Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Breakfast

Trina Solar Limited (NYSE:TSL)

Q2 2007 Earnings Call

August 23, 2007 8:00 am ET

Executives

Thomas Young - Director of Investor Relations

Jifan Gao - Chairman of the Board, Chief Executive Officer

Andy Klump - Vice President, Business Development

Sean Shao - Chief Financial Officer

Arturo Herrero - Vice President, Sales and Marketing

Sean Tzou - Chief Operating Officer

Analysts

Jesse Pichel - Piper Jaffray

Rob Stone - Cowen & Company

Daniel Beckman - ING

Caroline Howe - RCM

Tien Yu Sieh - Merrill Lynch

Sunil Gupta - Morgan Stanley

Karen Legaut - Glider

Charles Yonts - CLSA

Steve O’Rourke - Deutsche Bank

Eric Nu - Goldman Sachs

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Trina Solar second quarter 2007 earnings conference call. My name is Lauren and I’ll be your coordinator for today. (Operator Instructions) I’d now like to turn the presentation over to your host for today’s call, Mr. Thomas Young, Director of Investor Relations.

Thomas Young

Good morning and welcome to Trina Solar's second quarter 2007 earnings conference call. My name is Thomas Young and I am Trina Solar's Director of Investor Relations. With us today are Trina Solar's Chairman and CEO, Jifan Gao; Chief Financial Officer, Sean Shao; Chief Operating Officer, Sean Tzou; Vice President of Business Development, Andy Klump; and Vice President of Sales and Marketing, Arturo Herrero.

Before I turn the call over to Mr. Gao, may I remind our listeners that in this call, management’s prepared remarks and 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, August 23, 2007, CCT. 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 http://www.trinasolar.com.

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

Jifan Gao (Translation)

Welcome, everyone, and thank you for joining us on this call. We are very pleased to report another quarter of record financial results as we continue to make progress in our business plan towards our goal of making solar energy competitive with conventional sources of energy.

During the second quarter, we raised approximately $155 million of net proceeds via a follow-on offering of American Depository Shares. We launched a commercial production of our newly installed solar cell lines and achieved conversion efficiencies of 16.3% on average, and we also continued our success in Germany, while we expanded and diversified our customer base in the strategically important Southern European markets.

As we enter the third quarter, we are very excited with the outlook for demand for solar energy and we remain confident that Trina Solar is well-positioned to deliver consistent 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 solar PV modules from all of our target markets.

Andy Klump

Now that I’ve completed translating Chairman Gao’s comments, I would like to spend a few minutes discussing Trina Solar's business performance during the quarter in more detail. As Mr. Gao mentioned, Trina Solar delivered record financial results for the second quarter as we ramped up our newly installed cell lines to capacity, increased our module shipments to record levels, broadened our geographic footprint with an expanded customer base, and made progress on securing polysilicon supply to support our growth plans.

The second quarter highlights include the following results: total net revenues increased 77% sequentially and 160.4% year over year to $75.3 million; operating income increased 81% sequentially and 177.2% year over year to $8.1 million; net income from continuing operations increased 53.2% sequentially and 280.6% year over year to $7.2 million; we shipped 20.33 megawatts of solar modules, up from 10.52 megawatts in Q1 2007.

Following the successful launch of our 50 megawatts of cell lines, we have achieved commercial production cell efficiencies of 16.3% on average and expect to continue to improve on those levels with the goal to exceed 16.5% by the end of the year. As we enter the third quarter, we remain on planned target to complete four additional cell lines, as well as expand our existing ingot, wafer, and module capacity to achieve fully integrated capacity of 150 megawatts by the end of 2007.

Equipment for both our new cell lines three through six and our initial 50 megawatts of capacity of multi-crystalline ingot casting furnaces are in various stages of installation or shipment, with test processing on schedule to commence prior to the end of the third quarter.

Furthermore, we succeeded in achieving several key milestones in our technology roadmap, including a reduction in the amount of silicon feed stock required per watt, confirming our commitment to realize greater margins through lower manufacturing costs and higher conversion efficiencies.

In reducing our silicon wafer thickness from 220 to 200 microns, we have achieved commercial scale production that currently accounts for over 70% of our output, with a target of 100% expected by the end of the quarter.

But we believe that our fully vertically integrated business model differentiates Trina Solar from other PV solar manufacturers and creates a number of competitive advantages, including the ability to capture more value in the solar PV chain while at the same time [improving] our ability to monitor the quality of our products over the entire manufacturing process.

In addition, by having all the critical elements of the manufacturing process in-house, we will have the ability to streamline the production process with shorter cycle times, lower logistic costs, and lower breakage rates.

During the quarter, we benefited from strong demand for solar modules as adoption of solar energy in Europe continued to grow. As a result, we were able to ship 20.33 megawatts in Q2, nearly double the level of shipments in Q1. In addition, we strengthened our brand as well as our market penetration by signing several new agreements to supply from 88 to 99 megawatts of PV modules in Italy and Germany over the next two to three years.

During the second quarter, we added 12 new customers to end the quarter with approximately 30 active customers, with a total portfolio of over 50 customers. The geographic breakdown of our sales for the quarter was 57% Germany, 28% Spain, and 11% Italy, thus bringing our first half 2007 customer breakout to be 40% Germany, 31% Spain, and 15% Italy.

