Trina Solar's (TSL) CEO Jifan Gao on Q2 2014 Results - Earnings Call Transcript

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Trina Solar Limited (NYSE:TSL) Q2 2014 Earnings Conference Call August 26, 2014 8:00 AM ET

Executives

Yvonne Young - Head, IR

Jifan Gao - Chairman, CEO

Teresa Tan - CFO

Zhiguo Zhu - SVP, President, Module Business Unit

Analysts

Vishal Shah - Deutsche Bank

Philip Shen - ROTH Capital Partners

Xiao Yuan - RBC Capital Markets LLC

Patrick Jobin - Credit Suisse

Gordon Johnson - Axiom Capital Management

Emily Liu - Arete Research Services LLP

Colin Rusch - Northland Securities

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 2014 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) As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to your host for today's call, Ms. Yvonne Young, Trina Solar's Investor Relations Director. Please proceed, Yvonne.

Yvonne Young

Thank you, Melissa. Good morning everyone and welcome to Trina Solar's second quarter 2014 earnings conference call. This is Yvonne Young, Trina Solar's Investor Relations Director. With us today are Trina Solar's Chairman and CEO, Mr. Jifan Gao; Chief Financial Officer, Ms. Teresa Tan; and President of Trina Solar's Module Business Unit, Mr. Zhiguo Zhu.

Before I turn the call over to Mr. Gao, may I remind our listeners that in this call, management's prepared remarks contain forward-looking statements, which are subject to 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's 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.

For those of you unable to listen to the entire call at this time, a recording maybe made available via webcast for 90 days at the Investor Relations section of the company's Web site at www.trinasolar.com.

And with that, it's my pleasure to turn the call over to Trina Solar's Chairman and CEO, Mr. Jifan Gao for our second quarter opening remarks. Mr. Gao, please.

Jifan Gao

Thank you, Yvonne. Thank you all for joining us on the call today. We are pleased with the (indiscernible) results in the second quarter.

Our financial performance once again highlights that advantage of our young global sales network. We continue to see strong sequential module shipments closed this quarter. At the same time, our downstream business is progressing well. This is a key part of our growth strategy.

In our modules business, we had the vast demand from both China and overseas market including Europe where our customers continuously trust in Trina products and the service. China also saw a demand pick up and at the same time a strong growth in Q2 following a weak Q1.

In downstream sector, we continued to invest and extended to ensure stable and a long-term [growth] (ph). We keep on building a strong pipeline of new projects both in China and in a number of strategic international markets. We are also delighted to see with announcement of more favorable projects. The future perspective for DG business is getting brighter in time where we have seven of new products being developed at a different stages. We look forward to being able to continue to show news about development in both DG and the utilities as more projects come online throughout the remainder of 2014.

We ensure secured platform to support future growth. We successfully raised $222.7 million – follow-on offering in June. This fund provides us with additional flexibility to realize opportunities for our downstream growth as well as strategic production expansion.

Moving forward, we remain first on delivering long-term value for our shareholders and thank you all for your continued support.

Now, please allow me to turn the call to our CFO, Teresa for a review of our Q2 financial and further discussion of our downstream progress. Teresa, please.

Teresa Tan

Thank you, Mr. Gao. Hello everyone, welcome to the call. It is my pleasure to present our second quarter 2014 financial results and our progress in the downstream business followed by our guidance for the third quarter and the full year of 2014.

Overall, we delivered healthy results for the quarter. We achieved total module shipments of 943.3 megawatts this quarter including 148.7 megawatts of module shipped to our own downstream power plants in China and the U.K.

The revenues for these projects were not recognized based on the external shipments of 794.6 megawatts for Q2 net revenues were $519.4 million an increase of 16.8% sequentially and an increase of 17.9% year-over-year.

The sequential increase in revenues and shipments was primarily due to a bigger percentage of sales to China and the U.S. The year-over-year increase was driven largely by rising shipment volumes due to growing demand from key geographical regions particularly China, Japan and the U.S.

Gross profit was $80.2 million compared to $91.5 million in Q1 and $61.2 million in Q2 last year. Gross margin was 15.4% compared to 20.6% in the previous quarter and 11.6% in Q2 last year. The sequential decrease was primarily due to a decrease in ASP as a result of greater sales to China and up slightly increased polysilicon cost on per watt basis as we anticipated.

So in this quarter, our total non-silicon cost was $0.54 compared to $0.53 last quarter of which $0.11 was silicon cost compared to $0.10 in the first quarter. Further, as compared to the first quarter, net revenues and gross profit contributions from downstream business were insignificant. This is also part of the reason for margin compression quarter-over-quarter. The year-over-year increase in gross margin was primarily due to the increase in ASPs.

Operating expenses were $64.5 million or 12.4% of revenue, an increase of 21.2% sequentially and a decrease of 14% year-over-year. The sequential increase was primarily due to an increase in higher freight expenses associated with increasing shipments volume particularly to the U.S.

