Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Trina Solar Ltd. (NYSE:TSL)

Q3 2007 Earnings Call

November 21, 2007 8:00 am ET

Executives

Thomas Young - Director of IR

Jifan Gao - Chairman and CEO

Sean Shao - CFO

Sean Tzou - COO

Andy Klump - VP of Business Development

Arturo Herrero - VP of Sales and Marketing

David Seburn - VP of Silicon

Analysts

Rob Stone - Cowen and Company

Paul Clegg - Jefferies

Liu Yang - Merrill Lynch

Aden Croft

Tez Tupez

Adam Sinclair

Pavel Molkofov

Doug Ulchner

Max Lee

Jay Spindel

Charles Yonts - CLSA

Michael Hunt - Oso Partners

Operator

Good day ladies and gentlemen and welcome to the Trina Solar Third Quarter 2007 Earnings Call. My name is Lisa and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. Thomas Young, Director of Investor Relations. Please proceed sir.

Thomas Young

Okay, thank you. Good morning and welcome to Trina Solar's third 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; Vice President of Sales and Marketing, Arturo Herrero; and Vice President of Silicon, David Seburn.

Before I turn the call over to Mr. Gao, may I remind our listeners that in this call, management's prepared remarks contained forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statement in response to your questions. Therefore, the company claims the protection of the Safe Harbor statement 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 filing 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 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 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

(Translated)

Thomas, Thank you.

Welcome everyone, and thank you for joining us on this call. We are very pleased to report another quarter of solid progress in the execution of our business plans as we move towards our goal of becoming a leader in the global solar PV industry.

During the quarter, we've advanced our build-out of manufacturing lines and related facilities for capacity increases, to be realized in the fourth quarter. We initiated a test production of our 220 watt multi-crystalline PV modules, based on our self-manufactured multi-crystalline ingots and wafers.

We signed agreements with industry leading equipment suppliers to build our fully integrated capacity to 350 megawatts by the end of 2008. We've received approval from the company's Board to expand our fully integrated production to upstream poly-silicon production. And we strengthen our management team with the focus on improving quality management and evaluating upstream poly-silicon investment opportunities to support the long-term growth of our business in the quarters to come.

(inaudible) of the solar PV energy business remained very strong as a number of countries in Europe and elsewhere continued to successfully implement policies to accelerate adoption of solar PV energy, creating significant opportunities for the profitable growth of our business.

As we look towards the future, we remain confident that Trina Solar is well positioned with a vertically integrated business model, a seasoned management team, and a growing brand presence in key strategic markets, to take advantage of these opportunities.

We look forward to continue to deliver positive results to our customers, shareholders and employees, for many quarters to come.

Finally in October 2007, we were very honored to be ranked number one in the "Deloitte Technology Fast 50 China 2007" program. This award is a testament to the hard work of all of our employees, and reaffirms our commitment to establish Trina Solar as a leader in the global solar PV industry.

Now that I have completed translating Jifan Gao's comments, I would like to turn the call over to our Chief Operating Officer, Sean Tzou, who will discuss Trina Solar’s business performance during the quarter in more detail.

Sean Tzou

Thank you, Andy. As Mr. Gao mentioned, Trina Solar delivered solid results for the third quarter, as we benefited from improved ASP and strong demand from our expanding customer base.

The third quarter highlights include the following.

The net revenue increased 9.7% sequentially, and 155.2% year-over-year to $82.6 million.

Gross profit increased to 16.7% sequentially, and 95.4% year-over-year to $16.6 million.

Net income increased 0.5% sequentially, and 86.8% year-over-year to $7.2 million.

The shipment of 21.15 megawatts of solar modules was up from 20.33 megawatts in second quarter of 2007.

We had 100% commercial production of 200 micron thickness wafers, an improvement from the previous thickness level of 220 microns, to reduce our usage of silicon.

Subsequent to the end of the third quarter, we have launched a commercial production of our new cell lines, number 3 and number 4, which this month reached a production rate of 100% capacity, with cell efficiency level of 16.4%.

We are also in an advanced test phase to prepare our new cell lines, number 5 and 6, for commercial production of 156 millimeter cells made from our self-produced multi-crystalline ingots and wafers. And we will also drive our new module production line to offer module power, ranging from 200 to 220 watts, up from our current maximum of 185 watts.

We are very pleased with the results of our cell line ramp-up efforts, which would triple our in-house cell manufacturing capacity by quarter end, to achieve 150 megawatts of fully integrated manufacturing capacity, which will benefit us through lower manufacturing costs, end-to-end quality control, and shorter production cycle lead times.

Long term, we have [stronger] confidence that we will reach our target of 1 gigawatt of full integrated capacity by 2010.

Moving on to our technology roadmap, during the third quarter, we reduced our silicon wafer thickness from 220 to 200 microns for 100% of our monocrystalline wafer production capacity. As we continue our efforts to increase efficiency and reduce silicon requirement per watt, we are working to further reduce our wafer thickness to 180 microns in the third quarter of 2008.