Moving on to our polysilicon supply situation, our international procurement team maintains focus on evaluating the growing number of global and regional supply options for short, medium and long-term supply contracts to meet our growth plans and quality requirements. Our goal remains to secure the optimal mix of short and medium term contracts from polysilicon manufacturers, semiconductor companies, and silicon reclamation companies in consideration of favorable supply trend developments expected in late 2008 and 2009.

As of today, we have secured 90% and 60% of our silicon requirements for 2007 and 2008 respectively. We will also continue to leverage our proprietary know-how to improve costs and quality efficiencies in the use of our acquired and self-generated reclaimable materials, which give us important cost advantages and supply flexibilities versus our competitors.

As we move into multi-crystalline ingot production, we’ll have more flexibility to use different types of materials.

As we enter the third quarter, we continue to see favorable fundamentals supporting strong growth and demand for solar power. These include: increased awareness and media attention on global warming and climate change; ongoing development of favorable market-specific legislation to accelerate adoption of renewable energy, including that in the U.S. and in Europe; strong economic growth and rising income levels in emerging economies; and the need to improve global energy security by diversifying energy sources.

Our immediate objectives are to complete our vertically integrated manufacturing plan and to increase capacity and technology efficiencies as we pursue economies of scale to reduce our cost structure to improve margins.

At this point, I will now turn the call over to our CFO, Sean Shao, who will discuss our financial results in more detail.

Sean Shao

Thank you, Andy. We are very pleased with our second quarter results. Our net revenues in the quarter were $75.3 million, an increase of 77% sequentially and 160% year over year. Total shipments increased to 20.33 megawatts, up from 10.5 megawatts in the first quarter of 2007, and 7.07 megawatts in the second quarter of 2006.

As we had anticipated in our guidance, average sales price was down 2.6% sequentially to $3.70 in the second quarter of 2007, compared to $3.80 in the first quarter of 2007 and $4.03 in the second quarter of 2006.

Gross profit in the quarter was $14.2 million, up 49.5% sequentially and 78.7% year over year. Gross margin was 18.9% in the second quarter of 2007, down from 20.3% in the first quarter of 2007 and down from 27.5% in the second quarter of 2006. Sequential and year-over-year declines in gross margin was primarily the result of the ASP decline.

The operating expenses in the quarter were $6.1 million, an increase of 21.6% sequentially and 21.7% year over year. The sequential and year-over-year increase was primarily due to higher selling expenses for brand establishment, as well as G&A expenses to support the rapid growth of our business.

Depreciation was approximately $1 million, mainly from cost of revenues. Operating income in the second quarter was $8.1 million, up 81% sequentially and up 177% year over year. Operating margin was 10.7% in the second quarter of 2007, compared to 10.5% in the first quarter of 2007 and 10.1% in the second quarter of 2006.

Interest expense was $1.6 million in the second quarter of 2007, compared to $1.2 million in the first quarter of 2007 and $0.5 million in the second quarter of 2006. The sequential increase was due to an increase of short-term borrowings in the quarter.

The company recorded an income tax benefit of approximately $56,000 in the second quarter, after receiving approval from the tax authority of a qualified export enterprise

classification.

Net income was $7.2 million in the second quarter of 2007, an increase of 51.4% sequentially and 540% year over year respectively.

Turning to the balance sheet, as of the end of the quarter, we had $173.5 million in total cash and short-term investments; $224.5 million in working capital, and $114.8 million in short-term and long-term debt.

Shareholders equity stood at $335.6 million and our debt-to-equity ratio stood at 34.2% at the end of the quarter. Capital expenditures for the current quarter were approximately $28.3 million. For 2007, we expect the capital expenditures to be approximately $110 million to $120 million.

We remain very positive on the outlook for 2007 and we expect our business to remain very strong in the third and fourth quarter.

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 quarter. As we move into the third quarter, we will continue to take every opportunity to create value for our shareholders, customers and employees as we execute on our vertically integrated strategy, improve our cost structure, and expand our global reach.

With that, we’ll now open to your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jesse Pichel with Piper Jaffray.

Jesse Pichel - Piper Jaffray

Yes, good quarter, guys. Of the 20 megawatts you shipped, how much of it was of cell-to-module business and what was the margin on that business?

Sean Shao

I think all the sales is module business.

Jesse Pichel - Piper Jaffray

But I’m asking did you purchase cells for some of that business?

Sean Shao

The cells actually we, as you know, our cell capacity actually is up only to 50 megawatts, so therefore we continue to outsource a portion of our cell production for toll manufacturing.

Jesse Pichel - Piper Jaffray

So maybe I could ask it this way; how much of the 20 megawatts were your own wafers that your processed?

Sean Shao

Approximately one fourth.

Jesse Pichel - Piper Jaffray

A quarter -- the advances to suppliers declined from $62 million to $37 million in the quarter and I’m wondering what the implications there are on your poly supply for the rest of the year.

Sean Shao

The prepayments were down a little bit. I think we still have sufficient poly to maintain our operations.

Jesse Pichel - Piper Jaffray

And what was your wafer cost in the quarter and how should that trend for the balance of the year? I believe on the last call you said that it might be up 20% for 2007, if I’m not mistaken.

