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Trina Solar Limited (NYSE:TSL)

Q3 2008 Earnings Call

November 19, 2008 8:00 am ET

Executives

Jifan Gao - Chairman and Chief Executive Officer

Terry Wang - Chief Financial Officer

Sean Tzou - Chief Operating Office

Steven Zhu - Vice President of International Procurement and Business Development

Arturo Herrero - Vice President of Sales and Marketing

Thomas Young - Director of Investor Relations

Analysts

Rob Stone - Cowen & Company

Dan Ries - Collins Stewart

Pavel Molchanov - Raymond James

Adam Krop - Ardour Capital

Mithun Kumar - Unidentified Company

Brian Yerger - Jesup & Lamont Securities

Dhruv Mehta - UBS

Lu Heung - Merrill Lynch

Mehdi Hosseini - Friedman Billings Ramsey

Operator

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

Thomas Young

Thank you, operator. Hello and welcome to Trina Solar’s third 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, Sean Tzou; Vice President, International Procurement and Business Development, Steven Zhu; and Vice President of Sales and Marketing, Arturo Herrero.

Before I turn the call over to Mr. Gao, I would like to 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 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, November 19, 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.

Now it’s my pleasure to turn the call over to Trina Solar’s, Chairman and CEO, Mr. Jifan Gao and Steven Zhu, will be translating for Mr. Gao.

Jifan Gao [Interpreted]

Welcome everyone and thank you for joining us for today’s call. Let me start up by saying that we are pleased to report another successful quarter in which we continued to improve our cash flow and the financial position by meeting or exceeding our operation targets for revenue, operating margin and the shipments. We’ve also met our expansion goals, announced revised flexible capacity expansion strategy and initiated new product developments.

During the quarter we achieved our production capacity target of 300 megawatts and remain on target to meet our year end goal of 350 megawatt. This included the successful launch of cell Lines 11 through 14 of which Lines 11 and 12 were put into commercial production already.

From the recent changes in the global economic and credit environments, we recognize that significant concerns exist relating to the current market conditions of solar industry. These conditions which include recent Euro, US dollar exchange rate of movement, reductions in valuable commercial credits, Spanish market demand net adjustment, which all affect a downward demand pressure, will have a most notable effect to our fourth quarter guidance, in the form of lower ASP.

Despite the current quarter industry standards, we believe our industry growth patterns were not changed in 2009, driven by favorable solar investment legislation in the United States and Japan will grow with emerging European market led by Italy, Belgium, France and Czech Republic as well as further growth in Germany. So, those who are not immune to the affect of market conditions, we expect to increase our shipments and the market shares on a year-to-year basis given expected demands.

In response, I have directed our management team to adhere a careful and flexible operating strategy with focused attention to the increased generation of positive operating cash flows through further material and manufacturing cost in reductions and also prevent capital spending in 2009. Therefore, we were increased our cash holdings through these two areas.

In relation to this operating focus, we wish to state it is unlikely that we will have a need to return to the capital markets through at late of 2009. We will turn challenges into opportunities and by continues improving in management, technology, cost of reductions and a brand building, we will strengthen our core confidence and emerge from this challenging period, a stronger Solar Company.

Related to the above, we are pleased to announce the timing launch of our in-house developed UMG based module product. We feel that by providing a low cost and a reliable quality module, we will be able to provide more options and better returns to our customers. UMG modules will be sold with a 20 year power output warranty and it will be produced using existing manufacturing lines. We expect sales to begin in the fourth quarter with increasing production and the sales plan for next year.

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

Terry Wang

Thank you, Mr. Gao and Steven. Hello everyone; thank you for joining our call today. We are proud to announce our strong third quarter operating results this evening in Changzhou. I would like to first walk you through our operating highlights after which review forward-looking topics in light of the recent market condition developments.

We’ve experienced considerable growth in our third quarter net revenue, which grew by 42.4% sequentially and 252% year-over-year to $290.7 million. The increase reflect a strong and a continue growth output representing from of our strong market demand, capacity expansion and our increase in ASP to $4.09 per watt. The shipments in the third quarter was 66.36 megawatts and a sequential increase of 39.5% from 47 megawatt and a yearly increase of 213% from 21.1 megawatt.

Gross margin was 22.4% in the third quarter of 2008, compared to 23.2% from the second quarter and an increase from 20.1% from a year ago. The change in gross margin was primarily due to increases in our average cost of polysilicon feedstock which was partially offset by further reduction of our silicon usage rate, which is now approximately 6.6 gram per watt.

Our operating expenses were 6.3% of the third quarter net revenue. This represents the fourth straight quarterly improvement in percentage terms, which was primarily due to company’s on going expense control measures. Operating expenses in third quarter included approximately $0.6 million of share based compensation expenses.

Operating income in the third quarter was $46.8 million a significant increase of 60.6% from the previous quarter and 575% from a year ago. The increase was primarily due to our expanded output and the lower operating expenses as a percentage of net revenues.