OpEx included a reversal of accounts receivable provision of $0.9 million compared to an accounts receivable provision of $1.2 million in the first quarter and $8.7 million in Q2 last year. Operating margin was 3% compared to 8.6% in the first quarter and negative 5.4% in Q2 last year.

Net interest expense was $8.1 million compared to $8.7 million in the first quarter and $11 million in Q2 last year due to a decrease of overall bank borrowings this quarter. Income tax expense was $2.2 million compared to $6.4 million in the first quarter and income tax benefit of $0.9 million in Q2 last year. The results are largely inline with management's expectations for the quarter.

Consequently, net income was $10.3 million compared to $26.5 million in the first quarter and a net loss of $33.7 million in Q2 last year. Earnings per fully diluted ADS were $0.14 compared to $0.37 in Q1 and a loss per fully diluted ADS of $0.47 in Q2 of last year.

Next, I would like to quickly walk through the balance sheet. As of June 30, 2014, we had $562.7 million in cash and cash equivalents and restricted cash. Total bank borrowings were $774.7 million of which $669.5 million were short-term borrowings including current portion of the long-term borrowings.

Accounts receivable net of the allowance for doubtful accounts were $457.8 million. The company's working capital balances was $150.9 million as of June 30, 2014. Shareholders equity was $912.9 million; this is an increase from $448 million at the end of first quarter of this year.

In terms of CapEx, for the module business unit, it was approximately $29 million for the quarter. In addition, for the downstream business there was $129 million for the development of our own projects, majority of which were the China project that we intend to complete and hold.

For the full year 2014, we expect CapEx for our module manufacturing business to be in the range of $230 million to $250 million. Additionally, $580 million to $735 million for downstream projects to be held on balance sheet.

Now, I would like to update you on our system business. For projects in China, in the second quarter, we commenced construction of 90 megawatt solar power plant in Xinjiang province on schedule. And a 120 megawatt utility scale solar project in Jiangsu province in China. Both projects are expected to be completed this year.

We have also deployed resources in the area of disputed generation and I'm glad to see some steady progress on this front. For instance, we signed two energy management contracts lately with two companies to install 13 megawatt solar panels on its Carport as well as some smaller scale projects which will help Trina to advance in DG market with workable business model. These projects are the 4.4 megawatt and 3 megawatt respectively with the companies in Jiangsu province.

Overseas, we intend to sell to U.K. PV power plants with a total capacity of 23.8 megawatt in the third quarter. Further, we have recently announced to develop a 49.9 megawatt power project that is expected that we commence construction in the third quarter and complete grid connection no later than the end of March 2015.

In addition, beyond the 400 megawatt to 500 megawatt project for 2014, we have built a project pipeline of 682 megawatt and are currently engaged in materializing these projects while working on exploring new project resources. We look forward to sharing more achievements with investors in the near future.

This brings us now to our guidance for the third quarter and full year 2014 as follows. In the third quarter of 2014, we expect to ship between 1.06 gigawatt to 1.12 gigawatt of PV modules, of which 130 megawatt to 150 megawatt are expected to be shipped to our self developed downstream PV projects. We expect blended to gross margin for the third quarter slightly lower than previous quarter, therefore the whole year 2014 we still estimate our gross margin to be in the mid-teen in percentage terms.

We remain with our guidance for annual PV module shipments at 3.6 gigawatts to 3.8 gigawatts for 2014 of which 400 megawatt to 500 megawatt of PV modules will be shipped to our own downstream projects. And we will reiterate our guidance of completed downstream PV projects between 400 megawatt to 500 megawatt for the year of 2014.

With that, I would like to turn the call over to Module Business Unit President, Mr. Zhiguo Zhu to update you on our commercial and manufacturing and product development. Mr. Zhu?

Zhiguo Zhu

Thank you, Teresa. And thank you everybody for joining today's call. It is my pleasure to update you on our module business for this quarter.

In quarter two, we shipped a total of 143.3 megawatts compared to 558 megawatts in quarter one. Significant increase of 69.1%, of this 148.7 megawatts was shipped to our downstream power plant in China and in U.K.

Gross margin in quarter two was 15.4% compared to 20.6% in quarter one and 11% in quarter two in 2013. The decrease was primarily due to a decrease in ASP as a result of greater sales to China where price generally lower than other markets. There was also some downward pressure on margins, a rating from the CVD tariff levied on modules using sales – sorry in U.S., which become effective this quarter.

Talking about AD and CVD ruling, where we are responded with preliminary to – determination by the U.S. Department of Commerce to impose duties on solar products imported from Mainland China and Taiwan. Trina remains committed to serving our many customers and business partners in the United States where we are continuing to see robust sales to our industry specification. We will continue to stick to engage constructively with the range -- authorities to ensure we have perfect understanding of the issue at hand.

And in the same time, Trina's geographical diversification continues to progress well and we already have established solid market positions across Europe, South America, Asia and Africa. We continue to see good sales and momentum in all our key markets including China and Japan as well as the U.S.