In sales and marketing area, we continue to see strong demand for solar module in Europe, which we are leveraging in terms of strong ASP and increased brand recognition. In our key growth market of Italy, where we are targeting sales equal to 20% of total country demand in 2008, we are already working with several of the largest and fastest growing national distributors. Additionally, we have signed an initial contract with EniPower, one of the largest energy company in Italy.

Beyond Italy, our fastest growing markets are Belgium and the Netherlands, where we continue to make significant strides in sales contracts, and increased positive feedbacks related to Trina Solar's brand recognition.

For the third quarter, the geographic breakdown of our sales was 44% Germany, 37% Spain and 15% Italy. Thus, it brings our one year-to-date geographic breakdown to 43% Germany, 33% Spain and 15% Italy.

Moving to our supply chain outlook, as highlighted previously, Trina Solar has adopted a portfolio, polysilicon procurement strategy. This employs of a mix of short, medium and long-term contracts with numerous silicon suppliers, semiconductor companies, and silicon reclamation companies. The goal of this strategy is to preserve our flexibility to take advantage of the expected lower polysilicon prices in the years ahead. With that in mind, our international procurement team remains focused on evaluating the growing number of global and regional supply options that meets our growth plan and quality requirements.

Subsequent to the end of the quarter, we secured two important long-term polysilicon supplier agreements with the Nitol Group, and Sichuan Yongxiang Polysilicon. Nitol Group is a Moscow based chemical company which currently produces trichlorosilane, and in building a polysilicon production facility, with initial output expected in 2008. It has announced the agreement will supply to Trina Solar, with virgin polysilicon sufficient to produce over 200 megawatt of module in aggregate over a [six years] period, starting in 2009. The agreement also includes the opportunity to purchase polysilicon from the pool of unallocated production in 2008.

The company also recently announced a long-term agreement with Leshan-based Sichuan Yongxiang Polysilicon, whose affiliate company currently manufactures and supplies trichlorosilane gas to well-established polysilicon producers in China. Under the agreement, Sichuan Yongxiang will supply Trina Solar with virgin polysilicon, sufficient to produce approximately 1,300 megawatt of modules over a six years period. Sichuan Yongxiang will also deliver voluntarily 50 metric tons of virgin polysilicon in 2008, with the remainder spread over the 2009 to 2013 timeframe.

With these contracts, and company's existing supply agreements with Wacker Chemie, DC Chemical and others, we have now secured approximately 70% of the polysilicon requirements for our 2008 planned production. The company has also ordered and secured supplier allocations to its global suppliers to meet its 2008 planned production requirements for glass, crucibles, back-sheet, and EVA materials.

To support the continued robust growth of our business, we have continued investment to strengthen our management team. In the third quarter, we appointed Mr. Anthony Chia, as Vice President of Quality. Mr. Chia brings to Trina Solar over 21 years of experience in quality management, and will lead our efforts to maintain our focus on quality as we rapidly scale our production capacity.

In addition, we have appointed Mr. Dave Seburn as Vice President, Polysilicon. Mr. Seburn brings to Trina Solar 10 years of experience in the polysilicon manufacturing business, and will be responsible for evaluating strategic options for upstream investment in polysilicon production, including implementation and oversight of related projects to complement our portfolio approach to polysilicon procurement.

The company's Board of Directors recently approved the construction and operation of a polysilicon production facility, to enable the company to produce its own virgin polysilicon feedstock as an extension to its vertical integration strategy. The project includes construction of a 3,500 metric ton polysilicon facility, and represents the first phase of a broader plan that will eventually scale to a 10,000 metric ton capacity. The planned production output will be used for Trina Solar's own feedstock requirements, and will only meet part of the company's total feedstock requirements.

Trina Solar will continue to be a net purchaser of feedstock materials in future years and will continue to work with its long-term polysilicon supply partners. The project is a part of the company's long-term portfolio strategy, to secure its polysilicon feedstock in the most efficient and cost effective manner. With that, I will turn the call over to our Chief Financial Officer, Sean Shao, who will discuss our financial results in more detail.

Sean Shao

Thank you, Sean. We are very pleased with our third quarter results. Our net revenues in the quarter were $82.6 million, an increase of 9.7% sequentially, and 155% year-over-year. Total shipments increased to 21.15 megawatts, up from 20.33 megawatts in the second quarter of 2007, and 8.01 megawatts in the third quarter of 2006. Average sales price increased, sequentially, to $3.75 in the third quarter of 2007, compared to $3.70 in the second quarter of 2007, and $4.04 in the third quarter of 2006.

Our gross profit in the quarter was $16.6 million, up 16.7% sequentially, and 95% year-over-year. Gross margin was 20.1% in the third quarter of 2007, up from 18.9% in the second quarter of 2007 and down from 26.2% in the third quarter of 2006. The sequential improvement in gross margin resulted from a higher module ASP. The year-over-year decline in gross margin was primarily the result of lower ASPs and higher silicon costs.

Operating expenses in the quarter were $9.7 million, an increase of 57.7% sequentially, and 148% year-over-year. The sequential and year-over-year increases were primarily due to higher selling expenses, G&A expenses and research and development expenses, to support the rapid growth of our business.