Sean Shao

When you say wafer cost, are you referring to the silicon costs?

Jesse Pichel - Piper Jaffray

The silicon wafer costs, yes. Yeah, silicon -- yes, silicon costs.

Sean Shao

We don’t buy wafers. Yeah, silicon costs, yes, I think for the second quarter 2007, I think we see that there’s an approximate $0.14 to $0.15 per watt increase in respect of the silicon costs.

Jesse Pichel - Piper Jaffray

That’s great. And there was some confusion on DC Chemical this week and I was wondering if you can shed any light on their ramp and what you’ve seen. For instance, they were supposed to get reactors from GT Solar this month. Has that occurred? And how is their ramp of xylene production going at their subsidiary?

Andy Klump

I just want to comment that DC Chemical, as you know, signed an agreement with us that does not start until 2009, so I don’t have any comments on their production. We’ll let them handle that question but we feel very confident that they are going to succeed in meeting the needs for our long-term agreement with them.

Jesse Pichel - Piper Jaffray

Do we know how much volume you are supposed to get from DC in ’09?

Andy Klump

No, we’ve not released the volume. We’ve said it’s a $121 million contract.

Jesse Pichel - Piper Jaffray

Great. Thanks a lot, guys.

Operator

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

Rob Stone - Cowen & Company

I have several questions. It looks like the mix of sales shifted significantly back towards Germany versus Southern Europe in this quarter. How much of the change in ASP would you say was due to a shift in geographic distribution?

Arturo Herrero

I can answer this question. As you can see, the first quarter in the year was much more strong in Spain and Italy and it is mainly due to the winter season, so Germany is not too active in the first months of the year. As you must know for our strategy that we have announced previously, we are keen to keep a very good market share in Germany. As everybody knows, it is the highest market in the world so we want to have very good participation and quantities and volume in Germany. So in Q2, as you said Germany has been 50% or 57% of our total sales. So it is impacting the ASP slightly because Germany is much more competitive than in Southern Europe, Italy and Spain. This is why there has been a slight reduction in ASP from Q1.

Rob Stone - Cowen & Company

What is your outlook then for ASPs in Q3 or the second half generally?

Arturo Herrero

We have announced already that for the whole year, it will be a reduction -- we’ll keep this anticipation of reduction of 9% to 10% versus Q4 last year, 2006. But this is a quite conservative statement, so I think the marketing is going fast and we are in a good position, very strong in Southern Europe, in Italy and Spain. So we can keep a good average ASP in Q3 and Q4.

Rob Stone - Cowen & Company

With respect to the ramp-up of the new cell line, Sean, you noted that the biggest impact sequentially on gross margin was the ASP change. Would the remainder be influenced by the utilization of the new cell lines during Q2 or silicon costs? What accounted for the rest of the margin change?

Sean Shao

Rob, you’re right. I think the major factor which contributed to the reduction of the margin is the ASP, which accounts for approximately 2.5%. The remaining percent I think is related to the increased cost of the silicon.

Rob Stone - Cowen & Company

So as you increase your internal production in the second half, with respect to expected ASP changes, increased internal production and where you think silicon is going, what do you think will be the gross margin trend for the second half?

Sean Shao

I think the gross margin trend basically, we all know that the silicon, we have the pressure on the silicon price. In the meantime, actually, we are, as you already see in the news release, that we are reducing the thickness of the wafer from 220 to 200. I think that is going to help us to keep the gross margin sustainable.

Also, we are trying very hard to improve the supply chain management, reduce the usage of the material, so we have certain upward trends to offset the pressure coming from the silicon.

Rob Stone - Cowen & Company

Okay, so netting all those things out, are you expecting gross margins to be up, down, or flat in the second half from where they were in Q2?

Sean Shao

Rob, as you know, we don’t provide specific guidance on a quarterly basis but I think that kind of effort will help us to maintain the gross margin for the year between -- it will be above 20%, in the 23%, 24% range.

Rob Stone - Cowen & Company

Okay, a final question and just a clarification with respect to your answer to Jesse’s question earlier, where you said about one-fourth of the cells were your own. I think you meant the portion that were processed on your internal cell lines, because you produce a large quantity of your own wafers internally, is that correct?

Sean Shao

That’s correct. I think Jesse actually was asking the silicon cost rather than the wafer cost.

Rob Stone - Cowen & Company

No, the question was with respect to the proportion of wafers that you purchase in wafer form versus produced internally, and I thought you had said about one-fourth was internal, but your internal wafer production was much closer to 100% of what you --

Sean Shao

I was referring to the production of cells.

Rob Stone - Cowen & Company

Okay, that’s what I thought.

Andy Klump

But Rob, you are correct; all of our wafers that we produce internally, those are then sent to partners, the ones that we do not produce into cells ourselves, and so those are our own wafers that we are receiving back in cells from our partners. You are correct.

Rob Stone - Cowen & Company

Great. Finally, Andy, could you just review in maybe a little more detail your comments about the plan to do multi-crystalline in the second half? I didn’t quite catch the details there.