In China, key drivers such as approval of the National Energy Commission administration development target. The promulgation of incentive policies from a number of local government as well as seasonal demand, this gave rise to a significant opportunities for us in this market in the second half of the year of 2014.

We are confident about this strong growth prospects for us in the coming quarters besides we also see a number of opportunities in emerging markets such as Thailand, whose government just recently announced the new 25 years FIT for solar pumps and a pipeline of 176 megawatt solar pump.

So to the power deficient countries such as India, who plan to introduce a scheme for setting up 1500 megawatts of grid-connect solar power projects starting this August. We have deployed for the robust of emerging markets and have secured three years sales contract in South America and Southeast Asia. We will keep you all updated about the achievements closely.

On capacity, as of June 30, 2014, we had an annualized in-house ingot and wafer production capacity of 2 gigawatts and 1.6 gigawatts respectively and PV sale and module capacity of approximately 2.7 gigawatts and 3.6 gigawatts respectively. We expect that by the end of this year, we will have annualized in-house ingot production capacity of 2.2 gigawatts. We have a capacity of 1.7 gigawatts; PV sale capacity of approximately 3.0 gigawatts and module capacity of 3.8 gigawatts.

We are also pleased with the growth we have seen in sales of our Dual Glass Modules. We have received significant interest from both existing and prospective customers from China and overseas in these products due to its degree of volume proposition and unique features.

We are also actively marketing these products in higher ASP markets such as Japan to drive our sales growth including our 60-cell PDG5 Dual Glass Modules specification in 2013. Our new module, the 72-cell frameless Dual Glass Module has been certified by the [UAR] (ph) and TUV this August. The new product is our highest anti-PID level and kind of marketed to 80°C degree and relative humidity and suitable for wider range of power plants such as large scale utility power plants residential and commercial. This is currently in pilot production and will be available during the third quarter of 2014.

In R&D in quarter two, we continued to develop a lower cost industry [using] (ph) of the IBC cell and HJ cell. And on improving the assembly proceeds, the pilot line of the IBC cells and modules is currently on development. We have planned to commence industry pilot production towards the end of 2014.

With that, I would like to turn the call back to Yvonne. Yvonne?

Yvonne Young

Thank you, Mr. Zhu. I'd now like to open the call to questions. Melissa, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Vishal Shah [Deutsche Bank]. Your line is open.

Vishal Shah - Deutsche Bank

Yes. Thanks for taking my question. Two questions. First, maybe we can talk a little bit about how you think the Chinese market is developing in the third and the fourth quarter and what percentage of your shipments will be to China in Q3 and Q4?

And then secondly, what percentage of your backlog or the – other projects that you're holding on your balance sheet are to the U.K. market?

Teresa Tan

Sure. Thanks for your question, Vishal. First of all, the China market, as we start with the year a little bit slower, especially in the first quarter as we have previously discussed. And second quarter, we saw a significant increase, but then in the third quarter and fourth quarter, we believe that the demand will become very robust as we have evidenced right now. And we also believe that the first half of the year only about 3 gigawatt of installation put as a whole asset standard in the backlog – backend to achieve 13 or 14 gigawatts as what the government has set the target for.

So we believe that the third quarter – traditionally, third quarter is a very demanding quarter and we have seen the evidence for that. And furthermore this year, we believe that, as well we can see right now that the third quarter will be robust. And the fourth quarter as well, we believe that especially on the DG side, a lot of the installation will be very much backend loaded and we believe that this will pick up for the demand of our modules.

And your second question related to the backlog for U.K. in – for the system business, as we have – this year we have made a quite a bit of the progress in the U.K. market. And this is one of our strategic markets for developing system projects. And right now, we are working on the 49.9 megawatts project and we intend to start the construction in the third quarter and we are also working on a number of projects in the third and also fourth quarter, in the backlog that we have about 40 to 70 megawatts of projects that are being developed currently. Hope that answers your questions, Vishal.

Vishal Shah - Deutsche Bank

So what --

Teresa Tan

Yes. Hello?

Vishal Shah - Deutsche Bank

Yes, can you hear me? Yes, hi, can you hear me?

Teresa Tan

Yes, yes.

Vishal Shah - Deutsche Bank

Yes. So can you maybe just give us some numbers on China? What percentage of your Q3 shipments you think will be to the China market? And what kind of sequential growth would that be? And also, I mean we are already in late-August. Have you already seen the pickup that people are talking about in the third quarter in China?

Teresa Tan

Yes, third quarter definitely – the demand is further picked up compared to the second quarter in China as well as in other markets. So obviously, China is one important market for us. And we believe that the third quarter, the percentage will be in the range of 30% to 35% even depending on how things work out. Maybe Mr. Zhu, can further comment on China market.

Zhiguo Zhu

Yes, because traditionally quarter three and four was always a strong demand season. So we will have asset in China. We certainly will have very good sales and demand in China. So I believe at least 30% of our sales will come from China market because our capacity is managed. So we always have fully loaded our factory. So I think that we were limited it less than 35% and higher than [38%] (ph) in quarter three and quarter four.