Depreciation was approximately $1.8 million for the quarter. This was mainly from the cost of revenues. Operating income in the third quarter was $6.9 million, a decrease of 14.3% sequentially and an increase of 50.6%, year-over-year.

Operating margin was 8.4% in the third quarter of 2007, compared to 10.7% in the second quarter of 2007, and 14.2% in the third quarter of 2006. The sequential and year-over-year declines in operating margin were due to the increased costs associated with our current and future expansion of operations and staffing, incurred during the course.

Interest expense was $2.1 million in the third quarter of 2007, compared to $1.6 million in the second quarter of 2007, and $0.4 million in the third quarter of 2006. The sequential and year-over-year increases were due to the addition of bank borrowings, higher average borrowing balance, and higher interest rates on our borrowings compared to the second quarter of 2007 and the third quarter of 2006.

The company recorded income tax of approximately $15,000 in the third quarter, compared to a $55,000 tax benefit in the second quarter of 2007, and $236,000 tax expense in the third quarter of 2006.

Net income was $7.2 million in the third quarter of 2007, an increase of 0.5% sequentially, and 86.8% year-over-year. Earnings per fully diluted ADS were $0.29 in the third quarter of 2007, compared to $0.32 in the second quarter of 2007.

Turning to the balance sheet, as of the end of the quarter, we have $92.9 million in total cash and short-term investments, $176 million in working capital, and $122.9 million in short-term debt.

Shareholders' equities stood at $345.5 million, and our debt-to-equity ratio stood at 35.6% at the end of the quarter.

Capital expenditures for the current quarter were approximately $52.3 million, compared to approximately $28.3 million in the second quarter.

Inventory valuation: In response to the recent concerns with respect to inventory valuation in the solar PV industry in China, the company wishes to reconfirm its adequate polysilicon inventory controls.

The company's inventory control practices have been in place, and were developed as part of its internal controls, to reflect a fair valuation of its inventories in a timely manner. The company's inventories include reclaimable silicon feedstock, some of which, after going through quality review, may not meet Trina Solar's requirements. At the end of each quarter, Trina Solar writes down the value of its inventory from their corresponding book value, if any unusable silicon feedstock is identified. Trina Solar's financial statements are prepared in conformity with accounting principles, generally accepted in the United States. We believe we have adequate controls in place and that our silicon valuation is fair and reasonable.

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

Andy Klump

Thanks, Sean. In summary, we are very pleased with our results in the quarter and remain very confident in opportunities ahead to grow our business successfully. As we move into next year, [we bring] a high visibility into our revenue. The company has signed sales contracts representing approximately 100% and 50% of its planned first and second half 2008 module production, respectively.

Our sales efforts will be distributed throughout established and emerging markets. They include Belgium, the Netherlands, France and the Czech Republic. In the second half of 2008, we will also be increasing our sales and marketing activities in the United States, Korea, and Greece.

In addition, we have approximately 70% of our silicon requirements secured for next year, and have agreements with leading equipment suppliers to expand our fully-integrated capacity to 350 megawatts by year's end. We will continue to take every opportunity to create value for our shareholders, customers and employees, as we execute on a vertically integrated strategy. And we look forward to report on our progress in the quarters and years to come.

With that, we will now turn open the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Rob Stone, please proceed.

Rob Stone - Cowen and Company

Hi guys, I wonder if you could provide a little bit more detail on the very significant jump in operating expenses, is there anything in there one-time or should we expect expenses to remain at this level going forward and in that regard have you started any expenses related to the polysilicon project?

Sean Shao

Rob, I think the main reason for the increase of OpEx is related to, I think, the G&A, so the G&A, I think, increased and mainly it was due to the salaries and benefits. And I think as we get close to the end of the year, we have more visibility in respect of the results performance of the company. So, accordingly we accrued a portion of the bonus. So, I think that was the main reason for the increase of the G&A.

Rob Stone - Cowen and Company

So, does that mean that operating expenses should stay at this level in the fourth quarter? In connection with that in the past, Trina has mentioned and then reiterated goals for revenue in net income for 2007. I noticed that you did not have any mention of those goals in the press release, so any comment on targets for the year?

Sean Shao

I think the targets for the year, I think are based upon last year 2006, I think the OpEx was at 11% as a percentage of the revenue. And I think this year, I think for 2007 as a percentage of revenue will go down to the extent we can see I think that's some 8% to 9% as a percentage of revenue OpEx as a whole. So the main part of the OpEx again is the G&A. Last year, I think, 2006 level was approximately 8%. I think this year will also go down to 5% to 6%, as far as I can see.

Rob Stone - Cowen and Company

Let me just reiterate the question, I think I probably confused you by putting two things together. In the past, for example in Q2, Trina cited a particular goal for revenue and net income for full year 2007. I noticed that was not mentioned in the press release this time or in your prepared remarks. So, do you have any comments on your expected range of revenue and net income for 2007, now that there is just one quarter left to go?