Andy Klump

Yes, so of our ingot production plans in terms of actual expansion of our capacity, by Q4 this year we’ll have an additional 50 megawatts of multi-crystalline furnaces that will be installed and operational, and so that will bring our total ingot capacity to 150 megawatts. So as you know, multi-crystalline furnaces have a wider range of materials that we can input into those machines, so this gives us a little more flexibility in terms of our silicon procurement.

Rob Stone - Cowen & Company

So with respect to going from 75 to 150, 50 of multi and another 25 of mono?

Andy Klump

Yes. Currently we have 100 megawatts of ingot capacity. That’s all mono to date. By the end of the year, we’ll have 150 megawatts -- 100 is mono and 50 will be multi.

Rob Stone - Cowen & Company

So with respect to your capacity expansion plans for 2008, what proportion of that is going to be multi versus mono?

Andy Klump

We haven’t announced exact figures but we did say that we would continue to expand on both fronts. We will announce that in the future.

Rob Stone - Cowen & Company

Okay. Thanks very much.

Operator

Your next question comes from the line of Daniel Beckman with ING.

Daniel Beckman - ING

Just a follow-up to the previous question on internal cell production; by the fourth quarter of this year, what percent of your modules will be produced from internally generated cells? Will you be at 100% by then or is that not until 2008?

Sean Tzou

By the end of this year, we will be in line in our cell capacity and module capacity. However, due to currently the ramp status as well as the 125 count, 125 cells, the cell line capacity is slightly discounted, so there will be -- I believe there will be about 20% of the, 20% to 25% of the cell will be still outsourced.

Daniel Beckman - ING

Okay, and what is the margin difference between internally and externally generated cells on a consolidated basis?

Sean Shao

Well, put it this way -- if we do outsourcing 100% compared to in-house 100%, there’s a 10% to 12% difference in the margin.

Daniel Beckman - ING

Okay, and just one final question on a different subject. I know that Arturo made some comments on ASPs. Is the thought that ASPs are likely going to be flat now from the second quarter into the third quarter just because it sounds like that’s what most people in the industry are saying, or are there any factors that might lead to some downward trend?

Arturo Herrero

In fact, as we were saying, we feel very strong this Q3 and also Q4, but we want to keep a conservative, especially by the end of the year. Normally this is quite a stationary sector.

For Q3, I think there is not any surprise and Q4, we are predicting that there is some slightly down ASP due to the winter coming, especially also for the German customers, that they are not so active.

Daniel Beckman - ING

Okay, and just one final question; when should we expect to hear an update on your polysilicon procurement for 2008, given that only 60% is procured to date? Should we hear something this year or will that not likely be until next year?

Andy Klump

I just want to say that we have a very strong team that is in discussions with a number of opportunities, so we continue to evaluate those opportunities and we’ll certainly update the market when we have more news. We feel very positive about reaching our 2008 silicon targets.

Daniel Beckman - ING

Great. Thank you.

Operator

Your next question comes from the line of Caroline Howe with RCM.

Caroline Howe - RCM

Congratulations on the success of your integration strategy. Could you please comment on what it is that is causing this $0.14 to $0.15 per watt rise in silicon costs? Is it because you are experiencing increased spot prices for silicon? Is it that you are changing your contract mix so that you are buying more short-term and less long-term? Or is it that you are buying less off-cuts and more virgin poly?

Andy Klump

We still maintain the same procurement strategy that we’ve always had. We are essentially engaging in medium-term contracts with semiconductor companies, polysilicon manufacturers and silicon reclamation companies. Essentially the strategy has not changed but we do enter into some contracts where there is flexibility on the price, so that explains part of the increase.

Sean Shao

I just want to add to Andy’s comment. During the meetings, we discuss about the prospect of the silicon costs, so we all know there is a potential increase up to 20% for this year. But it just all depends on the timing of the expiry of the medium-term contracts and the short-term contracts. Sometimes, some of the contracts happen to fall into the first quarter and the first quarter price will go up, and some of the contracts happen to fall into the second quarter and that would affect the costs during the quarter.

Caroline Howe - RCM

Okay, Sean, thank you. That’s clear. Should investors expect any major contracts to expire in the second half of the year for Trina Solar?

Andy Klump

We don’t give any specific guidance on a per contract basis but we continue to work with a core group of suppliers. These are folks that we’ve been working with for some time. If you remember, we’ve been in ingot production since 2005, so we have had a number of very strong relationships and we just continue to build on those relationships and extend those contracts.

Caroline Howe - RCM

Okay, and I have one -- well, two further questions with regard to your operational success. You mentioned lower breakage rates and I would be curious to know what your yield rate is now and what it was earlier this year. But perhaps more importantly, you mentioned overall, factoring in improvements in yield rates and reduced thickness in wafers, you have reduced the grams per watt that you use. Could you say what that change is, please?

Sean Tzou

Okay, yes. We continue to strive for the changes. Currently we are changing our wafers from 220 microns to 200 microns, so we will see a slight improvement.

Caroline Howe - RCM

So what does that mean in terms of grams per watt?

Sean Shao

I think the grams per watt, I think we are currently at eight grams per watt for this year so far, and I think when we continue to make improvements in respect of the wafer thickness from 220 to 200, I think we will continue to drive this, drive down the grams per watt silicon usage.

Caroline Howe - RCM

Okay. Thank you very much.

Operator

Your next question comes from the line of Tien Yu Sieh with Merrill Lynch.