Vishal Shah - Deutsche Bank

That's helpful. So on a year-over-year basis do you think China market is up in Q3?

Teresa Tan

Year-over-year? Yes, it's definitely higher than last year and this year, we see that even the goal for the year has increased upon last year's 10 gigawatts as what the goal was for last year and this year, the goal was set at 14 are announced, people say 13, but no matter how you look at it, the demand has increased in China market. And with our established leadership position in the China market, we see the demand for our products has increased as well. So we definitely want to expect pretty robust demand and as Mr. Zhu has just commented, we have limited capacity with the – the margins in China and also the other markets that we also serve, we are basically targeting a 30% to 35% market, the percentage for the China sale for our overall third quarter maybe as well as fourth quarter.

Vishal Shah - Deutsche Bank

That's helpful. And just maybe a quick follow-up, can you talk about why the margins are going to be lower in Q3, is it just a mix issue of prices stabilizing in China. Can you provide some more color on that? Thank you.

Teresa Tan

Yes. Obviously, the margin – and for the China market is under pressure just compared to other markets that we also serve like Japan or U.S. And so with the pick up percentage wise for the China sales, the pressure will be evident. At the same time though, the market, the demand is very robust and the market is very, very important for us and that the price in China has pretty much stabilized as well. So we believe that we want to continue this business and want to make sure that we not only looking out for our customers in China, but also the market position, the market shift for our products as well. And maybe Mr. Zhu can further comment on that.

Zhiguo Zhu

Yes. The low margin is because – the competition of the price, the pressure is still very high. Also, our quality and reliability is the best. We are recognized just by the clients, by the market, but the premium for Trina's products is not very high because of the market features.

Teresa Tan

Great.

Vishal Shah - Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Philip Shen [ROTH Capital Partners]. Your line is open.

Teresa Tan

Hi, Philip. Hello?

Philip Shen - ROTH Capital Partners

Hi, Teresa, can you hear me?

Teresa Tan

Yes. We can now.

Philip Shen - ROTH Capital Partners

Great. Thank you for taking my questions. I would like to confirm the ASP in Q2; we were getting about $0.65. Can you give us the break down of the ASPs by region in Q2?

Teresa Tan

Right. ASP for Q2 as the mix kind of biased towards China compared to Q1, the ASP came down a little bit from what it was in the previous quarter. The average ASP for Q2 is about $0.65 and compared to $0.66 in the previous quarter. And that basically reflect the – largely reflected the increase on the China sales in the mix of our total sales. So but, overall though the mix still works pretty well from a perspective of a significant sale into Japan market and U.S. market. So but, the pressure is definitely there for the second quarter.

Philip Shen - ROTH Capital Partners

Teresa, how do you expect your ASP to evolve in Q3 and can you give us – again, the break down by region as well?

Teresa Tan

Right. For the third quarter, we believe that the ASP has stabilized compared to the second quarter and as we can see that the – in other regions there is pressure, you can definitely see that. But at the same time, it's not going one way or the other. And so we believe that it will be in a similar range as what we have seen in the past quarter. And it will carry over and also because of the mix especially the sale into China picked up even in the third quarter that will definitely put a little bit pressure for the ASPs that we believe it will be relatively stable.

So maybe Mr. Zhu can further comment as well.

Zhiguo Zhu

Yes. All regions the market price has stabilized in the past quarter and we believe we are stable in quarter three and quarter four. But, the ASPs mixed is based on geographic structure. So if China sales, I mean sales of whatever increase then ASP will go down. If U.S. increase ASP will go up. So we can estimate at this moment that ASP will be very close to the quarter two because we expect we will have more sales in the U.S. market that we will completely offset the sales volume increase in China market. So ASP maybe slightly lower – very slightly lower than quarter two.

Philip Shen - ROTH Capital Partners

Great. Thank you. I will jump back in queue.

Teresa Tan

Thanks Philip.

Operator

Your next question is from the line of Xiao Yuan [RBC Capital Markets LLC]. Your line is open.

Xiao Yuan - RBC Capital Markets LLC

Hi. Thanks for taking my questions. This is Xiao Yuan asking for Mahesh Sanganeria. First, I want to ask about your guidance, if I look at midpoint of the Q3 guidance as well as your full year guidance, it looks like the shipment volume for Q3 and Q4 are pretty evenly split. So but some of your competitors are saying, they are expecting a stronger Q4 versus Q3, so I'm just wondering can you comment on your assumptions, guidance and also what you see – what do you see differently from your competitors?

Teresa Tan

Right, absolutely. Well, from our perspective, we believe that Q3, if history says Q3 is generally the strong – very strong – or the strongest quarter and we have seen evidence that even stronger compared to Q2, so it's playing as we have in the past years. But, Q4 generally it's a little bit slightly – just slightly weaker compared to Q3, but this year could be little different and we also see that because the first half of the year in China market which is a very important market. The installation was up a bit slower compared to before and so the backend loaded will be even more so this year compared to prior year. And we agree with that opinion as well.