Sean Shao

Okay. For the revenue and the net income for the entire year, 2007 is still the target [that's due] unchanged. We are on track and to achieve the range of the target we said before. Having said that, it is challenging, it is not without any uncertainty, particularly in the environment when we see large fluctuations in respect of the silicon cost and also in respect of the ASP. So, they are factors which are changing fast, so let me reiterate, is that our targets are unchanged, not changed but it's not without uncertainty.

Rob Stone - Cowen and Company

Great, thank you.

Operator

Our next question comes from Paul Clegg. Please proceed.

Paul Clegg - Jefferies

Hi, good evening. Can you hear me?

Thomas Young

Yes, we hear clear, hello.

Paul Clegg - Jefferies

Good. Just kind of a follow-on on Rob's question there actually. Given the type of growth in production you are looking for in your expectations for expanding your sales effort, do you have a particular target in mind long-term for the percentage of revenues that OpEx makes up? What's your long-term model, I guess…

Sean Shao

Long-term, I think OpEx as a percentage of revenue long-term, I think it will stay at approximately 5% of the revenue long-term that's as far as I can see.

Paul Clegg - Jefferies

Okay. And I had a question also regarding your comments before about where you are seeing strength in the market? Did you say that Italy would be 20% of your projected output for 2008?

Andy Klump

Arturo, perhaps you could take this question.

Paul Clegg - Jefferies

And if you could just maybe comment on where else geographically you are seeing strength? I heard a 20% number in there though I couldn't quite match for that.

Sean Tzou

Yeah, this is Sean. We mentioned above we had like to take the 20% of Italy market demand.

Paul Clegg - Jefferies

Okay.

Sean Tzou

That's our goal.

Paul Clegg - Jefferies

And just also you mentioned a couple of the new countries, we don't hear a lot about this, can you just talk maybe momentarily about where you are seeing a lot of strength outside of Italy and Germany and Spain?

Sean Tzou

Okay, we currently are very strong in Spain and no question about that, that also we are working on Italy, which is our market. We see a lot of potential and we have tightened a lot of our strong relationship with current distributors as well as the power company [earning] power. So we engage [quite well] on that. We also work on Belgium and Netherlands.

Paul Clegg - Jefferies

Okay, I'll jump back in the queue. Thank you.

Operator

Our next question comes from [Lee Yin] please proceed.

Liu Yang - Merrill Lynch

Hi, this is [Liu Yang] from Merrill Lynch. Can you quantify how much impact of rising ASP and rising silicon costs in the third quarter have to your gross margin and how should we think about it in the fourth quarter?

Sean Shao

I think there is an increase of ASP of approximately 5% compared to the second quarter and the third quarter and that I think that pretty much explains why there was increase in gross margins. So, the cost structure is fairly consistent compared to the second quarter.

Liu Yang - Merrill Lynch

So, were you seeing increase in polysilicon costs in the third quarter?

Sean Shao

The polysilicon cost in the third quarter is flat compared to the second quarter.

Liu Yang - Merrill Lynch

And how should we think about polysilicon cost in the fourth quarter?

Sean Shao

Fourth quarter, as I discussed earlier that it's a fast changing quarter compared to the past two quarters. A lot of things are happening. I think one of them is the polysilicon cost and the other one is ASP. When we look at the polysilicon costs we do see indication of increasing trends.

But I think as we discussed before, I think we also discussed about our estimated increase in 2007 of the polysilicon cost. But the other thing we didn't really expect was the increasing trend of the ASP. If we compare to last year the fourth quarter we can remember that it was a decreasing trend.

And this year, I think, the fourth quarter when you look at the first month of the quarter compared to September was like 2% to 3% increase and then when you look at the next month November again as of, up to now and there's another 2% to 3% increase. So I think it's a fast moving quarter and with a lot of things happening.

Liu Yang - Merrill Lynch

And do you have a sense of how much gross margin expansion you would get from the fully vertically integrated module in the fourth quarter?

Sean Shao

It's -- if you ask me about cell line production ramp ups, that I can tell you for sure is that, we can -- we were [ready] to ramp up all the six production lines by the end of the quarter. And we are proceeding, we are on track. But if you ask me, the gross margin, it really depends upon the changing ASP and also changing the polysilicon cost. So…

Liu Yang - Merrill Lynch

I mean just from the vertical integration alone, can you -- are you on track to expand the margin from that or?

Sean Shao

Okay. So for the vertical integration alone, so we are basically referring to the cell line production. So you know what, we can significantly reduce the outsourcing of the cells by the fourth quarter. I am not saying that we are going to eliminate [100%] of the outsourcing. But, depending upon the exact timing of the fourth, the fifth and the sixth production lines, the exact timing of the ramp up, so it will decide how much we can make in-house.

So I think if we, assuming that we do want [2%] in-house, so that will give us the upside of 10 percentage point to 12 percentage point up to the gross margin, but obviously for the fourth quarter, we have the first line, second line and pretty much the third and fourth line actually ramp up in early October.

But the last two lines actually are currently at the test production stage. So we expect to get them ramped up very shortly.

