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Trina Solar Limited (TSL)

Q1 2007 Earnings Call

May 21, 2007 8:00 am ET

Executives

Thomas Young - Director, Investor Relations

Jifan Gao - Chairman and Chief Executive Officer

Sean Shao - Chief Financial Officer

Andy Klump - Director of Business Development

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Operator

Good day, ladies and gentlemen, and welcome to the Trina Solar first quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Thomas Young, Director of Investor Relations. Please proceed, sir.

Thomas Young

Thank you. Good morning and welcome to Trina Solar's first quarter 2007 earnings conference call. My name is Thomas Young and I am Trina Solar's Director of Investor Relations. With me today are Trina Solar's Chairman and CEO, Jifan Gao; Chief Financial Officer, Sean Shao; and Director of Business Development, Andy Klump.

Before I turn the call over to Mr. Gao, may I remind our listeners that in this call, management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties. 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, May 21, 2007. 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 60 days at the investor relations section of Trina Solar's website at http://www.trinasolar.com.

Further, we wish to state the Q&A session of the call has been cancelled due to the fact the company has filed a registration statement with the U.S. Securities and Exchange Commission in connection with a follow-on offering of American depository shares.

Now, it is my pleasure to turn the call over to Trina Solar's Chairman and CEO, Mr. Jifan Gao, and Director of Business Development, Mr. Andy Klump, who will be translating for Mr. Gao.

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Jifan Gao (Translation)

Thank you. Welcome everyone and thank you for joining us today. We are very pleased to speak with you today. We are very excited to give you a report of another quarter of solid financial performance and explain some of the many important accomplishments at Trina Solar as we pursue our goal to make solar energy more competitive with traditional sources of energy.

During the first quarter, we had a number of strong accomplishments. We successfully tested and launched our 50 megawatt solar cell line, achieving a current average conversion ratio of 16.3%, and we are one step close to our goal of becoming a fully vertically integrated solar PV manufacturer.

Secondly, we entered into a number of short and mid-term supply agreements to secure the polysilicon needs and support our growth objectives for the next several quarters.

We also expanded and diversified our customer base in new markets, including Spain, Italy, Austria, Norway and Belgium.

Fourth, we strengthened our management team by recruiting employees with good experience and international background.

And finally, we delivered solid results for our shareholders.

As we enter the second quarter, we remain very excited about Trina Solar's ability to deliver positive results to our customers and shareholders for the remainder of 2007 and beyond as we continue to expand our capacity to meet strong demand for our solar PV modules from all of our target markets.

Now we would like to discuss Trina Solar's business performance in greater detail.

Andy Klump

As Mr. Gao mentioned, Trina Solar delivered solid financial results for the first quarter as we increased our module shipments, expanding our customer base and broadening our geographic footprint.

During the quarter, we benefited from stronger-than-expected demand for solar modules as adoption of solar energy in Europe continued to accelerate. By addressing the growing need for environmentally friendly renewable energy, Trina Solar continued to increase our top line rapidly.

First quarter highlights include the following results: total net revenues increased 9.8% sequentially and 194.4% year over year to $42.5 million.

Operating income increased 28.5% year over year to $4.5 million, down 23.7% sequentially. The operating income last quarter reflected a one-time R&D expense of approximately $0.5 million relating to the test production of our cell lines.

We also had net income from continuing operations that increased 7.3% sequentially and 62.6% year over year to $4.7 million.

We also shipped 10.52 megawatts of solar modules, up from 8.98 megawatts in Q4 2006.

In addition to delivering another quarter of solid financial results, we also made significant progress towards becoming a fully integrated solar PV manufacturer. After successful preproduction test of our first 50 megawatts of cell lines, commercial production started as planned in April, 2007 and we achieved a current average cell efficiency of 16.3%.

We expect to continue to improve on these results and aim to achieve cell efficiencies exceeding 16.5% by the end of the year. During the next three quarters, we plan to build an additional four cell lines, as well as expand our existing ingot, wafer and module capacity to a fully integrated 150 megawatts by the end of 2007.

We believe that our fully integrated business model differentiates Trina Solar from other solar PV manufacturers and creates a number of competitive advantages. These advantages include the ability to capture more of the value added in the solar PV value chain, thus enhancing margins and improving our ability to monitor the quality of our products over the entire manufacturing process.

In addition, by having all of the critical elements of the manufacturing process in house we can better streamline the production process with shorter cycle times, reduce logistics cost, and lower breakage rates.

In 2006, we secured several important short and medium term polysilicon supply contracts. We negotiated these one- to three-year contracts at attractive prices which will help reduce our exposure to rising silicon prices.

In the first quarter 2007, we used part of the proceeds from the IPO to lock down additional silicon supplies and announced important long-term contracts with Wacker AG and DC Chemicals to ensure high quality polysilicon supply longer term.

We also renewed and expanded a major reclaimable polysilicon supply contract to complement our feedstock requirement to support our growth for the next several quarters.

Trina Solar’s proprietary know-how in the use of reclaimable materials, which accounts for 80% of our feedstock requirements, gives us a distinct cost advantage versus our competitors.

The company has further strengthened its polysilicon supplies, having signed supply contracts for approximately 90% and 60% of its 2007 and 2008 feedstock requirements, respectively. The supply contracts will be sourced through short and medium term contracts from polysilicon manufacturers, semiconductor companies, and silicon reclamation companies.

On the PV market, demand remains strong and we shipped 10.52 megawatts in the quarter. Our average sales price was down by only 1.6% sequentially to $3.80, despite the traditional slow season for the PV market. We expanded our geographic reach by successfully entering into contracts with well-recognized companies in Spain, Italy, and Belgium in addition to growing our strong presence in Germany.

During the first quarter, we added many new customers. The geographic breakdown of our first quarter sales included over 50% to Spain and Italy.

During the quarter, we continued to strengthen our management team in many areas to support the rapid growth of our business. In March, we announced the appointment of Sean Tzou as our Chief Operating Officer. Sean’s wealth of experience in product development, strategic planning, supply chain management and operations management from his former tenure at Solectron Corporation makes him a valuable addition to our team.

As we enter into the second quarter, we continue to see solid fundamentals supporting strong growth and demand for solar power. These include economic growth and rising income levels in emerging economies, the need to improve global energy security by diversifying energy sources and increasing concern for the environment.

Our medium objectives are to complete our vertically integrated manufacturing capability and to expand capacity as we pursue economies of scale to bring us closer to our goal of achieving great parity cost structure.

At this point, I would like to turn it over to our CFO, Sean Shao.

Sean Shao

Thank you, Andy. We are very excited with our first quarter results. Our net revenue in the first quarter of 2007 were $42.5 million, an increase of 9.8% sequentially and 194.4% year over year. Total shipments increased to 10.52 megawatts, up from 8.98 megawatts in the fourth quarter of 2006 and 3.34 megawatts in the first quarter of 2006. Average sales price was $3.80 in the first quarter of 2007 compared to $3.86 in the fourth quarter of 2006 and $4.03 in the first quarter of 2006. Sales to customers in Europe continue to generate almost all of the total net revenues in the first quarter of 2007.

Our gross profit in the first quarter of 2007 was $9.5 million, up 5.3% sequentially and 107% year over year. Gross margin was 22.3% in the first quarter of 2007, down from 23.3% in the fourth quarter of 2006 and down from 31.7% in the first quarter of 2006. The sequential decline in gross margin was mainly due to lower ASP in the first quarter of 2007. The year-over-year decline in gross margin was due to a lower ASP and also higher cost of raw material in the first quarter of 2007.

The operating expenses in the first quarter of 2007 was $5 million, an increase of 59.1% sequentially and an increase of 386% year over year. The sequential and year-over-year increase were primarily due to $0.5 million in research and development expenses associated with testing the company’s newly installed solar PV cell line, as well as higher selling expenses and G&A expenses to support the rapid growth of our business.

Depreciation was approximately $0.6 million for the quarter, and the operating income in the first quarter of 2007 was $4.5 million, down 23.7% sequentially and up 26.2% year over year. The operating margin was 10.5% in the first quarter of 2007 compared to 15.1% in the fourth quarter of 2006 and 24.5% in the first quarter of 2006.

Interest expense was $1.2 million in the first quarter of 2007 compared to $1.1 million in the fourth quarter of 2006 and $0.2 million in the first quarter of 2006. The increase was due to a slight increase in average balance of the short-term borrowings in the first quarter of 2007.

Our income tax benefit in the first quarter was related to the income tax exemption of a portion of our taxable income related to the increased paid up capital in 2006. Our net income was $4.8 million in the first quarter of 2007, an increase of 3.7% sequentially and 67.5% year over year respectively. Net income from continuing operations was $7.4 million in the first quarter of 2007, an increase of 7.2% sequentially and 62.7% year over year.

Earnings per fully diluted ADS were $0.223 in the first quarter of 2007 compared to $0.276 in the fourth quarter of 2006 and $0.284 in the first quarter of 2006.

Turning to the balance sheet, as of the end of the quarter, we had $28.6 million in total cash and short-term investments; $110.4 million in working capital; and $74.1 million in short-term and long-term debt.

The accounts receivable increased to $42 million at the end of the first quarter due to more favorable payment terms provided to the customers as a result of a slower season in the first quarter. However, subsequent collection had reduced the balance to approximately $20 million.

Inventories increased to $52 million at the end of the first quarter, mainly due to increased work in process and delivered silicon materials. The shareholders equity stood at $172 million and our debt-to-equity ratio stood at 43% at the end of the quarter.

Our capital expenditures for the current quarter were approximately $15 million. For 2007, we expect capital expenditures to be approximately $80 million to $100 million.

Turning over to our outlook, we remain very positive on the outlook for 2007 and coming off a seasonally weak quarter, we expect our business to pick up in the remaining quarters.

Our guidance for the year remains unchanged, with total net revenues expected to range from $270 million to $300 million, and net income in the range of $34.5 million to $36.5 million. Our revenue forecast takes into account a 9% to 10% decline in module ASPs for the year. In addition, we anticipate total shipments in the range of 75 megawatts to 80 megawatts for the full year 2007.

Now, I will turn the call back over to Andy for some closing remarks.

Andy Klump

Thanks, Sean. To summarize, we are very pleased with our progress and execution of our strategy during the first quarter. As we move into the second quarter, we will continue to take every opportunity to create value for our shareholders, customers and employees as we execute our vertically integrated strategy, improve our cost structure and expand our global reach.

For those of you who may have joined us since the start of the call, we wish to restate the Q&A session of this call has been cancelled due to the fact the company has filed registration statement with the U.S. Securities and Exchange Commission in connection with the follow-on offering of American depository shares.

At this point, I will pass it over to Thomas to close the call.

Thomas Young

On behalf of the entire Trina Solar management team, we want to thank you for your interest and participation on this call. If you have any interest in visiting with Mr. Gao or Sean, please let us know. Thank you for joining us on this call. This concludes Trina Solar's first quarter 2007 earnings conference call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

To sponsor a Seeking Alpha transcript click here.

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