Tien Yu Sieh - Merrill Lynch

Congratulations on the strong quarter. A couple of questions, the first is can you comment on what is the progress with regards to ramping up U.S. sales presence, and when perhaps we can expect sales into that market?

Arturo Herrero

Thank you for the question. We are in fact quite active in the U.S. market now. My team, part of my team is having very good target of customers that we are in touch and ready to buy from us, so we are foreseeing by the end of this year to have the first and to have next year a strong presence in terms of our share in our sales target for 2008.

The thing is that still we are waiting for the U.S. certification. It has been delayed due to the administration, this kind of overload and we expect by October or November to have the certification in hand.

We are also at the same time having the preparation for the office to be open at that time in California, and also the team is ready there to interact and to start to have their first [inaudible].

Tien Yu Sieh - Merrill Lynch

Okay, thanks, Arturo. Just following on from that, can you make a comment as far as sort of sales visibility into 2008? Some of your competitors or industry peers have commented that they have very strong visibility into 2008, some booking strong sales through the first half of next year already, with some indicated pricing. What are your thoughts right now in terms of 2008?

Arturo Herrero

I’m very positive. In fact, for this year 2007, it is mostly oversold, so some of the sales has to be postponed to 2008, and in fact the contracts that we have signed this year are for two, three and five year terms. So in 2008, of our expected output, we are almost at 60% already contracted.

Tien Yu Sieh - Merrill Lynch

Great. Okay, now a question for Andy on the raw materials supply side. Can you share with us sort of what are your assessments, if you have looked at them, of the Chinese polysilicon suppliers? Clearly a lot of your domestic competitors are sourcing to varying degrees from these emerging players. What are your thoughts on these emerging polysilicon manufacturers as a supply partner, either in 2008 or beyond?

Andy Klump

Thanks, Tien Yu, for the question. As you know, we have a very good presence in China with a very strong network of procurement folks and we have been getting to know a lot of the projects very well. I think we have a very optimistic viewpoint in terms of 2010. We do see that there will be anywhere from 20,000 to 50,000 tons of material that actually comes to the market. It’s true there are a lot of announcements that are beyond that total but we do see that a lot of these production plans will actually come to market.

Tien Yu Sieh - Merrill Lynch

Is there any chance that you could be purchasing from these guys by 2009?

Andy Klump

Yes, we do have a very strict quality requirements and so as long as we have strong suppliers that meet our quality requirements, then we will be buying from them.

Tien Yu Sieh - Merrill Lynch

Okay, great. Thanks.

Operator

Your next question comes from the line of Sunil Gupta with Morgan Stanley.

Sunil Gupta - Morgan Stanley

Thank you. I have two longer term questions. First, in terms of your in-house cell production, could you help us understand what you expect in terms of conversion efficiencies looking out the next two to three years, and how exactly will you achieve those?

Andy Klump

Your first question, we’ve always said our goal by the end of 2007 was to exceed 16.5% in terms of efficiency. As we look out to 2008, that’s roughly 17.2%. But as you know, we continue to invest in our capabilities and we expect to see continued increase beyond those figures.

Sunil Gupta - Morgan Stanley

And how do you go from 16.5% to 17.2%?

Andy Klump

We’ve essentially chosen to continue to develop on our same low-cost platform. As you know, our key driving factor in this industry is to reduce our cost, so we will -- we’ve already invested in R&D, a strong R&D team and we actually have a roadmap that will actually reach that efficiency level.

Sunil Gupta - Morgan Stanley

Would you be able to talk about what you could potentially achieve say beyond 2008, 2009, 2010 -- what’s the thinking at this point in time?

Andy Klump

I think beyond 2008, we don’t give any specific guidance but as you can see, there’s generally a 0.5% to 1% increase per year and I think that’s what we forecast at this point.

Sunil Gupta - Morgan Stanley

I also wanted to check what’s your thinking on polysilicon. Some of your other peers and competitors have announced various moves to either start manufacturing polysilicon on their own or get into joint ventures with some of the new polysilicon manufacturers. I was wondering what you are thinking.

Andy Klump

In terms of our polysilicon strategy, it’s essentially a portfolio strategy. We recognize that we’ve already signed a number of long-term agreements. We will continue to sign more and also continue to work with our medium-term suppliers.

But achieving vertical integration is clearly our business strategy. There have been a number of other highly integrated companies that have considered, considering moving upstream and we are also evaluating the best options.

Sunil Gupta - Morgan Stanley

So would you be open to investing in either a joint venture or getting into polysilicon manufacturing on your own?

Andy Klump

Sunil, as I said, we’re certainly evaluating our options and we’ll certainly disclose information once it’s available.

Sunil Gupta - Morgan Stanley

Okay, and I just want to reconfirm some of the earlier comments about polysilicon. You said the polysilicon costs, your fixed costs have been going up. Could you talk about what did you achieve in terms of blended per KG cost in Q2 and what do you expect this to do in Q3 and Q4?

Sean Shao

Sorry, can you repeat your question? You are asking for the blended cost?

Sunil Gupta - Morgan Stanley

Yes, for the feed stock.

Sean Shao

Actually, we estimated the change of the cost of silicon actually based upon the blended cost, because we use up to 80% of the reclaimables.