Liu Yang - Merrill Lynch

So if everything ramped up, you would get 10% to 12% margin upside, so if I hear it correctly?

Sean Shao

Assuming from the first day of the quarter, I'm sure at the end of the quarter we have six lines up and running through the quarter, than compared to we do everything [outsourcing] for that's 10 percentage point to 12 percentage point difference.

Liu Yang - Merrill Lynch

Got it. So one more question if I can, do you have a output target for 2008? If it is, what it is?

Sean Shao

Our output target for the year 2008, we are looking at 200, 210 megawatts.

Liu Yang - Merrill Lynch

Okay. And you already have orders for those fully 100% for the first '08 and 50% for second half '08, is that correct?

Sean Shao

Yeah. That's correct.

Liu Yang - Merrill Lynch

Okay. Thank you. I'll get back into the queue.

Operator

Our next question comes from [Aden Croft]. Please proceed.

Aden Croft

Good evening. You mentioned in your release that R&D was a significant -- was a portion of the increase in OpEx. I was hoping you can comment a little bit more on some of the R&D initiatives specifically on the cell side as you bring that in-house in 4Q and into 2008.

Sean Shao

Before Sean Tzou clarifies on the nature of the activities, I think I need to clarify what we say in the news [release]. Basically, what we say is due to increase of G&A, [salary] and R&D, actually it was referred to, compared to last year. Because if you look at a quarter-to-quarter sequentially, there's not a huge difference, R&D expenses compared to last quarter. So, it is compared to last year of 2006.

I will pass to Sean Tzou to clarify the nature of the activity.

Sean Tzou

Okay. There are few R&D activities we are working on now and just probably to give you a quick run down of it, on the incomes portion, we spent a tremendous effort trying to roundup our multicrystalline casting capability. We are not only ramping up currently commercially the [DSS 200 urban] from GT. Also, we are the first one achieved a commercial production of the DSS 450 testing furnace. So, that alone is a main effort we did on the front end.

And also during the wafering area, we spent tremendous effort not only working on 200 microns, we also are looking at 180 microns. We spent some of the effort there as well as also the slurry reduction, the recycle slurry that we are trying to reduce the usage of the new cell. So, that is going to help us on the manufacturing cost as well. And also on the cell line, we certainly are working on the multicrystalline cell manufacturing and also the automation of the line.

So, those are the main activities we are working on. As far as the module area, we also are working on the new material. We are testing now a few new materials. We've spend tremendous efforts on the certification of the new materials as well as working with the customer. And so, all those are basically a short summary of our R&D activities.

Aden Croft

Okay. Thank you. And just one quick follow up. Can you quantify the amount of inventory write-down in the quarter?

Sean Shao

Yes, of course. I think for third quarter, the inventory write-down was right below 500,000.

Aden Croft

Thank you very much.

Sean Shao

You are welcome.

Operator

Our next question comes from [Tez Tupez]. Please proceed.

Tez Tupez

Good evening. Could you give us some detail on your polysilicon plants, they [have been a fully inter-plant cruise reactor] technology are you using? What capital costs are you estimating and when you expect to begin production of the 3,500 tons?

Sean Shao

Dave, are you there?

David Seburn

Yeah. I'll go ahead and respond to that. Yeah, we are looking at constructing the 3,500 metric ton per year polysilicon factory. It is a fully integrated design. You have seen the classical TCS production process with the classical Siemens file, deposition process. We are now ready at this point to talk about the technology providers that we are using for the engineering companies. The time-to-market for the project is expected to be 24 months after we start.

Tez Tupez

And have you picked the location for the plant yet?

David Seburn

We have picked the location. But again, we are not ready to release those specific details at this time.

Tez Tupez

And I am sorry, I might have missed this. Did you say when you will begin, when you will break ground on the project?

David Seburn

We did not say, but again, we are trying to start the effort very soon. Time-to-market after we start is 24 months.

Tez Tupez

Okay. Thank you very much.

Arturo Herrero

This is Arturo Herrero, the VP for Sales and Marketing. Unfortunately, I couldn't answer your questions. Can you hear me now?

Sean Shao

Yeah. We hear you. Which question you want to comment to?

Arturo Herrero

Okay. Thank you. So, just to let you know, that I am in line now. So, if any of the investors want to repeat again the questions about the markets, I am ready to answer.

Sean Shao

Okay.

Operator

Our next question comes from [Adam Sinclair]. Please proceed.

Adam Sinclair

Hi. Thank you for taking my question. Just following up on Paul's last question, can you provide us a little bit more color as to poly pricing that you are seeing in the market, specifically related to the Sichuan Yongxiang deal. One of your large Chinese competitors recently commented on the new entry that will be supplying them at below $40 a kilo. I was wondering if that's consistent with the agreement long term for the new poly supply and ultimately, what you think your production cost will be, from you own internal production?

Sean Tzou

Okay. This is Sean. Let me try to answer your question. Our agreement with Sichuan Yongxiang is more based on the market price and we are not ready to release that. However, we can talk about the polysilicon price. We are working on our cost. Our plant production cost, operating cost will be between $30 to $35.