Our third quarter operating margin was 16.1% compared to 14.3% in the second quarter and 8.4% a year ago. The sequential increase was due to lower general administrative expenses as a percentage of net revenues, while the year-to-year increase was primarily due to both lower, general and administrative expenses and selling expenses as a percentage of net revenues. Net Interest expense in the third quarter of 2008 was $7.2 million, compared to $5.1 million in the second quarter of 2008 and $0.6 million in the third quarter of 2007.

Day sales outstanding in the third quarter was 31 days a significant improvement from the 37 days in the second quarter due to the control measures and improved terms with our customers instituted to improve our cash collection cycle process.

The company recorded a foreign currency exchange loss of $4.9 million in the third quarter of 2008 compared to $6.1 million in the second quarter. This was primarily linked to the devaluation of the Euro against the US dollar, which resulted in a loss upon the re-measurements of the company’s receivables.

Our net income grow 87.4% sequentially and 321.7% annually to $32.1 million in the third quarter. Net margin improved to 11% in the third quarter of 2008, compared to 8.4% in the second quarter of 2008 and a 9.4% in the third quarter of 2007. Earnings per fully diluted ADS were $1.17 per share. The effect of the third quarter foreign currency exchange losses, net of tax effect were approximately $0.17 respectively per fully diluted ADS.

On July 24, 2008, the company completed an offering of $138 million of senior convertible notes due in 2013. We intend to use the net proceeds of the offering for the manufacturing line expansion for our integrated production as well as for purchase of raw materials, research and development and other general corporate purposes.

Moving to the balance sheet; as a result of September 30, 2008 the company had a total of $184.8 million, consisting of $136.3 million in cash and cash equivalents and $48.5 million of restricted cash. The restricted cash comprised of deposits pledged to banks to secure bank borrowings and letter of credit facilities. The reduction in the restricted cash from a $125.6 million in the second quarter resulted from the repayment of the short-term loan balances. Our capital expenditures for the fourth quarter were approximately $67.4 million linked primarily to expansion of our manufacturing capacity.

Now, we would like to review our guidance for the fourth quarter and fiscal year 2008 as follows. Fourth quarter 2008 guidance; for the fourth quarter of 2008, we expected to ship between 55 to 60 megawatts of PV modules and total net revenues in the range of $190 million to $210 million. We believe gross margin for the fourth quarter will likely reach between 13% to 15%, an estimate. Our operating margins will range between 5% to 7% of the total net revenue.

In with regard of this current quarter guidance, both our gross margin, operating margin reflect a recent significant change in Euro evaluation to the US dollar which impact a lower range ASP of a module product. Though, we expect that future supply chain prices readjustment will diminish this impact through lower cost inputs, it is not expected to significant offset our projected fourth quarter ASP trend due to a lag in market response time.

Full year 2008 guidance; based on our current operating conditions and outlook, the company revises its projection as follows for the full year of 2008. Total net revenues to are to be in the range of $800 million to $850 million, representing an increase of 165% to 182% from our 2007 revenues. This compares to previous guidance of $850 million to $900 million.

Total PV module shipments between 200 to 206 megawatts, which represents a 163% to 171% increase compared to 2007; this compares to previous guidance of 210 to 220 megawatts. The company believes the gross margin will be in the range of 20% to 22% for the year and estimated operating margin will likely be in the range of 12% to 14% of total net revenues.

In regard to our future expansion, in light of the current global economic and operating environments, we reiterate our capital expenditure strategy; we’ll be closely collaborated to the market demand condition, as well as number one, our ability to generate and maintain a positive operating cash flow and preservation of the reasonable a sufficient cash balance for liquidity and working capital purposes.

We are focused to preserve sufficient cash holdings. We continue to evaluate options to maintain our standard quality positive operating cash flow which exceeded $20 million in the third quarter, as well as continue to improve the efficient use of working capital.

As better result to both our cash holding and internal generated cash flows, we are in a strong position, because we have received recently/confirm our domestic bank borrowing facilities in total with overseas borrowing facilities, which now totals more than $450 million including more than $100 of available credit facility.

Now I’d like to turn the call back to Sean Tzou for some closing remarks.

Sean Hsiyuan Tzou

Thanks, Terry. In summary, we are very pleased with our third quarter results and we remain confident to continue executing our strategic goals to increase our brand recognition, elevate our technology platform and take full advantage of our flexible integrated model to lower costs.

As an example to help offset the rising cost of silicon, our technology platforms drove efficiency improvements that allowed us to further lower our silicon usage. As a result, our silicon usage efficiency improved in the quarter to 6.6 grams per watt compared to 7.0 grams per watt, in the second quarter and 8.0 grams per watt a year ago. We are also pleased to announce a number of developments and strategic initiatives to broaden our geographic diversification and strengthen our brand recognition.

During the quarter, we announced a sales agreement with Invictus NV in Belgian, American Capital Energy in US, and GreenergyCapital and Enel in Italy. We also announced our sales and marketing collaboration agreement with Spanish Premier League, Football League or Football Club Espanyol for 600 kilowatt rooftop installation in their new stadium in Barcelona as well as their uniform sponsorship.

In September, we also announced our supplying of the largest single rooftop installation in North America for Atlantic City Convention Center in New Jersey, involving a 20 year power purchase agreement. Our latest product a 100% UMG based module product was to build out completely in-house and where it will be manufactured and managed into a separate brand than our standard high efficiency product lines. Lastly and most recently, we announced the plant opening of European warehouse operation in the key port city of Rotterdam in Netherlands.

Overall for 2009, we remain confidant that our flexible business model and manufacturing strengths will enable us to better defend our operating margins in an environment of lowering trending average selling prices. This includes secured sales order for approximately 70% of our 2009 sales target distributed in over 12 countries. Lower anticipated polysilicon feedstock costs, widened our diversified portfolio of short, medium and long-term supply contracts.

Lower junior manufacturing cost for technology driven saw efficiency improvements, process and production, yield enhancement, continued reduction in our average silicon usage rate per watt, but diversified product portfolio including a lower cost UMG-based module products.

With that we would like to open the call to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Rob Stone - Cowen & Company

Rob Stone - Cowen & Company

I wonder if you could just provide a little more color on your last comment Steve about securing 70% of your expected volume for 2009, has your target production volume changed? What is that and could you let us know what the pricing arrangements are for those orders or whether it’s just as volume commitment? Thank you.

Arturo Herrero

Okay. This is Arturo Herrero, Vice President for Sales and Marketing. So, in fact we still have the 70% as we announced previously of the sales order for 2009 and we feel comfortable that in the portfolio of customers that we have still, they are confirming the demand for next year 2009.

The rest of the 30% of the year 2009 we still are in negotiation, and after the winter season that this always very difficult in this solar market, after this season we will announce the rest of the negotiations, how they finish with new contracts.

Regarding the second question that you mentioned about the ASP, we are expecting for this New Year 2009 an increase of around 8% to 10% of the current ASP in Q4. I hope this answers your question.

Rob Stone - Cowen & Company

Right; and what would you estimate the ASP in Q4?

Arturo Herrero

So, for Q4 we are estimating ASP reduction in the level of $340 to $350.

Rob Stone - Cowen & Company

Okay and how much is ASP for 2009 influenced by the introduction of UMG modules or I assume those are selling at a lower price per watt?

Arturo Herrero

Yes, that’s correct; we will sell UMG modules with a lower ASP per watt. In fact the volumes for UMG will not be so much compared to the rest of Trina Solar modules. So, the impact of these UMG modules will be around 4% to 5% of the ASP.

Rob Stone - Cowen & Company

So that 4% to 5% of the ASP reduction is from adding UMG to the mix?

Arturo Herrero

Right, that’s correct

Rob Stone - Cowen & Company

About how much of the overall volume do you expect will be UMG?

Arturo Herrero

The volume for UMG let me pass it to our COO to answer this question.

Sean Hsiyuan Tzou

Let me clarify a little bit what Arturo just said. I think what Arturo meant is our Q4 ASP is about 3.4 to 3.5, and we are expecting a ASP drop of about 10% on this space in 2009 and the UMG impact will not be significant, because the volume is less than 10% and you will be gradually ramped throughout the end of the year and therefore 10% of the ASP drop should already consider this.

Rob Stone - Cowen & Company

Are you still targeting 450 megawatt?

Terry Wang

Rob, this is Terry. That 450 that we’re talking; about before the current situation come out and due to the current economic turmoil and we are right now still reassessing the future outlook for 2009 to get the market situation. At this time we will not 450 megawatts we will change that. We will not give the 2009 guidance till we feel that things getting more clear to us that we will give out, provide a guidance for the street.

Rob Stone - Cowen & Company

That’s probably after you report the year-end result?

Terry Wang

Between this time and the beginning of next year certainly. When we know the market is more stabilized and more clear, then we would be providing this guidance.

Operator

Your next question is from Dan Ries - Collins Stewart.

Dan Ries - Collins Stewart

Can you discuss how much of your silicon next year is going to be from contract versus what you would expect from the spot market; and of the contracts portion what portion of that has spot price adjustments in it versus fixed?

Terry Wang

Currently, our long-term contract we’re still continuing looking at 80% on the long-term contract.

Dan Ries - Collins Stewart

Okay. Is that all fixed or is that some flexible?

Terry Wang

Yes, they are all fixed price, however we are also working our partners to try to reflect the current market situation.

Dan Ries - Collins Stewart

Okay. So you are in negotiation with them now?

Terry Wang

That’s correct.

Dan Ries - Collins Stewart

Okay. A lot of your module sales contracts for 2009 I believe are in US dollars, but there are European based customers; can you explain how the process works with those customers, I assume that they are asking for adjustments. Some of those customers probably hedge their contracts when they sign them and if that’s the case probably they really don’t deserve an adjustment, but how is the whole process working with those dollar contracts to European customers?

Terry Wang

Yes. This is a very appropriate question, because we have experience; a 20% increase of the US dollar versus euro in the last two months and a half. So in fact, the control that we have is still confident that we will implement. Some of them were to sign in US dollar and we have very good partnership with our customers in order to accommodate the price to the marketing scenario by changing this conditions and adapting price in euro for European companies, that is a finally a question of negotiation.

So, we are taking into account the exchange rate of course, but also the good partnership that we have with this customers and also the impact to minimize for Trina Solar. So at the end we get into a consideration of our price in a range that we consider reasonable and in our good win-win situation for the long-term.

Dan Ries - Collins Stewart

Thanks. Based on your ASP comment for the fourth quarter, which seems like it’s down 16%, 17% sequentially, it seems like you’ve passed through already to your customers, is that a fair statement?

Terry Wang

Well, there is part, but we have already exactly included in these prices for Q4, but also it is true that we are anticipating in Q4 the prices for next year 2009. So some of the prices are already negotiated are including the expectations that we have for 2009 prices especially for Q1, so we don’t expect so much impact in the next coming months.

Dan Ries - Collins Stewart

Great, one last quick one; UMG, I assume will you be pricing that as the discount to your regular modules whatever it is, if you can say what would the discount be?

Terry Wang

Yes, this is what was my previous answer, I was saying to you. If they run 4% to 5% price discounts from our current sale price for Trina Solar module.

Let me also tell you that, I think it’s important. Some of the contracts you will see for the US market will be definitely in US dollar and also we are increasing this portfolio of customers and these percentage in our portfolio of countries for the next year 2009.

Dan Ries - Collins Stewart

What portion might be in the US in 2009?

Terry Wang

So, we are expecting around, in a range of 10% to 15% for next year 2009.

Operator

Your next question comes from the Pavel Molchanov - Raymond James.

Pavel Molchanov - Raymond James

Could you talk about your conversion efficiencies and also what the outlook for efficiencies is in 2009 and perhaps if you could elaborate on your R&D plans more generally?

Terry Wang

Yes. Our current sale conversion efficiency is up to 17.2 with the average of 17% plus. This is on the mono. On the module product is about 16%.

Pavel Molchanov - Raymond James

And any thoughts on how that will evolve in 2009?

Terry Wang

2009 we are looking for another 0.5% improvement on our target.

Pavel Molchanov - Raymond James

Okay, that’s great and any other R&D initiative that you are undertaking right now?

Terry Wang

Yes, definitely. We have a few programs, we are understudy and it’s not up to the time of there is any breakthrough we certainly will love to announce that.

Operator

Your next question comes from Adam Krop - Ardour Capital.

Adam Krop - Ardour Capital

My question is I think a little while ago you were talking about 600 megawatts in manufacturing capacity in 2009; given some of the demand softening that we’ve seen recently can you just comment how you expect that, if those plans are still intact?

Terry Wang

Yes. This is Terry. As again, due to the current uncertain outlook for 2009, we still are reviewing and reassessing our target for 2009. In terms of the capacity ramping up, again at we will next year focus on that our cash reserve and secondly maintain the positive cash flow, so that based on that, we’ll plan ahead and given the market condition moment. So, I will see the 600 megawatt will be changed and we’ll not keep that target, but we’ll announce that soon when we know the output for next year.

Adam Krop - Ardour Capital

Okay and then just two quick follow-ups on that. Have you made any improvements on the throughput of your lines or are we still at 25 megawatts, right now?

Terry Wang

Yes, we continue to make some improvement in the line; however, I do not have a solid measurement in front of me, but in general we’re seeing about 5% of the improvement.

Adam Krop - Ardour Capital

Okay and then finally, what is your current CapEx per watt?

Terry Wang

CapEx per watt; again that we are in vertical negotiation across four value chain and currently actually we’ve made improvement over our 2007 investment, so it’s about less than $1 million.

Arturo Herrero

1 megawatt?

Terry Wang

Yes.

Adam Krop - Ardour Capital

So that’s $1 basically?

Terry Wang

Yes, less than $1, little.

Operator

Your next question comes from Mithun Kumar.

Mithun Kumar – Unidentified Company

I just want to have an idea on the short-term debt. I mean, is it all on the revolver able basis or does it include some bonds payable that you have to pay back next year?

Terry Wang

Yes. So far you can see in Q3, our short-term debt is less than $290 million as pay down cut quite dramatically and from the second quarter, which is down about $60 million lower.

So, we repaid some of the debt and tried to reduce the cost of the capital, but for those short-term debt and again most of the revolver debt, in short-term revolving and debt in Chinese banks, that revolving and improved in the annual basis and also those revolving banks and diversify across different banks and also had a different schedule, and this year and all revolving it’s been proved; that’s why I’ve said that we have approved credit facilities up to $450 million has been proved and so some of that we will be revolving some time to time next year.

But keep in mind that in Chinese banks that it’s not like in oversea where they have a finance covenants, but in Chinese banks they monitor our operation on a regular basis. So during that time, the duration or maturity of the revolving because we’ve done and started earlier the typically revolving at the time rather way is sort of automatically long-term in nature.

Mithun Kumar – Unidentified Company

Sorry, I did not understand you said that in the Chinese banks the revolving happen right away that the maturity decline?

Terry Wang

The revolving at the maturity date and because of the Chinese bank we have a permissive within the amount. We have a record of your mentioned report to them. They valuate to that performance, the company performance, so we can be efficient much earlier, when the time of revolving the loans automatically revolve.

Mithun Kumar – Unidentified Company

The other part I wanted to ask was on the restricted cash. That actually declined. I mean it came down from 125 to 48.5. From, what I understand that is reflective of credit lines, securing your credit lines? So, is your total credit lines facility has comedown or how has that restricted cash position impacted your debt ability?

Terry Wang

Before among it’s a $125 million of restricted cash, the majority of that been used to press for the bank borrowings and since we repay significant amount of the loan to the banks, so that free [Inaudible] for the cash dramatically and to us, into the cash-and-cash equivalents at same time and also we to consolidate our accounts, to further reduce and to include the usage of our cash to free some of the additional cash that we didn’t restrict early. So, that we will change or reduce amount of mutual cash dramatically down to our close to $50 million, from a $120 million.

Mithun Kumar – Unidentified Company

And you expect this to remain around $50 million going forward?

Terry Wang

We were looking at slightly lower chance to free little more restricted cash as we repay from a more short-term debt in the future.

Mithun Kumar – Unidentified Company

And assuming that you go ahead with your CapEx plans, pointing it on your operating cash flows and then that case probably your debt won’t comedown meaningfully; would you be I mean, looking at taking more short-term debt and reaching to restricted cash up or how what do you think about that?

Terry Wang

Yes, that’s soon and next year actually solving for Q3 we generate positive operating cash and we’re expecting our channel to continue; next year, quarter-by-quarter so that actually help us to number one second quarter operation and number two is to cover in some as the CapEx as we steel him planning due to the market development. So, and we rely on operating cash flow mostly for next year.

Mithun Kumar – Unidentified Company

One last question on your payable days; I see that the table days has comedown to about 20 days considering that the, polysilicon’s and supply is actually increasing. I mean as a capacity that upstream capacity come up, do you see this earnings further, I mean compelling increasing your payable days?

Actually, let me rephrase my question; what I’m trying to guess is that as the polysilicon supply improved, would you be able to reduce your prepayments that you’ll need to do to your poly suppliers now and to basically improve your cash cycle.

Terry Wang

Yes, that’s part of the method we we’re taking in conjunctions with other working capital improvement strategy that we will reply about it and we talk because during the course of the previous quarter, you can see we have improved dramatically and talk to our supplier partner to shorten the time and it gives us the amount and secure only a portion of the total purchase not as before 100%, so that we will show it in the cycle and the other one, logistically other area, we shorten the cycle. It surely is due to increase our long-term. So relatively speaking our prepay for the short-term will be reduced, so that’s three factors and shortened our cycle to prepay to our silicon supplier.

Operator

Your next question comes from Brian Yerger - Jesup & Lamont Securities.

Brian Yerger - Jesup & Lamont Securities

I’m just trying to get a handle on the 2009 secured volumes. Last quarter you mentioned that ‘09 shipments, the expectations were about 360 to 400 megawatts. Obviously with your concern about next year’s market, do you have 70% secured for 350 or is it 400, how are we suppose to view that for next year.

Terry Wang

Yes. In sight for the Changzhou’s as to picking on accounts, the contracts and the customer portfolio, we have 70% because we announced if you remember the earnings call of Q2. It was 70% or 450 and still we are concentrated on this quantity of volume secured and now it depends if this 30% has to be implemented or not because we are still on negotiation with current customers to see which is the demand from market.

From my perspective, what I can see is that the demand still is there. Of course we are under difficult stances that specially in a little bit strong because of the winter. Especially in the winter times every year we have the same situation. We expect that after winter we’ll have much more clarity and the demand especially USA is ramping up; we will have a lot of more orders to conform finally what we can do for next year and we still keep at 450 or even we can increase these volumes. So, you will have the confirmation after next winter when the situation is much better.

Brian Yerger - Jesup & Lamont Securities

Okay, 70% of 450 mega watts anticipated, so right now you’re contracted for more next year than you actually are looking to produce potentially?

Sean Hsiyuan Tzou

What I’m saying is that we don’t have visibility enough until we -- part of this is specialty of the winter. That cold is impacting the solar industry especially, because the biggest market is Germany. So in winter they cannot do installations because of the snow. So this has happened and in the eight years that I’ve been in the industry, if you remember in 2006 it was a similar situation as today and finally we could see that the market was ramping up again with a lot of strength.

We expect that, because now-a-days we have many more countries that are putting on the table new subsidies and example is the USA with it’s tax rate for extension for eight years and hopefully also other countries that are now on the table like Europe, France, Belgium, Changzhou, Italy, Bulgaria, outside Europe like Korea, Australia, so we expect the market to ramp up. So we need to spec a little bit more to have an answer to your question.

Brian Yerger - Jesup & Lamont Securities

Okay thanks, just one housekeeping question for Terry. What was the depreciation in the quarter for the third quarter Terry?

Terry Wang

That was roughly about close to 3%, less than 3% of the total.

Operator

Your next question comes from [Dhruv Mehta – UBS].

Dhruv Mehta – UBS

I just wanted to get one clarity on UMG based modules. I was wondering since UMG cost would be substantially lesser than poly silicon costs, what kind of gross margin do you expect in UMG based product and if you could give us some color about the conversion costs in UMG, are they substantially higher than crystalline silicon conversion cost or are they inline with the same costs?

Terry Wang

The reason we go for UMG of course is due to the silicon price, which is lower than the regular poly silicon and we are looking at a very similar gross margin of 25% to 30% and we are expecting the non silicon cost of UMG is above 20% to 30% higher than the regular modules.

Dhruv Mehta – UBS

All right and we have got absolutely the same kind of color from one of your competitors in China as well. The stuff that I’m wondering about is going forward in a year’s time or two years time; what are the chances of taking this cost down further to bring it in line with crystalline silicon costs or is that totally unattainable?

Terry Wang

You mean the non silicon cost?

Dhruv Mehta – UBS

Yes.

Terry Wang

I think the key for the non silicon costs of UMG, there are few things that we need to consider. First of all UMG, certainly they have a longer testing time due to the impurity of the inside the material and therefore there will be some cost increase. Second of all, their efficiency is about 5% to 7% lower than the regular polysilicon sales and therefore if we say the costs will be eventually the same, the regular polysilicon sales, I would say it’s unlikely. You would always have the 5% to 10% minimum difference I believe.

Dhruv Mehta – UBS

About end demand, what percentage of shipment happened in Germany in Q3 and what kind of percentage are you looking in 2009 towards Germany?

Sean Hsiyuan Tzou

Yes, well in Q3 we have around 32; let me give you the exact numbers if you want to have them. For Q3 we have 32% into Spain and 32% into Germany, so more or less at the same level. Italy has been strong as we are increasing most of our market share in this country to 17%. Then we have Belgium between 10% to 12%; France between 0.5% to 0.7%; and of course Korea, China and to USA we have sold more than 4% and the rest of the world is the rest.

Operator

Your next question comes from Lu Heung - Merrill Lynch.

Lu Heung - Merrill Lynch

I just want to see what is the percentage of your inventory materials and what’s your plan for silicon cost in Q3 and what would it be in the fourth quarter?

Terry Wang

Okay this is Terry again. To answer the second question about the silicon costs, Q3 we had slightly up from the second quarter on a watt basis and it comes to 2005 watts. In the non-silicon side it’s $1.15 per watt and to answer your question for the inventory, you can see our total balance sheet on the earning release and break down wise it’s about 1/3 of the raw material side and the other work-in-process and the finish goods totaled about 2/3

Lu Heung - Merrill Lynch

Would you expect certain cost will be for the first quarter 2009?

Terry Wang

This is the things that we measure by per watt basis and the current situation of poly cost loss, dramatically I would like have to our procurement repeated part of the price change.

Steven (Yu) Zhu

Hi, this is Steven. We estimate approximately around like 30% to 40% of the decline on this fall market is for the silicon market and in 2009 we are expecting some further decline to some of the degrees towards the end of the year. So overall in the next couple of quarters, we’re going to see some significant reduce on the silicon cost side.

Sean Hsiyuan Tzou

This is Sean again. On the non-silicon cost we continue to strike for our goal of $1.5 in Q4 and we believe we can meet that; at the same time we continue looking for the drop below that in 2009, about 10% at least.

Lu Heung - Merrill Lynch

So would you expect a significant drop in the silicon costs starting in Q1, given that only 1/3 of your inventory are materials?

Sean Hsiyuan Tzou

Yes.

Steven (Yu) Zhu

As a matter of fact, also if the market, it’s gradually transferring to the buyers market on the silicon side, we do see these kind of transfers as helping the cost of going down on a varied it trend.

Lu Heung - Merrill Lynch

Also can you walk us through how much did you pay for silicon prepayments in the third quarter and what would you pay in the fourth quarter?

Terry Wang

The prepayment in the third quarter that we pay is our little payment in dollars just for our incremental third quarter; but in Q4, in this current quarter we’re expecting that the payment will dramatically drop due to the shift, the position in buying to the buy market and we would say it’s going to be only a very small prepayment that’ll occur in this quarter.

Most of the pre-payment for the long term contracts has almost been procured already. So in Q4 we don’t see a significant prepayment installment during the period.

Lu Heung - Merrill Lynch

Okay, so should I expect the prepayments during 2009 will be much less then?

Terry Wang

Compared with 2008, yes.

Lu Heung - Merrill Lynch

Okay. Can you also walk us through what is your capacity target at the end of 2008 and assume if everything’s according to plan, your target in 2009, as far as CapEx; if you can breakout first half of ‘09 or second half of ‘09?

Terry Wang

This is Terry. This year we planned it on schedule and we announced it early, in the beginning of the year and we will reach 350 mega watts or plus for value of chain and now we’re on schedule, actually a little ahead of schedule. Our pipe line [Inaudible] and reached 350, but it’s being launched a month ahead. So for 2008 our capital spending for the capacity expansion totaled approximately $195 million, less than $200 million this year.

Next year we are expecting because of Q2 again the market volatility here and for the total capacity we are still reassessing the target, but for first half of next year, so far we planned to spend for the two quarters of first half we’ll spend about $25 million in cash to maintain or to set some infrastructure for future pipeline and ready to pickup when market condition improve.

Lu Heung - Merrill Lynch

How much of your 2008 CapEx pay for 2009 capacity?

Terry Wang

We have ordered some of the equipment prepaid, but a fraction of the total CapEx in 2008 and basically it’s for 2009 only say about roughly about $20 million to a $30 million in advance for 2009.

Lu Heung - Merrill Lynch

One last question is based on the 4Q outlook, were there any customers who cancelled orders or pushed out orders. If there is any, can you comment on which market it is from?

Terry Wang

Well, during Q4, especially after September, we have experienced a very unique situation in the market, due mainly due to the credit crunch and also the main factor has been achieved for a US dollar versus Europe and has impacted the price on the countries we have over time. So instead of these contracts we have companies in the market in mainly Europe and I can say proudly that we can reach north of them and we can have this visibility for Q4 and also for next year contracts.

Lu Heung - Merrill Lynch

Based on its 1Q ’09 outlook, do you expect shipment to be at least to the level as Q4?

Terry Wang

In terms of?

Lu Heung - Merrill Lynch

Shipment?

Terry Wang

In terms of volume, in terms of revenues, in terms of?

Lu Heung - Merrill Lynch

Volume.

Terry Wang

In terms of volumes we will have more indications of the NOPs of this quarter but we will not expect to reduce the volumes.

Lu Heung - Merrill Lynch

From Q4.

Terry Wang

Exactly.

Operator

Your next question comes from Mehdi Hosseini - Friedman Billings Ramsey.

Mehdi Hosseini - Friedman Billings Ramsey

I’m still a little bit confused with all the commentary regarding CapEx for next year; can you please tell me again what the dollar value or what the dollar spend for the next year would be?

Terry Wang

The CapEx for 2009 has faded, again due to the market situation. Capacity is not decided as yet, but we are on the foot path of 2009. We plan to spent around approximately $25 million to help to build up our infrastructure of product line which we might set up for the future, ramping up. So we’ll maintain a CapEx quarter-by-quarter at the minimum level for the first half of 2009.

Mehdi Hosseini - Friedman Billings Ramsey

Okay, and then my second question has to do with the ESP. I think the ESP in Q4 is going to be down 10% to 15%; did you say that for 2009 you expect ESP to be down 10%.

Terry Wang

Let me clarify this point. The ESP change we were mentioning in Q4 you said on $3.40 to $3.50 per watt, have be mainly due to the exchange rates situation, because the US dollar has increased in the last two months around 20%.

So what we foresee is, next year will be a decrease and this is what we are also prepared for doing that as we are in a tendency that in general, all the industry, all the solar sector has to be little-by-little approaching to the agreed part, but it doesn’t mean that necessarily we will see that 10% reduction on the ESP. It will depend on the freight of course and still I think nobody can give us a good estimation of how it’s going to behave, the US dollar versus the Euro for the next year 2009.

Mehdi Hosseini - Friedman Billings Ramsey

So of the 70% of the 450 shipment for next year that is contracted is that based on 6AHP or is that negotiable on a quarterly basis?

Terry Wang

Yes good question. Now most of the contracts we have mainly are portfolios of long term contracts, negotiable contracts on a quarterly basis. We have them almost established and the prices will be adjusted depending on the [inaudible], depending also on the market situation. So we will have a balance and we have in fact a balance of contracts that are for fiscal year 2009 and also some contracts that are negotiable on a quarterly basis.

Mehdi Hosseini - Friedman Billings Ramsey

So if you’re going to go and try to negotiate some of the foreign contracts because of the cost, why wouldn’t your customers come in and try to ask for lower prices? I’m still not sure what you mean about next year’s pricing environment?

Terry Wang

Can you repeat that question please?

Mehdi Hosseini - Friedman Billings Ramsey

I’m still not clear what you mean about next year’s pricing environment. Earlier you said that you’re going to go and try to renegotiate some of the poly contracts to lower your cost; why couldn’t your customers come and ask you to renegotiate this contracts to ask for lower prices?

Terry Wang

Yes, we didn’t say that we cannot; in fact I said that we are in a partnership relationship with all of our biggest companies that we have in our portfolio and we are in fact already negotiating contracts on a quarterly basis depending on the exchange rates, depending on the marketing scenario. This is why we are quite convinced that 70% of the volume is completely secure and we are even announcing that we will fulfill this 30% at the beginning of next year when the winter situation is over come.

So you are right; I mean this is the up and downs that we have seen in this industry for the last 20 years and it is normal that sometimes like in 2008, because of the short term, the silicon, we were in a very exceptional situation where the price were going up, but the tendency should be that the companies has to reduce the prices and reduce the cost and Trina Solar is very well prepared for taking this challenge and we are very well prepared to reduce our cost and to aspire this to our customers.

Mehdi Hosseini - Friedman Billings Ramsey

Reducing the cost, does that imply that there is also a plan B and in case you have to shutdown mines you can do that?

Terry Wang

Let me pass this question to our CEO.

Jifan Gao

Your line is unfortunately a little soft, could you please repeat the last question for our benefit?

Mehdi Hosseini - Friedman Billings Ramsey

I’m sorry about that; in terms of the managing the cost is there also flexibility to take lines down, to shutdown lines in case you have to preserve gross margin?

Jifan Gao

Definitely not. Currently all lines are in full production and as I mentioned earlier we are taking quite a lot of measures. During my earlier script I actually described there are avenues that we will work with our team as well as our customers to calculate the load on our costs. Like for example, we lowered silicon free stock cost as we discussed and also lowered the union manufacturing cost as we discussed, okay. So we are using those to protect our margin and to defend our operating margin in this continued trending, lower trending ASP environment.

Operator

Your final question comes from Unidentified Participant.

Unidentified Participant

With regard to your Q4 of pricing and the 2009 pricing, in terms of the underlying euro price of your modules has that actually gone down in Q4 as well or is the lowered Q4 pricing entirely due to the effects of effect?

Arturo Herrero

Yes this is Arturo again. This is a good question because the main impact has been the exchange rate situations for the US dollar versus euro. The euro price has in fact has not been still so much impacting, so we will see these changes next year, but the main reason has been in Q3 mainly the exchange rate.

If you see, in Q3 we have increased in fact our ASP to 4.09 and I’m proud to say that we have trading sort, increasing the ASP for six quarters continuously. So it means since Q2 2007 to 2008 that we are announcing Q3 2008, we have increased the ASP quarter-by-quarter. But this is also true that in Q4 we will experience this impact of exchange rate and also we are foreseeing that in 2009, unless the Euro gets stronger we will be anticipating this 10% reduction to be conservative.

Unidentified Participant

And could you give us an absolute price range in Euros, what you expect for 2009 in terms of dollar per watt?

Arturo Herrero

Well it will be different Q1 than Q2 or Q3, but in average I can try to be a little bit brave to anticipate Euro price range between 2.45, 2.65, 2.70.

Unidentified Participant

Okay, and based on that sort of price level and your sort of current visibility of polysilicon costs coming down, so where do expect your gross margin level for 2009. I mean do you expect your polysilicon prices coming down you know as in months in percentage terms?

Terry Wang

Yes this is Terry. Again the market is difficult to predict, but O’Connell will have field steps to take to get our polysilicon costs down. The team is working on this, talking to our existing long term purchase of the polysilicon supplier down. We negotiated contracts and also the poly and spa rate is down by 30% or 40% and next year.

Without these factors our long term contracts are long and we experience between 20% or 30% down compared to the price in long term contract this year. So we have a lot of room and that the cost of it turned out to be lower, reducing faster than the ASP drop and given current in our scenario analysis been done in-house and so we are confident that our gross margin will maintain in a level that satisfied us and to our investors.

Terry Wang

Actually from the breaking point of view, this is not only the policy become price, but it will effect our cost; also our manufacturing cost and the non-silicon portion of the cost also presents a great opportunity for us to further reduce our cost. We have a much stronger position for us to discuss with our supply chain, our partnership and therefore we actually got some very substantial improvements on the improved supply chain situation as well.

So through all these efforts together, the silicon situation, we did have the very strong confidence that we can defend our gross margin.

Unidentified Participant

Okay and could you share with us what kind of prices you are seeing in a poly silicon spot market at the moment?

Arturo Herrero

Averagely the polysilicon spot price right now is around like $200 to $250 per kg.

Unidentified Participant

And do you expect that to fall further in the coming weeks and months like?

Arturo Herrero

In the weeks yes may be; in the quarters we don’t know yet.

Unidentified Participant

One last question on your plan for the capital expenditure next year; obviously you said this is sort of under review and what sort of lead time would you see for example at another 100 mega watt of integrated production line. Sort of when would you have to place the order at the latest in order for new capacity to have an impact on your 2009 production volume?

Terry Wang

Yes we’ve done that, because of the various lead times and all the equipment varies from different product line and typically on average we’ve done that in the four or five months range and so we still have time in the first half of next year. We’ll reassess the market when we plan ahead in future market demands.

Operator

I’ll now turn the conference back over to Mr. Thomas Young for the closing statements.

Thomas Young

Well on behalf of the entire Trina Solar team, we’d like to thank you for your interest and participation on this call. If you have any interest to visit us here or would like to contact us otherwise you may do so via the address ir@trinasolar.com.

Well this formally concludes Trina Solar’s third quarter 2008 earnings conference call. Thank you operator for your assistance, you may now disconnect.

Operator

Thank you sir, have a good day. Once again you may now disconnect.

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Source: Trina Solar Ltd. Q3 2008 Earnings Call Transcript
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