And so from our perspective, we see that with the strong Q3 coming in, Q4 might be just at par could be – we could be – also made the price with uptick, but we are managing our capacity as well as our shipment into different regions. So if the plan works well, it will be at least what we have planned and so maybe Mr. Zhu can further comment.

Zhiguo Zhu

Yes. Plus the additional information because in past time, the market (indiscernible) in the Northeast, I mean North China – Northwest China, but now the market has gradually increased in the South of China. So that area you can [walk-in] (ph) window. So we can forecast in China, we estimate, this is quarter four where we – because we just mentioned capacity limit. So we will have mixture, quarter four demand, it maybe similar to quarter three.

Teresa Tan

Great.

Xiao Yuan - RBC Capital Markets LLC

Thank you. Great. That's helpful. And then on one more question on the project side. Do you still expect, previously said that in a 150 megawatt project when you recognize mission and approximately 300 megawatts is that deal the next you are looking at and also in your prepared remarks you mentioned about project pipeline offer 600 megawatt. And can you talk about the pipeline where are they located geographically and what – how long do you see those projects will convert from pipeline to a backlog?

Teresa Tan

All right. As far as system development, this is the one you see it in area that we are addressing and the progress estimate is, we are very happy to see the progress. And our frontline people who are developing the projects are making very good progresses and we are happy to see that.

And at the same time, we – with the China market being the very important market rather backend loaded issue and with the approval and permit and all that so we expect that the fourth quarter, we are expecting 100 megawatts to 150 megawatts of additional construction to be completed in the fourth quarter.

And the 682 megawatt pipelines are the ones that are in very late stage mainly coming from China market, but some coming from the Japan market which we haven't really in the first two quarters – was coming into the third quarter we haven't really build up significant amount in Japan yet. So with the development coming into the late stage, we certainly hope that the Japan market will generate positive results and we are hoping to share with you in the near future.

So with the 400 megawatts to 500 megawatts that we have planned in addition with the over 600 megawatts of pipeline, or the late stage development, we expect that we meet our target for the year and going into 2015 as well where we will be well positioned for the development into the first half of next year. And further, we have developed the framework agreement with various government bodies as well as with companies that are – that we are jointly developing some. And so as those projects come into fruition then we will be happy to share with you at that time. So but, all-in-all we believe that we are very well positioned to complete our project and at the same time advance into the next year.

I hope that answers your question.

Xiao Yuan - RBC Capital Markets LLC

Yes. It's helpful. Thanks Teresa. And then one more quick question if I may, the poly cost increased from $0.10 to $0.11 this quarter and given the announced import expansion, poly import expansion in China, do you expect the poly cost to increase, how do you see the trend of poly cost – poly price and your cost? Can you comment on that?

Teresa Tan

Yes.

Xiao Yuan - RBC Capital Markets LLC

In Q3 and Q4?

Teresa Tan

Sure. The poly cost as expected and I believe we talk about this in last earning call that we saw the slight uptick on the poly cost into the second quarter as we now have seen from the financials that has been reflected. But we also see that the poly cost have stabilized and also it's – on overall we see the trend of coming – having the price to come down on the poly cost. And maybe Mr. Zhu can share with you a little bit in greater detail.

Zhiguo Zhu

Yes. The silicon cost we believe for long-term go down because new technology will be used like, so and we know even too much of cost – I mean given the (indiscernible) – reduced cost very fast. So we know the price – the costs will go down, so the same price of silicon will go down.

But for short-term because the anti-dumping reason maybe will not go down maybe stable, but long-term certainly will go down.

Xiao Yuan - RBC Capital Markets LLC

Okay. Got it. Thank you.

Teresa Tan

Sure.

Zhiguo Zhu

Thanks.

Operator

Your next question is from the line of Patrick Jobin [Credit Suisse]. Your line is open.

Patrick Jobin - Credit Suisse

Yes. Hi. Thank you for taking the question. First question, I just wanted to – again in Q3, I'm just trying to reconcile stable pricing in the markets. China, 30% to 35% of your mix seems relatively consistent relative to Q2 and poly price is relatively consistent. Just trying to understand – not sure how much of it is U.S. related? That's the first question. Just any help on that would be appreciated.

Teresa Tan

Right. As we have discussed a little bit earlier that the U.S. market is a very important market for us and we certainly intended to continue our penetration and establish with not only serve our existing customers, but also develop new customers as we are more and more well-known in the market. And we believe that not only in the second quarter, but also in the third quarter, the percentage for the U.S. share compared to our total shipments will be in the high-20s and may even be in the 30s, low-30s in our total shipments.

And we believe that this will be the expectation for Q3 and we also expect a very strong quarter for Q4 as well based on the order intake that we have – now have the information for. So of course, the – it comes into play with the ASP as well as we increase our sales into the U.S. and maybe Mr. Zhu, want to comment further.

Zhiguo Zhu

Because the good brand with the high quality and this – the liability of Trina, so our demand is very strong in the U.S. markets, plus we get with our mixed tariff rate is the lowest compared with our competitors. So we have the advantage on this for short-term. So we believe our demand would be very strong in the quarter three and quarter four, of course, good tariff and product cost, that means our cost is actually lower than our competitors.

So we can expect in the U.S. market is where the highest percent of our sales and we also have the product sales in maybe North America, in Canada, so total sales will be very good in the American market.

Patrick Jobin - Credit Suisse

Second question. It's just two parts. First on your system sales, are you anticipating any system sales revenue and profits in Q3 or Q4? And can you remind us maybe what your expectation would be on the U.K. projects as far as the margin is concerned? And how many systems you have currently on your balance sheet at the end of Q2? And I have one follow-up.

Teresa Tan

Right. For U.K. market, this is one strategic market for us as well and we have continued to increase our presence as well as our penetration into market and try to develop more projects. And we have – in the first quarter we have connected two projects in U.K. that adds up to 23.7 megawatts. And we have – right now the two projects are intended to be sold in Q3 and that's what we are expecting that the revenue coming out of this project.

And in general, our projects – with developments coming, using our own modules that the total profit margins for – so the project is about – is in the high-teens and we expect this project to be in the same range as well. And as far as pipeline, we have developed –49.9 megawatts projects will be coming into construction as we discussed earlier. And this project will be connected no later than March of 2015 and we are hoping that it will be completed before the end of the year and connect it then.

And in that case, that project will be also up for sale, but we don't believe that's going to happen in the third quarter or nor in the fourth quarter so most likely it will be in the first quarter of next year. And like I said earlier that we had additional pipelines in U.K. around 70 megawatts projects that are being developed and we're certainly hoping that this will come into conclusion. And if that happens, we will definitely share with the market and the investors the progress we made in this area.

So overall, U.K. is a very strategic market and we see the demand not only in the utility side, but also on the rooftop and residential side and we believe that there is a significant room for us to further develop our project and develop our business in the market.

Patrick Jobin - Credit Suisse

Thank you. So the Q3 margin guidance does already include the 23.7 megawatt project sales margin impact?

Teresa Tan

That's correct.

Patrick Jobin - Credit Suisse

Okay. And then, last question. Just thinking about retainage revenue, did you recognize any retainage in Q2? And can you remind us what your retainage balance is?

Teresa Tan

For system, for business, we have – we are building a couple of projects. One is the 90 megawatt Xinjiang project that is to be – we are expecting now to be completed in the beginning of fourth quarter. So that would be retained. And also a 120 megawatts of project that we are expecting to complete at the – maybe beginning of the fourth quarter as well and that would also be retained. And so because of the size of those projects, it takes six, seven times even a little bit longer time to complete those projects. But those are the projects in China that we intend to complete this year and retain.

And on top of that, we have a number of projects in Europe and in America a smaller project that we are holding on our balance sheet and that adds up to be about 45.9 megawatts, in total that we are currently holding and generating electricity revenues. There are smaller projects, but compared to – especially compared to the China project but overall that's what we have on the balance sheet right now.

Patrick Jobin - Credit Suisse

Great. We'll follow up. Thank you.

Teresa Tan

Thank you.

Operator

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

Gordon Johnson - Axiom Capital Management

Thanks for taking my question.

Teresa Tan

Hi, Gordon.

Gordon Johnson - Axiom Capital Management

Hey. I guess just focusing on the ASP in the revenue mix, I'm just looking at your guidance for, I guess, the geographical mix and in Q1 and Q2, you did 32% and 38% in the U.S. And you guys are guiding the U.S. to 28% for the full year. So you guys are saying the U.S. will be 30% in Q3, so does that mean that there is going to be a huge falloff in the fourth quarter in the U.S. to get to that 28% guidance for the full year?

Teresa Tan

Actually, no. We believe that that the U.S. percentage actually has been increasing from -- Q1 was extremely high only because the China market was very low and in Q2, it went up significantly. By Q3, we expect that to be in the high 20s and 30%. So that would be in line with Q2. And we actually do expect that the U.S. percentage to maintain. And so even though right now we are – we have estimated based on the total shipment of 3.2 megawatt, the U.S. is about 28. And we believe we will exceed that if all works out. But right now, we estimate at this level to be around 30%. So I don't think it's a decrease and maybe there is uptick on that. And there is – definitely there is a potential.

Gordon Johnson - Axiom Capital Management

Okay. And then just looking at your balance sheet, there was a significant increase in accounts payable, I think it's the highest it's ever been. Is that something we should be concerned about or is that just, I guess, in the regular line of business, is that something that you guys have to pay back in a certain amount of time? How should we think about that?

Teresa Tan

I'm sorry. Oh, I can say – okay, another point, I was just looking at the data, Gordon, that the Q3 U.S. percentage was actually 25%, so it gets you to 28% and we are expecting the Q4 should be strong as well. So back to your question about AP, we are actually – as part of our cash management, we have significantly increased our working capital. One of the things is that the AR has increased because of the total shipments. And the DSO has significantly improved actually from what it was last quarter of 80 to this quarter of 71. But GTO, this payable, we are also pacing ourselves for many perspectives to – in making the payments and as well as negotiating favorable payment terms.

So from that perspective, the payments are definitely to be paid, but then we are paying according to the payment terms. So it's really nothing – from our perspective, it's been managed according to our business process and basically that's part of the process we're doing.

Zhiguo Zhu

Traditionally, quarter two is the highest that you might see because we have the highest shares in quarter three. So you have to make more protecting ahead to make sure you can meet the demand of the market. So that's why quarter three – quarter two, the AP is highest because of the [new deals] (ph) is high.

Gordon Johnson - Axiom Capital Management

Okay. That's helpful. And then, just a couple of housekeeping questions. I didn't see where you guys said your polysilicon cost was up to $0.11 in Q2, but can you run us through what your total cost was, I guess, in-house non-silicon and silicon?

Teresa Tan

Sure. That was in my prepared statements where we discussed the cost. But obviously, our in-house cost has remained stable even with the increase on – a slight increase on the polysilicon side from $0.10 in Q1 to $0.11 of Q2. But overall, the total in-house manufacturing costs remained at $0.48, which was in par with the first quarter. And the total blended cost went from $0.53 in Q1 to $0.54 in Q2 and so that included – reflected the change on the polysilicon price increase. So hopefully --

Gordon Johnson - Axiom Capital Management

Do you expect that cost to be stable or do you expect it to go down in Q3?

Zhiguo Zhu

Yes. Q3 is – silicon cost – go down compared with Q2. Q2 is the highest in this year, we believe.

Gordon Johnson - Axiom Capital Management

I'm sorry. You said it will go down in Q3.

Zhiguo Zhu

Yes. A bit – it will slightly go down.

Teresa Tan

While the poly cost has stabilized. We saw the uptick a little bit in the second quarter, but coming into the third quarter, it really has stabilized and we have seen that – even under pressure, it's coming down. So we believe that overall the price – the total cost will stabilize and might even be going down kind of – the trend of lowering the cost compared to what we have in the second quarter. But I think overall it will be relatively stable.

Gordon Johnson - Axiom Capital Management

Okay. And then lastly, what was your depreciation CapEx and operating cash flow for the quarter?

Teresa Tan

For the CapEx, we have – this quarter, we have for the module business because we really have two pieces now. One piece is our module business, which is our normal manufacturing leg of our business. And that part of it, the total CapEx was about $29 million and also for the system business, where we are building downstream projects and we are holding the projects and so the spending on that will be in our basically PP&E as well and that for Q2, we have about $129 million spent for the projects we are building currently.

Gordon Johnson - Axiom Capital Management

Okay. And your operating cash flow and depreciation?

Teresa Tan

The operating – the depreciation, maybe I have to follow-up with you on that I didn't get that break down, so I'm looking for a breakdown, maybe I can follow-up with you later?

Gordon Johnson - Axiom Capital Management

Perfect. Thanks a lot for the questions.

Teresa Tan

Thank you, Gordon.

Operator

Your next question is from the line of Emily Liu [Arete Research Services LLP]. Your line is open.

Emily Liu - Arete Research Services LLP

Hi. Thanks for taking my question. And congratulation on a very strong quarter. I have a question regarding your shipment to China in the first quarter and second quarter, the first quarter it seems like you shipped 55 megawatts and second quarter is 270 megawatts based on the percentage of your exposure. Do you think that reflective of the market run rate or because as you increase the market share in China?

Teresa Tan

Yes. I think Emily just the – really very much reflected at the cycle of business in China, the first quarter as holidays and usually it's a very, very slow quarter and if you compare that with last year 2013 first quarter, we had a very minimal sales and for this year, the first quarter of 2014 we actually were able to make 12% of our total sales into China, which was a progress.

So for the second quarter, it will be much stronger as anticipated and it proved to be as such. So we definitely are increasing our presence in China as well as the cycle of the business in China was playing out as well.

Emily Liu - Arete Research Services LLP

So do you have an estimate of your market share currently in China?

Teresa Tan

The market share is – we believe that we are – depend on the – looking at the total installation that we have for the – estimated for last year as well as for this year. We believe that our market share is between 6% to 8% for what we have in China market.

Zhiguo Zhu

In top of market share, you have to consider because we also do installation on downstream.

Emily Liu - Arete Research Services LLP

Yes.

Zhiguo Zhu

So if you add downstream that would be different. If you don't consider this as part of market share because the way people think of market share it means all demand of – for the projects. So –

Emily Liu - Arete Research Services LLP

Okay.

Zhiguo Zhu

So in terms of our project as told, our market share will be roughly 9% to 10%.

Emily Liu - Arete Research Services LLP

Okay. That's very helpful. Thank you so much. Thanks.

Operator

Your next question is from the line of Colin Rusch [Northland Securities]. Your line is open.

Colin Rusch - Northland Securities

Thanks so much for taking the question. Can you talk a little bit about the operating leverage that you see going into the second half, obviously was a nice performance when you look at the OpEx plus interest expense kind of per watt basis? How you guys think about that as you can see volumes ramping up and what can you get to in terms of lowering that overall overhead on a per watt basis?

Teresa Tan

Right. The OpEx percentage was about 12% for the first quarter and 12.4% for the second quarter. And the increase largely because of the shipments of the freight cost as we increase our sales into U.S., the shipment cost has increased. And the OpEx basically are determined by three factors, if I may say that.

First is, if the volumes goes up and the shipment, the freight cost goes up as well in dollar terms. And secondly, the sales structure is, you know, depend on the region where you are selling into as you sell more into China where the freight is lower than obviously, the OpEx could be a little bit on the low end. And if you ship more to countries like U.S., the OpEx might pick up a little bit.

And also, if you look at the company's business structure, if you have more sales from the downstream business and the project sales and that obviously would not have much of OpEx and that will – when you have that kind of revenue the OpEx percentage will come down as well so very much determined by different aspect.

But one thing that I do want to point out is that and other than the freight and warranty which are related to sales. Our normal OpEx, the OpEx that we can manage from our efficiency because the activity increase efficiency increase that's been very stable and going down percentage from what we can see and that shows the management as very determined to look at the normal OpEx and try to manage it and make the productivity increase for the people as well as the resources that we have.

And maybe Mr. Zhu can comment further on that.

Zhiguo Zhu

Yes, because it really depends on the country. It will be Japan – and if you see to Japan all have changed. So we accounted more with – actually for our maintenance we consider more because of the contributions. I mean that setting prior to minus variable cost. So because of this financial statement is different, issued cost like (indiscernible) the overhang. Those are really different.

Teresa Tan

Yes. Those are very much the sales.

Colin Rusch - Northland Securities

Okay. So but basically taken your OpEx per watt in terms of shipments down so $0.10 which is a pretty meaningful metric when you sort of get to the gross margin potential for your module sales even on the percentage of revenue basis, you just know that you are wrong, your OpEx is going in the right direction on a per watt basis. So maybe I can follow up with you on that a little bit later.

And then the second question is really around the U.S. market share, obviously we have seen some folks have exit the U.S. market, can you talk a little bit about your strategy as you move through the back half of the year and into 2015 in terms of shipments into the U.S., how you are managing your pricing strategy and what you expect out of volumes through the back half of the year in the U.S.?

Teresa Tan

Right. U.S. market is a very important market for us as I said earlier and I want to answer your question from a different perspective from a couple of different angles. First of all, obviously, with 80 CVD ruling that is in everybody's mind that adds to the cost for Chinese exporters into the U.S. and that is no doubt about that. And we are very regretfully seeing this result and we don't believe that this kind of any trade barriers will help any company with their operation issues and also we don't believe that this kind of trade barrier will help the industry as well and actually it will hurt the industry not only in America, but also not only in U.S. but maybe the other – the manufacturing company as well and also by going into – by having less choice for – available for the customers in U.S. and then that's not going to help either. So we are very much regretfully seeing the results of the trade wars. That's one thing.

But secondly, we believe that with our name brand, with our service and our product quality, the demand for our product as increased even after the ruling and that very much sent a strong message to us that we are – we have much room to play and not only because of our – the past history for what we have served our customer well, but also it's a strong statement to say that we are still able to make profitable sales into the market and again, we are making profitable growth, it's our goal and we would not compromise on that but at the same time, we are able to do that. And so that again, provides the available – our flexibility and our ability to serve the market. And so that's another thing.

And the third perspective that I want to say – to answer your question, is that from our perspective we are very much looking into establish global footprint for our manufacturing facility. And that will further increase our ability to serve the U.S. market as well as other market and get our products closer to the customers and allow us to serve better customers in various markets overseas.

So all-in-all, we believe that we have lot of room to even go further to work in the – to provide our products in the U.S. market. And maybe Mr. Zhu can further comment on that.

Zhiguo Zhu

Yes. According to the investigation, the contact with – from our clients and we believe we will have a very strong demand included for and even next year. So we are working on the investigation to find a site for new manufacturing overseas and out of China. So we believe next year we can better support U.S. market growth. We have the good expects from that market.

Colin Rusch - Northland Securities

Okay and perfect. Thank you so much.

Teresa Tan

Thank you.

Operator

We have reached the end of our question-and-answer session. Ms. Young, I will turn the call back over to you.

Yvonne Young

Yes. We are sorry that with only half of the time, it's still for the investors who are unable to ask questions during this call. We would like to follow-up with you after the ConCall. So with that on behalf of the entire Trina Solar management team, we want to thank you for your interest and participation in our second quarter 2014 earnings conference call. If you are interested in visiting Trina Solar team at our PV Park as well as if you like to schedule the conference call, please feel free to get in touch with me.

So this concludes Trina Solar's second quarter 2014 earnings conference call. So Melissa you may now disconnect. Thank you.

Operator

Thank you. Also this does conclude today's conference call. You may now disconnect.

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