Adam Sinclair

At what level of production will you be at $30 to $35?

Sean Tzou

Would you like me to answer that, Thomas?

Thomas Young

Yeah. I think we have several questions here, yeah.

Sean Tzou

Yeah. So, the polysilicon project, again, it's a 24-month time-to-market and after that we have a ramp up time period. So, we should see cost levels of $30 to $35 approximately six to nine months after the plant is fully operational.

Adam Sinclair

Okay. And then just can you talk about the renegotiation mechanisms on the Sichuan Yongxiang deal? How often are you going to be re-pricing the poly?

Andy Klump

Yeah. Adam, thanks for the question. This is Andy. At this point, we have not yet disclosed any additional details on the pricing and the pricing mechanisms. So, we certainly feel very confident about this project and it is inline with our overall trend of decreasing prices with similar or other contracts. So, we feel very confident with this part in the future.

Adam Sinclair

Okay. Thanks, guys.

Operator

Our next question comes from [Pavel Molkofov]. Please proceed.

Pavel Molkofov

Hi, guys. Follow up on your polysilicon project, how should we think about the capital cost for such a project in terms of per ton or in the aggregate?

Sean Tzou

Dave, you want to answer the question?

David Seburn

Sure. I'll address that. The targeted capital cost is $120 to $140 per kilogram installed capacity, and when you look at that in relation to a 3,500 metric ton per year polysilicon factory, that's $420 million to $490 million.

Pavel Molkofov

Got it. And would that -- would that cost be spread out evenly over the 24-month [lead] time?

Andy Klump

No, there is a cash flow curve and Sean and Arturo are [not] ready to speak about that at this point. Perhaps Sean Shao can get involved with that.

Sean Shao

Well I think that particular question, I think it really depends upon the finalization of some of the negotiations with the current suppliers. And I think that really, depends upon the size of down payments and also the [term] of payment.

Pavel Molkofov

Okay got it, that helps. And just a quick follow-up, what is the current conversion efficiency of your modules?

Sean Shao

Well, I think we basically have two types of cells, in-house made cells and also a small portion is outsourced for cells. Now the conversion efficiency of the module really depending upon the conversion efficiency of the cells and -- for in-house we already hit the level of [16.56.6] and for those outsourced is lower. So, I think there is a difference between the module conversion efficiency and the cells approximately 2.5% consistent.

Pavel Molkofov

Okay got it. And lastly your income tax rate in the quarter was almost zero can you give us maybe little bit of guidance on what you think it will be next year?

Sean Shao

Yeah next year -- let me first just clarify the tax rate of this year. And I think this year the reason it's so low is really because we have a majority of the taxable income, 82% is tax exempt. So with remaining 18% is tax at a 12 percentage point, so it's [18 times 12%], so it's only 2%, so that's why you see a very minimal tax.

Next year, I think it's going to be based upon Chinese tax policy, of exemption followed by three years half reduction. So, basically I think my estimate for the effective tax rate is approximately 10% for the next three years from 2008 to 2010.

Sean Tzou

Can I make a little bit of comment on what Sean Shao was just talking about the conversion efficiency? Basically the conversion efficiency, if my understanding is correct, is you're talking about from the cell to module conversion efficiency.

So, additionally with the monocrystalline modules, we are experiencing about 2% to 2.5% efficiency loss. However, with the new improved process, we used our [FS8] etching process in our lines three and four. We actually are gaining some of them back, so in our average conversion efficiency loss right now is about 1%.

Pavel Molkofov

Got it. Thanks very much.

Sea Tzou

Okay.

Operator

Our next question comes from [Doug Ulchner]. Please proceed.

Doug Ulchner

Given the different expansions including the poly plant, when do you think you'll have to go to the equity market to raise money?

Sean Shao

Okay. I will take this question. This is Sean. I think before we go back to the equity market, we have to make sure [a few things] happen. The first is that, for this being a large project, which takes two years to build, so the first thing we do is we actually have the plan, and also we are planning on, and are also [trying] to arrange a long-term debt to fit such a project which is long-term in nature. So, I mean in respect of the amount of the finance, in the debt financing, we are looking up to 50% of the total required fund. So, that's the long-term debt, which is the first thing we need to do and actually we are doing.

The second thing, we need to do before we go back to the capital market. I think it’s to make sure, we execute it on our side, sufficiently so that we can sit down with the investors, show the investors that we are ready. So, we have a whole bunch of things to work on before we can even think about that. The last thing, I think that we need to consider before we go back to the Wall Street, really is to make sure that we keep a close eye on the market cap and valuation of the company. If the valuation doesn't make sense, we are not going to jeopardize the interest of the existing shareholders to equity finance. So, those are the main things, I think we need to ensure before we can even do that.

Doug Ulchner

Okay. Just one other question. Given the explosion in the G&A expense and R&D expense in the third quarter, in the fourth quarter can you still meet these targets of $0.55 to $0.58 of earnings, $95 million in sales?

Sean Shao

As I discussed earlier that, our targets for the [shipment], our targets for the top-line and our targets for the bottom-line are unchanged. So, that's the answer.

Doug Ulchner

And what were they, I forgot?

Sean Shao

But I think in respect of the shipment, we set the range of 75 to 80 megawatts and we are, we estimated a revenue from 270 to 300 and the estimated net income is 34.5 to 35.5.

Doug Ulchner

Okay. And just one last question, has the Russian polysilicon producer ever produced any polysilicon?

Andy Klump

Well, thanks for the question. Yeah, Nitol has been a manufacturer of trichlorosilane for electronic grade polysilicon manufacturers. So, they are actually in the plan to launch their plants in the coming months. So, the answer is no, they have not previously produced polysilicon. However, we have a high confidence level they will succeed with this project, because they have already solved the most difficult problem which for a lot of companies is the [TCS].

Doug Ulchner

And what percent of Nitol's poly will come from them?

Andy Klump

We have not quoted specific volumes for the contracts each on a year basis, but just put it in aggregate figure.

Doug Ulchner

Okay, thank you.

Operator

Our next question comes from Max Lee. Please proceed.

Max Lee

Yeah, good evening guys, thanks for taking my questions. I would like to understand what was your outsourcing ratio in the third quarter?

Sean Shao

Well, the outsourcing ratio, are you referring to the outsourcing of the cell production?

Max Lee

Yes. It was 50% outsourced in the third quarter.

Sean Shao

Well, I think the third quarter outsourcing ratio is consistent to the second quarter which is approximately 75%.

Max Lee

Still 75% in the third quarter, and how would you expect it to become by fourth quarter and also the first quarter in next year?

Sean Shao

The fourth quarter we estimated approximately 75% in-house and 25% outsourcing. The next quarter, the first quarter of 2008, I think this percentage will continue to reduce.

Max Lee

Okay, great. Then what is your silicon sourcing mix for scrub versus virgin poly for the quarter?

Sean Tzou

We continue to maintain our mixture of approximately 80% reclaimable polysilicon and about 20% virgin polysilicon.

Max Lee

Do you also expect us to maintain this (inaudible) for next year?

Sean Tzou

We do expect this to be more in line with the same ratio next year as well. As we move out beyond that, that ratio will change. But I think for 2008 that remains our current estimates.

Max Lee

Sure? Okay, thank you very much.

Operator

Our next question comes from [Jay Spindel]. Please proceed.

Jay Spindel

Thank you. I have two questions, how much incremental margin do you expect in the fourth quarter with your in-house cell line?

Sean Shao

I think we discussed the -- I think two factors in it. The first is the percentage of the sales which we [daily have], that's one factor. But the second factor basically is the per watt production cost. So, I think last quarter in the earnings call we discussed about our in-house production costs per watt approximately $0.40 and for the fourth quarter we estimated that it can be reduced by approximately $0.10.

Jay Spindel

Okay. Also 70% of your poly coverage for next year, where do you think prices are going versus this year and the other 30% you are just going to go after the spot market or is there any -- what's going on with negotiations and timing of the other 30%?

Sean Tzou

Well, the guidance that we've issued was a 20% increase from '06 to 2007 and then another 10% increase in 2008. So, we are maintaining with that same estimate. In terms of the remaining 30%, management feels very confident they will be able to fill that gap. We do have other companies we are discussing with for volumes as part of long-term contracts, and it’s part of our medium term contract strategy. So, we do feel very confident that we will be able to reach the remaining 30%.

Jay Spindel

Thank you.

Operator

Our next question comes from Charles Yonts. Please proceed.

Charles Yonts - CLSA

Hi guys. Could you comment on return in 3Q versus 2Q and how that may have impacted OpEx through product returns?

Sean Shao

You mean the returns of the sales?

Charles Yonts - CLSA

Right, no return exactly returns of modules from customers.

Sean Shao

We don't have returns.

Charles Yonts - CLSA

No returns?

Sean Shao

No returns.

Charles Yonts - CLSA

No returns. Okay. Then could you go into a little bit more detail about what caused G&A end sales [to go high] so much and what makes you confident that in 4Q they will come back down?

Sean Shao

I think that G&A, as I discussed, the main reason for the increase is, due to the bonus accrual when we are approaching the second half of the year, so that we have more visibility about our performance and target, so that we have certain accrual. And so, that I don't think is based upon actual results. So, when we are getting into the fourth quarter there may be some additional.

But I don't expect that accrual the bonus can be of the same amount as the one in the third quarter. And when you mentioned about increase of operating expenses, yes there was an increase. I think part of the increase more is related to the freight. So, I think this is more related to the better management of the scheduling. So that we make sure that we don't have any trucks, they come and go back without to be fully loaded. So I think there's room for us to make improvement to cut the freight charge.

Charles Yont - CLSA

Okay. Thank you.

Operator

Our next question comes from Paul Clegg. Please proceed.

Paul Clegg - Jefferies

Hi guys, just a couple of clarification questions. You mentioned $30 to $35 per metric ton of polysilicon production costs. Was that cash costs, or does that include the depreciation? And then on the ramp to 3500 metric tons annualized production, you said I think that takes 6 to 9 months after you bring the plant online. Is it pretty much a linear ramp up?

Sean Tzou

Dave, we'll let you take this question.

Dave Seburn

Yeah. As far as the ramp up rate, it is somewhat of a linear ramp up. But due to the 3500 metric ton per year capacity number, that will likely happen one to two years after startup. So, we do have some numbers put in the first year after operation that will allow us to achieve the $30 to $35 per kilogram costs then. The cost was of $30 to $35 per kilogram not per metric ton.

Paul Clegg - Jefferies

Yes of course. Yeah.

Dave Seburn

And it is a fully loaded cost.

Paul Clegg - Jefferies

Full loaded cost with depreciation. Thanks very much.

Operator

Our next question comes from [Jeff Osborn]. Please proceed.

Michael Hunt - Oso Partners

This is not [Jeff Osborn], this is [Michael Hunt] from Oso Partners. There must have been a screw-up. Are you there?

Sean Tzou

Yes. Please continue.

Michael Hunt - Oso Partners

Okay. Sorry. I was wondering in the third quarter, how much of the impact on the tax rate is from the off-balance sheet entities like we saw in the first quarter?

Sean Shao

Sorry. Can you clarify what's the off-balance sheet impact?

Michael Hunt - Oso Partners

I was wondering how much of the impact on the tax rate in the third quarter was from off-balance sheet entities like we saw in the first quarter of this year.

Sean Shao

So, I think the income tax for the third quarter was 16,000. It was a very small amount. I think the reason was mainly due to actual effective tax rate 2% and then on top of that, we have certain tax rebate related to the purchasing of domestic-made equipments.

So, this is the additional tax credit which was provided during the quarter, and I think that was the only thing which is probably maybe affected -- the tax is affected.

Michael Hunt - Oso Partners

But in the first quarter, I remember the tax was affected by local Chinese investments, what was this number?

Sean Shao

The first quarter, the tax was 1.1 million. I think, I don't recall exactly what was behind it, but I think I don't remember if there's anything else in the first quarter. I think first quarter was a straight, I think tax related to the 18% taxable income. And I think the tax rate was not 12%, it's 24%.

And in second quarter, tax rate was reduced to 12%, the same as the third quarter. The reason is, we qualify as the export enterprise during the second quarter. So, therefore the tax rate was reduced from 24% to 12% and related to this 18% taxable income.

Michael Hunt - Oso Partners

Okay. So, the statutory tax rate for Trina alone is what?

Sean Shao

It’s 12% right now, related to the 18% taxable income.

Michael Hunt - Oso Partners

12%, okay.

Sean Shao

Yes.

Michael Hunt - Oso Partners

And so, why was it zero this quarter?

Sean Shao

It was zero this quarter because the effective tax rate is only 2%. And then it's further reduced by certain tax credit related to the impact of equipments made domestically.

Michael Hunt - Oso Partners

What are the credits?

Sean Shao

It's the credit related to the purchasing of equipments which is made in China.

Michael Hunt - Oso Partners

And that's the off-balance sheet company?

Sean Shao

No. We don't have any off-balance sheet company. The purchase was made by Trina [alone]. Let me clarify this, our structure is very straightforward. It's just Cayman company and we have 100% on the (inaudible) in China and also we have a trading company in Hong Kong, that's it. We don't have any off-balance sheet items.

Michael Hunt - Oso Partners

In the April call, the first quarter call, you said you invested in a local company that had a loss, that wasn't off-balance sheet?

Sean Shao

Our investments in the local company, I don't recall that, maybe offline we can get into the details, because we don't have any investments in a local company. As I said, the Cayman company and (inaudible) and the trading company in Hong Kong, that's it. We don't have anything else.

Michael Hunt - Oso Partners

Okay. And then one last one, has there been any turnover in the senior ranks in purchasing or procurements recently?

Sean Shao

No.

Michael Hunt - Oso Partners

People with their international passport are --

Sean Shao

We haven't.

Sean Tzou

No. There's nothing.

Sean Shao

Nothing.

Michael Hunt - Oso Partners

Okay. Thank you.

Sean Tzou

Yeah, in fact we are adding people.

Operator

We have time for one more question. Our last question comes from Rob Stone. Please proceed.

Rob Stone - Cowen and Company

Hi, Sean. I wonder if you could just clarify a bit of your comments about the quarter-to-date ASP increase. I think you've said it's growing up 2% or 3% in October and further in November. So, if prices stayed at the level where they are through the quarter to-date, can you say approximately what the ASP would be in the quarter?

Sean Shao

I think in October, if I am not mistaken, the ASP was in the range -- I think was $3.80 to $3.85 and in November I think it went up. Like I said it was 2% to 3% based upon the October number.

Rob Stone - Cowen and Company

Okay. Thanks very much.

Sean Shao

You are welcome.

Thomas Young

In the absence of the Operator, I would like to thank everyone. 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 the call. This concludes Trina Solar's third quarter 2007 earnings conference call.

Operator

Thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day. Thank you.

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 Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts