haven’t disclosed at this point.

Dan Ries - Collins Stewart

Okay. Well, thank you very much. Great quarter.

Operator

Our next question comes from the line of Colin Rusch of Broadpoint Securities.

Colin Rusch - Broadpoint Securities

Can you talk a little bit about how you are structuring your portfolio of customers? How are you thinking about how big your lead customers are and how many of the little ones that you want to keep in your portfolio as you go forward?

Andy Klump

Generally speaking, we want to work with a mix of companies that we see as being leaders in the space, so we have picked some of the largest companies in some of the key markets, such as Italy and Germany, as well as Spain. So we will continue to work with some distributors and wholesalers but increasingly we are focusing more on end installers because this is where we believe that we can capture slightly more margin and we can also strengthen our brand within the end marketplace. So I think the second area is important to us but of course, we will continue to work with our existing wholesalers and distributors.

And if you ask for a geographic split, it really is going to vary market by market, so I would just kind of -- I don’t know exactly what you were specifically looking for.

Colin Rusch - Broadpoint Securities

No, it’s really -- we can take this offline, Andy. I’ll catch up with you another time on it but I just wanted to get started thinking about it.

The second thing is just about incoming phone calls versus marketing efforts pushing out. How are you seeing that mix evolving over the next 18 months versus the last 18 months?

Andy Klump

So you’re asking just about overall future demand for --

Colin Rusch - Broadpoint Securities

Yeah, and the level of activity in terms of the number of people contacting you and the volumes that they are looking for.

Andy Klump

Without a doubt, we are seeing a significant amount of interest from new players, from larger companies that are new to this space. But other companies that are big players, as you know, folks like Enel -- they are growing, they are working with a lot of different suppliers but most every customer we have, we just cannot meet the requirements from the market. I would say there is only an increase in overall demand vis-à-vis what we’ve seen the last year-and-a-half.

Colin Rusch - Broadpoint Securities

Perfect, and even with that level of demand, you are still feeling comfortable with poly prices coming down pretty dramatically in the next 18 months or so?

Andy Klump

Yes, and the reason is that we’ve thought about -- we’ve anticipated the trend and have really acted proactively by signing long-term contracts, so that’s why our poly prices are coming down so aggressively, is the fact that we have favorably priced contracts that will benefit us.

But as I stated before, it’s not just the existing markets where you see demand being strong but also the new markets, places like the Czech Republic, France. We’ve positioned ourselves very well and have roughly 10 megawatts of orders in the second half of this year. That is for a market that’s very small. Trina is taking a very proactive stance in getting good penetration into some of these key emerging markets, such that in a year or two or three years from now, we will be able to get a significant share of those markets.

Colin Rusch - Broadpoint Securities

Perfect. Thanks a lot, Andy.

Operator

Our next question comes from the line of Cheryl Tang of Goldman Sachs.

Cheryl Tang - Goldman Sachs

Thanks for taking my questions. First is on CapEx -- Terry, what is the planned CapEx for ’09?

Terry Wang

You know, we still are targeted the capacity expansion up to 600 megawatts by the end of next year, so from this year, 350 and gradually up to quarter by quarter, we will reach the capital expenditure throughout next year of about $250 million.

Cheryl Tang - Goldman Sachs

A second question is can you help me understand what is the advancement from customers which amount to, total amount to $15 million?

Terry Wang

The $15 million was prepaid.

Cheryl Tang - Goldman Sachs

From customers, yes.

Terry Wang

Yes, the customers -- so we’ve been -- actually, I’m glad you asked that question. In the second quarter, compared to the first quarter, we actually launched the cash, the collection cycle shortened efficiency used and on the working capital sides, so two things we want to do. One is we, in order to shorten the collection periods, we -- internal control, [talk to investor], get the collection done. The other portion is to restructure and the customers payment path to the customer. And given the current high demand for product, we request customers to give us the prepay advanced payment to us, so that number one, we can secure our sales from customer orders and number two, this will help us with the cash collection and to reduce our cash on hand, on the customer hands, actually increase our cash efficiency.

Cheryl Tang - Goldman Sachs

My third question is for Andy -- among the 60% poly covered for ’09 production, how much will come from TDK and how much will come from [inaudible]?

Andy Klump

These two products have a very small portion of our overall long-term contracts, so it is not a big portion in 2009.

Cheryl Tang - Goldman Sachs

Okay. Thank you.

Operator

Our next question comes from the line of Paul Leming with Soleil Securities.

Paul Leming - Soleil Securities

Good evening. A couple of questions, and if I could start with one clarification -- the 7.2 grams per watt that you’ve mentioned a couple of times on the call, do you calculate that at the wafer, the cell, or the module level?

Xiyuan Tzou

We calculate it at the module level.

Paul Leming - Soleil Securities

So am I right in thinking that the consumption would even be lower than that at the cell level, i.e. you take into account the loss of power in going from cells to modules?

Xiyuan Tzou

Absolutely correct, yes.

Paul Leming - Soleil Securities

Second, I’m wondering if you could break down your raw materials supply, your silicon supply in the second quarter -- what percent was virgin polysilicon, what percent was scrap, what percent was broker wafers -- just give us some sense of the rough mix of your silicon supply.

Andy Klump

First of all, I just want to comment, Paul, we do not disclose our recipe so we do not give a specific amount of every different type of material that we have. I think Sean can answer your question in terms of just virgin and non-virgin material.

Xiyuan Tzou

Approximately half and half.

Paul Leming - Soleil Securities

I’m sorry, I didn’t catch the answer.

Xiyuan Tzou

Approximately half and half.

Paul Leming - Soleil Securities

Okay, thank you. And then final question is you talked about the long-term silicon contracts you’ve signed with GTLD, TK, and some others. I’m just curious how comfortable you are that these companies will be able to raise the capital they need to reach the capacity levels they are targeting for 2011 and 2012. I’m obviously curious about this in light of GCL’s IPO being pulled from the market.

Andy Klump

Paul, we work with our long-term suppliers and review their financing plans and continue to get updates from them, so we certainly know that sometimes market conditions change but once again, we feel very confident that they are going to continue to expand. GCL is an important supplier for us, as you mentioned, but they have a very aggressive plan and they also have a very strong investor set behind them to finance that plan. So there may be some near-term changes but we think in the long-term we are choosing the right suppliers to meet our needs.

Paul Leming - Soleil Securities

You’re comfortable that GCL can meet their contractual commitments to you, even without an IPO?

Andy Klump

Yes, we do feel confident.

Paul Leming - Soleil Securities

Thank you.

Operator

Our next question comes from the line of Adam Krop of Ardour Capital.

Adam Krop - Ardour Capital

Good evening, gentlemen. Thanks for taking my question. I just had a couple of geographic questions and then one clarification -- maybe you said on the call already but can you just repeat how much sales came from Spain in the quarter?

Andy Klump

The sales in Spain were roughly 45% to 50% in Q2, and the second half we’re looking closer to 15% or so.

Adam Krop - Ardour Capital

And how much in the third quarter, by chance -- can you break that out?

Andy Klump

Roughly 15% to 20% in Q3 and then in Q4, roughly 10% to 15%, so about 15% to 18% in aggregate for the second half of ’08.

Adam Krop - Ardour Capital

Okay, thanks, that’s helpful. And we’ve heard a lot of announcements about the U.S. market in the last month or so, you know, the utilities [scale]. Can you comment just how you might -- what you see as an opportunity there and how you might be addressing that market right now?

Andy Klump

Yes, we have had a lot of customer demand out of the U.S. and have been working -- been negotiating with a number of customers over the last six to nine months, so we’ve begun shipments in the U.S. We do see that there are some high profile announcements getting a lot of attention but we continue to see the U.S. as a very broad, diversified market that is going to have a very strong demand on a long-term basis, so we are going to enter into other larger contracts in the future. To date, we have a very strong concentration in Europe. We’re now diversifying not just the U.S. but also into other markets in Asia-Pacific, so we’ll continue to have a very broad portfolio as we expand our presence.

Adam Krop - Ardour Capital

Okay, and then just going back to the foreign exchange questions, can you just break out as far as what were the key drivers in the loss for the quarter, the foreign exchange loss?

Terry Wang

The key driver for the second quarter and for the currency loss, we will see that the -- this comes from our RMB denominated borrowing from the banks. That’s the -- when we do the -- borrow the money at the beginning of the quarter and by the end of the quarter, if RMB appreciated, the difference we have to re-measure at the end of the quarter. If increase or appreciating, then we book a loss and for depreciating against U.S. dollars, we book a gain.

And the other side, we have a minor -- the Euro in customer orders and if the Euro is depreciating, we will book a loss and for appreciating, we book a gain. But that exposure is much less than the RMB in the loans exposure.

Adam Krop - Ardour Capital

Is there a way to quantify the two? Is it 75-25, maybe?

Terry Wang

Yeah, you can quantify that as the majority is from that and the minority from your [inaudible].

Adam Krop - Ardour Capital

Okay. Thanks very much.

Operator

Our next question comes from the line of [Vital Shah] of Lehman Brothers.

Vital Shah - Lehman Brothers

A couple of questions, firstly on the supply side -- can you talk about your contract with DC Chemical? Have you started receiving shipments from DC Chemical and how the ramp looks like?

Andy Klump

Our long-term contract with DC Chemical that we had signed last year was actually starting in 2009 so we have not received the long-term volume yet. However, we have received some material from them on a short-term basis and that is very good material. It’s certainly in line with our expectations.

Vital Shah - Lehman Brothers

Okay. Would that be a meaningful portion of your second half volume or it would not be, from short-term contracts?

Andy Klump

As I said, this was a short-term -- so a short-term contract from DC Chemical is not a meaningful part of our latter half of ’08. That’s the direct answer to your question.

Vital Shah - Lehman Brothers

Okay, perfect. And then in terms of your exposure to the U.S. dollar, what happens when there’s a -- for the contracts that you’ve signed in U.S. dollars, what happens to those contracts when there is a meaningful change in the exchange rate? Can your customers renegotiate your contracts or those are unchanged?

Terry Wang

In so far as we -- the contracts we signed and the majority of contracts we signed with the customers in the U.S. dollar term -- in other words, and we are [inaudible] currency, U.S. dollar as a function currency, and we don’t have exposure to U.S. dollars if -- but relatively speaking and the customers really are willing to sign U.S. dollars contracts with us. That’s why we had request them to sign U.S. dollars to minimize the Euro exposure to currency risk.

Vital Shah - Lehman Brothers

Okay, perfect. And then one last question on the Italian market. I’m not sure if you have talked about this earlier but can you maybe give us some indication of what kind of volumes you are seeing for the Italian market in second half for this year and 2009?

Andy Klump

You know, we’ve had a lot of discussion with our customers and received very optimistic growth in 2009. I think the Italian market this year can be anywhere from the 200 megawatts to 250 megawatts range. Next year, we’ve seen some progressions and based on customer feedback, that could be as high as 600, if not even 800. The second number might be a little aggressive but I think in aggregate the Italian market will certainly double year over year.

Vital Shah - Lehman Brothers

Thank you very much.

Operator

Our next question comes from the line of Brian Yerger of Jesup & Lamont.

Brian Yerger - Jesup & Lamont Securities

Most of my questions have been answered so I guess I’ll ask Andy -- when do you think visibility for the second half of ’09 ASPs will come in for you guys in terms of increasing visibility on the ASPs?

Andy Klump

I think we are going to continue to work with our customers on ’09 pricing on an ongoing basis, so I would really just say it kind of just depends on how those negotiations go. If they reach the favorable targets that we want, we could see a lot more by the end of Q3, into Q4. But by the end of ’09, pricing I imagine something is going to evolve. There’s a lot of questions about the pricing for the end of next year but I really don’t see it being a --- we don’t expect to see a massive correction, like some other predictions have been made. But based on what we see right now, we have 20% at fixed pricing.

Brian Yerger - Jesup & Lamont Securities

Okay, so you essentially see more of a gradual decline in ASPs throughout the year next year at this point?

Andy Klump

Correct. But I think I was answering your question with respect to when we will achieve that visibility, and I think it will be a gradual period of time in which we have more and more visibility into it.

Brian Yerger - Jesup & Lamont Securities

Okay, and all your fixed pricing right now is related to Q1 of ’09?

Andy Klump

It’s in the first half of 2009.

Brian Yerger - Jesup & Lamont Securities

First half, okay. Thank you, Andy.

Operator

Our last question comes from the line of Mehdi Hosseini of FBR.

Mehdi Hosseini - Friedman Billings Ramsey

A couple of clarifications; when you talked about your 2009 contracts, can you please tell me again, or clarify, what percentage of your shipment is already contracted? And as a predetermined ASP, is that negotiated ASP? And then is there any penalty if the customers come back and cancel any of those contracts? And I have a follow-up.

Andy Klump

Okay. As we’ve stated before, we have 60% of 2009 of volumes actually contracted. Of that, roughly one-third or 20% of the total is at fixed pricing. Now, in terms of how do we structure our contracts, I can’t give you specifics on a customer-by-customer basis but I will certainly say that some customers pre-pay, others have penalty clauses in the contract. It really varies by contract, so I -- but I will certainly say we have mechanisms -- and one again we are working with best-in-breed customers who have multi-year agreements with us, so we have a very strong confidence that all these contracts will be fulfilled.

Mehdi Hosseini - Friedman Billings Ramsey

Sure. And then going back to your comment regarding the size of the Italian market, obviously there’s a lot of confusion as to the extent of the demand next year, given uncertainties associated with the policies. When you talk about the range of 600 to 800 megawatts of installation in Italy and your rather positive outlook for next year, can you help us understand how you come up with those projections? Is that based on your customer feedback? Is that more of a bottom, top down analysis? Or anything else you can help us to better assess how you come up with those estimates.

Andy Klump

Those estimates are based on both a top down, as well as a bottom up analysis. Once again, we speak with many different folks in the industry. We have a lot of customers promoting who know the Trina Solar brand and they want to work with us. Once again, we’ve been selling into the Italian market since 2005, so we have a lot of these existing relationships. We have a sales team that’s in the market. We have a lot of I think strong reads in the Italian market. That’s where we get a lot of our data. But at the same time we are also in touch with folks in the government and who are working the association, so we really do collect our data from many different angles to feed into our projections.

Mehdi Hosseini - Friedman Billings Ramsey

And just one final question -- your polysilicon commentary that prices are coming down, that is a reflection of your contracts kicking in or is that your view that overall poly supply and demand is going to reach a more balanced environment?

Andy Klump

We do see next year a lot of the pricing coming down based on our visibility into fixed contract pricing, so this is based on the long-term contracts that we have. We still think that market demand will be very robust next year so pricing will potentially remain high but we do see there are some correction in polysilicon pricing but we do not see there being an polysilicon over-supply in 2009.

Mehdi Hosseini - Friedman Billings Ramsey

Thank you.

Operator

Ladies and gentlemen, thank you for your questions and I would now like to turn the call over to Mr. Young for some closing remarks.

Thomas Young

Thank you, Jacob. On behalf of the entire Trina Solar management team, we would like to thank you for your interest and participation. If you have any interest in visiting us here in Changzhou, please let us know.

We also would like to inform that during the month of September, Trina Solar will be attending or presenting at several conferences in Europe, North America, and Asia. These include the September 1st through 5th European photovoltaic solar energy conference in Valencia, Spain; the September 4 Raymond James European investors North American equities conference in London; the September 10th Cowen & Company clean energy conference in New York; and the September 16th Credit Suisse Asian technology conference in Shenzhen.

Again, thank you for your participation on the call. This concludes Trina Solar's second quarter 2008 earnings conference call. Operator, thank you for your assistance and you may now disconnect.

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