Sunil Gupta - Morgan Stanley

So what was the cost on a per KG basis in Q2?

Sean Shao

We don’t disclose specific cost per kilo of the silicon, but basically we explained the fluctuations, the changes that increased or decreased.

Sunil Gupta - Morgan Stanley

And what do you expect these increases to be, or changes to be in Q3 and Q4?

Sean Shao

I think for the second quarter, it’s approximately, if you look at the increase of the silicon costs at $0.14 to $0.15 per watt, so basically you are looking at approximately a 10% increase.

Now, I think it all depends upon the timing of the expiry of some of the contracts and the time when these contracts expire independent upon the market price of these silicons. So at this moment, we can only say compared to the average silicon cost of 2006 and then there may be a potential up to 20% increase of the silicon costs for this year. That’s the best disclosure we can say.

Sunil Gupta - Morgan Stanley

Okay, so would it be fair to assume that you have already seen about a 10% increase on a blended basis and you could see another, based on what you know right now, another 8% to 10% increase in the second half?

Sean Shao

Potentially.

Sunil Gupta - Morgan Stanley

Potentially. Okay, great. Thank you.

Operator

Your next question comes from the line of Karen [Legaut] with [Glider].

Karen Legaut - Glider

I’m not sure I understood still what you were talking about in terms of the production of your own wafers. When you -- at what percentage of the wafers that you produced internally went into your module production? I still understand it to be 75%. Is that correct?

Andy Klump

Karen, I’ll just explain it. Right now, we manufacture ingots and wafers for 100% of our modules. About a quarter of the wafers that we produce, we process into cells in-house and about three-quarters we outsource to OEM partners. When we get those process cells back, they are still made from our wafers, so 100% of the actual modules have our wafers. Is that clear?

Karen Legaut - Glider

So you just -- they just do that intermediate step for you and then you turn them into modules?

Andy Klump

Exactly, exactly.

Karen Legaut - Glider

And then what was your average cost for wafers in the quarter? I think that -- were you saying that the $0.14 to $0.15, was that second half or second quarter?

Sean Shao

No, actually I was referring to the cost of the silicon. In the second quarter of 2007, there was a $0.14 to $0.15 per watt increase. That was nothing to do with wafers, just silicon cost.

Karen Legaut - Glider

Could you talk about the wafer cost increase?

Sean Shao

Well, the wafer cost -- the production cost of the wafer is fairly consistent and has been slowly decreasing, but basically the major cost is the silicon.

Andy Klump

We are not buying wafers, so we don’t see any change.

Karen Legaut - Glider

Thank you.

Operator

Your next question comes from the line of Charles Yonts with CLSA.

Charles Yonts - CLSA

Congratulations on a great quarter. A couple of quick questions, first housekeeping; how should we look at taxes going forward? You had another --

Sean Shao

Charles, I think during the second quarter, we just received an additional tax benefit coming from the Tax Authority. That was related to qualified export enterprise, so therefore there was a small tax benefit which reflected what is recorded in the first quarter. In the first quarter, we didn’t receive that approval, so now with the latest status, our best estimate for the coming quarters in 2007, we estimate that the effective tax rate at approximately 3%.

I don’t know if you remember that we increased the paying capital last year in 2006, so therefore the local tax authority provided us with additional two years exemption and three years tax reduction. But that is only applicable to the portion of the paying capital we increased in 2006, so that was 82% versus 12%, so 82% actually is tax exempt. The 12% is still subject to tax. So that 2% effective tax rate is related to that 12% of the taxable income.

Charles Yonts - CLSA

Okay. Thank you very much, Sean, quite clear. Now, another thing is, just looking at the numbers, I’m not certain but it looks like you’re tolling prices could have gone up in the second quarter. Is that accurate? If so, would there be a possibility to source from different suppliers?

Sean Shao

I think the tolling cost actually per watt base is coming down instead of going up. I think going forward, third quarter and fourth quarter, I think it will further come down.

Charles Yonts - CLSA

Okay. And one more; regarding the -- for news or people talking about shipments, broken wafers that have been stopped and not allowed into China, have you seen anything like that and what sort of impact would that have on your supply?

Sean Tzou

Yes, the broken wafers with the coding on it is stopped to come to China, and that is true. We do have some of the broken wafers in the past. The way we have handled it to date is we handle it outside of China and then bring it in, so in general that is no impact to our production at this moment.

Charles Yonts - CLSA

Do you actually have handling, processing plants outside of China? Or are you --

Sean Tzou

Currently we are handling outside of China.

Charles Yonts - CLSA

Okay. Thanks a lot. That’s it. Thank you.

Operator

Your next question comes from the line of Steve O’Rourke with Deutsche Bank.

Steve O’Rourke - Deutsche Bank

Good evening. Do you plan to integrate further downstream to include the integration and installation of complete systems?

Sean Shao

Actually, system integration has been part of our business. It’s just in the past, the business volume was very small.

Andy Klump

And I’ll just mention that that business was primarily focused on China. If you look back at our history, as early as 2002 and 2003, we participated in the Chinese Western Brightness program and actually installed about 40 power generation stations in Tibet, so we do have an experienced team in-house. That business is just focused in China.

Steve O’Rourke - Deutsche Bank

If I could clarify then, do you intend to extend that integration installation of systems outside of China in the future?

Andy Klump

We haven’t announced any plans for that development.

Steve O’Rourke - Deutsche Bank

Okay, and are you doing anything specifically to address a reduction in balance of system costs?

Arturo Herrero

We are not in fact buying balance of systems. We are just selling our modules, we sell our raw material frames and glass and all this stuff, but we don’t buy any batteries, controllers for the systems because we are not doing installation outside of China.

Steve O’Rourke - Deutsche Bank

No, I understand but the question is more along the lines that if the ultimate goal is to reduce the cost per kilowatt hour, can you help reduce balance of system costs by working with your partners? And if so, are you doing that in any aggressive fashion?

Arturo Herrero

What we can do and in fact we are doing is to link our customers that are doing the installations with some of the producers of inverters or controllers. So in this way, we can advise them which kind of quality of material they can fit with our models and which are the estimation in the sense of price or cost for them.

Steve O’Rourke - Deutsche Bank

I see, okay. And one other question; do you remotely monitor systems that are installed with your panels?

Arturo Herrero

Our customers, some of our customers do.

Steve O’Rourke - Deutsche Bank

Okay, but you do not?

Arturo Herrero

Not ourselves. Even in the website, you can also track some of the systems that are working with Trina Solar modules and you can see the power and efficiencies that they are giving and it is quite positive, quite good to know.

Steve O’Rourke - Deutsche Bank

Okay, fair enough. Thank you.

Operator

Your next question comes from the line of Eric [Nu] with Goldman Sachs.

Eric Nu - Goldman Sachs

Hello. A couple of questions, and the first question is how many additional new clients are you going to have in the second half? And are those new clients you got in the second quarter to carry into the second half?

Arturo Herrero

I didn’t understand the second question. Can you repeat it, please?

Eric Nu - Goldman Sachs

My first question is how many additional new clients are you going to --

Arturo Herrero

Correct, and the second question?

Eric Nu - Goldman Sachs

Are those new clients you got in the second quarter carrying into the second half of 2007?

Arturo Herrero

Okay, I understand. In Q2, we have increased up to 29 customers -- I mean, for Q2 it has been 29 customers active. So for Q3 and Q4, in our portfolio of more than 50 customers, some of them already placed the order for September or October or November, and some of the current customers, as you mentioned, are still placing some orders. So remember that we have a very clear strategy to address not only to distributors but also to PV integrators.

So these PV integrators, they just produced a big solar park and they are already, had already signed a contract with us for the end of the year, for November and December, so this is much more punctual. But the distributors, the wholesalers are buying on a monthly basis, so they are keeping monthly quantities of orders coming to Trina Solar.

Eric Nu - Goldman Sachs

Okay. Thank you. My second question is what are your thoughts on the Germany and Spain demand in the second half? It seems that the company increased exposure to Germany in the second quarter. What is your forecast for the market size of those two regions?

Arturo Herrero

For your first question regarding the Trina Solar forecast for Q3 and Q4, we mainly will continue Q1 and Q2 breakdown in terms of geographic percentage, so mainly 40% to 42% will be Germany and 30% to 31% will be Spain, and around 15% will be Italy.

For the second question that you are asking, about how these markets will be evolving, our expectation for the rest of the market, it seems that it is quite strong. Germany is very active and will keep leading the PV industry and the PV market in terms of demand. But also Spain and Italy, where we are very focused and we have an important market share, even there it is in smaller markets. They are potentially even higher. So we expect in Q3, Q4 to keep these percentages that I mentioned before and to have a good market share in Spain and a very strong presence in Italy.

Eric Nu - Goldman Sachs

Okay, thank you. Last question is could you give us some guidance on the percentage of in-house cell supply in the third and fourth quarter?

Andy Klump

I think we have said that roughly by Q4, we will have roughly 75% of our cells manufactured in-house and we expect by Q1 of next year to be fully self-reliant on cell production.

Eric Nu - Goldman Sachs

Okay. Thank you.

Operator

Your last question comes from the line of Rob Stone with Cowen & Company.

Rob Stone - Cowen & Company

Just two quick follow-ups, please; with respect to your silicon procurement for 2008, I think you said you have about 60% under agreement now. Could you comment on what percent of your supply is in short or medium term agreements that you might expect to renew for next year that would be in addition to the 60%?

Andy Klump

Rob, we still have a number of agreements that we do anticipate renewing. We haven’t commented on what the percentages are but we certainly do have visibility into next year’s polysilicon supply and definitely feel very confident that we will reach our targets.

Rob Stone - Cowen & Company

All right, well, let me ask the question a different way; of your 2007 production, how much of that roughly is on agreements of an annual or shorter basis?

Andy Klump

Just as a ballpark, Rob, it’s kind of difficult for me to give an exact number, but I will just definitely say that we have been working with a number of suppliers. Some of those we’ve already entered into two and three-year agreements. Other ones we have had one-year agreements that we plan to update, but a lot of these suppliers are very stable sources of supply and so we intend to continue to move forward on those relationships into next year.

Rob Stone - Cowen & Company

Okay. Finally, in the first quarter there was some discussion with respect to your first quarter results, some discussion about the influence on ASP and gross margin as a result of shifting a significant portion of your shipments from FOB to CIF. Could you just comment on whether there was any change in the proportion from Q1 relative to Q2?

Sean Shao

I think the shipping term remains the same compared to the first quarter. Now, the majority of the sales, they are on the CIF term and it will be very comparable to the first quarter, and that trend will continue.

Rob Stone - Cowen & Company

Okay, thanks very much.

Operator

Your next question comes from the line of Jesse Pichel with Piper Jaffray.

Jesse Pichel - Piper Jaffray

Just a follow-up question on the tolling charge; is the differential between tolling and internal production approximately $0.30?

Sean Shao

Jesse, I think maybe I’ll respond from my perspective. The tolling per watts basically for second quarter was approximately $0.70 per watt, plus or minus. I don’t know whether that responds to your question.

Jesse Pichel - Piper Jaffray

Then the processing to make cells internally is about $0.30, $0.35?

Sean Shao

That was -- yes, I think approximately the cell production at this moment was approximately $0.40.

Jesse Pichel - Piper Jaffray

So you save $0.30 as you reduce your tolling as the year progresses, is that right?

Sean Shao

That’s correct.

Jesse Pichel - Piper Jaffray

Okay, that’s interesting. And then I have a question on crucibles. Today, [Renna] Solar lowered its outlook because they couldn’t get crucibles for its new multi-crystalline furnaces. Are you hearing about a crucible shortage and is there risk to your guidance on this particular issue?

Sean Tzou

Yes, we do understand the crucible situation. It is very tight. We have secured with our new multi-crystalline casting operation, we have secured the crucible required for this year and early next year, and we continue to discuss with our suppliers to build a strategic relationship to continue our supply.

Jesse Pichel - Piper Jaffray

Are you going to use both ceramic and graphite, or do you have a preference?

Sean Tzou

We are currently using graphite.

Jesse Pichel - Piper Jaffray

And I have a question for Arturo; Arturo, what is the demand like, the demand difference between multi-modules and mono modules? Is there any difference in demand between the two different types of cells?

Arturo Herrero

This is a very good question that everybody is trying to clarify and this is not a clear answer. In fact, in the past six years that they have been in this sector, it has been moving from a very definitively high interest for the mono-crystalline, mainly due to higher efficiency than poly-crystalline or multi-crystalline. But nowadays, thanks to the technology that has been improving, also the cell efficiency of the multi-crystalline cells, there is not so much demand. And the variables that maybe a customer to decide on are mainly the price, obviously and of course the quality and the company that is behind.

So in this sense, Trina Solar is quite strong to have a very good warranty condition to our customers and credibility of the quality of our models, so either we sell mono or we sell multi-crystalline, I think would be very welcome, both technologies.

Jesse Pichel - Piper Jaffray

Is the price per rated watt always lower for multi?

Arturo Herrero

Slightly lower, yes. Slightly lower.

Jesse Pichel - Piper Jaffray

Okay, great, Arturo. Thank you very much.

Operator

Your next question comes from the line of Caroline Howe with RCM.

Caroline Howe - RCM

Sorry, just a follow-up question; you mentioned in terms of what we should expect in the second half of the year that you are expecting to see ASPs roughly flat, if I understand you correctly. We could see, my own interpretation, a 5% to 7% improvement in margin from the increase in production of your own cells to a 75%, away from the 25% level at current. We could also see a 2% to 3% reduction in material as you move from 70% to 100% at 200 microns, which could potentially have a 1% to 2% impact on margins. And then maybe a 1% improvement from further yield improvements.

So this gives me a margin projection of around 7% to 11%. Bearing in mind that you have said you could see another 8% to 10% increase in silicon costs in H2, I’m looking maybe for another 1% or 2% here in gross margin improvement in order to get to the level that you’ve hinted at of exceeding 20%, perhaps getting more towards the 23% level for H2. Could you point me out what I’m missing here, or where I am going wrong?

Sean Shao

I think I probably can help you with a few comments in respect of where the upside comes from. I think we all know the downside of the silicon costs but when we look at the upside I think for -- first of all, the fourth quarter this year, we are going to have 100% in-house cell production, which is going to -- although we know that 2007, we don’t really have the full year to reflect such cost savings, but we are looking at half of what we can achieve at the 6% level.

And the second item we are looking at is really the silicon use you also already mentioned from 8.5 grams per watt down to 8 grams per watt, which basically is going to create approximately a 3% upside to the gross margin.

And then you look at the cell efficiency. We used to outsource everything for toll manufacturing. Normally we get this sales factor at 16% to 16.2% or 16.3%, but now if we can achieve, and I think we are on track to achieve such efficiency exceeding 16.5% by the end of 2007. Then I think that could additionally create a 1% to 2% upside to the gross margin.

And then also, you may want to include the supply chain management and further economies of scale at 1% to 2%, but those would be the general sources of the upside, where I’m looking at.

Caroline Howe - RCM

Thank you. That’s very helpful.

Sean Shao

We will take one last question.

Operator

(Operator Instructions) There are currently no further questions in the queue.

Thomas Young

Okay. 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 Trina Solar, please let us know. Again, thank you for joining us on this call. This concludes Trina Solar's second quarter 2007 earnings conference call.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Trina Solar Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts